EXHIBIT 10.11

 

EMPLOYMENT AGREEMENT

 

THIS EMPLOYMENT AGREEMENT (the “Agreement”) is entered into as of November 7,
2011, by and between HANCOCK FABRICS, INC., a Delaware corporation (the
“Company”), and STEVEN R. MORGAN (“Executive”). In consideration of the mutual
covenants and agreements set forth herein, the parties agree as follows:

 

1.              Employment and Duties.   Subject to the terms and conditions of
this Agreement, the Company employs Executive to serve as President and Chief
Executive Officer. Executive accepts such employment and agrees to undertake and
discharge the duties, functions and responsibilities commensurate with the
aforesaid position and such other duties and responsibilities as may be
prescribed from time to time by the Board of Directors of the Company (the
“Board”). Executive shall devote his full business time, attention and effort to
the performance of his duties hereunder and shall not engage in any business,
profession or occupation, for compensation or otherwise without the express
written consent of the Board, other than personal investment, charitable, or
civic activities or, with prior notice to the Board, service in a non-executive
capacity on industry, civic, community, charitable, or educational boards so
long as (i) Executive does not serve on any Board that the Company considers to
be a competitor, (ii) any such activities do not conflict with or unreasonably
interfere with Executive’s duties, and (iii) if the Board requests Executive to
resign from any such position at any time, Executive shall resign immediately.
Executive currently serves on the Board and shall be nominated to stand for
election at each annual or special meeting of stockholders (as applicable) as
long as he serves as President and Chief Executive Officer, and such nomination
shall be affirmatively recommended to the stockholders for election. Executive
shall, if requested, also serve as an executive officer and/or director of any
Company subsidiaries. Executive will maintain his principal office, and his
principal place of work shall be, at the Company’s primary executive offices in
Baldwyn, Mississippi.

 

2.              Term.    The term of Executive’s employment pursuant to this
Agreement commenced on October 17, 2011 (the “Commencement Date”) and, unless
terminated as set forth in Section 9, shall continue for a period of three (3)
years ending on the third anniversary of the Commencement Date (the “Initial
Term”). Following the Initial Term, this Agreement shall be extended
automatically for successive one (1) year periods (the Initial Term and any
extensions being collectively referred to as the “Employment Term”).
Notwithstanding the foregoing, Executive shall at all times be considered an “at
will” employee (subject to the obligations set forth in this Agreement). Either
party may terminate this Agreement as of the end of the then-current period by
giving written notice at least sixty (60) days prior to the end of that period.
Notwithstanding any termination of this Agreement or Executive’s employment,
Sections 9 and 10 shall remain in effect until all obligations and benefits that
accrued prior to termination are satisfied.

 

3.               Salary.   During the Employment Term, the Company shall pay
Executive an annual base salary, before deducting all applicable withholdings,
of $600,000 per year, payable at the time and in the manner dictated by the
Company’s standard payroll policies. Such annual base salary may be reviewed
annually and increased (but not decreased without Executive’s express written
consent) at the discretion of the Board or a committee thereof to reflect, among
other matters, cost of living increases and performance results (such annual
base salary, including any increases pursuant to this Section 3, the “Annual
Base Salary”).

 

 

 

 

4.              Other Compensation and Fringe Benefits.   In addition to any
executive bonus, retirement, deferred compensation and long-term incentive plans
which the Company may from time to time make available to Executive, Executive
shall be entitled to the following during the Employment Term:

 

(a)          all Company benefits generally available to the Company’s other
senior executives in accordance with the terms of those plans;

 

(b)          all retirement, life, disability, medical and dental plan benefits
generally available to the Company’s other senior executives in accordance with
the terms of those plans;

 

(c)          an automobile allowance of $750 per month during the Employment
Term;

 

(d)          an annual incentive bonus opportunity under the Company’s annual
short-term incentive plan (“Annual Bonus Plan”) for each fiscal year in the
Employment Term, with such opportunity to be earned based upon attainment of
performance objectives and other terms and conditions established by the Board
or the Management Review and Compensation Committee of the Board (the
“Compensation Committee”) (“Annual Bonus”); provided that for the fiscal year
ending January 28, 2012 Executive’s Annual Bonus shall be based upon attainment
of performance metrics previously approved by the Compensation Committee. The
Annual Bonus earned shall be paid not later than sixty (60) days after the end
of the applicable fiscal year to which the Annual Bonus relates. Unless provided
otherwise herein or the Board determines otherwise, no Annual Bonus shall be
paid to Executive unless Executive is employed by the Company on the Annual
Bonus payment date; and

 

(e)          participation in the Company’s long-term incentive plan, which will
provide certain equity incentives to the Company’s officers and key employees on
terms currently being developed by the Compensation Committee. The plan will be
adopted on or before April 17, 2012. Although the final terms of the plan have
not yet been adopted by the Compensation Committee, elements of the plan will
include: (a) an initial grant to the Executive of a number of shares of
restricted common stock, par value $0.01 per share, of the Company, determined
by dividing the Executive’s annual salary by the 20-trading day average closing
share price as reported by the OTC Markets as of the Commencement Date, (b)
vesting based 50% on time in service over the three year period from the
Commencement Date) and 50% on achievement of performance metrics to be
determined by the Board upon adoption of its yearly budgets in each of three
fiscal years commencing with the fiscal year beginning January 29, 2012.

 

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5.              Equity Incentive Grant.   Executive shall immediately be granted
342,857 shares of restricted common stock, par value $0.01 per share, of the
Company (the “Incentive Restricted Stock”), pursuant to the Company’s 2011 Stock
Incentive Plan (the “Stock Plan”). The Incentive Restricted Stock shall vest on
an annual basis over the three-year period beginning on the Commencement Date,
with fifty percent (50%) vesting on the first anniversary of the Commencement
Date, and twenty-five percent (25%) vesting on each of the 2nd and 3rd
anniversaries of the Commencement Date, subject to Executive’s continued
employment with the Company. Notwithstanding the foregoing, the Incentive
Restricted Stock shall become immediately vested upon a Change in Control Event
(defined herein). The specific terms and conditions of the Incentive Restricted
Stock grant shall be subject to the terms of the Stock Plan, and shall be
evidenced by an award agreement between Executive and the Company. “Change in
Control Event” shall mean: (i) the acquisition by any person or group of persons
(as such term is defined in Rule 13d-5(b)(1) promulgated under the Securities
Exchange Act of 1934, as amended to date) of shares carrying more than fifty
percent (50%) of the voting rights at general meetings of the Company, (ii) the
consummation of a merger or consolidation of the Company with any other company,
other than (x) a merger or consolidation which actually results in the voting
securities of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) more than fifty percent (50%) of the
combined voting power of the voting securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation, or (y) a
merger or consolidation effected to implement a recapitalization of the Company
(or similar transaction) in which no person or group of persons acquires more
than fifty percent (50%) of the combined voting power of the Company’s then
outstanding securities, (iii) the replacement of a majority of the Incumbent
Directors during any 12-month period by directors whose appointment or election
is not endorsed by a majority of the Incumbent Directors in office immediately
before the date of such appointment or election, or (iv) the complete
liquidation of the Company or the sale or disposition of the Company or all or
substantially all of the Company’s overall assets or any transaction having a
similar effect. “Incumbent Directors” shall mean members of the Board who either
(x) are members of the Board as of the Commencement Date, or (y) are elected, or
nominated for election, to the Board with the affirmative vote of at least a
majority of the Incumbent Directors at the time of such election or nomination
(but shall not include an individual whose election or nomination is in
connection with an actual or threatened proxy contest relating to the election
of members of the Board).

 

6.              Vacation.   For and during each calendar year within the
Employment Term, Executive shall be entitled to reasonable paid vacation periods
and holidays consistent with Executive’s position and in accordance with the
Company’s policies and practices with respect to its senior executive officers,
or as the Board may approve.

 

7.              General Expense Reimbursement.   In addition to the compensation
and benefits provided herein, the Company shall, upon receipt of appropriate
documentation, reimburse Executive for his reasonable travel, lodging,
entertainment, promotion and other ordinary and necessary business expenses to
the extent such reimbursement is permitted under the Company’s expense
reimbursement policy.

 

8.              Relocation Benefits.   Executive intends to sell his current
Texas residence and agrees to maintain a residence in the Baldwyn/Tupelo area.
In connection with such relocation, Executive shall be entitled to the
relocation benefits set forth below.

 

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(a)          Relocation Payment. In consideration of Executive’s current
intention to sell his current Texas residence (the “Primary Residence”) in
connection with his employment and his establishment of a residence in the
Baldwyn/Tupelo area, the Company shall pay Executive a lump sum in the amount of
up to Two Hundred Thousand Dollars ($200,000) (the “Relocation Payment”). At the
Company’s sole option, the Company may pay all or any part of the Relocation
Payment in cash or by delivery of shares of restricted common stock, par value
$0.01 per share, of the Company (the “Relocation Restricted Stock”). If the
Company elects to deliver Relocation Restricted Stock, the number of shares
delivered shall be equal to the portion of the Relocation Payment being paid in
shares, divided by the average closing price per share for the Company’s common
stock over the period of twenty trading days ending on the day prior to the date
of grant, as reported by the OTC Markets. The Relocation Restricted Stock shall
vest on an annual basis over the three-year period beginning on the date of
grant on the same vesting schedule as the Incentive Restricted Stock (but based
on anniversaries of grant date). The specific terms and conditions of the
Relocation Restricted Stock grant shall be subject to the terms of the Stock
Plan, and shall be evidenced by an award agreement between Executive and the
Company. The Company shall pay Executive the Relocation Payment (in cash or by
delivery of Relocation Restricted Stock) on or before February 15, 2012.

 

(b)          Relocation Benefits. In addition to the Relocation Payment,
Executive shall be entitled to the following relocation benefits provided by the
Company:

 

(i)           temporary housing in the Baldwyn/Tupelo area for the period of
time ending when Executive has secured a local residence in the Baldwyn/Tupelo
area (the “New Residence”);

 

(ii)          payment or reimbursement of reasonable airfare (and associated
local transportation to and from the airport) for a total of sixteen (16) trips
per year during the Employment Term, allocated among Executive and his spouse as
Executive shall determine from time to time, to make home visits and/or to
conduct housing searches for the New Residence;

 

(iii)         payment or reimbursement for reasonable and customary closing
costs associated with the sale of the Primary Residence and the purchase of the
New Residence, provided that any discount points, hazard insurance, property
taxes, deposits and other prepaid expenses shall not be included; and

 

(iv)         the services of a Company-approved moving company for the packing
and transportation of all of Executive’s household goods and vehicles.

 

The Company shall reimburse Executive for any income taxes owed by Executive as
a result of the benefits provided pursuant to this Section 8(b), and such
reimbursement shall be determined by the Company on a tax grossed-up basis. The
amounts referenced in clauses (ii), (iii) and (iv) above that are paid by the
Company on Executive’s behalf or reimbursed to Executive are referred to as
“Relocation Costs.”

 

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9.              Termination of Employment. The Company or Executive may
terminate Executive’s employment at any time and for any reason in accordance
with Section 9(a) below. The Employment Term shall be deemed to have ended on
the last day of Executive’s employment. The Employment Term shall terminate
automatically upon Executive’s death.

 

(a)          Notice of Termination. Any purported termination of Executive’s
employment (other than by reason of death) shall be communicated by written
Notice of Termination (as defined herein) from one party to the other in
accordance with the notice provisions contained in Section 28. For purposes of
this Agreement, a “Notice of Termination” shall mean a notice that indicates the
Date of Termination (as that term is defined in Section 9(b)) and, with respect
to a termination for Cause (as that term is defined in Section 9(d)), Disability
(as that term is defined in Section 9(e)) or Good Reason (as that term is
defined in Section 9(f)), sets forth in reasonable detail the facts and
circumstances that are alleged to provide a basis for such termination. A Notice
of Termination from the Company shall specify whether the termination is with or
without Cause or due to Executive’s Disability. A Notice of Termination from
Executive shall specify whether the termination is with or without Good Reason.

 

(b)          Date of Termination. For purposes of this Agreement, “Date of
Termination” shall mean the date of Executive’s death or the date specified in
the Notice of Termination (but in no event shall such date be earlier than the
thirtieth (30th) day following the date the Notice of Termination is given
except in the case of termination for Cause, for which the Company may give less
than thirty (30) days notice).

 

(c)          No Waiver. The failure to set forth any fact or circumstance in a
Notice of Termination, which fact or circumstance was not known to the party
giving the Notice of Termination when the notice was given, shall not constitute
a waiver of the right to assert such fact or circumstance in an attempt to
enforce any right under or provision of this Agreement.

 

(d)          Cause. For purposes of this Agreement, a termination for “Cause”
means a termination by the Company based upon: (i) an act or acts by Executive
which have been found in an applicable court of law to constitute a felony
(other than traffic-related offenses); (ii) an act or acts by Executive which
are in the good faith judgment of the Board in violation of law or of policies
of the Company and which result in demonstrably material injury to the Company;
(iii) if the termination shall have been the result of an act or acts of proven
dishonesty by Executive resulting or intended to result directly or indirectly
in significant gain or personal enrichment to the Executive at the expense of
the Company; (iv) a termination upon the willful and continued failure by the
Executive substantially to perform his duties with the Company (other than any
such failure resulting from incapacity due to mental or physical illness not
constituting a Disability), after a demand in writing for substantial
performance is delivered by the Board, which demand specifically identifies the
manner in which the Board believes that Executive has not substantially
performed his duties; (v) any material breach by Executive of this Agreement; or
(vi) a termination as a result of a crime involving moral turpitude. In order
for the Company to terminate Executive’s employment pursuant to clause (iv) or
(v) of this definition of “Cause”, the Company shall have first given written
notice of the circumstances alleged to constitute “Cause” under such clause and
the same shall not have been cured (if capable of cure) within thirty (30) days
of such written notice. If, after the expiration of any applicable cure period,
the Company asserts that grounds exist for termination with Cause, it shall so
notify Executive and within fifteen (15) days shall afford Executive the
opportunity to appear before the Board regarding any disputed facts. The Board
shall make a determination regarding the existence of “Cause” upon completion of
such meeting. At any time prior to the final determination of Cause by the
Board, the Company shall be entitled to suspend (with pay and benefits)
Executive’s duties pending determination of the existence of “Cause”.

 

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(e)          Disability. For purposes of this Agreement, a termination based
upon “Disability” means a termination of Executive’s employment by the Company
based upon Executive’s entitlement to long-term disability benefits under the
Company’s long-term disability plan or policy, as in effect on the Date of
Termination, or if no such policy or prior to such a determination of
entitlement, based on Executive’s inability to engage in any substantial gainful
activity for a period of at least six months, by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or can be expected to last for a continuous period of not less than twelve
(12) months, as determined by the Board in good faith.

 

(f)          Good Reason. For purposes of this Agreement, a termination for
“Good Reason” means a termination by Executive during the Employment Term based
upon the occurrence (without Executive’s consent) of any of the following:

 

(i)   a material diminution in Executive’s Annual Base Salary;

 

(ii)  a material diminution in Executive’s authority, duties, or
responsibilities; or

 

(iii) a material breach by the Company of any of its obligations under this
Agreement.

 

Executive’s continued employment shall not constitute consent to, or a waiver of
rights with respect to, any act or failure to act constituting Good Reason
hereunder; provided, however, that no such event described above shall
constitute Good Reason unless: (1) Executive gives Notice of Termination to the
Company specifying the condition or event relied upon for such termination
within ninety (90) days of the initial existence of such condition or event; (2)
the Company fails to cure the condition or event constituting Good Reason within
thirty (30) days following receipt of Executive’s Notice of Termination; and (3)
the Executive’s employment is terminated by the Executive for Good Reason no
later than two (2) years after the initial existence of such condition or event.

 

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10.              Obligations of the Company Upon Termination.

 

(a)          Termination by the Company for a Reason Other than Cause, Death or
Disability and Termination by Executive for Good Reason. If Executive’s
employment is terminated during the Employment Term by: (1) the Company for any
reason other than Cause, death or Disability, or (2) Executive for Good Reason,
then, in lieu of any other compensation, severance or benefits provided under
any Company severance plan, policy or arrangement, and in exchange for the
execution and delivery by Executive of a release agreement in a form
satisfactory to the Company:

 

(i)           the Company shall pay Executive the following (collectively, the
“Accrued Obligations”): (A) within five (5) business days after the Date of
Termination, any earned but unpaid Annual Base Salary; (B) within a reasonable
time following submission of all applicable documentation and in accordance with
the Company’s expense reimbursement policy, any expense reimbursement payments
owed to Executive for expenses incurred prior to the Date of Termination; and
(C) any earned but unpaid Annual Bonus payments relating to the prior fiscal
year shall be paid within sixty (60) days following the end of such fiscal year;

 

(ii)          the Company shall pay Executive an amount equal to two (2) times
Executive’s Annual Base Salary in effect immediately prior to the Date of
Termination (disregarding any reduction in Annual Base Salary to which Executive
did not expressly consent in writing) (the “Severance Amount”), as follows: (A)
commencing within the period starting sixty (60) days following the Date of
Termination and ending on February 28 of the year following the year in which
the Date of Termination occurs, the Company shall pay in equal monthly
installments 1/24th of the Severance Amount each month in such period, and (B)
in a lump-sum payment on or before March 15 following the end of such period,
the remaining unpaid balance of the Severance Amount;

 

(iii)         the Company shall pay Executive the Annual Bonus, if any, to which
Executive is entitled under the Annual Bonus Plan and for which Executive is
eligible immediately prior to the Date of Termination, prorated for the portion
of the fiscal year prior to the Date of Termination, in a lump-sum payment
within sixty (60) days following the end of such fiscal year;

 

(iv)         (A) all shares of Incentive Restricted Stock and Relocation
Restricted Stock granted by the Company that were outstanding but not vested as
of the Date of Termination shall become immediately vested on the Date of
Termination; and (B) all other shares of restricted stock and all restricted
stock units, stock options and other forms of equity compensation (x) that would
otherwise vest during the two year period following the Date of Termination
based on time in service or (y) that would otherwise vest upon such termination
under the terms of the applicable award agreement, shall in each case become
immediately vested on the Date of Termination;

 

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(v)          as long as Executive pays the full monthly premiums for COBRA
coverage, the Company shall provide Executive and, as applicable, Executive's
eligible dependents, with continued medical and dental coverage, on the same
basis as provided to the Company's active employees and their dependents, until
the earlier of: (x) eighteen (18) months after the Date of Termination; or (y)
the date Executive is first eligible for medical and dental coverage (without
pre-existing condition limitations) with a subsequent employer; and

 

(vi)         within thirty (30) business days after the Date of Termination, the
Company shall pay Executive a lump sum cash payment equal to eighteen monthly
medical and dental COBRA premiums based on the level of coverage in effect for
the Executive (e.g., employee only or family coverage) on the Date of
Termination.

 

(b)          Termination by the Company for Cause and Termination by Executive
Other Than for Good Reason. If Executive’s employment is terminated during the
Employment Term by (1) the Company for Cause, or (2) Executive for any reason
other than Good Reason, then:

 

(i)          the Company’s only obligation under this Agreement shall be payment
of any Accrued Obligations described in Section 10(a)(i) and COBRA coverage
described in Section 10(a)(v), except that Company shall have no obligation to
pay Executive any unpaid Annual Bonus payments relating to the prior calendar
year;

 

(ii)          Executive shall not be entitled to receive any of the compensation
set forth in Section 10(a)(ii), (iii), (iv) or (vi), nor any other severance,
termination pay or similar compensation or benefits; and

 

(iii)         if such termination by the Company or Executive shall occur within
twelve (12) months of the date of the last payment to Executive of any
Relocation Costs pursuant to Section 8(b), Executive shall, within sixty (60)
days following the Date of Termination, reimburse the Company for any and all
such amounts received.

 

(c)          Termination due to Death or Disability. If Executive’s employment
is terminated during the Employment Term due to Executive’s death or Disability,
then the Company shall pay Executive (or to Executive’s estate or personal
representative in the case of death), any Accrued Obligations described in
Section 10(a)(i) and COBRA coverage described in Section 10(a)(iv). In addition,
all shares of Incentive Restricted Stock and Relocation Restricted Stock not
vested as of the Date of Termination shall be deemed vested as of the Date of
Termination. Executive shall not be entitled to receive any of the compensation
set forth in Section 10(a)(ii), (iii) or (vi), nor any other severance,
termination pay or similar compensation or benefits.

 

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(d)          Six-Month Delay. To the extent Executive is a “specified employee,”
as defined in Section 409A(a)(2)(B)(i) of the Internal Revenue Code of 1986, as
amended (the “Code”) and the regulations and other guidance promulgated
thereunder and any elections made by the Company in accordance therewith,
notwithstanding the timing of payment provided in any other Section of this
Agreement, no payment, distribution or benefit under this Agreement that
constitutes a distribution of deferred compensation (within the meaning of
Treasury Regulation Section 1.409A-1(b)) upon separation from service (within
the meaning of Treasury Regulation Section 1.409A-1(h)), after taking into
account all available exemptions, that would otherwise be payable during the
six-month period after separation from service, will be made during such
six-month period, and any such payment, distribution or benefit will instead be
paid on the first business day after such six-month period.

 

11.             Change in Control.

 

(a)          If Executive’s employment is terminated during the Employment Term
and within a Change in Control Period by (1) the Company for any reason other
than Cause, or (2) Executive for Good Reason, then the Company shall, in lieu of
any payment otherwise payable pursuant to Section 10(a)(ii) or (iii), pay
Executive in a lump-sum payment as soon as practicable after Executive’s Date of
Termination but in no event later than March 15 of the year following the year
in which Executive’s Date of Termination occurs, an amount equal to the sum of
(i) two and one-half (2.5) times Executive’s Annual Base Salary in effect
immediately prior to the Date of Termination (disregarding any reduction in
Annual Base Salary to which Executive did not expressly consent in writing) and
(ii) two and one-half (2.5) times the average of the Annual Bonus paid or
payable to Executive for the two (2) years ended immediately prior to the Date
of Termination, annualized if prorated for any partial year (if the Annual Bonus
was prorated), or, if Executive has not been employed longer than one (1) year,
two (2) times the Annual Bonus paid or payable to Executive for the year ended
immediately prior to the Date of Termination, annualized if for a partial year.
As used herein, “Change in Control Period” means the period (A) commencing on
the earliest of: (x) thirty (30) days prior to the date of consummation of the
Change in Control Event, (y) the date of the first public announcement of a
definitive agreement that would result in a Change in Control Event (even though
still subject to approval by Company’s stockholders and other conditions and
contingencies), and (z) the date of the public announcement of a tender offer
that is not approved by the Incumbent Directors, provided the tender offer if
successful would result in a Change in Control Event, and (B) ending on the day
prior to the two-year anniversary date of the consummation of the Change in
Control Event.

 

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(b)          Notwithstanding any other provision hereof to the contrary, if
Executive receives any benefits or payments (“Change in Control Payments”) that
would subject Executive to the excise tax imposed under 4999 of the Code on
excess parachute payments in connection with a Change in Control of the Company
(within the meaning of Section 280G of the Code), the Company will, in general,
“gross up” Executive’s compensation to offset the excise tax (along with the
Federal, state and local income taxes, excise taxes and payroll taxes payable by
Executive with respect to the “gross up” payment), except that (i) if the
aggregate Change in Control Payments that would otherwise be made to the
Executive do not exceed 110% of the maximum amount of Change in Control Payments
that can be made without triggering the excise tax, the Change in Control
Payments to the Executive will be reduced to the extent necessary to avoid the
imposition of the excise tax and no “gross up” will be paid, and (ii) if the
aggregate Change in Control Payments that would otherwise be made to Executive
do exceed 110% of the maximum amount of Change in Control Payments that can be
made without triggering the excise tax, the full amount of those Change in
Control payments will be made, Executive will have to individually bear the
excise tax allocable to 10% of the aggregate total of his Change in Control
Payments, and the Company will “gross up” Executive’s compensation to offset the
excise taxes other than that portion that is allocable to 10% of the aggregate
total of parachute payments. In the event that the Change in Control Payments
exceed the minimum amount required to impose the excise tax penalty of Section
4999 of the Code (the “Threshold 280G Amount”) by an amount equal to or less
than ten percent (10%) of the Threshold 280G Amount, then the Change in Control
Severance Benefits shall be reduced so that they total $1.00 less than the
Threshold 280G Amount, with such reduction being applied to the cash severance
amounts payable under Section 11(a).

 

12.              Non-Delegation of Executive’s Rights. The obligations, rights
and benefits of Executive hereunder are personal and may not be delegated,
assigned or transferred in any manner whatsoever, nor are such obligations,
rights or benefits subject to involuntary alienation, assignment or transfer.

 

13.              Nondisclosure of Confidential Information. During the course of
Executive’s employment with the Company, Executive will have access to certain
Confidential Information. Executive agrees to hold in strictest confidence and
not to use, except for the benefit of the Company, the Company’s Confidential
Information. For purposes of this Agreement, “Confidential Information” means
any information, without regard to form, relating to the Company’s and its
subsidiaries’ and affiliates’ customers, operations, finances, and business that
derives economic value, actual or potential, from not being generally known to
other persons or entities, including but not limited to technical or
non-technical data, compilations (including compilations of customer, supplier,
or vendor information), programs, methods, devices, techniques, processes,
inventions, improvements, writings, memoranda, reports, drawings, sketches,
financial data, pricing methodology, formulas, patterns, strategies, studies,
business development, software systems, marketing techniques and lists of actual
or potential customers (including identifying information about customers),
whether or not in writing. Confidential Information includes information
disclosed to the Company by third parties that the Company is obligated to
maintain as confidential. Confidential Information shall not include any
information that: (i) at the time of the disclosure was generally known to the
public; (ii) becomes known to the public through no violation of this Agreement;
or (iii) is disclosed to Executive by a third party that is not under an
obligation to maintain the confidentiality of the information. In the event that
Executive becomes legally compelled to disclose any Confidential Information,
Executive shall provide the Company with prompt written notice of such
requirement prior to any disclosure to allow the Company to seek a protective
order or other remedy. Confidential Information subject to this Agreement may
include information that is not a trade secret under applicable law, but
information not constituting a trade secret under applicable law shall only be
treated as Confidential Information under this Agreement for a two (2) year
period following Executive’s termination of employment.

 

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14.              Restrictive Covenants.

 

(a)          Non-Competition. While Executive is employed with the Company or
its affiliates, and for a period of two (2) years after Executive’s employment
with the Company terminates for any reason, Executive will not, directly or
indirectly, provide Executive Services, whether as an owner, investor, lender,
employee, director, officer, independent contractor, or consultant to any person
or entity that provides or offers products or services that are the same as or
substantially similar to the products and services offered as part of the
Company’s business (each, a “Competitor”); provided that in no event shall
ownership of less than one percent (1%) of the outstanding equity securities of
any issuer whose securities are registered under the Securities and Exchange Act
of 1934, as amended, standing alone, be prohibited by this Section 14(a); and
provided further that A.C. Moore Arts & Crafts, Inc., Jo-Ann Stores, Inc.,
Calico Corners, Inc. and Michaels Stores, Inc. shall each be deemed to be
Competitors. The “Territory” shall mean the geographic area of the United States
of America. Executive acknowledges that the Territory is the geographic
territory in which he performs services on behalf of the Company. “Executive
Services” shall mean the provision of management and strategic business advice,
direction and guidance. Following termination of the Employment Term, upon
request of the Company made while this Section 14(a) is in effect, Executive
shall notify the Company of Executive’s then current employment status.

 

(b)          Non-Solicitation of Employees. Executive agrees that while
Executive is employed with the Company or its affiliates, and for two (2) years
after Executive’s employment with the Company terminates for any reason,
Executive shall not, directly or indirectly, whether on behalf of Executive or
others, solicit, lure or attempt to hire away any individual who is or, within
two (2) months of the date of such action, was an employee of the Company or any
of its affiliates.

 

(c)          Nondisparagement. During the Employment Term and thereafter,
Executive and the Company each agree not to make any untruthful or disparaging
statements, written or oral, about the other party, its affiliates, their
predecessors or successors or any of their past and present officers, directors,
stockholders, partners, members, agents and employees or each party's business
practices, operations or personnel policies and practices to any of Company's
customers, clients, competitors, suppliers, investors, directors, consultants,
employees, former employees, or the press or other media in any country. Nothing
contained in this Section 14(c) shall preclude either party from enforcing its
rights under this Agreement.

 

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(d)          Return of Non-Compete Payment. Executive agrees that the provisions
of Section 14(a) are reasonable restrictions necessary for the protection of the
Company’s business. The Company and Executive agree that twenty percent (20%)
(the “Non-Compete Payment”) of any payment to Executive pursuant to Section
10(a) or Section 11(a) is specifically attributable to the provisions contained
in Section 14(a). Should a court determine that any provision of Section 14(a)
is unreasonable, either in period of time or otherwise, the parties hereto agree
that such covenant should be interpreted and enforced to the maximum extent
which such court deems reasonable. The Company and Executive acknowledge that,
should a court determine that the entire covenant not to compete contained in
Section 14(a) is unenforceable, there will have been a failure of consideration
for the Non-Compete Payment. In such an event, Executive agrees to repay to
Company the entire Non-Compete Payment within sixty (60) days following any
court determined violation of Section 14(a).

 

15.              Proprietary Rights. Executive assigns all of Executive’s
interest in any and all inventions, discoveries, improvements and patentable or
copyrightable works initiated, conceived or made by Executive, either alone or
in conjunction with others, during the Employment Term and related to the
Company’s business to the Company or its nominee. Whenever requested to do so by
the Company, Executive shall execute any and all applications, assignments or
other instruments that the Company shall in good faith deem necessary to apply
for and obtain trademarks, patents or copyrights of the United States of America
or any foreign country or otherwise protect the interests of the Company and its
affiliates therein. These obligations shall continue beyond the conclusion of
the Employment Term with respect to inventions, discoveries, improvements or
copyrightable works initiated, conceived or made by Executive during the
Employment Term.

 

16.              Return of Company Property. Upon termination of Executive’s
employment for any reason or at any time upon the Company’s request, Executive
shall promptly return to the Company all Property that has been entrusted or
made available to Executive by the Company. For purposes of this Agreement,
“Property” means all records, files, electronic storage media, memoranda,
reports, price lists, customer lists, drawings, plans, sketches, keys, codes,
computer hardware and software, equipment and other property of any kind or
description prepared, used or possessed by Executive during Executive’s
employment with the Company and, if applicable, any of its affiliates (and any
duplicates of any such property), which relate to the Company or its affiliates,
or the Company’s or its affiliates’ business, products or services.

 

17.              Cooperation. In the event of termination of Executive’s
employment, for whatever reason (other than death), Executive agrees to
cooperate with the Company and its affiliates and to be reasonably available to
the Company and its affiliates for a reasonable period of time thereafter with
respect to matters arising out of Executive’s employment hereunder or any other
relationship with the Company and its affiliates, whether such matters are
business-related, legal or otherwise. The Company shall reimburse Executive for
all expenses reasonably incurred by Executive during such period in connection
with such cooperation services. Any such cooperation shall take into account any
responsibilities to which Executive is subject to a subsequent employer or
otherwise.

 

12

 

 

18.              Actions.   The parties agree and acknowledge that the rights
conveyed by this Agreement are of a unique and special nature and that the
Company will not have an adequate remedy at law in the event of a failure by
Executive to abide by its terms and conditions, nor will money damages
adequately compensate for such injury. Therefore, it is agreed between and
hereby acknowledged by the parties that, in the event of a breach by Executive
of any of the obligations of this Agreement, the Company shall have the right,
among other rights, to damages sustained thereby and to obtain an injunction or
decree of specific performance from any court of competent jurisdiction to
restrain or compel Executive to perform as agreed herein. Executive hereby
acknowledges that obligations under Sections 13, 14, 15 and 16 shall survive the
termination of Executive’s employment and of the Employment Term and be binding
by their terms at all times subsequent to the termination of employment for the
periods specified therein. Nothing herein shall in any way limit or exclude any
other right granted by law or equity to the Company.

 

19.              Release; Resignations.   Notwithstanding any provision herein
to the contrary, the Company may require that, prior to payment of any amount or
provision of any benefit under Section 10 (other than due to Executive’s death)
or Section 11, Executive shall have executed, delivered and not revoked a
release in such form as is reasonably acceptable to the Company, and any waiting
periods contained in such release shall have expired. With respect to any
release required to receive payments owed pursuant to Section 10 or Section 11,
the Company must provide Executive with the form of release no later than seven
(7) days after the Date of Termination and the release must be signed by
Executive and returned to the Company, no later than thirty (30) days after the
Date of Termination. In addition, in the event that Executive’s employment with
the Company is terminated for any reason, Executive shall upon the Company’s
request resign from each position he holds on the Board and/or the board of
directors of any of Company’s affiliated entities and any position Executive
holds as an officer of Company or any of Company's affiliated entities.

 

20.              No Mitigation.   The Company agrees that, if Executive’s
employment hereunder is terminated during the Employment Term, Executive is not
required to seek other employment or to attempt in any way to reduce any amounts
payable to Executive by the Company hereunder. Further, the amount of any
payment or benefit provided for hereunder shall not be reduced by any
compensation earned by Executive as the result of employment by another
employer, by retirement benefits or otherwise.

 

21.              Entire Agreement and Amendment. This Agreement embodies the
entire agreement and understanding of the parties hereto in respect of the
subject matter of this Agreement, and supersedes and replaces all prior
agreements, understandings and commitments with respect to such subject matter.
This Agreement may be amended only by a written document signed by both parties
to this Agreement.

 

22.              Governing Law; Consent to Jurisdiction.   This Agreement shall
be governed by, and construed in accordance with, the laws of the State of
Mississippi, excluding any conflicts or choice of law rule or principle that
might otherwise refer construction or interpretation of this Agreement to the
substantive law of another jurisdiction. Each of the parties hereto: (a)
irrevocably consents to the exclusive jurisdiction and venue of the state and
federal courts located in Mississippi, in connection with any matter based upon
or arising out of this Agreement or the matters contemplated herein, (b) agrees
that process may be served upon them in any manner authorized by the laws of the
state of Mississippi for such persons, and (c) waives and covenants not to
assert or plead any objection which they might otherwise have to such
jurisdiction and venue in the state of Mississippi and such process.

 

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23.              Successors.   This Agreement may not be assigned by Executive.
In addition to any obligations imposed by law upon any successor to the Company,
the Company will require any successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the stock,
business and/or assets of the Company, to expressly assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. Failure of the
Company to obtain such assumption by a successor shall be a material breach of
this Agreement. Executive agrees and consents to any such assumption by a
successor of the Company, as well as any assignment of this Agreement by the
Company for that purpose. As used in this Agreement, “the Company” shall mean
the Company as herein before defined as well as any such successor that
expressly assumes this Agreement or otherwise becomes bound by all of its terms
and provisions by operation of law. This Agreement shall be binding upon and
inure to the benefit of the parties and their permitted successors or assigns.

 

24.              Counterparts.   This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.

 

25.              Legal Fees.   The Company shall reimburse Executive for
reasonable attorney’s fees Executive incurs in connection with the negotiation,
preparation and/or execution of this Agreement up to $5,000. If it becomes
necessary for either party to file a lawsuit to enforce this Agreement, and if a
final judgment is rendered by the court in such a lawsuit, the non-prevailing
party shall pay the reasonable attorney’s fees and costs incurred by the
prevailing party.

 

26.              Indemnification.   During the Term of this Agreement and after
Executive’s termination of employment for any reason, the Company shall
indemnify Executive and hold Executive harmless from and against any claim, loss
or cause of action arising from or out of Executive’s performance as an officer,
director or employee of the Company or any of its subsidiaries or other
affiliates or in any other capacity, including any fiduciary capacity, in which
Executive serves at the Company’s request, in each case to the maximum extent
permitted by law and under the Company’s Certificate of Incorporation and
By-Laws. The rights under this Section 26 shall survive the termination of
employment and the Employment Term until the expiration of the applicable
statute of limitations.

 

27.              Severability.   If any section, subsection or provision hereof
is found for any reason whatsoever to be invalid or inoperative, that section,
subsection or provision shall be deemed severable and shall not affect the force
and validity of any other provision of this Agreement. If any covenant herein is
determined by a court to be overly broad thereby making the covenant
unenforceable, the parties agree and it is their desire that such court shall
substitute a reasonable judicially enforceable limitation in place of the
offensive part of the covenant and that as so modified the covenant shall be as
fully enforceable as if set forth herein by the parties themselves in the
modified form. The covenants of Executive in this Agreement shall each be
construed as an agreement independent of any other provision in this Agreement,
and the existence of any claim or cause of action of Executive against the
Company, whether predicated on this Agreement or otherwise, shall not constitute
a defense to the enforcement by the Company of the covenants in this Agreement.

 

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28.              Notices.   Any notice, request, or instruction to be given
hereunder shall be in writing and shall be deemed given (a) on the date of
delivery if delivered personally; (b) one (1) business day after being sent
overnight by a well-established commercial overnight service, or (c) four (4)
days after being mailed by registered or certified mail, return receipt
requested, prepaid and addressed to the parties or their successors at the
following addresses, or at such other addresses as the parties may later
designate in writing:

 

To the Company:

 

Hancock Fabrics, Inc.

One Fashion Way

Baldwyn, Mississippi 38824

Attention: Chairman of the Board

 

With a copy to:

 

Kilpatrick Townsend & Stockton LLP

1100 Peachtree Street NE, Suite 2800

Atlanta, Georgia 30309

Attention: W. Benjamin Barkley

 

To Executive: at the last residential address known by the Company.

 

29.              Waiver of Breach.   The waiver by any party of any provisions
of this Agreement shall not operate or be construed as a waiver of any prior or
subsequent breach by the other party.

 

30.              Warranty by Executive.   Executive represents and warrants to
the Company that Executive is not subject to any contract, agreement, judgment,
order or decree of any kind, or any restrictive agreement of any character, oral
or written, that restricts Executive’s ability to perform his obligations under
this Agreement or that would be breached by Executive upon his performance of
his duties pursuant to this Agreement.

 

31.              Compliance with Rules and Policies.   Executive shall perform
all services in accordance with the policies, procedures and rules established
by the Company and the Board. In addition, Executive shall comply with all laws,
rules and regulations that are generally applicable to the Company or its
subsidiaries and their respective employees, directors and officers.

 

32.              Tax Withholding.   The Company or an affiliate may deduct from
all compensation and benefits payable under this Agreement any taxes or
withholdings the Company is required to deduct pursuant to state, federal or
local laws.

 

15

 

 

33.              Code Section 409A. To the extent applicable, it is intended,
and this Agreement shall be administered and interpreted in accordance with such
intent, that this Agreement and any payment made hereunder shall comply with the
requirements of Section 409A of the Code, and any related regulations or other
guidance promulgated with respect to such Section by the U.S. Department of the
Treasury or the Internal Revenue Service (“Code Section 409A”). Any provision
that would cause the Agreement or any payment hereof to fail to satisfy Code
Section 409A shall have no force or effect until amended to comply with Code
Section 409A, which amendment may be retroactive to the extent permitted by Code
Section 409A. Without limiting the generality of the foregoing: (i) for all
purposes under this Agreement, reference to Executive’s “termination of
employment” (and corollary terms) with the Company shall be construed to refer
to Executive’s “separation from service” (as determined under Treasury
Regulation Section 1.409A-1(h), as uniformly applied by the Company) with the
Company; (ii) to the extent that any reimbursement, fringe benefit or other,
similar plan or arrangement in which Executive participates during the term of
Executive’s employment under this Agreement or thereafter provides for a
“deferral of compensation” within the meaning of Code Section 409A of the Code,
(x) the amount eligible for reimbursement or payment under such plan or
arrangement in one calendar year may not affect the amount eligible for
reimbursement or payment in any other calendar year (except that a plan
providing medical or health benefits may impose a generally applicable limit on
the amount that may be reimbursed or paid), and (y) subject to any shorter time
periods provided in any expense reimbursement policy of the Company, any
reimbursement or payment of an expense under such plan or arrangement must be
made on or before the last day of the calendar year following the calendar year
in which the expense was incurred; (iii) any tax “gross up” payment to which
Executive is entitled under this Agreement shall be paid to Executive no later
than the last day of the calendar year in which Executive remits the taxes to
which the “gross up” payment relates to the applicable tax authority; or (iv)
for purposes of Section 10(a) with respect to amounts payable in the event of
termination of Executive’s employment by the Company for a reason other than
Cause, death or Disability or by Executive for Good Reason, each such payment is
a separate payment within the meaning of the final regulations under Section
409A.

 

34.              Clawback. Any incentive based compensation, or any other
compensation, paid or payable to Executive pursuant to this Agreement or any
other agreement or arrangement with the Company, which is subject to recovery
under any law, government regulation, order or stock exchange listing
requirement, will be subject to such deductions and clawback (recovery) as may
be required to be made pursuant to law, government regulation, order, stock
exchange listing requirement (or any policy of the Company adopted pursuant to
any such law, government regulation, order or stock exchange listing
requirement). Executive specifically authorizes the Company to withhold from
future wages any amounts that may become due under this provision; provided,
however, nothing in this provision is intended to permit a change in the terms
of payment of any deferred compensation subject to Section 409A in any manner
that would violate or create a plan failure under Section 409A. This Section 34
shall survive the termination of this Agreement for a period of three (3) years.

 

[Signature Page Follows]

 

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EXHIBIT 10.11

 

IN WITNESS WHEREOF the parties have executed this Agreement to be effective as
of the date first set forth above.

 

  COMPANY       HANCOCK FABRICS, INC.         By: /s/ Steven D. Schiewe   Its:
Chairman         /s/ Steven R. Morgan   Steven R. Morgan

 

Signature Page to Morgan Employment Agreement