EXHIBIT 10.35

HANCOCK FABRICS, INC.
2001 STOCK INCENTIVE PLAN
(AS AMENDED AND RESTATED EFFECTIVE
AS OF JANUARY 30, 2011)
 
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 6,300,000 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.
 
 
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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).

 
 
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(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.

 
 
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(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.
 
 
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(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;

 
 
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(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.

 
 
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(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.

 
 
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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.
 
 
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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):

 
 
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(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;

 
 
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(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.

 
 
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(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.
 
 
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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 ______, 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.
 
 
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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 14th DAY OF
JUNE 2001.
 
By:
 

 
As amended June 9, 2005, June 7, 2006, August 4, 2008, April 26,
2009,                  , 2010 and                    , 2011
 
 
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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

  

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* 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.

 
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