UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended August 1, 2015

 

OR

 

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from_____________to___________.

 

Commission File Number 1 – 9482

 

HANCOCK FABRICS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware				64-0740905
(State or other jurisdiction				(I.R.S. Employer
of incorporation or organization)				Identification No.)
One Fashion Way, Baldwyn, MS				38824
(Address of principal executive offices)				(Zip Code)

                                                  

(662) 365-6000

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 by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).          Yes [X]     No [ ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer (Do not check if a smaller reporting company) [ ] Smaller reporting company [ X ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [  ]     No [X]

 

 

As of August 28, 2015, there were 22,955,773 shares of Hancock Fabrics, Inc. $.01 par value common stock outstanding.

 

 

Hancock Fabrics, Inc.,

INDEX TO FORM 10-Q

 

Part I. Financial Information	Page
Item 1. Condensed Financial Statements (unaudited)
Consolidated Balance Sheets as of August 1, 2015, July 26, 2014, and January 31, 2015	4
Consolidated Statements of Operations and Comprehensive Loss for the Thirteen and Twenty-six Weeks Ended August 1, 2015 and July 26, 2014	5
Consolidated Statement of Shareholders’ Deficit for the Twenty-six Weeks Ended August 1, 2015	6
Consolidated Statements of Cash Flows for the Twenty-six Weeks Ended August 1, 2015 and July 26, 2014	7
Notes to Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3. Quantitative and Qualitative Disclosures about Market Risks	21
Item 4. Controls and Procedures	22
Part II. Other Information
Item 1. Legal Proceedings	22
Item 1A. Risk Factors	22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3. Defaults Upon Senior Securities	23
Item 4. Mine Safety Disclosures	23
Item 5. Other Information	23
Item 6. Exhibits	23
Signatures	24

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED FINANCIAL STATEMENTS

HANCOCK FABRICS, INC.

CONSOLIDATED BALANCE SHEETS

 

 

See accompanying notes to consolidated financial statements.

(1) From consolidated audited balance sheet included in our annual report on Form 10-K for the fiscal year ended January 31, 2015.

 

 

HANCOCK FABRICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited)

 

 

See accompanying notes to consolidated financial statements.

 

 

HANCOCK FABRICS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
(unaudited)

 

 

See accompanying notes to consolidated financial statements.

 

 

HANCOCK FABRICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

 

 

See accompanying notes to consolidated financial statements.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

 

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with the consolidated financial statements as of and for the thirteen and twenty-six weeks ended August 1, 2015, including the notes to those statements, appearing elsewhere in this report. We also suggest that management’s discussion and analysis appearing in this report be read in conjunction with the management’s discussion and analysis and consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2015 filed with the Securities and Exchange Commission (“SEC”) on May 1, 2015. Our fiscal year ends on the last Saturday in January and refers to the calendar year ended immediately prior to such date, which contained the substantial majority of the fiscal period (e.g., “fiscal 2014” or “2014” refers to the fiscal year ended January 31, 2015). Fiscal years consist of 52 weeks, comprised of four 13-week fiscal quarters, unless noted otherwise. References herein to second quarter 2015 and second quarter 2014 are for the 13 week periods ended August 1, 2015 and July 26, 2014, respectively. References to twenty-six weeks 2015, first half 2015 or 2015, and twenty-six weeks 2014, first half 2014 or 2014 are for the 26 week periods ended August 1, 2015 and July 26, 2014, respectively. References herein to “Hancock,” the “Company,” “Registrant,” “we,” “our,” or “us” refer to Hancock Fabrics, Inc. and its subsidiaries unless the context specifically indicates otherwise.

 

 

Forward Looking Statements

 

 

This Quarterly Report on Form 10-Q (“Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Such statements are not historical facts and reflect our current views regarding matters such as operations and financial performance. In general, forward-looking statements are identified by such words or phrases as “anticipates,” “believes,” “approximates,” “estimates,” “expects,” “intends” or “plans” or the negative of those words or other terminology. Forward-looking statements involve inherent risks and uncertainties; our actual results could differ materially from those expressed in our forward-looking statements.

 

The risks and uncertainties, either alone or in combination, that could cause our actual results to differ from those expressed in our forward-looking statements include, but are not limited to: adverse economic conditions; intense competition and adverse discounting actions taken by competitors; our merchandising initiatives and marketing emphasis may not provide expected results; changes in customer demands and failure to manage inventory effectively; our inability to effectively implement our growth strategy; risks associated with obtaining merchandise from foreign suppliers; transportation industry challenges and rising fuel costs; delays or interruptions in the flow of merchandise between our suppliers and/or our distribution center and our stores; our current cash resources might not be sufficient to meet our expected near-term cash needs; and those other risks that are discussed in our Annual Report on Form 10-K filed with the SEC on May 1, 2015 under Item 1A. Risk Factors. Forward-looking statements speak only as of the date made, and neither Hancock nor its management undertakes any obligation to update or revise any forward-looking statement.

 

Our Business

 

Hancock Fabrics, Inc. is a specialty retailer committed to nurturing creativity through a complete selection of fashion and home decorating textiles, sewing accessories, needlecraft supplies and sewing machines. We are one of the largest fabric retailers in the United States, operating as of August 1, 2015, 260 stores in 37 states and an internet store under the domain name hancockfabrics.com. Our stores present a broad selection of fabrics and notions used in apparel sewing, home decorating and quilting projects. None of the information on the website referenced above is incorporated by reference into our reports filed with, or furnished to, the SEC.

 

Overview

 

Financial Summary:

 

●

Sales for the second quarter of 2015 were $58.7 million compared to $59.3 million for the second quarter of 2014, and comparable store sales decreased 1.3% in the second quarter of 2015 following an increase of 0.9% in the second quarter of 2014. Sales for the first half of 2015 were $120.4 million compared to $122.3 million for the first half of 2014 and comparable store sales declined 1.6% following a decrease of 0.1% in the first half of 2014. Management believes the disruption of product flow into our distribution center and stores due to the West Coast port issues early in the year has hindered our efforts to gain sales momentum through the spring and into the summer, and also required aggressive promotional activity which is reflected in our gross profit results.

 

●

Our online sales for the second quarter of 2015, which are included in the sales number and comparable sales percentage above, increased 28.4% to $1.2 million compared to $0.9 million for the second quarter of 2014 and increased by 30.7% to $2.3 million in the first half of 2015 compared to $1.8 million in the first half of 2014.

 

 

●

Gross profit for the second quarter and first half of 2015 was 42.1% and 42.9%, respectively, compared with 44.6% and 44.9% for the second quarter and first half of 2014, respectively.

 

●

Selling, general and administrative expenses for the second quarter of 2015 were $27.0 million compared to $27.4 million for the second quarter of 2014 and were $54.2 million for the first twenty-six weeks of 2015 compared to $53.9 million for the same period of 2014.

 

●

Operating loss was $3.4 million for the second quarter of 2015 compared to a loss of $1.9 million in the second quarter of 2014. For the first half of 2015, operating loss was $4.7 million compared to an operating loss of $1.0 million for the first half of 2014.

 

●

Net loss was $4.9 million, or $0.23 per basic share, in the second quarter of 2015 compared to a net loss of $3.3 million, or $0.16 per basic share in the second quarter of 2014. Net loss was $9.1 million or $0.43 per basic share in the first half of 2015 compared to a net loss of $3.8 million or $0.18 per basic share in the first half of 2014.

 

●

The amount of cash used in operating activities was $8.2 million during the first half of 2015 compared to $8.5 million of cash used in operating activities for the first half of 2014.

 

We use a number of key performance measures to evaluate our financial performance, including the following:

 

		Thirteen Weeks Ended								Twenty-six Weeks Ended
		August 1,				July 26,				August 1,				July 26,
		2015				2014				2015				2014
Net sales (in thousands)		$	58,738			$	59,317			$	120,406			$	122,311
Gross margin percentage			42.1	%			44.6	%			42.9	%			44.9	%
Number of stores
Open at end of period (1)			260				260				260				260
Comparable stores at period end (2)			251				257				251				257
Sales growth
All retail outlets			(1.0	)%			0.3	%			(1.6	)%			(0.5	)%
Comparable sales (3)			(1.3	)%			0.9	%			(1.6	)%			(0.1	)%
Total store square footage at period end (in thousands)			3,522				3,600				3,522				3,600
Net sales per total square footage		$	16.68			$	16.48			$	34.19			$	33.98

 

 

(1)	Store count does not include the internet store.
(2)	A new store is included in the comparable sales computation immediately upon reaching its one-year anniversary. In instances where stores are either expanded, down-sized or relocated within an existing market the store is not treated as a new store and, therefore, remains in the computation of comparable sales.
(3)	Comparable sales change includes net sales derived from e-commerce.

 

 

Results of Operations

 

The following table sets forth, for the periods indicated selected statement of operations data expressed as a percentage of sales. This table should be read in conjunction with the following discussion and with our Consolidated Financial Statements, including the related notes.

 

		Thirteen Weeks Ended								Twenty-six Weeks Ended
		August 1,				July 26,				August 1,				July 26,
		2015				2014				2015				2014
Net sales			100.0	%			100.0	%			100.0	%			100.0	%
Cost of goods sold			57.9				55.4				57.1				55.1
Gross profit			42.1				44.6				42.9				44.9
Selling, general and administrative expense			46.0				46.1				45.0				44.1
Depreciation and amortization			1.9				1.7				1.8				1.6
Operating loss			(5.8	)			(3.2	)			(3.9	)			(0.8	)
Interest expense, net			2.6				2.4				3.7				2.3
Loss before income taxes			(8.4	)			(5.6	)			(7.6	)			(3.1	)
Income taxes			0.0				0.0				0.0				0.0
Net loss			(8.4	)%			(5.6	)%			(7.6	)%			(3.1	)%

 

Sales

 

		Thirteen Weeks Ended								Twenty-six Weeks Ended
(change as % of prior year)		August 1,				July 26,				August 1,				July 26,
		2015				2014				2015				2014
Retail comparable store base			(1.8	)%			0.8	%		$	(2.1	)%			(0.3	)%
E-Commerce			28.4	%			6.6	%			30.7	%			4.5	%
Comparable sales			(1.3	)%			0.9	%			(1.6	)%			(0.1	)%

 

The retail comparable store base percentage presented in the table above was computed based on sales of all stores that have reached their 53^rd week of operation. The second quarter 2015 retail comparable store base sales decrease of 1.8% was the result of a 2.6% decrease in transaction count, partially offset by a 0.8% improvement in average ticket evidencing higher sales volumes for each individual transaction. The first half 2015 retail comparable store base decline of 2.1% resulted from a 2.3% decline in transaction count partially offset by a 0.2% increase in average ticket.

 

Sales provided by our e-commerce channel increased 28.4% and 30.7% in the second quarter and the twenty-six weeks of fiscal 2015, respectively, compared to the same periods in fiscal 2014. The continuing sales improvement is due to improvements in areas such as paid search, organic search, social marketing and merchandising.

 

 

Nine new stores opened and nine stores, where we chose not to stay in the market, have closed since the second quarter of 2014, the sales from these locations are included in net sales. During the second quarter of 2015, the Company opened one new location and closed three, ending the period with 260 stores.

 

Our merchandise mix has had minimal change year over year, as reflected in the table below. 

 

		Thirteen Weeks Ended								Twenty-six Weeks Ended
		August 1,				July 26,				August 1,				July 26,
		2015				2014				2015				2014
Apparel and Craft Fabrics			43	%			43	%			43	%			43	%
Home Decorating Fabrics			12	%			12	%			12	%			12	%
Sewing Accessories			32	%			32	%			32	%			32	%
Non-Sewing Products			13	%			13	%			13	%			13	%
			100	%			100	%			100	%			100	%

 

Gross Margin

 

Costs of goods sold include:

 

●

the cost of merchandise

 

●

inventory rebates and allowances including term discounts

 

●

inventory shrinkage and valuation adjustments

 

●

freight charges

 

●

costs associated with our sourcing operations, including payroll and related benefits

 

●

costs associated with receiving, processing, and warehousing merchandise

 

The classification of these expenses varies across the retail industry.

 

Specific components of cost of goods sold for the second quarters and the twenty-six weeks of fiscal 2015 and 2014 are as follows:

 

		Thirteen Weeks Ended																Twenty-six Weeks Ended
		August 1,				% of				July 26,				% of				August 1,				% of				July 26,				% of
(dollars in thousands)		2015				Sales				2014				Sales				2015				Sales				2014				Sales
Total net sales		$	58,738				100.0	%		$	59,317				100.0	%		$	120,406				100.0	%		$	122,311				100.0	%
Merchandise cost			28,394				48.3	%			27,403				46.2	%			57,738				48.0	%			56,787				46.4	%
Freight			2,200				3.8	%			2,240				3.8	%			4,465				3.7	%			4,374				3.6	%
Sourcing and warehousing			3,434				5.8	%			3,195				5.4	%			6,578				5.4	%			6,236				5.1	%
Gross Profit		$	24,710				42.1	%		$	26,479				44.6	%		$	51,625				42.9	%		$	54,914				44.9	%

 

 

Merchandise cost increased as a percentage of sales for the second quarter of 2015 as compared to the same period of 2014 by 210 basis points. This increase resulted primarily from promotional activity and inventory shrinkage. For the twenty-six weeks of 2015 compared to the twenty-six weeks of 2014, merchandise cost increased by 160 basis points. The increase resulted from promotional activity, inventory valuation charges primarily caused by merchandise placed in the clearance program at quarter end, and inventory shrinkage for the twenty-six week period.

 

Freight expense was flat as a percentage of sales for the second quarter of 2015 as compared to 2014 and 10 basis points over last year for the twenty-six weeks of 2015 reflecting the additional freight cost incurred in the first quarter as a result of the West Coast shipping disruption.

 

Sourcing and warehousing costs for the Company vary based on the volume of inventory received during any period, the rate at which inventory is shipped out, and inventory turns. The cost difference for the second quarter and twenty-six weeks of 2015 compared to the same periods in 2014 is due to increased sourcing and warehousing costs and improving inventory turns.

 

In total, gross margin declined by 250 basis points in the second quarter 2015 from second quarter 2014 and by 200 basis points for the twenty-six weeks of 2015 as compared to the same period of 2014.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses include:

 

●

payroll and related benefits (for our store operations, field management, and corporate functions)

 

●

advertising

 

●

general and administrative expenses

 

●

occupancy including rent, common area maintenance, taxes and insurance for our retail locations

 

●

operating costs of our headquarter facilities

 

●

other expense (income)

 

Specific components of selling, general and administrative expenses (SG&A) include:

 

		Thirteen Weeks Ended																Twenty-six Weeks Ended
		August 1,				% of				July 26,				% of				August 1,				% of				July 26,				% of
(dollars in thousands)		2015				Sales				2014				Sales				2015				Sales				2014				Sales
Retail store labor costs		$	10,047				17.1	%		$	9,838				16.6	%		$	20,014				16.6	%		$	19,333				15.8	%
Advertising			1,996				3.4	%			2,498				4.2	%			4,193				3.5	%			4,708				3.8	%
Store occupancy			7,554				12.9	%			7,376				12.4	%			15,285				12.7	%			14,998				12.3	%
Retail SG&A			4,866				8.3	%			4,876				8.2	%			9,300				7.7	%			9,292				7.6	%
Corp SG&A			2,557				4.3	%			2,781				4.7	%			5,411				4.5	%			5,598				4.6	%
Total SG&A		$	27,020				46.0	%		$	27,369				46.1	%		$	54,203				45.0	%		$	53,929				44.1	%

 

 

Retail Store Labor Costs – The Company’s store labor costs increased during the second quarter and first twenty-six weeks of 2015 as compared to the same periods in 2014. The increases were primarily the result of increased benefit costs for medical claims and pension expense as compared to 2014.

 

Advertising – The reduction in advertising expense for the second quarter of 2015 and the twenty-six weeks of 2015 were achieved through continuing improvements to our marketing program and one less direct mail piece as compared to the same periods of 2014, due to a calendar shift in our marketing program.

 

Store Occupancy – Store occupancy expense increased as compared to the same period of the prior year for both the second quarter and the twenty-six weeks of 2015. This increase was driven by higher direct occupancy cost in both periods of 2015 and higher repair and maintenance expenditures in the second quarter.

 

Retail SG&A – Retail selling, general and administrative expenses for the second quarter and the twenty-six weeks of 2015 were basically flat as compared to the same periods of 2014. During the second quarter of 2015, reductions in supply and utility costs were offset by higher telephone expenses and reduced net commission income from a third party loyalty program. For the first twenty-six weeks of 2015, reduced loyalty program net commissions and higher telephone expense were offset by reductions in claim based insurance cost, supplies and utilities.

 

Corporate SG&A – These are costs related primarily to staffing and operation of the Company’s headquarters. Corporate SG&A declined for the second quarter and first twenty-six weeks of 2015 as compared to the same periods of 2014. Reductions in professional fees, stock-based compensation and accrued vacation expense was partially offset by higher corporate payroll cost primarily driven by increased cost for medical claims and pension expense during the second quarter. The reduction for the twenty-six weeks of 2015 as compared to the same period of 2014 is due to reductions in stock-based compensation, accrued vacation expense and the gain recognized from sale of an owned store location, partially offset by increased professional fees.

 

Interest Expense

 

		Thirteen Weeks Ended																Twenty-six Weeks Ended
(dollars in thousands)		August 1,				% of				July 26,				% of				August 1,				% of				July 26,				% of
		2015				Sales				2014				Sales				2015				Sales				2014				Sales
Interest expense, net		$	1,553				2.6	%		$	1,442				2.4	%		$	4,387				3.7	%		$	2,808				2.3	%

 

The Company’s interest costs are driven by borrowings on our credit facilities and a small number of capital leases. We currently have an asset-based facility and subordinated-debt outstanding. Interest expense for the first twenty-six weeks of 2015 includes $1.4 million of costs resulting from the early termination of the amended and restated loan and security agreement with General Electric Capital Corporation on April 22, 2015 (see Note 4 to the Consolidated Financial Statements included in this report). Excluding the non-recurring item, interest expense was $3.0 million or 2.5% of sales for the first twenty-six weeks of 2015.

 

Income Taxes

 

The Company did not recognize any income tax benefit during the periods of fiscal 2015 or 2014 presented in this report given the uncertainty in realizing the future benefit. As of August 1, 2015, January 31, 2015, and July 26, 2014 the Company has established a 100% valuation allowance to offset the net deferred tax assets related to net operating loss carryforwards and other book-tax timing differences.

 

 

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 have historically been generated from Hancock's operations, short-term trade credit in the form of extended payment terms from suppliers for inventory purchases, and borrowings from commercial lenders.

 

We have a history of losses over the three year period ended January 31, 2015 and we have generated positive operating cash flow in only the year ended January 31, 2015. During the years ended January 31, 2015, January 25, 2014 and January 26, 2013, the Company had net losses of $3.2 million, $1.9 million and $8.5 million, respectively and net cash provided by (used in) operating activities for the corresponding periods was $3.2 million, $(5.7) million and $(11.3) million, respectively. As a result, since fiscal 2011, it has been necessary to rely on bank borrowings for our capital needs to fund the Company’s required cash contribution to the Company’s defined benefit pension plan, for capital expenditures, and working capital needs.

 

At August 1, 2015, the Company had outstanding long-term indebtedness and capital lease obligations of $95.8 million compared to $52.3 million as of January 28, 2012. As a consequence of our significant amount of indebtedness as of August 1, 2015, a significant portion of our cash flow from operations must be dedicated to interest and principal payments on our indebtedness, thereby reducing the availability of our cash flow to fund capital expenditures or other growth initiatives and other general corporate requirements, see “Item 1A. Risk Factors − Risks Related to Our Business − We have a significant amount of indebtedness, which could have important negative consequences to us” in our Annual Report on Form 10-K for the year ended January 31, 2015 filed with the SEC on May 1, 2015. In addition, at August 1, 2015, the Company had limited cash resources, with cash of $2.3 million, see “Item 1A. Risk Factors − Risks Related to Our Business − Our current cash resources might not be sufficient to meet our expected near-term cash needs” in our Annual Report on Form 10-K for the year ended January 31, 2015 filed with the SEC on May 1, 2015.

 

Our short-term and long-term liquidity needs arise primarily from our working capital requirements, required cash contributions to the defined benefit pension plan, planned capital expenditures and debt service requirements. We anticipate that capital expenditures for the fiscal year ending January 30, 2016 will be approximately $2.2 to $2.5 million, primarily for store and technology upgrades. We anticipate that we will be able to satisfy our short-term and long-term liquidity needs highlighted above through the next twelve months with available cash, proceeds from cash flows from operations, short-term trade credit, borrowings under our revolving credit facility (the “Revolver”) and other sources of financing. As of August 1, 2015, we have $6.5 million available to borrow under the Revolver. We consolidate our daily cash receipts into a centralized account. In accordance with the terms of our $100.0 million Revolver, on a daily basis, all collected and available funds are applied to the outstanding loan balance. We then determine our daily cash requirements and request those funds from the Revolver availability.

 

Our ability to improve our liquidity in future periods will depend on generating positive operating cash flow, primarily through comparable store sales increases, improved gross margin and controlling our expenses, which in turn, may be impacted by prevailing economic conditions and other financial and business factors, some of which are beyond our control, see “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended January 31, 2015 filed with the SEC on May 1, 2015.

 

 

Hancock’s cash flow related information as of the twenty-six weeks of fiscal 2015 and 2014 follows:

 

		Twenty-six Weeks Ended
		August 1,				July 26,
		2015				2014
Net cash flows provided by (used in):
Operating activites		$	(8,186	)		$	(8,528	)
Investing activities			(1,214	)			(2,351	)
Financing activites			8,841				11,446

 

Operating Activities

 

In the first twenty-six weeks of 2015, the net loss plus non-cash adjustments used $4.9 million of cash compared to $0.5 million used in the same period of 2014. The increased cash usage can be attributed to the larger net loss incurred in the first twenty-six weeks of 2015 as compared to 2014 partially offset by the non-cash charge for amortization of deferred loan cost which was inflated by $0.9 million due to the early termination of the amended and restated loan and security agreement with General Electric Capital Corporation on April 22, 2015. In addition, a $2.5 million inventory build, $1.1 million reduction in accrued liabilities and $0.9 million decrease in pension related liabilities partially offset by a $1.2 million increase in accounts payable resulted in $8.2 million of cash used in operating activities for the first twenty-six weeks of 2015.

 

For the twenty-six weeks of 2014, net loss plus non-cash adjustments used of $0.5 million which combined with an inventory increase of $6.8 million and a $1.4 million decline in pension and SERP liabilities were the primary contributors to the $8.5 million of cash used in operating activities.

 

Investing Activities

 

Cash used for investing activities consists primarily of purchases of property and equipment. Capital expenditures during the twenty-six weeks of 2015 consisted primarily of store fixtures, for three new stores and two relocated units, store technology upgrades, and maintenance capital expenditures for the stores and distribution center. Capital expenditures during the twenty-six weeks of 2014 consisted primarily of store fixtures and leasehold improvements for two relocated units, one new store which opened and several other locations which will open later in the year, and development cost related to the re-launch of the Company website.

 

Financing Activities

 

During the twenty-six weeks of 2015, working capital needs, expenditures for investing activities discussed above, the required contribution to the defined benefit pension plan and payment of $2.2 million of debt issuance costs related to the refinancing in April 2015 increased outstanding borrowings by $11.2 million. For the twenty-six weeks of 2014, the seasonal build up of inventory, expenditures for investing activities discussed above and the required contribution to the defined benefit pension plan produced a net increase in cash provided by financing activities of $11.4 million.

 

Credit Facilities

 

The following should be read in conjunction with Note 4 to the Consolidated Financial Statements included in this report.

 

 

As of August 1, 2015, the Company had outstanding borrowings under the Revolver of $67.8 million and $17.5 million under the term loan facility entered into on April 22, 2015 (the “Term Loan”), and amounts available to borrow of $6.5 million.

 

At August 1, 2015, Hancock had commitments under the Revolver for $1.2 million of documentary letters of credit, which support purchase orders for merchandise. Hancock also has standby letters of credit for $5.4 million, to guarantee payment of potential insurance claims, shipments of inventory, security bonds and freight charges, and backstop letters of credit issued to its previous lender for $0.7 million.

 

As of August 1, 2015, the Company had an outstanding balance of $8.2 million on the Floating Rate Secured Notes due 2017 (the “Notes”).

 

Off-Balance Sheet Arrangements

 

Hancock has no off-balance sheet financing arrangements. Hancock leases its retail fabric store locations mainly under non-cancelable operating leases. Four of the Company’s store leases qualified for capital lease treatment and are reflected on the Company’s balance sheet. Future payments under the operating leases are excluded from the Company’s balance sheet.

 

Contractual Obligations and Commercial Commitments

 

Hancock has an arrangement within its revolving credit agreement that provides up to $15.0 million in letters of credit. At August 1, 2015, Hancock had commitments for $1.2 million of documentary letters of credit, which support purchase orders for merchandise. Hancock also has standby letters of credit for $5.4 million, to guarantee payment of potential insurance claims, shipments of inventory, security bonds and freight charges, and backstop letters of credit issued to its previous lender for $0.7 million. Hancock leases its retail fabric store locations under operating leases expiring at various dates through 2026.

 

The Company has no standby repurchase obligations or guarantees of other entities' debt.

 

For further information on our contractual obligations, please refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations and Commercial Commitments” as presented in our Annual Report on Form 10-K for the fiscal year ended January 31, 2015.

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to adopt accounting policies and make significant judgments and estimates to develop amounts reflected and disclosed in the financial statements. In many cases, there are alternative policies or estimation techniques that could be used. We maintain a process to review the application of our accounting policies and to evaluate the appropriateness of the many estimates that are required to prepare the financial statements of a large corporation. However, even under optimal circumstances, estimates routinely require adjustment based on changing circumstances and the receipt of new or better information. There have been no significant changes to our accounting policies and estimates as discussed under Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2015.

 

 

Related Party Transactions

 

See Note 14 to the Company’s Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2015 filed with the SEC on May 1, 2015, for details regarding the related party transactions that the Company has entered into.

 

The Company has no other balances with related parties, nor has it had any other material transactions with related parties during the twenty-six week period ended August 1, 2015.

 

Effects of Inflation

 

Inflation in labor and occupancy costs could 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 in those requirements will affect Hancock. In addition, payroll taxes, employee benefits, and other employee costs continue to increase, and the full impact of the recently enacted health care reform legislation will not be known for several years. Health insurance costs, in particular, continue to rise at a high rate in the United States each year, and higher employer contributions to Hancock’s pension plan could be necessary if investment returns are weak. Costs of leases for new store locations and renewal costs of older leases continue to increase. Hancock believes the practice of maintaining adequate operating margins through a combination of price adjustments and cost controls, careful evaluation of occupancy needs, and efficient purchasing practices are the most effective tools for coping with increased costs and expenses.

 

Seasonality

 

Hancock's business is seasonal. Peak sales periods occur during the fall and early spring weeks, while the lowest sales periods occur during the summer. Working capital requirements needed to finance our operations fluctuate during the year and reach their highest levels during the second and third fiscal quarters as we increase our inventory in preparation for our peak selling season during the fourth quarter.

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

 

Hancock did not hold derivative financial or commodity instruments at August 1, 2015.

 

Interest Rate Risk

 

We are exposed to financial market risks, including changes in interest rates. At our option, borrowings under the revolving credit facility bear interest at a rate equal to, either (a) a LIBOR rate determined by reference to the offered rate for deposits in dollars for the interest period relevant to such borrowing or (b) a base rate, in each case plus an applicable margin and adjusted for certain additional costs and fees and the term loan bears interest at a LIBOR rate. As of August 1, 2015, we had borrowings outstanding of approximately $67.8 million under the Revolver and $17.5 million under the Term Loan. If interest rates increased 100 basis points, our annual interest expense would increase approximately $853,000, assuming borrowings under the Revolver and Term Loan as existed at August 1, 2015.

 

 

In addition to the Revolver and Term Loan, as of August 1, 2015 the Company has outstanding Notes for $8.2 million on which interest is payable quarterly on the issuance date anniversary. The quarterly interest is payable at LIBOR plus 12.0% on the Notes. If interest rates increased 100 basis points, our annual interest expense would increase $82,000, assuming borrowings under the Notes as existed at August 1, 2015.

 

 

Foreign Currency Risk

 

All of the Company’s business is transacted in U.S. dollars and, accordingly, devaluation of the dollar against other currencies can increase product costs although this did not significantly impact the twenty-six week period ended August 1, 2015. As of August 1, 2015, the Company had no financial instruments outstanding that were sensitive to changes in foreign currency exchange rates.

 

 

ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the Company’s management, including our President and Chief Executive Officer (principal executive officer) and Executive Vice President and Chief Financial Officer (principal financial officer), as appropriate, to allow timely decisions regarding the required disclosures.

 

In connection with the preparation of this Quarterly Report on Form 10-Q as of August 1, 2015, the Company’s management, under the supervision and with the participation of the Company’s President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in the Rules 13a-15(e) and 15d-15(e) under the Exchange Act).  Based upon this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of August 1, 2015.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) within the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

The Company was a party to a consolidated action pending in the Northern District of Mississippi, captioned Hancock Fabrics, Inc. v. Rowdec, LLC d/b/a Westlake Associates, Case No. 1:12-cv-131-SA-DAS, and Case No. 1:12-cv-222-SA-DAS.  The action stemmed from a March 22, 2012 arbitration award, which involved a dispute over calculating royalties under a Consulting and Sales Agreement between the Company and Rowdec, LLC d/b/a Westlake Associates (“Westlake”). Westlake sought royalties on sales in all of the Company’s nearly 270 stores and on the internet and attorneys’ fees. On April 24, 2013 Westlake filed a motion to confirm the award through which it sought to have the court broaden the arbitration award and grant it royalties on sales in all stores and on the internet. On November 19, 2013, the United States District Court for the Northern District of Mississippi issued a Judgment and Order upholding the arbitral award of attorneys’ fees but declining to order the Company to pay royalties on sales in all of the Company’s stores. Following the district court’s decision, the matter was closed.   On January 23, 2014, Westlake tried to revive the closed case by filing a motion to enforce judgment and for contempt against the Company and sought to appoint an independent auditor at the Company’s expense and attorneys’ fees for the costs of bringing its motion. The Court denied Westlake’s motion in full on September 23, 2014.

 

On November 26, 2014, Westlake filed an Arbitration Demand with AAA, in which it seeks the same relief that it already sought in federal court. On December 10, 2014, the Company filed a motion to stay the arbitration and for sanctions against Westlake. On August 27, 2015, the district court denied Hancock’s motion to stay the arbitration. The district court held that Westlake did not waive its right to arbitrate, and refused to decide whether Westlake’s Arbitration Demand is barred by the federal court decision, finding that that issue should be resolved by the arbitrator. Hancock plans to appeal to the United States Court of Appeals for the Fifth Circuit. The arbitration may go forward while the appeal is being briefed and heard. We believe Westlake’s position is meritless and plan to continue to contest the matter vigorously, but if we do not prevail on appeal and the arbitration were to reach a conclusion that is adverse to us, we could be required to pay damages that could be material. 

 

“Item 3. Legal Proceedings” of our Form 10-K for the fiscal year ended January 31, 2015 includes a discussion of other legal proceedings. There have been no other material changes from the legal proceedings described in our Form 10-K.

 

 

ITEM 1A. RISK FACTORS

 

The risk factors listed in Part I “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2015, should be considered with the information provided elsewhere in this Quarterly Report on Form 10-Q, which could materially adversely affect the Company’s business, financial condition or results of operations.  There are no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2015.

 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

In June of 2000 the Board of Directors authorized the repurchase of up to 2,000,000 shares of the Company’s Common Stock from time to time when warranted by market conditions. There have been 1,756,755 shares purchased under this authorization through August 1, 2015, and the number of shares that may yet be purchased under this authorization is 243,245. The Company did not repurchase any shares in the market during the period covered by this Quarterly Report, but did accept shares in settlement of tax withholding obligations on restricted shares.

 

The Company did not sell any unregistered equity securities during the period covered by this Quarterly Report.

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not Applicable

 

 

ITEM 5. OTHER INFORMATION

 

The previously reported purchase agreement between the Company and F9 Properties LLC for the sale of its corporate headquarters was terminated on July 23, 2015 as conditions to closing the transaction were not met because final terms could not be agreed to.

 

In connection with Mr. O. Pierce Crockett’s appointment as interim Chief Financial Officer (CFO), Mr. Crockett will be entitled to an initial annual base salary of $175,000 while serving as interim CFO. This was approved by the Management Review and Compensation Committee of the Board of Directors on September 4, 2015.

 

 

ITEM 6. EXHIBITS

 

3.1	Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on July 31, 2008)
3.2	Amended and Restated By-Laws (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on June 8, 2012)
10.1	Amended and Restated 2001 Stock Incentive Plan, effective as of May 1, 2015
10.2	Purchase Agreement between Hancock Fabrics, Inc. and F9 Properties LLC dated June 4, 2015 (terminated as of July 23, 2015)
31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) Under The Securities Exchange Act of 1934
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) Under The Securities Exchange Act of 1934
32.1	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant To Section 906 of The Sarbanes-Oxley Act of 2002
101 INS	XBRLInstance Document
101 SCH	XBRLTaxonomy Extension Schema Document
101 CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101 DEF	XBRL Taxonomy Extension Definition Linkbase Document
101 LAB	XBRL Taxonomy Extension Label Linkbase Document
101 PRE	XBRL Taxonomy Extension Presentation Linkbase Document

 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, 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/ James Brown
		James Brown
		Executive Vice President and
		Chief Financial Officer
		(Principal Financial Officer)

Date: September 4, 2015

 

 

EXHIBIT INDEX

 

 

 

Exhibit No.	Description
3.1	Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on July 31, 2008)
3.2	Amended and Restated By-Laws (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on June 8, 2012)
10.1	Amended and Restated 2001 Stock Incentive Plan, effective as of May 1, 2015
10.2	Purchase Agreement between Hancock Fabrics, Inc. and F9 Properties LLC dated June 4, 2015 (terminated as of July 23, 2015)
31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) Under The Securities Exchange Act of 1934
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) Under The Securities Exchange Act of 1934
32.1	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant To Section 906 of The Sarbanes-Oxley Act of 2002
101 INS	XBRLInstance Document
101 SCH	XBRLTaxonomy Extension Schema Document
101 CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101 DEF	XBRL Taxonomy Extension Definition Linkbase Document
101 LAB	XBRL Taxonomy Extension Label Linkbase Document
101 PRE	XBRL Taxonomy Extension Presentation Linkbase Document

 

      

25 

Exhibit 10.1

 

HANCOCK FABRICS, INC.
2001 STOCK INCENTIVE PLAN
(AS AMENDED AND RESTATED EFFECTIVE
AS OF MAY 1, 2015)

 

1.

Purpose.

 

The purpose of the HANCOCK FABRICS, INC. 2001 STOCK INCENTIVE PLAN (the “Plan”) is to further the earnings of HANCOCK FABRICS, INC., a Delaware corporation, and its subsidiaries (collectively, the “Company”) by assisting the Company in attracting, retaining and motivating key employees and directors of high caliber and potential. The Plan provides for the award of long-term incentives to those key employees and directors who make substantial contributions to the Company by their loyalty, industry and invention.

 

2.	Administration.

 

The Plan shall be administered by the Stock Plan Committee (the “Committee”) selected by the Board of Directors of the Company (the “Board of Directors”) consisting solely of two or more members who are “outside directors” as described in Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”). Except to the extent permitted under Section 6(c) hereof or Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the “1934 Act”) (or any successor rule of similar import), each Committee member shall be ineligible to receive, and shall not have been, during the one-year period prior to appointment thereto, granted or awarded awards pursuant to this Plan or any other similar plan of the Company or any affiliate of the Company. Without limiting the foregoing, the Committee shall have full and final authority in its discretion to interpret the provisions of the Plan and to decide all questions of fact arising in its application. Subject to the provisions hereof, the Committee shall have full and final authority in its discretion to determine the employees and directors to whom awards shall be made under the Plan; to determine the type of awards to be made and the amount, size and terms and conditions of each such award; to determine the time when awards shall be granted; to determine the provisions of each agreement evidencing an award; and to make all other determinations necessary or advisable for the administration of the Plan.

 

3.	Stock Subject to the Plan.

 

The Company may grant awards under the Plan with respect to not more than a total of 8,800,000 shares of $.01 par value common stock of the Company (the “Shares”), (subject to adjustment as provided in Section 17, below). Such Shares may be authorized and unissued Shares or treasury Shares. Except as otherwise provided herein, if, for any reason, any Shares awarded or subject to purchase under the Plan are not delivered or purchased, or are reacquired by the Company, for reasons including, but not limited to, a forfeiture of Restricted Stock or termination, expiration or cancellation of an Option, Stock Appreciation Right, or Restricted Stock Units (“Returned Shares”), such Returned Shares shall not be charged against the aggregate number of Shares available for issuance pursuant to awards under the Plan and shall again be available for issuance pursuant to an award under the Plan.

 

 

4.	Eligibility to Receive Awards.

 

Persons eligible to receive awards under the Plan shall be limited to those officers, other key employees and directors of the Company who are in positions in which their decisions, actions and counsel have a significant impact upon the profitability and success of the Company (but excluding members of the Committee, except as provided in Section 6(c)).

 

5.	Form of Awards.

 

Awards may be made from time to time by the Committee in the form of stock options (“Options”) to purchase Shares, stock appreciation rights (“SARs”), restricted stock, restricted stock units (“RSUs”) or any combination of the above. Options shall be limited to Options which do not qualify (“Nonqualified Stock Options”) as incentive stock options within the meaning of Section 422(b) of the Code.

 

6.	Options and SARs.

 

(a)

Options for the purchase of Shares shall be evidenced by written agreements in such form not inconsistent with the Plan as the Committee shall approve from time to time; provided that the maximum number of Options and SARs in the aggregate which may be granted to any one grantee during any twelve-month period is 100,000 (except that (i) the Committee in its discretion may exceed such limitation as to executive officers of the Company and (ii) such limitation shall be adjusted pursuant to Section 17 below). Such agreement shall contain the terms and conditions applicable to the Options, including in substance the following terms and conditions:

 

(i)

Number of Shares. Each Option agreement shall identify the Options represented as Nonqualified Stock Options, and shall set forth the number of Shares subject to the Option (as adjusted pursuant to Section 17, below).

 

(ii)

Option Price. The Option exercise price to be paid by the optionee to the Company for each Share purchased upon the exercise of an Option shall be determined in good faith by the Committee, but shall in no event be less than 100 percent of the fair market value per Share on the date the Option is granted, as determined in good faith by the Committee. Notwithstanding anything herein to the contrary, the Committee shall not reprice any Options to a lower exercise price at any time during the term of any Option granted under this Plan (except as provided in Section 17).

 

(iii)

Vesting and Exercise Term. Each Option agreement shall state the period or periods of time within which the Option may be exercised, in whole or in part, as determined by the Committee and subject to such terms and conditions as are prescribed for such purpose by the Committee, provided that no Option shall be exercisable, except as provided in Section 15 or in the event of Retirement (as defined below), death or Disability (as defined below), any more rapidly than from (A) the first anniversary of the date of grant thereof, to the extent of 25% of the Shares covered thereby, (B) the thirteenth month from the date of grant thereof, and each additional month thereafter, to the extent of an additional 1/36th of the Shares covered thereby, provided that, effective for grants of Options made on or after April 16, 2009 each Option agreement shall state the period or periods of time within which the Option may be exercised, in whole or in part, as determined by the Committee and subject to such terms and conditions as are prescribed for such purpose by the Committee. The Committee, in its discretion, may provide in the Option agreement (or at the time of the Optionee’s termination of employment) that the Option shall become vested and immediately exercisable, in whole or in part, in the event of the grantee’s Retirement, death or Disability (or in one or more of such events). Notwithstanding the foregoing, no Option shall be exercisable after seven years from the date of grant.

 

 

(iv)

Payment for Shares. The purchase price of the Shares with respect to which an Option is exercised shall be payable in full at the time of exercise in cash, or Shares at fair market value (i.e., in either a “net” exercise, a “cashless” exercise or attestation of ownership of Shares), or a combination thereof, as the Committee may determine and all subject to such terms and conditions as may be prescribed by the Committee for such purpose. If the purchase price is paid by tendering Shares, the Committee in its discretion may grant the optionee a new Option for the number of Shares used to pay the purchase price.

 

(v)

Exercise Rights Upon Termination. In the event of Termination (as defined below) of an optionee’s status as an employee or director of the Company for any cause other than Retirement, death or Disability, all unexercised Options shall terminate immediately unless otherwise specified in the Option agreement or unless the Committee shall determine otherwise. As used herein, “Termination” means, (i) in the case of an employee, the cessation of the grantee’s employment by the Company for any reason, and (ii) in the case of a director, the cessation of the grantee’s service as a director of the Company; and “Terminates” has the corresponding meaning. As used herein, “Retirement” means (in the case of an employee) (A) for grants made prior to January 30, 2011, termination of employment under circumstances entitling the participant to elect immediate payment of retirement benefits under the Hancock Fabrics, Inc. Consolidated Retirement Plan (“Retirement Plan”) or any successor plan (or if the grantee was not a participant in the Retirement Plan, the grantee had satisfied the same age, service and other conditions as would be required to receive immediate payment of benefits under the Retirement Plan) and (B) for grants made on or after January 30, 2011, Retirement shall be defined as set forth on Appendix A attached hereto. In the case of a director, Retirement shall have the same meaning as Termination or Terminates. As used herein, “Disability” means the grantee’s failure to return to full-time employment duties immediately after the grantee has exhausted the short term disability benefits under the then applicable short term disability policy or procedures of the Company, and “Disabled” has the corresponding meaning. In the event that an optionee Retires, dies or becomes Disabled prior to the expiration of his Option and without having fully exercised his Option, the optionee or his Beneficiary (as defined below) shall have the right to exercise the part of the Option that is vested at Termination during its term within a period of (i) one year after Termination due to Retirement, death or Disability, or (ii) one year after death if death occurs either within one year after Termination due to Retirement or Disability to the extent that the Option was exercisable at the time of death or Termination, or within such other period, and subject to such terms and conditions, as may be specified by the Committee. As used herein, “Beneficiary” means the person or persons designated in writing by the grantee as his Beneficiary with respect to an award under the Plan; or, in the absence of an effective designation or if the designated person or persons predecease the grantee, the grantee’s Beneficiary shall be the person or persons who acquire by bequest or inheritance the grantee’s rights in respect of an award. In order to be effective, a grantee’s designation of a Beneficiary must be on file with the Committee before the grantee’s death, but any such designation may be revoked and a new designation substituted therefor at any time before the grantee’s death.

 

 

(vi)

Nontransferability. Except as provided in Section 13(b), Options granted under the Plan shall not be sold, assigned, transferred, exchanged, pledged, hypothecated, or otherwise encumbered, other than by will or by the laws of descent and distribution. Except as provided in Section 13(b), during the lifetime of the optionee the Option is exercisable only by the optionee.

 

(b)     Stock Appreciation Rights (SARs) may be granted to an eligible employee or director in the discretion of the Committee. A SAR shall entitle the holder, within the specified period (which may not exceed 7 years), to exercise the SAR and receive in exchange therefor a payment having an aggregate value equal to the amount by which the fair market value of a Share exceeds the exercise price, times the number of Shares with respect to which the SAR is exercised. The exercise price for a SAR shall not be less than 100% of the fair market value of a Share on the date the SAR is granted. SARs granted under the Plan shall be exercisable at such times and shall be subject to such restrictions and conditions as the Committee shall in each instance approve, including conditions related to continuing employment, which need not be the same for each grant or each grantee. The Committee may provide in the SAR agreement for exercise rights upon termination that are the same as those provided for Options in Section 6(a)(v) above. SARs shall not be transferable and shall be subject to the same transferability restrictions as Options. The Committee shall have sole discretion to determine in each Agreement whether the payment with respect to the exercise of a SAR will be in the form of all cash, all Shares, or any combination thereof. If payment is to be made in Shares, the number of Shares shall be determined based on the fair market value of a Share on the date of exercise. If the Committee elects to make full payment in Shares, no fractional Shares shall be issued and cash payments shall be made in lieu of fractional shares. The Committee shall have sole discretion as to the timing of any payment made in cash or Shares, or a combination thereof, upon exercise of SARs. Payment may be made in a lump sum, or in annual installments in accordance with such rules as the Committee may establish.

 

 

(c)

Grants to Nonemployee Directors. Notwithstanding any other provision of the Plan, the grant of Options, SARs, RSUs and/or restricted stock hereunder to directors who are not also employees of the Company (“Nonemployee Directors”) shall be subject to the following terms and conditions:

 

(i)

The Nonemployee Directors of the Company installed pursuant to the Company’s Plan of Reorganization approved on August 1, 2008, shall receive an initial grant of 50,000 Shares of restricted stock (granted at August 4, 2008), vesting to the extent of 50% of the shares so granted on the first anniversary of the date of grant, and 25% and 25% on the successive second and third such anniversary dates. Subsequent grants of awards to Nonemployee Directors may be made at the discretion of the Compensation Committee, subject to any limitations under Section 16 of the Securities Exchange Act of 1934.

 

(ii)

Each Nonemployee Director of the Company may elect annually (at the time of his initial election and subsequently prior to the annual meeting of stockholders for the election of directors), in advance at such time as may be designated by the Committee, to receive all or a portion of his compensation for services rendered as a Nonemployee Director in Shares of restricted stock issued under this Plan in lieu of cash, which Shares shall be granted at the time of such annual election, vesting to the extent of 1/12th of the shares so awarded on the same date of each subsequent month.

 

(iii)

The exercise price of Shares subject to an Option or SAR granted to Nonemployee Directors and the price used to calculate the number of Shares of restricted stock to be issued in lieu of cash consideration under this paragraph 6(c) shall be equal to 100 percent of the fair market value of such Shares on the date the Option or SAR is granted or the compensation would otherwise have been paid in cash, all as determined by the Committee.

 

(iv)

Except as provided in Section 15, each Option or SAR granted to Nonemployee Directors under this paragraph 6(c) shall not be exercisable until one year after the date of grant;

 

(v)

Unless otherwise provided in the Plan, all provisions with respect to the terms of Nonqualified Stock Options and SARs hereunder shall be applicable to Options or SARs granted to Nonemployee Directors under this Section 6(c).

 

 

(vi)

The grants described in this Section 6(c) shall constitute the only awards under the Plan permitted to be made to Nonemployee Directors.

 

7.	Restricted Stock Awards; Restricted Stock Units.

 

(a)

Restricted stock awards under the Plan shall consist of Shares free of any purchase price, or for such purchase price as may be established by the Committee, restricted against transfer, subject to forfeiture, and subject to such other terms and conditions (including attainment of performance objectives) as may be determined by the Committee. Shares of restricted stock issued to Nonemployee Directors shall be governed by Section 6(c) above if that section is inconsistent with this Section 7(a). Restricted stock shall be evidenced by written restricted stock agreements in such form not inconsistent with the Plan as the Committee shall approve from time to time, which agreement shall contain the terms and conditions applicable to such awards, including in substance the following terms and conditions:

 

(i)

Restriction Period. Restrictions shall be imposed for such period or periods as may be determined by the Committee. The Committee, in its discretion, may provide in the agreement circumstances under which the restricted stock shall become immediately transferable and nonforfeitable, or under which the restricted stock shall be forfeited, provided that no restricted stock award shall become immediately transferable and nonforfeitable, except as provided in Section 15 or unless provided in the agreement in the event of Retirement, death or Disability, any more rapidly than from (i) the first anniversary of the date of grant thereof, to the extent of 50% of the Shares covered thereby, (ii) the second anniversary of the date of grant thereof, to the extent of an additional 25% of the Shares covered thereby, and (iii) the third anniversary of the date of grant thereof, to the extent of an additional 25% of the Shares covered thereby.

 

(ii)

Restrictions Upon Transfer. Restricted stock and the right to vote such Shares and to receive dividends thereon, may not be sold, assigned, transferred, exchanged, pledged, hypothecated, or otherwise encumbered, except as herein provided, during the restriction period applicable to such Shares. Notwithstanding the foregoing, and except as otherwise provided in the Plan, the grantee shall have all of the other rights of a stockholder, including, but not limited to, the right to receive dividends and the right to vote such Shares. Any right to receive dividends shall be limited to a right to receive such dividends at the same time and in the same amount as dividends which are paid to holders of unrestricted shares of capital stock of the Company.

 

 

(iii)

Certificates. A certificate or certificates representing the number of restricted Shares granted shall be registered in the name of the grantee. The Committee, in its sole discretion, shall determine when the certificate or certificates shall be delivered to the grantee (or, in the event of the grantee’s death, to his Beneficiary), may provide for the holding of such certificate or certificates in escrow or in custody by the Company or its designee pending their delivery to the grantee or Beneficiary, and may provide for any appropriate legend to be borne by the certificate or certificates.

 

(iv)

Lapse of Restrictions. The restricted stock agreement shall specify the terms and conditions upon which any restriction upon restricted stock awarded under the Plan shall expire, lapse, or be removed, as determined by the Committee. Upon the expiration, lapse, or removal of such restrictions, Shares free of the restrictive legend shall be issued to the grantee or his legal representative.

 

(b)           Awards of Restricted Stock Units (RSUs) may be made to eligible employees in accordance with the following terms and conditions:

 

(i)

The Committee, in its discretion, shall determine the number of RSUs to grant to a grantee, the restriction period and other terms and conditions of the award, including whether the award will be paid in cash, Shares or a combination of the two and the time when the award will be payable (i.e., at vesting, termination of employment or another date).

 

(ii)

RSUs shall not be sold, transferred or otherwise disposed of and shall not be pledged or otherwise hypothecated.

 

(iii)

Awards of RSUs shall be subject to the same terms as are applicable to awards of restricted stock under Section 7(a); provided, however, a grantee to whom RSUs are awarded has no rights as a shareholder with respect to the Shares represented by the RSUs unless and until the Shares are actually delivered to the grantee; provided further, however, RSUs may have dividend equivalent rights if provided for by the Committee which may be subject to the same terms and conditions governing dividends and distributions applicable to restricted stock awards under Section 7(a)with the exception that in no event shall RSUs possess voting rights.

 

(iv)

The RSU agreement shall set forth the terms and conditions that shall apply upon the termination of the grantee’s employment with the Company (including a forfeiture of RSUs for which the restrictions have not lapsed upon Participant’s ceasing to be employed) as the Committee may, in its discretion, determine at the time the award is granted.

 

 

8.	General Restrictions.

 

Each award under the Plan shall be subject to the requirement that if at any time the Company shall determine that (i) the listing, registration or qualification of the Shares subject or related thereto upon any securities exchange or under any state or federal law, or (ii) the consent or approval of any regulatory body, or (iii) an agreement by the recipient of an award with respect to the disposition of Shares, or (iv) the satisfaction of withholding tax or other withholding liabilities is necessary or desirable as a condition of or in connection with the granting of such award or the issuance or purchase of Shares thereunder, such award shall be consummated in whole or in part only if such listing, registration, qualification, consent, approval, agreement, or withholding shall have been effected or obtained on terms acceptable to the Company. Any such restriction affecting an award shall not extend the time within which the award may be exercised; and neither the Company nor its directors or officers nor the Committee shall have any obligation or liability to the grantee or to a Beneficiary with respect to any Shares with respect to which an award shall lapse or with respect to which the grant, issuance or purchase of Shares shall not be effected, because of any such restriction.

 

9.	Single or Multiple Agreements.

 

Multiple awards, multiple forms of awards, or combinations thereof may be evidenced by a single agreement or multiple agreements, as determined by the Committee.

 

10.	Rights of the Shareholder.

 

The recipient of any award under the Plan shall have no rights as a stockholder, except as provided in Section 7(a), with respect thereto unless and until certificates for Shares are issued to him, and the issuance of Shares shall confer no retroactive right to dividends.

 

11.	Rights to Terminate Employment.

 

Nothing in the Plan or in any agreement entered into pursuant to the Plan shall confer upon any person the right to continue in the employment of the Company or to serve as a director, or affect any right which the Company may have to terminate the employment or directorship of such person.

 

12.	Withholding.

 

Prior to the issuance or transfer of Shares under the Plan, the recipient shall remit to the Company an amount sufficient to satisfy any federal, state or local withholding tax requirements. The amount to be withheld shall be determined by the Company and shall be the based on the statutory requirements. The recipient may satisfy the withholding requirement in whole or in part by electing to have the Company withhold Shares having a value equal to the amount required to be withheld. The value of the Shares to be withheld shall be the fair market value, as determined by the Committee, of the stock on the date that the amount of tax to be withheld is determined (the “Tax Date”). Such election must be made prior to the Tax Date, must comply with all applicable securities law and other legal requirements, as interpreted by the Committee, and may not be made unless approved by the Committee, in its discretion.

 

 

13.	Non-Assignability.

 

(a)

Except as provided in Section 13(b), no award under the Plan shall be sold, assigned, transferred, exchanged, pledged, hypothecated, or otherwise encumbered, other than by will or by the laws of descent and distribution, or by such other means as the Committee may approve. Except as provided in Section 13(b), or as otherwise provided herein, during the life of the recipient, such award shall be exercisable only by such person or by such person’s guardian or legal representative.

 

(b)

The Committee may, in its sole discretion from time to time, permit the assignment of any Nonqualified Stock Option to one or more of an optionee’s “Immediate Family” (as defined herein). As used herein, members of an optionee’s “Immediate Family” shall include only (i) persons who, at the time of transfer, are the optionee’s spouse or natural or adoptive lineal ancestors or descendants, and (ii) trusts established for the exclusive benefit of the optionee and/or one or more of the persons described in clause (i) of this Section 13(b).

 

14.	Non-Uniform Determinations.

 

The Committee’s determinations under the Plan (including without limitation determinations of the persons to receive awards, the form, amount and timing of such awards, the terms and provisions of such awards and the agreements evidencing same, and the establishment of values and performance targets) need not be uniform and may be made selectively among persons who receive, or are eligible to receive, awards under the Plan, whether or not such persons are similarly situated.

 

15.	Change In Control Provisions.

 

(a)

In the event of a Change in Control (as defined below), the Committee in its sole discretion may cause any Options or SARs awarded under the Plan to vest and the restrictions on restricted stock and RSUs granted under the Plan to lapse, all in accordance with terms determined by the Committee in such event, even though such determination is made after the date of award or grant (so long as such terms are not more restrictive than those contained in any prior agreement with the grantees relating to the affected awards). In addition, the Committee may provide in the award agreements issued pursuant to this Plan that some or all of the following acceleration and valuation provisions (provided that more restrictive provisions may be applicable in the discretion of the Committee) shall apply in the event of a Change in Control to the grantee, or to the grantee but only if such grantee is (i) involuntarily terminated upon a Change in Control as a direct result of the Change in Control or (ii) terminates his own employment for good reason (as defined in the agreement) upon a Change in Control (which determination of causation in (i) and (ii) is to be made by the Committee):

 

(A)

Any Options or SARs awarded under the Plan not previously exercisable and vested shall become fully exercisable and vested.

 

 

	(B)	Any restrictions and deferral limitations applicable to any restricted stock or RSUs to the extent not already vested under the Plan, shall lapse and such shares shall be deemed fully vested.
	(C)	The value of all outstanding Options, SARs or RSUs, and restricted stock, in each case to the extent vested, shall, unless otherwise determined by the Committee in its sole discretion at or after grant but prior to any Change in Control, be cashed out on the basis of the Change in Control Price (as defined) as of the date such Change in Control is determined to have occurred or such other date as the Committee may determine prior to the Change in Control.

  

(b)

As used herein, the term “Change in Control” means the occurrence of any of the following events, provided that, to the extent Section 409A is applicable, such event also constitutes a change in the ownership or effective control of the Company or in the ownership of a substantial portion of the assets of the Company, each as defined for purposes of Section 409A of the Code:

 

(i)

Any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a “Person”), is or becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of 50% or more of the total voting power of the then outstanding Voting Stock; provided, however, that the following events shall not constitute or result in a Change in Control: (A) any acquisition of Voting Stock directly from Company, (B) any acquisition of Voting Stock by Company, (C) any acquisition of Voting Stock by any employee benefit plan (or related trust, or any trustee or other fiduciary thereof in such capacity) sponsored or maintained by Company or any Subsidiary or (D) any acquisition of Voting Stock by any Person pursuant to a Business Combination that complies with clauses (A), (B) and (C) of subsection (iii) below;

 

(ii)

During any two-year period, individuals who, as of the beginning of such period, constitute the Board (the “Incumbent Board”) cease for any reason (other than death or disability) to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by Company’s stockholders, was approved by a vote of at least a majority of the then Incumbent Directors (either by a specific vote or by approval of the proxy statement of Company in which such person is named as a nominee for director, without objection of Company, to such nomination) shall be considered as though such individual were an Incumbent Director, but excluding for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest (as described in Rule 14a-12(c) of the Exchange Act) with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board;

 

 

(iii)

Consummation of a reorganization, merger or consolidation, or sale or other disposition of all or substantially all of the assets, of Company (a “Business Combination”), unless, in each case, immediately following such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners of Voting Stock of Company immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the entity resulting from such Business Combination (including, without limitation, an entity which as a result of such transaction owns Company or all or substantially all of Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions relative to each other as their ownership, immediately prior to such Business Combination, of the Voting Stock of Company (B) no Person (excluding any entity resulting from such Business Combination or any employee benefit plan (or related trust, of any trustee or other fiduciary thereof in such capacity) sponsored or maintained by Company, any Subsidiary or such entity resulting from such Business Combination) beneficially owns, directly or indirectly, voting securities representing 15% or more of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the entity resulting from such Business Combination except to the extent such ownership existed prior to the Business Combination and (C) at least a majority of the members of the Board of the entity resulting from such Business Combination were Incumbent Directors at the time of the execution of the initial agreement or of the action of the Board providing for such Business Combination; or

 

(iv)

Consummation by the Company of a plan of complete liquidation or dissolution of Company, except pursuant to a Business Combination that complies with clauses (A), (B) and (C) of subsection (iii) above;

 

(v)

For purposes of this section, “Voting Stock” means securities of the Company entitled to vote generally in the election of directors and “Subsidiary” means an entity in which the Company directly or indirectly beneficially owns 50% or more of the outstanding Voting Stock.

 

(c)

As used herein, the term “Change in Control Price” means, as to (b)(i) above, the average closing price per share as reported on the exchange on which the Shares are then traded during the 60 day period immediately preceding the occurrence of the Change in Control, or as to (b)(ii) above, the actual price paid in any transaction (or the weighted average price paid in the case of a combination of transactions) related to the Change in Control, in each case as determined by the Committee.

 

 

16.	Non-Competition Provision.

 

Unless the award agreement relating to an Option, SAR or RSU or restricted stock specifies otherwise, a grantee shall forfeit all unexercised, unearned and/or unpaid awards, including, but not by way of limitation, awards earned but not yet paid, all unpaid dividends and dividend equivalents, and all interest, if any, accrued on the foregoing, if the grantee, without the written consent of the Company, engages directly or indirectly in any manner or capacity as principal, agent, partner, officer, director, employee or otherwise, in any business or activity which is, in the opinion of the Committee, (i) competitive with the business conducted by the Company or any of its subsidiaries, or (ii) inimical to the best interests of the Company or any of its subsidiaries.

 

17.	Adjustments.

 

In the event of any change in the outstanding common stock of the Company, by reason of a stock dividend or distribution, recapitalization, merger, consolidation, reorganization, split-up, combination, exchange of Shares or the like, then equitable adjustments shall be made by the Committee, as it determines are necessary and appropriate, in the number of Shares which may be issued under the Plan, the number of Shares subject to outstanding awards, and the Option or SAR exercise price of each outstanding Option or SAR, in order to prevent dilution or enlargement of the rights of grantees, provided that any fractional Shares resulting from such adjustments shall be eliminated. Provided, however, that no change in the terms may provide the holder of Options or SARs with a direct or indirect reduction in the ratio of the Option or SAR exercise price to the fair market value of the Shares.

 

18.	Amendment.

 

The Board of Directors may terminate, amend, modify or suspend the Plan at any time, except that the Board shall not, without the authorization of the holders of a majority of Company’s voting securities, modify existing awards respecting the number of Shares, exercise price or extension of terms, issue new awards in exchange for the cancellation of outstanding awards, increase the maximum number of Shares which may be issued under the Plan (other than pursuant to Section 17 hereof), extend the last date on which awards may be granted under the Plan, extend the date on which the Plan expires, change the class of persons eligible to receive awards, or change the minimum Option or SAR price. In no event, however, shall the provisions of Section 6(c) be amended more often than once every six months, other than to comport with changes in the Code, the Employment Retirement Income Security Act of 1974, as amended, or the rules thereunder. No termination, modification, amendment or suspension of the Plan shall adversely affect the rights of any grantee or Beneficiary under an award previously granted, unless the grantee or Beneficiary shall consent; but it shall be conclusively presumed that any adjustment pursuant to Section 18 hereof does not adversely affect any such right.

 

19.	Effect on Other Plans.

 

Participation in this Plan shall not affect a grantee’s eligibility to participate in any other benefit or incentive plan of the Company. Any awards made pursuant to this Plan shall not be used in determining the benefits provided under any other plan of the Company unless specifically provided therein.

 

 

20.	Effective Date and Duration of the Plan.

 

The Plan was initially effective March 4, 2001 when adopted by the Board of Directors, and was subsequently approved by the holders of a majority of the Company’s voting securities. The Plan was amended in April 7, 2010 and approved by stockholders on June 8, 2010, to extend the term of the Plan until March 4, 2021. Unless it is sooner terminated in accordance with Section 18 hereof, the Plan shall remain in effect until all awards under the Plan have been satisfied by the issuance of Shares or payment of cash or have expired or otherwise terminated, but no awards shall be granted after March 4, 2021, provided that awards outstanding on March 4, 2021 shall remain outstanding in accordance with their terms.

 

21.	Unfunded Plan.

 

The Plan shall be unfunded, except to the extent otherwise provided in accordance with Section 7 hereof. Neither the Company nor any affiliate shall be required to segregate any assets that may be represented by Options and neither the Company nor any affiliate shall be deemed to be a trustee of any amounts to be paid under any stock option. Any liability of the Company or any affiliate to pay any grantee or Beneficiary with respect to an option shall be based solely upon any contractual obligations created pursuant to the provisions of the Plan; no such obligations will be deemed to be secured by a pledge or encumbrance on any property of the Company or an affiliate.

 

22.	Governing Law.

 

The Plan shall be construed and its provisions enforced and administered in accordance with the laws of the State of Delaware except to the extent that such laws may be superseded by any federal law.

 

 

23.	Section 409A Compliance.
	The Plan shall at all times be interpreted and operated in good faith compliance in accordance with the requirements of Section 409A. Any action that may be taken (and, to the extent possible, any action actually taken) by the Company or the Committee shall not be taken (or shall be void and without effect), if such action violates the requirements of Section 409A. Any provision in the Plan that is determined to violate the requirements of Section 409A shall be void and without effect. In addition, any provision that is required to appear in the Plan in accordance with Section 409A that is not expressly set forth herein shall be deemed to be set forth herein, and the Plan shall be administered in all respects as if such provision were expressly set forth. The Company and the Committee shall have the authority to delay the commencement of all or a part of the payments to a grantee under the Plan  if the grantee is a “key employee” of the Company (as determined by the Company in accordance with procedures established by the Company that are consistent with Section 409A) to a date which is six months after the date of grantee’s termination of employment (and on such date the payments that would otherwise have been made during such six-month period shall be made), but only to the extent such delay is required under the provisions of Section 409A to avoid imposition of additional income and other taxes, provided that the Company and the Committee will take into account any transitional rules and exemption rules available under Section 409A.

 

ADOPTED BY THE BOARD OF DIRECTORS OF HANCOCK FABRICS, INC., ON THE 14^th DAY OF JUNE 2001.

 

By:                                                                                          

 

As amended June 9, 2005, June 7, 2006, August 4, 2008, April 26, 2009, April 7, 2010, March 22, 2011, and May 1, 2015

 

 

APPENDIX A

 

DEFINITION OF RETIREMENT

 

 

 

 

 

For grants made under the Plan on or after January 30, 2011, a grantee is eligible for Retirement if he or she has satisfied the following age and service conditions at the date of Termination:

 

		Years
		Of
	Age	Service*
	55	15 or more
	56	14 or more
	57	13 or more
	58	11 or more
	59	9 or more
	60	7 or more
	61	7 or more
	62	7 or more
	63	7 or more
	64	7 or more
	65 or older	7 or more

 

                                             

* A grantee’s Years of Service will be determined by the Committee, but will generally reflect the grantee’s Years of Service under the Company’s tax-qualified retirement plan.

 

 

15

 

Exhibit 10.2

 

 

 

 

 

 

 

PURCHASE AGREEMENT

 

Between

 

HANCOCK FABRICS, INC.,
a Delaware corporation,

 

as Seller,

 

and

 

F9 Properties, LLC

 

 

as Buyer

 

 

PURCHASE AGREEMENT

 

THIS PURCHASE AGREEMENT (this “Agreement”) is made as of the 4th day of June, 2015 (the “Effective Date”), between HANCOCK FABRICS, INC., a Delaware corporation (“Seller”), and F9 Properties, LLC, a New Hampshire Limited Liability Company (“Buyer”), jointly the “Parties” and, occasionally, each of the Parties is hereinafter referred to individually as a “Party.”

 

FACTUAL CONTEXT

 

A.     Seller is the owner of that certain 64.50 acre parcel of land and the improvements thereon, including a building containing approximately 742,372 square feet situated in the County of Lee, State of Mississippi, described in Exhibit A attached hereto and incorporated herein, which land and improvements are also known as One Fashion Way, Baldwyn, Mississippi and are herein referred to as the “Property.”

 

B.     The Parties have agreed that, subject to certain conditions, Buyer shall purchase the Property and concurrently with such purchase shall lease the Property back to the Seller, and the Parties desire to hereby set forth their agreement with respect to that transaction and certain other matters.

 

NOW THEREFORE, in consideration of the foregoing and the mutual covenants hereinafter contained, the Parties agree as follows:

 

1.          Agreement of Purchase and Sale. On and subject to all of the terms and conditions of this Agreement, Seller agrees to sell, and Buyer agrees to buy, the Property.

 

2.          Agreement to Lease Property Back to Seller. Commencing on the Closing Date, Buyer, as landlord, shall lease to Seller, as tenant, the Property pursuant to a lease agreement (the “Lease Agreement”) substantially in the form attached as Exhibit B hereto. The Lease Agreement shall have an initial term of twenty (20) years. Seller shall have the right to renew the term of the Lease Agreement for up to five (5) successive extended terms of five (5) years each. As part of Section 5 (a) CONDITION TO BUYER’S PURCHASE OBLIGATION, this Agreement to Lease Property Back to Seller shall become part of the Due Diligence obligations described in Section 5 (a) and be executed within such due diligence timeframe of sixty (60) days as a contingency to the closing.

 

3.          Earnest Money Deposit. Within three (3) business days after the Effective Date, Buyer shall deposit the sum of Two Hundred Fifty Thousand Dollars ($250,000.00) (the “Earnest Money”) with Escrow Holder, as identified in Section 6 below, who shall hold it in trust. Said earnest money received by Escrow Holder shall be deposited in a federally insured escrow account and shall remain in that account until the Closing or other termination of the transaction set forth in this Agreement. Upon Closing, as defined below, the Earnest Money shall be applied against the total purchase price set forth in Section 4(a). In the event Buyer fails, without legal excuse, to complete the purchase contemplated herein, Buyer shall forfeit to Seller the Earnest Money. Said forfeiture of the Earnest Money shall be Seller’s sole remedy against Buyer in the event of any such failure to complete the purchase contemplated herein.

 

 

4.          Purchase Price.

 

(a)         Property. The purchase price for the Property shall be Eighteen Million Five Hundred Thousand Dollars ($18,500,000.00) (the “Purchase Price”).

 

(b)         Net to Seller. The Purchase Price shall be net to Seller, it being understood that Buyer shall have no right or remedy of offset, abatement or deduction against the Purchase Price for any reason, including, but not limited to, any reason arising out of any facts or circumstances regarding the Property, whether discovered in connection with Buyer’s investigation of the Property or otherwise.

 

5.          Conditions to Buyer’s Purchase Obligation.

 

(a)          Conditions.

 

(i)          Title Condition. That the condition of title to the Property be satisfactory to Buyer.

 

(A)         Within three (3) business days after the Effective Date, Seller shall order a current commitment for title insurance evidencing the condition of title to the Property (the “Commitment”).

 

(B)          Buyer shall have ten (10) days after receipt of the Commitment within which to object to the condition of title to the Property reflected in the Commitment. Buyer shall not object to current taxes and assessments for public improvements not delinquent, any printed exception to title in a commitment for a standard ALTA title insurance policy, any exception to title contained in the commitment which does not materially effect the value or use of the Property, any lien for the payment of money incurred by Seller, which shall be removed by Seller at or prior to Closing, that certain lease between Seller, as landlord, and HF Merchandising, Inc., as tenant, dated March 1, 2004, or that certain lease between Seller, as landlord, and hancockfabrics.com, Inc., as tenant, dated October 1, 2004 . Any objection to title made by Buyer (an “Objection”) shall be in writing and shall identify the title matter to which Buyer objects and the reason(s) for such Objection. If Buyer fails so to make an Objection within such ten (10) day period, Buyer shall be deemed to have approved the condition of title to the Property (except for any lien for the payment of money incurred by Seller other than current taxes and assessments, which shall be removed by Seller at or prior to Closing), and the condition contained in this Section 5(a)(i) shall be satisfied. If Buyer so objects within such ten (10) day period, then this Agreement shall terminate on the tenth (10th) business day following Seller’s receipt of Buyer’s Objection and the reasons supporting it, unless, within that ten business (10) day period, Seller delivers to Buyer the agreement of Seller to eliminate, prior to the Closing, the title matter or matters to which Buyer has objected or the commitment of the Title Insurer to insure over the title matter or matters to which Buyer has objected, by endorsement or otherwise, in Buyer’s policy of title insurance, in which event this Agreement shall continue in full force and effect and the condition contained in this Section 5(a)(i) shall be satisfied as of such delivery by Seller, as long as, at the Closing, such title matter or matters are in fact removed or insured over. If Seller does not so agree to remove such title matter or matters to which Buyer has objected or if Title Insurer does not so commit to insure over within such ten (10) business day period, the title condition shall be deemed not satisfied.

 

 

(ii)         (C)          Commencing on the Closing Date, Buyer, as landlord, shall lease to Seller, as tenant, the Property pursuant to a lease agreement (the “Lease Agreement”) substantially in the form attached as Exhibit B hereto. The Lease Agreement shall have an initial term of twenty (20) years. Seller shall have the right to renew the term of the Lease Agreement for up to five (5) successive extended terms of five (5) years each. This Lease shall be executed by Buyer/Landlord and Seller/Tenant before the closing date of this Purchase Agreement as a contingency to said closing of this transaction. Due Diligence Investigations.

 

(A)         For a period of sixty (60) days after the Effective Date (the “Feasibility Period”), Buyer shall have the right to enter onto the Property and conduct such investigations as it may reasonably desire, which investigations may include, but are not limited to, surveys, Phase I environmental testing, engineering studies and building inspections; provided, however, Buyer shall not perform any destructive or invasive testing without Seller’s prior written consent, which consent shall not be unreasonably withheld.

 

(B)         Notwithstanding any other provision of this Agreement, Seller shall have no obligation to consider Buyer’s request to perform destructive or invasive tests unless Buyer’s request is accompanied by a reasonably detailed statement of the scope and methodology of such testing. If Seller approves Buyer’s proposed testing program, Buyer shall be entitled to proceed therewith, and Buyer shall not vary from the program approved by Seller unless Seller’s prior written consent to such deviation is first obtained. Seller shall have the right to have its representatives present when Buyer or its agents shall be on the Property conducting Buyer’s investigations, and Buyer shall give Seller written notice at least one (1) business day prior to any planned entry onto the Property so that Seller shall have the opportunity to have its representatives present on-site.

 

(C)         Pending the Closing and if this Agreement terminates without the occurrence of the Closing, Buyer shall hold the results of its investigations in confidence and shall not disclose the same to any third party without the prior written consent of Seller. Notwithstanding the foregoing, Buyer may share the results of its investigations with its attorneys, contractors, consultants and lenders so long as such parties agree to hold such information in confidence as provided herein.

 

(D)         Upon request, Buyer shall provide Seller with a copy of any report generated by or for Buyer as a result of such investigations; provided, however, that any reliance by Seller upon the contents of any such report shall be at Seller’s own risk, and Buyer shall not be deemed to have made any representation or warranty regarding the accuracy of any such report. Pending the Closing and after the Closing, Seller shall not disclose such information to any third party without the prior written consent of Buyer. Notwithstanding the foregoing, Seller may share such information with its attorneys, contractors, consultants and lenders so long as such parties agree to hold such information in confidence as provided herein.

 

(E)         Section 5(a)(ii)(C) and (D) hereof shall not be construed to require the non-disclosure of information when disclosure is compelled by law; provided, however, the Party subject to such compulsion shall give the other Party prompt written notice thereof so that such other Party may seek legal protection against such disclosure. Further, Section 5(a)(ii)(C) and (D) hereof shall not be construed to prevent either Party from disclosing any information in the course of making or defending a claim under this Agreement.

 

(F)         Buyer’s due diligence investigations shall be conducted at no expense to Seller. IN CONDUCTING SUCH INVESTIGATIONS BUYER SHALL NOT DISTURB OR OTHERWISE INTERFERE UNREASONABLY WITH THE USE AND OCCUPANCY OF THE PROPERTY. All work shall be done during normal business hours. Buyer agrees to hold Seller and the Property free of all claims, demands, liens, expenses and liability arising or alleged to have arisen from Buyer’s due diligence investigations pursuant to this Agreement (collectively, “Potential Claims”). With respect to any and all Potential Claims, Buyer agrees to defend (at Seller’s option and with counsel reasonably acceptable to Seller), protect, indemnify and hold Seller free and harmless from all liability and expense (including, but not limited to, reasonable attorneys’ fees and litigation expenses). In the event that this Agreement terminates without the occurrence of the Closing, Buyer, at its expense, shall promptly repair and restore all damage to the Property resulting from Buyer’s investigations.

 

(G)         Seller shall, within three (3) business days following the Effective Date, furnish to Buyer copies of any recent environmental studies, soils tests, easements, covenants, and restrictions, existing title insurance policies, boundary and topographic surveys, building plans, certificates of occupancy, real estate tax statements and/or proof of payment of real estate taxes, and insurance documents that are in the possession of Seller; provided, however, that any reliance by Buyer upon the contents of any such report shall be at Buyer’s own risk, and Seller shall not be deemed to have made any representation or warranty regarding the accuracy of any such report.

 

(iii)         Satisfaction. Buyer shall have the right to be satisfied in Buyer’s reasonable discretion with the result of its investigations pursuant to Section 5(a)(ii). If Buyer shall not be so satisfied, Buyer shall give Seller written notice of such lack of satisfaction (including a detailed description of the lack of satisfaction), if any, on or before the end of the Feasibility Period. If Buyer so gives such notice of lack of satisfaction, this Agreement shall terminate. If Buyer fails to give such notice of lack of satisfaction within the Feasibility Period, Buyer shall be deemed to have been satisfied with the results of its investigations, and the condition contained in Section 5(a)(ii) shall be deemed satisfied.

 

 

(b)          Termination. If the conditions to Buyer’s obligation to purchase the Property set forth in Section 5(a) hereof are not satisfied or deemed satisfied as provided herein, Buyer’s obligation to purchase the Property shall be excused, this Agreement shall terminate as provided herein, Buyer’s Earnest Money shall be refunded, and thereafter the Parties shall have no further obligations hereunder except for those that shall have accrued and remain undischarged.

 

6.        Escrow Holder. Promptly following the occurrence of the Effective Date, if any, Buyer shall open an escrow with Meland, Russin Budwick – Attorney At law 3200 Southeast Financial Center 200 South Biscayne Blvd. Miami, FL 33131 Tel:305.358.6363 Attn: Amy Ginoris (the “Escrow Holder”). Escrow Holder shall conduct the close of any sale hereunder pursuant to escrow instructions of the Parties consistent with this Agreement. Buyer may purchase this Property using the Like-Kind Exchange Program under IRC Code Section 1031. Should Buyer elect to do so, Seller shall cooperate fully with all requests from Buyer under this program which do not subject Seller to monetary or other material obligations.

 

7.        Closing.

 

(a)          Closing. Provided that this Agreement is not terminated as provided herein, the “Closing” shall take place through the office of Escrow Holder on a business day mutually satisfactory to Buyer and Seller not later than thirty (30) days after the expiration of the Feasibility Period. At the Closing and in exchange for the Purchase Price, Seller shall convey title, subject to exceptions to title as provided in Section 7(b) hereof, to Buyer by quitclaim deed (the “Deed”). For the purposes of this Agreement, the term “Closing” means the transfer of the executed Deed from Buyer to Seller with the recording of the Deed in the Official Records of Lee County to subsequently take place as described in the instructions to Escrow Holder.

 

(b)          Title. Buyer shall purchase the Property subject to: (i) real property taxes for 2015 and subsequent years and assessments not delinquent, (ii) all title exceptions contained in the Commitment, except (A) those which Seller shall remove pursuant to this Agreement, and (B) those to which Buyer timely objected pursuant to Section 5(a)(i) above and which Seller agrees to eliminate, (iii) the printed exceptions and exclusions referred to in the Standard ALTA Owner’s Policy of Title Insurance issued by Title Insurer, (iv) zoning laws and ordinances, and (v) all acts or omissions of Buyer and any other governmental authority and those acting by, through or under such parties.

 

(c)        Title Policy. As an additional condition to the Closing, Title Insurer shall have agreed to issue to Buyer at Closing a Standard ALTA Owners Policy of Title Insurance with policy limits equal to the Purchase Price subject only to the standard preprinted exceptions and exclusions and those title exceptions approved as provided in this Agreement (the “Title Policy”).

 

 

(d)        Prorations. 2015 taxes and assessments shall be prorated between the Parties at Closing and taxes and assessments for subsequent years shall be assumed by Buyer.

 

(e)        Costs. Title attorney fees and the cost of any policies of title insurance shall be paid by Buyer. Document preparation fees, recording fees and escrow fees shall be paid by Buyer. Buyer and Seller shall each pay fifty percent (50%) of the closing fee. Seller shall pay any transfer taxes associated with the transaction contemplated hereunder. Each Party shall pay for its own legal fees.

 

(f)         Business Days. In the event that this Agreement establishes a particular date for the giving of a notice or the occurrence of an event and that day is not a business day in the State of Mississippi, that notice shall be given or that event shall occur on the next business day thereafter. As used in this Agreement, the term “business day” means Monday through Friday, legal holidays in the State of Mississippi excepted. All references to “days” herein, as opposed to business days, means calendar days.

 

8.         Representations and Warranties of Seller. Seller hereby makes the following representations and warranties, each of which shall be deemed to be remade at Closing, except as Buyer may be notified in writing, and, as remade, shall survive the delivery of the Deed, and covenants and agrees with Buyer as follows:

 

(a)         Seller hereby warrants that (i) Seller is duly organized, validly existing, and in good standing under the laws of the State of Delaware and is duly qualified to do business in the State of Mississippi, (ii)  Seller has the full right and authority to enter into this Agreement and to consummate the sale and transfer, contemplated herein, and (iii) the person or persons signatory to this Agreement and any document executed pursuant hereto on behalf of Seller have full power and authority to bind Seller and no other signatures are needed to effectuate the sale of the Property.

 

9.         Broker. (a) Each Party (in this Section 9, “Indemnitor”) represents to the other Party (in this Section 9, “Indemnitee”) that Indemnitor has not entered into any contracts with any brokers or finders nor has Indemnitor obligated itself to pay any real estate commissions or finders’ fees on account of the execution of this Agreement or the close of the transaction contemplated hereby, other than Daniel Herrold of Stan Johnson Company (“Buyer’s Broker”) and Craig Tomlinson of Stan Johnson Company (“Seller’s Broker”) (collectively, “Brokers”). Therefore, Indemnitor agrees to defend, protect, indemnify and hold Indemnitee free and harmless from any claims, damages, expenses, liabilities, liens or judgments (including costs, expenses and reasonable attorneys’ fees in defending the same) which arise on account of any claim made that real estate commissions or finders’ fees are payable as a result of Indemnitor’s conduct.

 

(b)     Commission. At the Closing, Seller shall pay the Brokers pursuant to a separate agreement.

 

10.         Condition of Property; “As Is” Sale. At the Closing, the Property shall be delivered to Buyer by Seller in its condition on the day of Closing. Buyer hereby affirms that Seller, its agents, employees and/or attorneys have not made, nor has Buyer relied upon, any representation, warranty or promise by Seller or its representatives with respect to the Property, or any other subject matter of this Agreement, including, without limitation, any warranties or representations, express or implied, as to the condition of title, general plan designation, zoning, value, permitted use, tax status or physical condition of the Property, or improvements thereon, or any part thereof, including, but not limited to, the flood elevations, drainage patterns and soil and subsoils composition and compaction level, and other conditions at the Property, or the existence or non-existence of toxic or hazardous materials in, on or under the Property or any improvements (and Buyer assumes the risk that any such materials are located in, on or under the Property or any such improvements) or as to the accuracy of any boundary survey or other survey or any soils reports or other plans or reports therefor. Buyer agrees that it has ample opportunity to investigate, and Buyer hereby confirms that it shall rely solely on Buyer’s own investigation. THEREFORE, WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, BUYER, IS PURCHASING THE PROPERTY FROM SELLER, IN “AS IS,” “WHERE IS” CONDITION, SUBJECT TO “ALL FAULTS,” INCLUDING, BUT NOT LIMITED TO, BOTH LATENT AND PATENT DEFECTS AND THE EXISTENCE OF ANY HAZARDOUS MATERIAL THEREON. BUYER HEREBY WAIVES ALL WARRANTIES, EXPRESS OR IMPLIED, REGARDING THE TITLE, CONDITION AND USE OF THE PROPERTY, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.

 

 

11.          Casualty; Condemnation. In the event that, prior to Closing, the Property is damaged by a casualty, or any authority having the power of condemnation initiates proceedings to acquire by condemnation any portion of or interest in the Property, this Agreement shall continue in full force and effect without reduction of the Purchase Price.

 

12.          Notices. Notices made or given by the Parties must be in writing and may be served by express courier service (overnight or better service) which maintains delivery records (such as Federal Express) or by the United States Mail, registered or certified, postage prepaid, addressed as follows (or at such other address of which the Party gives written notice):

 

To Seller:	Attn: Chief Financial Officer One Fashion Way Baldwyn, Mississippi 38824
To Buyer:	Attn: F9 Properties, LLC     844 Alton Road, Suite #3 Miami Beach, Florida 33139

 

 

Notices are effective upon receipt, or upon attempted delivery if delivery is refused or if delivery is impossible because of the recipient’s failure to provide a reasonable means for accomplishing delivery.

 

13.          Attorneys’ Fees. In the event a Party commences a legal proceeding to enforce any of the terms of this Agreement, the prevailing Party in such action shall have the right to recover reasonable attorneys’ fees and costs from the other Party to be fixed by the court in the same action. The term “legal proceedings” as used above shall be deemed to include appeals from a lower court judgment and it shall include proceedings in the Federal Bankruptcy Court, whether or not they are adversary proceedings or contested matters. The term “prevailing Party” as used above in reference to proceedings in the Federal Bankruptcy Court shall be deemed to mean the prevailing Party in any adversary proceeding or contested matter, or any other actions taken by the nonbankrupt Party which are reasonably necessary to protect its rights in the Property and the terms of this Agreement.

 

14.          Survival. The provisions of this Agreement shall survive any expiration or termination of this Agreement and shall not merge into any deed delivered and accepted at the Closing.

 

15.          No Offer. This Agreement shall neither be deemed an offer to sell nor shall it bind, obligate or be effective against Seller unless and until (a) the Agreement has been approved in writing by Seller’s appropriate management authority and (b) this Agreement has been fully executed by Seller and Purchaser and an executed copy is delivered to Seller.

 

16.          No Liability. No individual officers, directors, shareholders, agents or representatives of Seller or of Purchaser shall have any personal liability under this Agreement, either for the observance or performance of such party’s rights, duties or obligations hereunder, or for the default of such party to observe and perform its obligations hereunder, or under any document executed in connection with the transactions contemplated hereby, or otherwise.

 

17.          Miscellaneous. The terms, covenants and conditions herein contained shall be binding upon and inure to the benefit of the heirs, personal representatives, successors, transferees and assigns of the Parties. Neither Buyer nor Seller shall assign this Agreement or any rights hereunder to anyone except with the prior written consent of the other Party, which consent shall not be unreasonably withheld if such assignee assumes the obligations of the assigning party hereunder and the assignor is not released of primary obligation hereunder. This Agreement shall be interpreted and construed only by the contents hereof, and there shall be no presumption or standard of construction in favor of or against either Seller or Buyer for any reason, including the fact that counsel for Seller prepared this Agreement, as each Party has had the opportunity to negotiate each and every provision of this Agreement. This Agreement shall be construed and enforced in accordance with, and governed by, the law of the State of Mississippi. The captions in this Agreement are for convenience only and do not constitute a part of the provisions hereof. Whenever required by the context, the singular shall include the plural and vice versa. If any term or provision of this Agreement or the application of it to any person, entity or circumstance shall to any extent be invalid and unenforceable, the remainder of this Agreement or the application of such term or provision to persons or circumstances other than those as to which it is invalid or unenforceable shall not be affected thereby, and each term and provision of this Agreement shall be valid and shall be enforced to the extent permitted by law. Time is of the essence of this Agreement. This Agreement supersedes any prior agreements and contains the entire agreement of the Parties on the matters covered. No other agreement, statement or promise made by any Party or agent of any Party that is not in writing and signed by all Parties shall be binding. Any amendments to this Agreement shall be in writing and signed by all Parties.

 

 

IN WITNESS WHEREOF, this Agreement has been executed as of the date first above written.

 

 

 

“Buyer”   F9 PROPERTIES, LLC       By:

“Seller”   HANCOCK FABRICS, INC. a Delaware corporation     By:/s/ Steven R. Morgan                                                        By:

 

 

EXHIBIT A

 

(LEGAL DESCRIPTION)

 

 

EXHIBIT B

 

LEASE AGREEMENT

 

 

 

 

-10-

 

 

 

 

 

 

 

 

 

Exhibit 31.1

Certification of Chief Executive Officer
Pursuant to Rule 13a-14(a) Under
The Securities Exchange Act of 1934

 

I, Steven R. Morgan, certify that:

 

1.	I have reviewed this quarterly report on Form 10-Q for the quarter ended August 1, 2015 of Hancock Fabrics, Inc.;

 

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)     Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)     Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a)     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: September 4, 2015
		/s/ Steven R. Morgan
		Steven R. Morgan
		President and Chief Executive Officer

 

 

 

 

 

 

 

 

 

 

 

Exhibit 31.2

 

Certification of Chief Financial Officer
Pursuant to Rule 13a-14(a) Under
The Securities Exchange Act of 1934

 

I, James B. Brown, certify that:

 

1.	I have reviewed this quarterly report on Form 10-Q for the quarter ended August 1, 2015 of Hancock Fabrics, Inc.;

 

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)     Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)     Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a)     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: September 4, 2015
		/s/ James B. Brown
		James B. Brown
		Executive Vice President and
		Chief Financial Officer
		(Principal Financial Officer)

 

 

 

Exhibit 32.1

 

Certification of Chief Executive Officer and Chief Financial Officer

Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant To

Section 906 Of The Sarbanes-Oxley Act of 2002

 

In connection with the Quarterly Report of Hancock Fabrics, Inc. (“Hancock”) on Form 10-Q for the period ended August 1, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of Steven R. Morgan, President and Chief Executive Officer of Hancock and James B. Brown, Executive Vice President and Chief Financial Officer of Hancock, certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of their knowledge:

 

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the corporation.

 

 

Date: September 4, 2015

		/s/ Steven R. Morgan
		Steven R. Morgan
		President and Chief Executive Officer
		/s/ James B. Brown
		James B. Brown
		Executive Vice President and
		Chief Financial Officer
		(Principal Financial Officer)