EXHIBIT 10.36
 
HANCOCK FABRICS, INC.
 
SHORT TERM INCENTIVE PLAN
 
Effective as of January 30, 2011
 
1.
ESTABLISHMENT AND EFFECTIVE DATE OF PLAN

 
Hancock Fabrics, Inc. (the “Corporation”) hereby adopts the Hancock Fabrics,
Inc. Short Term Incentive Plan (the “Plan”) for its executive officers and
certain other executives and employees of the Corporation, its Operating Units
and affiliates who are in management positions designated as eligible for
participation by the Compensation Committee (the “Committee”) of the Board of
Directors of the Corporation or its designee.  The Plan shall be effective as of
January 30, 2011 and shall remain in effect, subject to the rights of amendment
and termination in Section 13.  The Committee may determine to submit the Plan
for approval by the stockholders of the Corporation.
 
2.
PURPOSE OF THE PLAN

 
The purpose of the Plan is to further the growth and financial success of the
Corporation by offering performance incentives to designated executives and
other employees who have significant responsibility for such success.
 
3.
DEFINITIONS

 
 
(a)
“Base Annual Salary” means the actual base salary paid to a Participant during
the applicable Plan Year, increased by the amount of any pre-tax deferrals or
other pre-tax payments made by the Participant to the Corporation’s deferred
compensation or welfare plans (whether qualified or non-qualified).

 
 
(b)
“Board of Directors” means the Board of Directors of the Corporation.

 
 
(c)
“Change in Control” shall have the meaning ascribed to such term in the Hancock
Fabrics, Inc. 2001 Stock Incentive Plan, as amended and restated effective as of
January 30, 2011, and as it may be further amended.

 
 
(d)
“Chief Executive Officer” means the chief executive officer of the Corporation,
unless otherwise specified.

 
 
(e)
“Code” means the Internal Revenue Code of 1986, as amended.

 
 
 

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(f)
“Committee” means the Compensation Committee of the Board of Directors or any
other committee designated by the Board of Directors that is responsible for
administering all or part of the Plan.

 
 
(g)
“Corporation” means Hancock Fabrics, Inc., a Delaware corporation, and its
successors.

 
 
(h)
“Incentive Award” or “Award” means the bonus awarded to a Participant under the
terms of the Plan.

 
 
(i)
“Maximum Award” means the maximum percentage (which may vary among Participants
and from Plan Year to Plan Year) of Base Annual Salary which may be paid based
upon the Relative Performance during the Plan Year.

 
 
(j)
“Operating Unit” means a separate business operating unit of the Corporation
with respect to which separate performance goals may be established hereunder.

 
 
(k)
“Participant” means an employee of the Corporation, an Operating Unit or an
affiliate who is designated by the Committee or its designee to participate in
the Plan.

 
 
(l)
“Plan Rules” means the guidelines established annually by the Committee pursuant
to Section 4, subject, where applicable, to ratification by the Board of
Directors.

 
 
(m)
“Plan Year” means the twelve month period which is the same as the Corporation’s
fiscal year.  The initial Plan Year for this Plan shall be January 30, 2011
through January 28, 2012.

 
 
(n)
“Relative Performance” means the extent to which the Corporation, and/or
designated Operating Unit, as applicable, achieves the performance measurement
criteria set forth in the Plan Rules.

 
 
(o)
“Section 409A” means Section 409A of the Code and the regulations and rulings
thereunder.

 
 
(p)
“Target Award” means the percentage (which may vary among Participants and from
Plan Year to Plan Year) of Base Annual Salary which will be paid to a
Participant as an Incentive Award if the performance measurement criteria
applicable to the Participant for the Plan Year is achieved, as reflected in the
Plan Rules for such Plan Year.

 
 
(q)
“Threshold Award” means the percentage (which may vary among Participants and
from Plan Year to Plan Year) of Base Annual Salary which corresponds to the
minimum acceptable Relative Performance during the Plan Year.

 
 
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4.
ADMINISTRATION OF THE PLAN

 
The Plan will be administered by the Committee, subject to its right to delegate
responsibility for administration of the Plan to employees of the
Corporation.  The Committee will have authority to establish Plan Rules with
respect to the following matters for the Plan Year, subject to the right of the
Board of Directors to ratify such Plan Rules as provided in this Section 4:
 
 
(a)
the employees of the Corporation, its Operating Units and affiliates who are
Participants in the Plan;

 
 
(b)
the Target Award, Maximum Award (if any) and Threshold Award (if any) that can
be granted to each Participant and the method for determining such award, which
the Committee may amend from time to time;

 
 
(c)
the performance targets and the measurement criteria to be used in determining
the Corporation’s or an Operating Unit’s Relative Performance, which may include
one or more of the following, as determined by the Committee or its designee
each year:  earnings before interest and taxes (EBIT), earnings before interest,
taxes, depreciation and amortization (EBITDA), return on capital employed,
operating income, SGA as a percentage of sales, inventory turnover ratio, cost
reductions, leverage ratios, gross margin, product introduction, sales, sales
growth, net income, earnings per share, return on equity, return on assets (or
net assets), after-tax or pre-tax profit, market value of the Corporation’s
stock, total shareholder return, return on investment, economic profit,
capitalized economic profit, cash flow, cash flow from operations, and cash flow
return; and

 
 
(d)
the personal performance targets, objectives or goals for individual
Participants and the measurement criteria to be used in determining performance;
and

 
 
(e)
the time or times, the form of payment, and the conditions subject to which any
Incentive Award may become payable.

 
The Plan Rules will be adopted by the Committee prior to, or as soon as
practical after, the commencement of each Plan Year.  Subject to the provisions
of the Plan and the Committee’s right to delegate its responsibilities, the
Committee will also have the discretionary authority to interpret the Plan, to
prescribe, amend and rescind rules and regulations relating to it, and to make
all other determinations deemed necessary or advisable in administering the
Plan.  The determinations of the Committee on the matters referred to in
paragraphs (a) through (e) of this Section 4 with respect to such Participants
as the Committee may determine shall be submitted at least annually to the Board
of Directors for its consideration and ratification.  The Committee may in its
discretion (i) establish performance measures and criteria not listed in this
Section 4; and (ii) during a Plan Year revise the performance targets and
measurement criteria to the extent the Committee believes necessary to achieve
the purposes of the Plan in light of any unexpected or unusual circumstances.
 
 
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The Committee may specify in the Plan Rules or awards for any Plan Year that the
Participant’s rights, payments, and benefits with respect to an award shall be
subject to reduction, cancellation, forfeiture, or recoupment upon the
occurrence of specified events, in addition to any otherwise applicable
performance conditions of an award.  Such events may include, but shall not be
limited to, the requirement for, or decision to make, a financial statement
restatement, termination of service for cause or any act by a Participant
(including violation of confidentiality agreements and restrictive covenants),
whether before or after termination of service, that could constitute cause for
termination of service.
 
5.
PARTICIPATION

 
Eligibility for participation in the Plan is limited to executive officers of
the Corporation and certain other executives and employees of the Corporation
and its Operating Units or affiliates who hold key management and staff
positions.  From among those eligible and based upon the recommendations of the
Chief Executive Officer and other designees, the Committee will designate by
name or position the Participants each Plan Year.  Any employee who is a
Participant in one Plan Year may be excluded from participation in any other
Plan Year.  If, during the Plan Year, a Participant changes employment positions
to a new position which corresponds to a different award level, the Committee
may, in its discretion, adjust the Participant’s award level for such Plan
Year.  The Committee may, in its discretion, designate employees who are hired
after the beginning of the Plan Year as Participants for such Plan Year and as
eligible to receive full or partial Incentive Awards for such year.
 
6.
INCENTIVE AWARDS

 
 
6.1
Determination of the Amount of Incentive Awards

 
At or after the end of each Plan Year, the Committee or its designee shall
certify the extent to which the performance targets and measurement criteria
established pursuant to Section 4 have been achieved for such Plan Year based
upon financial information provided by the Corporation and, where applicable,
the Participant’s individual performance.  A Participant’s Incentive Award shall
be computed by the Committee based upon the achievement of the established
performance targets, measurement criteria and the requirements of the Plan.  In
addition to any adjustments provided by the Incentive Award, the Committee may
in determining whether performance targets have been met adjust the
Corporation’s financial results to exclude the effect of unusual charges or
income items or other events, including acquisitions or dispositions of
businesses or assets, stock dividends, stock splits, recapitalizations or other
changes in the capital structure of the Corporation, reorganizations,
restructurings, reductions in force, currency fluctuations or changes in
accounting, which are distortive of results for the year (either on a segment or
consolidated basis); provided, that for purposes of determining the Incentive
Awards that are intended to qualify as performance-based compensation under Code
Section 162(m), the Committee shall exclude unusual items whose exclusion has
the effect of increasing Relative Performance if such items constitute
“extraordinary items” under generally accepted accounting principles or are
unusual events or items.  In addition, the Committee will adjust its
calculations to exclude the unanticipated effect on financial results of changes
in the Code or other tax laws, or the regulations relating thereto.
 
 
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The Committee may, in its discretion, decrease the amount of a Participant’s
Incentive Award for any reason, including the Committee’s judgment that the
performance targets have become an inappropriate measure of achievement, a
change in the employment status, position or duties of the Participant,
unsatisfactory performance of the Participant, or for such other reasons as the
Committee deems appropriate.
 
In the event that the Corporation’s or an Operating Unit’s performance is below
the anticipated performance thresholds for the Plan Year and the Incentive
Awards are below expectations or not earned at all, the Committee may in its
discretion grant Incentive Awards (or increase the otherwise earned Incentive
Awards) to deserving Participants, except for Incentive Awards to Participants
that are intended to qualify as performance-based compensation under Code
Section 162(m).
 
To the extent applicable, the Plan Rules and Incentive Awards under the Plan
shall be administered in a manner to qualify payments under the Plan to
Participants for the performance-based exception under Code Section 162(m) and
the regulations thereunder, except where the Compensation Committee or the Board
of Directors determines such compliance is not necessary.
 
 
6.2
Eligibility for Payment of Incentive Award

 
No Participant will have any vested right to receive any Incentive Award until
such date as the Board of Directors has ratified the Committee’s determination
with respect to the payment of individual Incentive Awards, except where the
Committee determines such ratification is not necessary.  No Incentive Award
will be paid to any Participant who is not an active employee of the
Corporation, an Operating Unit or an affiliate at the end of the Plan Year to
which the Incentive Award relates; provided, however, at the discretion of the
Committee or its designee (subject to ratification by the Board of Directors,
where required, and the limitations of Code Section 162(m)), partial Incentive
Awards may be paid to Participants (or their beneficiaries) who are terminated
without cause (as determined by the Committee or its designee) or who retire,
die or become permanently and totally disabled during the Plan Year.  No
Participant entitled to receive an Incentive Award shall have any interest in
any specific asset of the Corporation, and such Participant’s rights shall be
equivalent to that of a general unsecured creditor of the Corporation.
 
 
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6.3
Payment of Awards

 
Payment of the Incentive Awards will be made as soon as practicable after their
determination pursuant to Sections 6.1 and 6.2 (but in no event later than the
later of March 15th of the calendar year following the calendar year in which
such Incentive Awards become vested or the fifteenth day of the third month
following the end of the Corporation’s fiscal year in which the Incentive Awards
became vested), subject to the Committee’s right to allow a Participant to defer
payment pursuant to an applicable deferred compensation plan of the
Corporation.  Payment will generally be made in a lump sum in cash, in options
to purchase Common Stock of the Corporation, in stock appreciation rights, or in
restricted stock or restricted stock units, or in a combination of such awards,
as determined by the Committee either at the time Awards are established or when
they are paid (which may be different for different groups of Participants).
 
 
6.4
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
Corporation 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 Corporation and the Committee shall have the authority to delay the
commencement of all or a part of the payments to a Participant under the
Plan  if the Participant is a “key employee” of the Corporation (as determined
by the Corporation in accordance with procedures established by the Corporation
that are consistent with Section 409A) to a date which is six months and one day
after the date of Participant’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 Corporation and the Committee will take into account any transitional
rules and exemption rules available under Section 409A.  Payments of Incentive
Awards under the Plan are intended to satisfy the “short-term deferral”
exception under Section 409A.
 
 
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7.
DELEGATION OF AUTHORITY BY THE COMMITTEE

 
Notwithstanding the responsibilities of the Committee set forth herein, the
Committee may delegate to the Chief Executive Officer or others all or any
portion of its responsibility for administration of the Plan.  Such delegation
may include, without limitation, the authority to designate employees who can
participate in the Plan, to establish Plan Rules, to interpret the Plan, to
determine the extent to which performance criteria have been achieved, and to
adjust any Incentive Awards that are payable.  In the case of each such
delegation, the administrative actions of the delegate shall be subject to the
approval of the person within the Corporation to whom the delegate reports (or,
in the case of a delegation to the Chief Executive Officer, to the approval of
the Committee).
 
8.
CHANGE IN CONTROL

 
Upon the occurrence of a Change in Control, the Committee may determine that the
Participant’s Incentive Award for the Plan Year during which the Change in
Control occurs shall be determined based upon the Corporation’s performance to
the date of the Change in Control in relation to the performance targets for
such fiscal year, provided that` the Participant shall only be entitled to a pro
rata portion of the total Incentive Award for such year based upon the number of
days within the Plan Year that had elapsed as of the effective date of the
Change in Control divided by 365.  The Incentive Award amount shall be paid only
in cash within thirty (30) days of the effective date of the Change in
Control.  Notwithstanding the above, the Committee may provide in the Plan Rules
for a Plan Year for alternative consequences upon a Change in Control, which may
apply to some or all Participants and which may vary among Participants.
 
9.
BENEFICIARY

 
In the event of a Participant’s death after the determination of the
Participant’s Incentive Award under Sections 6.1 and 6.2, but prior to payment
of such Incentive Award, the Incentive Award shall be payable to the
Participant’s surviving spouse or, if none, to the Participant’s estate,
provided that a Participant may, in his or her discretion, contact the Committee
(or its designee) and designate a person or persons to receive any Incentive
Award to which the Participant would then be entitled under Sections 6.1 and
6.2.  Such designation will be made in the manner determined by the Committee
and may be revoked by the Participant in writing.
 
10.
WITHHOLDING OF TAXES

 
The Corporation shall deduct from each Incentive Award the amount of any taxes
required to be withheld by any governmental authority.
 
11.
EMPLOYMENT

 
Nothing in the Plan or in any Incentive Award shall confer (or be deemed to
confer) upon any Participant the right to continue in the employ of the
Corporation, an Operating Unit or an affiliate, or interfere with or restrict in
any way the rights of the Corporation, an Operating Unit or an affiliate to
discharge any Participant at any time for any reason whatsoever, with or without
cause.
 
 
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12.
SUCCESSORS

 
All obligations of the Corporation under the Plan with respect to Incentive
Awards that have been determined to be payable under Sections 6.1 and 6.2 shall
be binding upon any successor to the Corporation, whether such successor is the
result of an acquisition of stock or assets of the Corporation, a merger, a
consolidation or otherwise.
 
13.
TERMINATION AND AMENDMENT OF THE PLAN

 
The Committee, subject to the ratification rights of the Board of Directors, has
the right to suspend or terminate the Plan at any time, or to amend the Plan in
any respect, provided that no such action will, without the consent of a
Participant, adversely affect the Participant’s rights under an Incentive Award
that has been determined to be payable under Sections 6.1 and 6.2.
 
14.
GOVERNING LAW.

 
The Plan shall be interpreted and construed under the laws of the State of
Delaware.
 
AS APPROVED BY THE BOARD OF DIRECTORS OF THE CORPORATION ON THE _____ DAY OF
_______________, 2011.
 
 
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