Document:

Hancock Fabrics 8-K 03/21/06 Exhibit 10.1

    Exhibit
      10.1
 

    Amendment
      No. 2 to the 

    Amended
      and Restated Rights Agreement

     

    This
      Amendment No. 2 to the Amended and Restated Rights Agreement, effective as
      of
      March 20, 2006 (“Amendment No. 2”), between
      Hancock Fabrics, Inc.,
      a
      Delaware corporation (the “Company”), and
      Continental Stock Transfer & Trust Company
      (the
“Rights Agent”), provides as follows:

     

    Whereas,
      the
      Company and the Rights Agent are parties to an Amended and Restated Rights
      Agreement dated as of March 4, 2001 and most recently amended on December 9,
      2005 (the “Rights Agreement”), specifying the terms of the Rights (as defined
      therein);

     

    Whereas,
      the
      Company and the Rights Agent now desire to amend the definition of "Person",
      as
      provided herein.

     

    Now,
      Therefore,
      in
      consideration of the premises and mutual agreements herein set forth, the
      parties hereby agree as follows:

     

    1.              
      Amendment and Restatement of Section 1(k):  “Certain
      Definitions." 
      Section 1(k) of the Rights Agreement is hereby amended, restated and replaced
      in
      its entirety by the following:

     

     “Person”
      means
      any
      individual, partnership, firm, corporation, company, association, trust,
      unincorporated organization, syndicate or group (the existence of a “group”
being determined in accordance with Rule 13d-5 under the Exchange Act, as the
      Rule is in effect on the date of this Agreement including, but not limited
      to, a
      Person having any agreement, arrangement or understanding [whether formal or
      informal and whether or not in writing] with any other Person to act together
      to
      acquire, offer to acquire, hold, vote or dispose of any Common Shares of the
      Company).

     

     2.              
      No Other Amendments. 
      Except as expressly amended hereby, the terms of the Rights Agreement will
      remain in full force and effect in all respects.

     

    3.              
      Governing Law.
      This
      Agreement and each Right Certificate issued hereunder shall be deemed to be
      a
      contract made under the laws of the State of Delaware and for all purposes
      shall
      be governed by and construed in accordance with the laws of such state
      applicable to contracts to be made and performed entirely within such
      state.

     

    4.              
      Counterparts. 
      This Amendment No. 2 may be executed in any number of counterparts, and each
      of
      such counterparts will for all purposes be deemed to be an original, and all
      such counterparts will together constitute but one and the same
      instrument.

     

     

    
      
        
        

        
        

      

      
        
        

        
          

        

      

      
        
        

        
           

        

      

    

    

    IN
      WITNESS WHEREOF,
      the
      parties hereto have caused this Amendment No. 2 to be executed by their duly
      authorized representatives as of the date first above written.

     

    
      	
              Continental
                Stock Transfer & Trust Company

            
	
               

            
	
              /s/
                William F. Seegraber

            	
               

            
	
              William
                F. Seegraber

              Vice
                President 

            
	
               

            
	
              Hancock
                Fabrics, Inc.

            
	
               

            
	
              /s/
                Bruce D. Smith

            	
               

            
	
              Bruce
                D. Smith

            
	
              Executive
                Vice President, 

              Chief
                Financial Officer and TreasurerHancock Fabrics 8-K 03/21/06 Exhibit 10.2

    Exhibit
      10.2

    

    

     

    AMENDED
      AND RESTATED RIGHTS AGREEMENT

     

    HANCOCK
      FABRICS, INC.

     

    and

     

    CONTINENTAL
      STOCK TRANSFER & TRUST COMPANY

     

    Rights
      Agent

     

    

     

    Rights
      Agreement

    Dated
      as of March 23, 1987 as 

    Amended
      and Restated

    through

    March
      20, 2006

     

     

    
 

    
      
        
          

          

        

        
        

      

      
        
        

        
          

        

      

      
        
        

        
          

        

      

    

    TABLE
      OF CONTENTS

    

      
        	
                Section
                  1.

                 

              	
                Certain
                  Definitions

                 

              	
                3

                 

              
	
                Section
                  2.

                 

              	
                Rights
                  Agent

                 

              	
                6

                 

              
	
                Section
                  3.

                 

              	
                Issue
                  of Right Certificates

                 

              	
                9

                 

              
	
                Section
                  4.

                 

              	
                Form
                  of Right Certificates

                 

              	
                10

                 

              
	
                Section
                  5.

                 

              	
                Countersignature
                  and Registration

                 

              	
                11

                 

              
	
                Section
                  6.

                 

              	
                Transfer,
                  Split-Up, Combination and Exchange of Right Certificates; Mutilated,
                  Destroyed, Lost or Stolen Right Certificates; Cancellation and
                  Destruction
                  of Right Certificates

                 

              	
                11

                 

              
	
                Section
                  7.

                 

              	
                Exercise
                  of Rights; Purchase Price; Expiration Date or Rights; Fractional
                  Rights
                  and Fractional Shares of Stock

                 

              	
                11

                 

              
	
                Section
                  8.

                 

              	
                Reservation
                  and Availability of Shares of Common Stock

                 

              	
                13

                 

              
	
                Section
                  9.

                 

              	
                Right
                  Holders

                 

              	
                14

                 

              
	
                Section
                  10.

                 

              	
                Adjustment
                  of Number of Shares; Exchange Option

                 

              	
                15

                 

              
	
                Section
                  11.

                 

              	
                Consolidation,
                  Merger or Sale or Transfer of Assets or Earning Power

                 

              	
                16

                 

              
	
                Section
                  12.

                 

              	
                Adjustments
                  of Purchase Price, Number of Shares or Number of Rights

                 

              	
                17

                 

              
	
                Section
                  13.

                 

              	
                Redemption

                 

              	
                21

                 

              
	
                Section
                  14.

                 

              	
                Notice
                  of Certain Events

                 

              	
                21

                 

              
	
                Section
                  15.

                 

              	
                Notices

                 

              	
                22

                 

              
	
                Section
                  16.

                 

              	
                Supplements
                  and Amendments

                 

              	
                22

                 

              
	
                Section
                  17.

                 

              	
                Determinations
                  and Actions by the Board of Directors

                 

              	
                22

                 

              
	
                Section
                  18.

                 

              	
                Successors

                 

              	
                23

                 

              
	
                Section
                  19.

                 

              	
                Benefits
                  of this Agreement

                 

              	
                23

                 

              
	
                Section
                  20.

                 

              	
                Severability

                 

              	
                23

                 

              
	
                Section
                  21.

                 

              	
                Governing
                  Law

                 

              	
                24

                 

              
	
                Section
                  22.

                 

              	
                Counterparts

                 

              	
                24

                 

              
	
                Section
                  23.

                 

              	
                Descriptive
                  Headings

                 

              	
                24

                 

              

      

    

     

     

    
      
        
          i

        

      

      
        
        

        
          

        

      

      
        
        

        
          

        

      

    

    RIGHTS
      AGREEMENT

     

    Agreement,
      dated as of March 23, 1987, between Hancock Fabrics, Inc., a Delaware
      corporation (the “Company”), and Continental Stock Transfer & Trust Company,
      as Rights Agent (the “Rights Agent”), as amended and restated
      through March 20, 2006.

     

    The
      Board
      of Directors of the Company (the “Board”) has authorized and declared a dividend
      of one right (a “Right”) for each share of Common Stock (as hereinafter defined)
      of the Company and has authorized the issuance of one Right with respect to
      each
      share of Common Stock that shall become outstanding between May 4, 1987 and
      the
      earliest of the Distribution Date, the Redemption Date and the Expiration Date
      (as such terms are hereinafter herein), each Right initially representing the
      right to purchase one share of Common Stock.

     

    Accordingly,
      in consideration of the premises and the mutual agreements herein set forth,
      the
      parties hereby agree as follows:

     

    Section
      1.  Certain
      Definitions.

     

    For
      purposes of this Agreement, the following terms have the meanings
      indicated:

     

    (a)  “Acquiring
      Person” shall mean any Person who or which, together with all Affiliates and
      Associates of such Person, shall be the beneficial owner of 20% or more of
      the
      Common Stock then outstanding (other than as a result of a Permitted Offer),
      but
      shall not include the Company, any Subsidiary of the Company, any employee
      benefit plan of the Company or of any Subsidiary of the Company, or any entity
      holding shares of capital stock of the Company for or pursuant to the terms
      of
      any such plan in its capacity as an agent or trustee for any such plan.
      Notwithstanding the foregoing, no Person shall become an “Acquiring Person” as
      the result of an acquisition of Common Stock by the Company which, by reducing
      the number of shares outstanding, increases the proportionate number of shares
      beneficially owned by such Person to 20% or more of the Common Stock of the
      Company then outstanding; provided, however, that if a Person shall become
      the
      Beneficial Owner of 20% or more of the Common Stock of the Company then
      outstanding by reason of share purchases by the Company and shall, after such
      share purchases by the Company, become the Beneficial Owner of any additional
      shares of Common Stock of the Company, then such Person shall be deemed to
      be an
“Acquiring Person.” Notwithstanding the foregoing, if the Board of Directors of
      the Company determines in good faith that a Person who would otherwise be an
      Acquiring Person, as defined pursuant to the foregoing provisions of this
      paragraph (a), has become such inadvertently, and such Person divests as
      promptly as practicable a sufficient number of shares of Common Stock so that
      such Person would no longer be an Acquiring Person, as defined pursuant to
      the
      foregoing provisions of this paragraph (a), then such Person shall not be deemed
      to be an “Acquiring Person” for any purposes of this Agreement.

     

    (b)  “Affiliate”
      and “Associate” shall have the respective meanings ascribed to such terms in
      Rule 12b-2 of the General Rules and Regulations, as in effect on the date of
      this Agreement, under the Securities Exchange Act of 1934, as amended (the
      “Exchange Act”).

     

    (c)  A
      Person
      shall be deemed the “beneficial owner” of and shall be deemed to “beneficially
      own” any securities:

     

    
      
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    (i)  that
      such
      Person or any Affiliate or Associate of such Person beneficially owns, directly
      or indirectly;

     

    (ii)  that
      such
      Person or any Affiliate or Associate of such Person has (A) the right to acquire
      (whether such right is exercisable immediately or only after the passage of
      time) pursuant to any agreement, arrangement or understanding (whether or not
      in
      writing) (other than customary agreements with and between underwriters and
      selling group members with respect to a bona fide public offering of
      securities), or upon the exercise of conversion rights, exchange rights, rights
      (other than the Rights), warrants or options, or otherwise; provided, however,
      that a Person shall not be deemed the beneficial owner of securities tendered
      pursuant to a tender or exchange offer made by or on behalf of such Person
      or
      any Affiliate or Associate of such Person until such tendered securities are
      accepted for purchase or exchange; or (B) the right to vote or to dispose of
      pursuant to any agreement, arrangement or understanding (whether or not in
      writing); provided, however, that a Person shall not be deemed the beneficial
      owner of any security if the agreement, arrangement or understanding to vote
      such security (1) arises solely from a revocable proxy or consent given to
      such
      Person in response to a public proxy or consent solicitation made pursuant
      to,
      and in accordance with, the applicable rules and regulations of the Exchange
      Act
      and (2) is not also then reportable on Schedule 13D under the Exchange Act
      (or
      any comparable or successor report); or

     

    (iii)  that
      are
      beneficially owned, directly or indirectly, by any other Person with which
      such
      Person or any Affiliate or Associate of such Person has any agreement,
      arrangement or understanding (whether or not in writing) (other than customary
      agreements with and between underwriters and selling group members with respect
      to a bona fide public offering of securities) for the purpose of acquiring,
      holding, voting (except to the extent contemplated by the proviso to clause
      (B)
      of subparagraph (ii) of this paragraph) or disposing of any securities of the
      Company.

     

    (d)  “Business
      Day” shall mean any day other than a Saturday, Sunday, or a day on which banking
      institutions in either the State of New York or Mississippi are authorized
      or
      obligated to close by law or executive order.

     

    (e)  With
      respect to any given date, “close of business” shall mean 5:00 p.m., Central
      Time, on such date; provided, however, that if such date is not a Business
      Day
      it shall mean 5:00 p.m., Central Time, on the next succeeding Business
      Day.

     

    (f)  The
      “closing price” of the Common Stock or of the Rights, as applicable, for any day
      shall be the last sale price, regular way, or, in case no such sale takes place
      on such day, the average of the closing bid and asked prices, regular way,
      in
      either case as reported in the principal consolidated transaction reporting
      system with respect to securities listed or admitted to trading on the New
      York
      Stock Exchange or, if the Common Stock or the Rights are not listed or admitted
      to trading on the New York Stock Exchange, as reported in the principal
      consolidated transaction reporting system with respect to securities listed
      on
      the principal national securities exchange on which the Common Stock or the
      Rights are listed or admitted to trading or, if the Common Stock or the Rights
      are not listed or admitted to trading on any national securities exchange,
      the
      last quoted price or, if not so quoted, the average of the high bid and low
      asked prices in the over-the-counter market, as reported by the National
      Association of Securities Dealers, Inc. Automated Quotations System (“NASDAQ”)
      or such other system then in use, or, if on any such date the Common Stock
      or
      the Rights are not quoted by any such organization, the average of the closing
      bid and asked prices as furnished by a professional market maker making a market
      in the Common Stock or the Rights selected by the Board.

     

    
      
        4

      

      
        
        

        
          

        

      

      
        
        

      

    

    (g)  “Common
      Stock” shall mean the shares of common stock, $.01 par value, of the Company.
      When used with reference to any Person other than the Company, “common stock”
shall mean the capital stock (or equity interest) with the greatest voting
      power
      of such other Person or, if such Person is a Subsidiary of another Person,
      the
      Person or Persons that ultimately control such first-mentioned
      Person.

     

    (h)  “Distribution
      Date” shall mean the earlier of (i) the tenth day after the Stock Acquisition
      Date, or (ii) the tenth day (or such later date as may be determined by an
      action of the Company’s Board of Directors) after the date of the commencement
      of, or first public announcement of the intention of any Person (other than
      the
      Company, a Subsidiary of the Company, an employee benefit plan of the Company
      or
      of a Subsidiary of the Company, or any entity holding shares of capital stock
      of
      the Company for or pursuant to the terms of any such plan in its capacity as
      an
      agent or trustee for any such plan) to commence, a tender or exchange offer
      (other than a Permitted Offer) the consummation of which would result in
      beneficial ownership by a Person of 30% or more of the outstanding Common
      Stock.

     

    (i)  “Expiration
      Date” shall mean March 4, 2011.

     

    (j)  “Permitted
      Offer” shall mean a tender or exchange offer which is for all outstanding Common
      Stock at a price and on terms determined, prior to the purchase of shares under
      such tender or exchange offer, by at least a majority of the members of the
      Board of Directors who are not Acquiring Persons, Affiliates or Associates
      of an
      Acquiring Person or, nominees or representatives of any of them, to be adequate
      (taking into account all factors that such Directors deem relevant including,
      without limitation, prices that could reasonably be achieved if the Corporation
      or its assets were sold on an orderly basis designed to realize maximum value)
      and otherwise in the best interests of the Company and its stockholders (other
      than the Person or any Affiliate or Associate thereof on whose basis the offer
      is being made) taking into account all factors that such directors may deem
      relevant.

     

    (k)  “Person”
      means any individual, partnership, firm, corporation, company, association,
      trust, unincorporated organization, syndicate or group (the existence of a
      “group” being determined in accordance with Rule 13d-5 under the Exchange Act,
      as the Rule is in effect on the date of this Agreement including, but not
      limited to, a Person having any agreement, arrangement or understanding [whether
      formal or informal and whether or not in writing] with any other Person to
      act
      together to acquire, offer to acquire, hold, vote or dispose of any Common
      Shares of the Company).

     

    (l)  “Purchase
      Price” shall mean the price of a share of Common Stock pursuant to the exercise
      of a Right under the terms of this Agreement.

     

    (m)  “Redemption
      Date” shall mean the date on which the Rights are redeemed pursuant to Section
      13 hereof.

     

    (n)  “Stock
      Acquisition Date” shall mean the first date of public announcement by the
      Company or any Acquiring Person that an Acquiring Person has become
      such.

     

    
      
        5

      

      
        
        

        
          

        

      

      
        
        

      

    

    (o)  “Subsidiary”
      of any Person shall mean any corporation or other entity of which a majority
      of
      the voting power of the voting equity securities or equity interests is owned,
      directly or indirectly, by such Person.

     

    (p)  “Trading
      Day” shall mean a day on which the principal national securities exchange on
      which the Common Stock is listed or admitted to trading is open for the
      transaction of business or, if the Common Stock is not listed or admitted to
      trading on any national securities exchange, a Business Day.

     

    Section
      2.  Rights
      Agent.

     

    (a)  The
      Company hereby appoints the Rights Agent to act as agent for the Company and
      the
      holders of the Rights (who, in accordance with Section 3 hereof, shall prior
      to
      the Distribution Date also be the holders of the Common Shares) in accordance
      with the terms and conditions hereof, and the Rights Agent hereby accepts such
      appointment. The Company may from time to time appoint such Co-Rights Agents
      as
      it may deem necessary or desirable. Contemporaneously with such appointment,
      if
      any, the Company shall notify the Rights Agent thereof.

     

    (b)  The
      Company agrees to pay to the Rights Agent reasonable compensation for all
      services rendered by it hereunder in accordance with a fee schedule to be
      mutually agreed upon and, from time to time, on demand of the Rights Agent,
      its
      reasonable expenses and counsel fees and other disbursements incurred in the
      administration and execution of this Agreement and the exercise and performance
      of its duties hereunder.

     

    (c)  The
      Rights Agent undertakes the duties and obligations imposed by this Agreement
      upon the following terms and conditions, and the Company and the holders of
      Right Certificates, by their acceptance thereof, shall be bound by all such
      terms and conditions:

     

    (i)  The
      Rights Agent may consult with legal counsel (who may be legal counsel for the
      Company), and the opinion of such counsel shall be full and complete
      authorization and protection of the Rights Agent as to any action taken or
      omitted by it in good faith and in accordance with such opinion.

     

    (ii)  Whenever
      in the performance of its duties under this Agreement the Rights Agent shall
      deem it necessary or desirable that any fact or matter be proved or established
      by the Company prior to taking or suffering any action hereunder, such fact
      or
      matter (unless other evidence in respect thereof be herein specifically
      prescribed) may be deemed to be conclusively proved and established by a
      certificate signed by the Chairman of the Board, the President, any Executive
      Vice President, any Senior Vice President, the Treasurer, or the Secretary
      of
      the Company and delivered to the Rights Agent, and such certificate shall be
      full authorization to the Rights Agent for any action taken or suffered in
      good
      faith by it under the provisions of this Agreement in reliance upon such
      certificate.

     

    (iii)  The
      Rights Agent shall be liable hereunder only for its own negligence, bad faith
      or
      willful misconduct. The Rights Agent shall be protected and shall incur no
      liability for or in respect of any action taken, suffered or omitted by it
      in
      connection with its administration of this Agreement in reliance upon any Right
      Certificate, certificate for shares of Common Stock or for other securities
      of
      the Company, instrument of assignment or transfer, power of attorney,
      endorsement, affidavit, letter, notice, instruction, direction, consent,
      certificate, statement, or other paper or document believed by it to be genuine
      and to be signed, executed and, where necessary, verified, acknowledged or
      attested by the proper person or persons, or otherwise upon the advice of
      counsel as set forth in this Section.

     

    
      
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    The
      Company agrees to indemnify the Rights Agent for, and to hold it harmless
      against, any loss, liability, or expense, incurred without negligence, bad
      faith
      or willful misconduct on the part of the Rights Agent, for anything done or
      omitted by the Rights Agent in connection with the acceptance and administration
      of this Agreement, including the costs and expenses of defending against any
      claim of liability in the premises.

     

    (iv)  The
      Rights Agent shall not be liable for, or by reason of, any of the statements
      of
      fact or recitals contained in this Agreement or in the Right Certificates
      (except as to its countersignature thereof) or be required to verify the same,
      but all such statements and recitals are and shall be deemed to have been made
      by the Company only.

     

    (v)  The
      Rights Agent shall not be under any responsibility in respect of the validity
      of
      this Agreement or the execution and delivery hereof (except the due execution
      hereof by the Rights Agent) or in respect of the validity or execution of any
      Right Certificate (except its countersignature thereof); nor shall it be
      responsible for any breach by the Company of any covenant or condition contained
      in this Agreement or in any Right Certificate; nor shall it be responsible
      for
      any change in the exercisability of the Rights or any adjustment in the terms
      of
      the Rights (including the manner, method or amount thereof) provided for in
      Sections 3, 10, 11, 12 or 13, or the ascertaining of the existence of facts
      that
      would require any such adjustment or determination (except with respect to
      the
      exercise of Rights evidenced by Right Certificates after actual notice that
      such
      adjustment or determination is required); nor shall it by any act hereunder
      be
      deemed to make any representation or warranty as to the authorization or
      reservation of any shares of Common Stock to be issued pursuant to this
      Agreement or any Right Certificate or as to whether any shares of Common Stock
      will, when so issued, be validly authorized and issued, fully paid and
      non-assessable.

     

    (vi)  The
      Company agrees that it will perform, execute, acknowledge and deliver or cause
      to be performed, executed, acknowledged and delivered all such further and
      other
      acts, instruments and assurances as may reasonably be required by the Rights
      Agent for the carrying out or performing by the Rights Agent of the provisions
      of this Agreement.

     

    (vii)  The
      Rights Agent is hereby authorized and directed to accept instructions with
      respect to the performance of its duties hereunder from the Chairman of the
      Board, the President, any Executive Vice President, any Senior Vice President,
      the Treasurer, or the Secretary of the Company, and to apply to such officers
      for advice or instructions in connection with its duties under this Rights
      Agreement, and it shall not be liable for any action taken or suffered to be
      taken by it in good faith in accordance with instructions of any such officer
      or
      for any delay while waiting for those instructions. Any application by the
      Rights Agent for written instructions from the Company may, at the option of
      the
      Rights Agent, set forth in writing any action proposed to be taken or omitted
      by
      the Rights Agent with respect to its duties or obligations under this Rights
      Agreement and the date on or after which such action shall be taken or omitted
      and the Rights Agent shall not be liable for any action taken or omitted in
      accordance with a proposal included in any such application on or after the
      date
      specified therein (which date shall not be less than three business days after
      the date any such officer actually receives such application, unless any such
      officer shall have consented in writing to an earlier date) unless, prior to
      taking or omitting any such action, the Rights Agent has received written
      instructions in response to such application specifying the action to be taken
      or omitted.

     

    
      
        7

      

      
        
        

        
          

        

      

      
        
        

      

    

    (viii)  The
      Rights Agent and any stockholder, director, officer or employee of the Rights
      Agent may buy, sell or deal in any of the Rights or other securities of the
      Company or become pecuniarily interested in any transaction in which the Company
      may be interested, or contract with or lend money to the Company or otherwise
      act as fully and freely as though it were not Rights Agent under this Agreement.
      Nothing herein shall preclude the Rights Agent from acting in any other capacity
      for the Company or for any other legal entity.

     

    (ix)  The
      Rights Agent may execute and exercise any of the rights or powers hereby vested
      in it or perform any duty hereunder either itself or by or through its attorneys
      or agents, and the Rights Agent shall not be answerable or accountable for
      any
      act, default, neglect or misconduct of any such attorneys or agents or for
      any
      loss to the Company resulting from any such act, default, neglect or misconduct,
      provided reasonable care was exercised in the selection and continued employment
      thereof.

     

    (x)  At
      any
      time and from time to time after the Distribution Date, upon the request of
      the
      Company, the Rights Agent shall promptly deliver to the Company a list, as
      of
      the most recent practicable date (or as of such earlier date as may be specified
      by the Company), of the holders of record of Rights.

     

    (d)  The
      Rights Agent or any successor Rights Agent may resign and be discharged from
      its
      duties under this Agreement upon 30 days’ notice in writing mailed to the
      Company and to each transfer agent of the Common Stock by registered or
      certified mail and to the holders of the Right Certificates by first-class
      mail.
      The Company may remove the Rights Agent or any successor Rights Agent upon
      30
      days’ notice in writing mailed to the Rights Agent or successor Rights Agent, as
      the case may be, and to each transfer agent of the Common Stock by registered
      or
      certified mail, and to the holders of the Right Certificates by first-class
      mail. If the Rights Agent shall resign or be removed or shall otherwise become
      incapable of acting, it shall remit to the Company, or to any successor Rights
      Agent designated by the Company, all books, records, funds, certificates or
      other documents or instruments of any kind then in its possession that it
      acquired in connection with its services as Rights Agent hereunder, and shall
      thereafter be discharged from all duties and obligations hereunder. Following
      notice of such removal, resignation or incapacity, the Company shall appoint
      a
      successor to such Rights Agent. If the Company shall fail to make such
      appointment within a period of 30 days after giving notice of such removal
      or
      after it has been notified in writing of such resignation or incapacity by
      the
      resigning or incapacitated Rights Agent or by a holder of a Right Certificate
      (who shall, with such notice, submit his Right Certificate for inspection by
      the
      Company), then the registered holder of any Right Certificate may apply to
      any
      court of competent jurisdiction for the appointment of a new Rights Agent.
      Any
      successor Rights Agent, whether appointed by the Company or by such a court,
      shall be a corporation organized and doing business under the laws of the United
      States or of any state of the United States, in good standing, that either
      has a
      combined capital and surplus of at least $50 million or is otherwise financially
      sufficient, in the judgement of the Board, to enable it to serve as Rights
      Agent, that has an office in the State of New York or an affiliate with an
      office in the State of New York and that is subject to supervision or
      examination by Federal or state authority. After appointment, the successor
      Rights Agent shall be vested with the same powers, rights, duties and
      responsibilities without further act or deed as if it had been originally named
      as Rights Agent; but the predecessor Rights Agent shall deliver and transfer
      to
      the successor Rights Agent any property at the time held by it hereunder, and
      execute and deliver any further assurance, conveyance, act or deed necessary
      for
      the purpose. Not later than the effective date of any such appointment the
      Company shall file notice thereof in writing with the predecessor Rights Agent
      and each transfer agent of the Common Stock, and mail a notice thereof in
      writing to the registered holders of the Right Certificates. Failure to give
      any
      notice provided for in this paragraph, however, or any defect therein, shall
      not
      affect the legality or validity of the resignation or removal of the Rights
      Agent or the appointment of the successor Rights Agent.

     

    
      
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    (e)  Any
      corporation with which the Rights Agent or any successor Rights Agent is merged
      or consolidated, or any corporation resulting from any such merger or
      consolidation, or any corporation succeeding to the corporate trust business
      of
      the Rights Agent or any successor Rights Agent, shall be the successor to the
      Rights Agent under this Agreement without the execution or filing of any paper
      or any further act on the part of any of the parties hereto, provided that
      such
      corporation would be eligible for appointment as a successor Rights Agent under
      the provisions of paragraph (d) of this Section. If any of the Right
      Certificates shall have been countersigned but not delivered at the time such
      successor Rights Agent shall succeed to the agency created by this Agreement,
      such successor Rights Agent may adopt the countersignature of the predecessor
      Right Agent and deliver such Right Certificates so countersigned; if at that
      time any of the Right Certificates shall not have been countersigned, any
      successor Rights Agent may countersign such Right Certificates either in the
      name of the predecessor Rights Agent or in its own name; and in all such cases
      such Right Certificates shall have the full force provided in the Right
      Certificates and in this Agreement.

     

    (f)  If
      the
      name of the Rights Agent is changed and at such time any of the Right
      Certificates shall have been countersigned but not delivered, the Rights Agent
      may adopt the countersignature under its prior name and deliver Right
      Certificates so countersigned; and if at that time any of the Right Certificates
      shall not have been countersigned, the Rights Agent may countersign such Right
      Certificates either in its prior name or in its changed name; and in all such
      cases such Right Certificates shall have the full force provided in the Right
      Certificates and in this Agreement.

     

    Section
      3.  Issue
      of
      Right Certificates.

     

    (a)  Until
      the
      Distribution Date, the Rights shall be evidenced (subject to the provisions
      of
      paragraph (b) of this Section) by the certificates for shares of Common Stock
      registered in the names of the holders thereof (which Certificates for Common
      Shares shall also be deemed to be Right Certificates) and not by separate Right
      Certificates, and the right to receive Right Certificates will be transferable
      only in connection with the transfer of Common Stock. As soon as practicable
      after the Distribution Date, the Company will prepare and execute, the Rights
      Agent will send or cause to be sent (and the Rights Agent will, if requested,
      send), by first-class, insured, postage-prepaid mail, to each record holder
      of
      Common Stock as of the close of business on the Distribution Date, at the
      address of such holder shown on the records of the Company, a Right Certificate,
      in substantially the form of Exhibit A hereto, evidencing one Right for each
      share of Common Stock so held. As of the Distribution Date, the Rights will
      be
      evidenced solely by such Right Certificates.

     

    
      
        9

      

      
        
        

        
          

        

      

      
        
        

      

    

    (b)  The
      Company will send or cause to be sent a copy of a Summary of Rights to Purchase
      Common Stock, in substantially the form attached hereto as Exhibit B (the
“Summary of Rights”), by first-class, postage-prepaid mail, to each holder of a
      share of Common Stock that shall become outstanding between May 4, 1987 and
      the
      earliest of the Distribution Date, the Redemption Date and the Expiration Date.
      Until the Distribution Date, the Rights shall be evidenced by certificates
      for
      Common Stock registered in the names of the holders thereof (together with
      a
      copy of the Summary of Rights), registered holders of Common Stock shall also
      be
      the registered holders of the associated Rights, and the surrender for transfer
      of any certificate for Common Stock, with or without a copy of the Summary
      of
      Rights attached thereto, shall also constitute the transfer of the associated
      Rights. Certificates issued for Common Stock (including, without limitation,
      certificates issued upon transfer or exchange of Common Stock) prior to the
      earliest of the Distribution Date, the Redemption Date or the Expiration Date
      shall have impressed on, printed on, written on or otherwise affixed to them
      the
      following legend:

     

    This
      certificate also evidences and entitles the holder hereof to certain Rights
      as
      set forth in a Rights Agreement between Hancock Fabrics, Inc. and Continental
      Stock Transfer & Trust Company, dated as of March 23, 1987, as from time to
      time amended, (the “Rights Agreement”), the terms of which are hereby
      incorporated herein by reference and a copy of which is on file at the principal
      executive offices of Hancock Fabrics, Inc. Under certain circumstances, as
      set
      forth in the Rights Agreement, such Rights will be evidenced by separate
      certificates and will no longer be evidenced by this certificate. Hancock
      Fabrics, Inc. will mail to the holder of this certificate a copy of the Rights
      Agreement without charge after receipt of a written request therefor. Under
      certain circumstances, Rights issued to Acquiring Persons or Associates or
      Affiliates thereof (as defined in the Rights Agreement) may become null and
      void.

     

    (c)  In
      the
      event that the Company purchases or acquires any shares of Common Stock prior
      to
      the Distribution Date, any Rights associated with such shares of Common Stock
      shall be deemed canceled and retired so that the Company shall not be entitled
      to exercise any Rights associated with shares of Common Stock that are no longer
      outstanding.

     

    Section
      4.  Form
      of
      Right Certificates.

     

    (a)  The
      Right
      Certificates (and the form of election to purchase shares, certification and
      assignment to be printed on the reverse thereof) shall be substantially in
      the
      form of Exhibit A hereto and may have such marks of identification or
      designation and such legends, summaries or endorsements printed thereon as
      the
      Company may deem appropriate and as are not inconsistent with the provisions
      of
      this Agreement, or as may be required to comply with any applicable law or
      with
      any rule or regulation made pursuant thereto or with any rule or regulation
      of
      any stock exchange on which the Rights may from time to time be listed, or
      to
      conform to usage. The Right Certificates shall be in machine printable form
      and
      in a format reasonably satisfactory to the Rights Agent. Subject to the
      provisions of paragraph (b) of this Section, the Right Certificates, whenever
      issued, shall be dated as of March 23, 1987, and shall show the date of
      countersignature by the Rights Agent, and on their face shall entitle the
      holders thereof to purchase such number of shares of Common Stock as shall
      be
      set forth therein at the Purchase Price set forth therein, but the number and
      kind of such shares and the Purchase Price shall be subject to adjustment as
      provided herein.

     

    (b)  Notwithstanding
      any of the provisions of this Agreement or of the Rights to the contrary, the
      Company may, at its option, issue new Right Certificates evidencing Rights
      in
      such form as may be approved by the Board to reflect any adjustment or change
      in
      the Purchase Price and the number or kind or class of shares or other securities
      or property purchasable under the Right Certificates made in accordance with
      the
      provisions of this Agreement.

     

    
      
        10

      

      
        
        

        
          

        

      

      
        
        

      

    

    Section
      5.  Countersignature
      and Registration.

     

    The
      Right
      Certificates shall be executed on behalf of the Company by the Chairman of
      the
      Board, President or any Vice President and by its Secretary or an Assistant
      Secretary, either manually or by facsimile signature, and shall have affixed
      thereto the Company’s seal or a facsimile thereof. The Right Certificates shall
      be manually countersigned by an authorized signatory of the Rights Agent, but
      it
      shall not be necessary for the same signatory to countersign all of the Right
      Certificates hereunder. No Right Certificate shall be valid for any purpose
      unless so countersigned. In case any officer of the Company who shall have
      signed any of the Right Certificates shall cease to be such officer of the
      Company before countersignature by the Rights Agent and issuance and delivery
      by
      the Company, such Right Certificates, may nevertheless be countersigned by
      the
      Rights Agent, and issued and delivered by the Company with the same force and
      effect as though the person who signed such Right Certificates had not ceased
      to
      be such officer of the Company.

     

    Following
      the Distribution Date, the Rights Agent will keep or cause to be kept, at its
      principal office in the Borough of Manhattan in the City of New York, books
      for
      registration and transfer of the Right Certificates issued hereunder. Such
      books
      shall show the names and addresses of the respective holders of the Right
      Certificates, the number of Rights evidenced on its face by each of the Right
      Certificates and the date of each of the Right Certificates.

     

    Section
      6.  Transfer,
      Split-Up, Combination and Exchange of Right Certificates; Mutilated, Destroyed,
      Lost or Stolen Right Certificates; Cancellation and Destruction of Right
      Certificates.

     

    (a)  Subject
      to the provisions of Section 7(f) and (g) hereof, at any time after the close
      of
      business on the Distribution Date, and at or prior to the close of business
      on
      the earlier of the Redemption Date or the Expiration Date, any Right Certificate
      or Right Certificates may be transferred, split up, combined or exchanged for
      another Right Certificate or Right Certificates, entitling the registered holder
      to purchase a like number of shares of Common Stock as the Right Certificate
      or
      Right Certificates surrendered then entitled such holder to purchase. Any
      registered holder desiring to transfer, split up, combine or exchange any Right
      Certificate shall make such request in writing delivered to the Rights Agent,
      and shall surrender such Right Certificate or Right Certificates at the
      principal office of the Rights Agent. Thereupon the Rights Agent shall
      countersign and deliver to the person entitled thereto a Right Certificate
      or
      Right Certificates, as the case may be, as so requested. The Company may require
      payment from the holders of Right Certificates of a sum sufficient to cover
      any
      tax or governmental charge that may be imposed in connection with any transfer,
      split-up, combination or exchange of such Right Certificates.

     

    Upon
      receipt by the Company and the Rights Agent of evidence reasonably satisfactory
      to them of the loss, theft, destruction or mutilation of a Right Certificate,
      and, in case of loss, theft or destruction, of indemnity or security reasonably
      satisfactory to them, and, at the Company’s request, reimbursement to the
      Company and the Rights Agent of all reasonable expenses incidental thereto,
      and
      upon surrender to the Rights Agent and cancellation of the Right Certificate
      if
      mutilated, the Company shall execute and deliver a new Right Certificate of
      like
      tenor to the Rights Agent for delivery to the registered owner in lieu of the
      Right Certificate so lost, stolen, destroyed or mutilated.

     

    
      
        11

      

      
        
        

        
          

        

      

      
        
        

      

    

    All
      Right
      Certificates surrendered for the purpose of exercise, transfer, split-up,
      combination or exchange shall, if surrendered to the Company or to any of its
      agents, be delivered to the Rights Agent for cancellation or in canceled form,
      or, if surrendered to the Rights Agent, shall be canceled by it, and no Right
      Certificates shall be issued in lieu thereof except as expressly permitted
      by
      any of the provisions of the Rights Agreement. The Company shall deliver to
      the
      Rights Agent for cancellation and retirement, and the Rights Agent shall so
      cancel and retire, any other Right Certificate purchased or acquired by the
      Company otherwise than upon the exercise thereof. The Rights Agent shall deliver
      all canceled Right Certificates to the Company, or shall, at the written request
      of the Company, destroy such canceled Right Certificates, and in such case
      shall
      deliver a certificate of destruction thereof to the Company.

     

    Section
      7.  Exercise
      of Rights; Purchase Price; Expiration Date of Rights; Fractional Rights and
      Fractional Shares of Stock.

     

    (a)  The
      registered holder of any Right Certificate may exercise the Rights evidenced
      thereby (except as otherwise provided herein) in whole or in part at any time
      after the Distribution Date upon surrender of the Right Certificate, with the
      form of election to purchase and certification on the reverse side thereof
      duly
      executed, to the Rights Agent at the principal office of the Rights Agent in
      the
      Borough of Manhattan in the City of New York, together with payment of the
      Purchase Price for each share of Common Stock as to which the Rights are
      exercised, at or prior to the earlier of (i) the close of business on the
      Expiration Date or (ii) the Redemption Date.

     

    (b)  The
      Purchase Price for each share of Common Stock purchased pursuant to the exercise
      of a Right shall be $24, shall be subject to adjustment from time to time as
      hereinafter provided and shall be payable in lawful money of the United States
      of America in accordance with paragraph (c) of this Section.

     

    (c)  Upon
      receipt of a Right Certificate representing exercisable Rights, with the form
      of
      election to purchase and certification duly executed, accompanied by payment
      of
      the Purchase Price for the shares of Common Stock to be purchased and an amount
      equal to any applicable transfer tax required to be paid by the holder of such
      Right Certificate in accordance with Section 8 hereof, in cash, or by certified
      check or cashier’s check payable to the order of the Company, the Rights Agent
      shall thereupon promptly (i) requisition from any transfer agent of the Common
      Stock (or make available, if the Rights Agent is the transfer agent)
      certificates for the number of shares of Common Stock to be purchased and the
      Company hereby irrevocably authorizes its transfer agent to comply with all
      such
      requests, (ii) when appropriate, requisition from the Company the amount of
      cash
      to be paid in lieu of issuance of fractional shares of Common Stock in
      accordance with paragraph (g) of this Section, (iii) promptly after receipt
      of
      such certificates, cause the same to be delivered to or upon the order of the
      registered holder of such Right Certificate, registered in such name or names
      as
      may be designated by such holder, and (iv) when appropriate, after receipt,
      promptly deliver such cash to or upon the order of the registered holder of
      such
      Right Certificate.

     

    (d)  In
      case
      the registered holder of any Right Certificate shall exercise less than all
      the
      Rights evidenced thereby, a new Right Certificate evidencing Rights equivalent
      to the Rights remaining unexercised shall be issued by the Rights Agent to
      the
      registered holder of such Right Certificate or to his duly authorized assigns,
      subject to the provisions of paragraph (f) of this Section.

     

    
      
        12

      

      
        
        

        
          

        

      

      
        
        

      

    

    (e)  Notwithstanding
      anything in this Agreement to the contrary, neither the Rights Agent nor the
      Company shall be obligated to undertake any action with respect to a registered
      holder upon the occurrence of any purported exercise as set forth in this
      Section unless the certification contained in the appropriate form of election
      to purchase set forth on the reverse side of the Right Certificate surrendered
      for such exercise shall have been completed and signed by the registered holder
      thereof and the Company shall have been provided with such additional evidence
      of the identity of the beneficial owner (or former beneficial owner) or
      Affiliates or Associates thereof as the Company shall reasonably
      request.

     

    (f)  The
      Company shall not be required to issue fractions of Rights or to distribute
      Right Certificates that evidence fractional Rights. In lieu of fractional
      Rights, the Company shall pay to the registered holders of the Right
      Certificates with regard to which such fractional Rights would otherwise be
      issuable an amount in cash equal to the same fraction of the current market
      value of a whole Right. For the purposes of this paragraph, the current market
      value of a whole Right shall be the closing price (as defined in Section 1(f))
      of the Rights for the Trading Day immediately prior to the date on which such
      fractional Rights would have been otherwise issuable. If the Rights are not
      publicly held or not so listed or traded, the “current market value of a whole
      Right” shall mean the fair value of a Right on such date as determined in good
      faith by the Board.

     

    (g)  The
      Company shall not be required to issue fractions of shares of Common Stock
      upon
      exercise of the Rights or to distribute certificates which evidence fractional
      shares of Common Stock. In lieu of fractional shares of Common Stock, the
      Company may pay to the registered holders of Right Certificates at the time
      such
      Rights are exercised as herein provided an amount in cash equal to the same
      fraction of the current market value of one share of Common Stock. For purposes
      of this paragraph, the current market value of the Common Stock shall be the
      closing price (as defined in Section 1(f)) of a share of Common Stock for the
      Trading Day immediately prior to the date of such exercise.

     

    Section
      8.  Reservation
      and Availability of Shares of Common Stock.

     

    The
      Company covenants and agrees that it will cause to be reserved and kept
      available out of its authorized and unissued Common Stock, or any authorized
      and
      issued Common Stock held in its treasury, the number of shares of Common Stock
      that will be sufficient to permit the exercise in full of all outstanding
      Rights. In the event that there shall not be sufficient treasury stock or
      authorized but unissued Common Stock to permit the exercise in full of the
      Rights in accordance with the provisions of this Agreement, the Company shall
      take all such action as may be necessary to authorize additional shares of
      Common Stock for issuance upon exercise of the Rights.

     

    So
      long
      as the Common Stock issuable upon the exercise of Rights may be listed on any
      national securities exchange, the Company shall use its best efforts to cause,
      from and after such time as the Rights become exercisable, all shares of Common
      Stock reserved for such issuance to be listed on such exchange upon official
      notice of issuance upon such exercise.

     

    The
      Company covenants and agrees that it will take all such action as may be
      necessary to ensure that all Common Stock delivered upon exercise of Rights
      shall, at the time of delivery of the certificates for such stock (subject
      to
      payment of the Purchase Price), be duly and validly authorized and issued and
      fully paid and non-assessable stock.

     

    
      
        13

      

      
        
        

        
          

        

      

      
        
        

      

    

    The
      Company further covenants and agrees that it will pay when due and payable
      any
      and all Federal and state transfer taxes and charges which may be payable in
      respect of the issuance or delivery of the Right Certificates or of any Common
      Stock upon the exercise of Rights. The Company shall not, however, be required
      to pay any transfer tax which may be payable in respect of any transfer or
      delivery of Right Certificates to a person other than, or the issuance or
      delivery of certificates for Common Stock in a name other than that of, the
      registered holder of the Right Certificate evidencing the Rights surrendered
      for
      exercise or to issue or deliver any certificates for Common Stock upon the
      exercise of any Rights until any such tax shall have been paid (any such tax
      being payable by the holder of such Right Certificate at the time of surrender)
      or until it has been established to the Company’s satisfaction that so such tax
      is due.

     

    Section
      9.  Right
      Holders.

     

    (a)  Every
      holder of a Right by accepting the same consents and agrees with the Company
      and
      the Rights Agent and with every other holder of a Right that:

     

    (i)  prior
      to
      the Distribution Date, the Rights shall be transferable only in connection
      with
      the transfer of Common Stock;

     

    (ii)  after
      the
      Distribution Date, the Right Certificates shall be transferable only on the
      registry books of the Rights Agent if surrendered at the principal office of
      the
      Rights Agent, duly endorsed or accompanied by a proper instrument of
      transfer;

     

    (iii)  the
      Company and the Rights Agent may deem and treat the person in whose name the
      Right Certificate (or, prior to the Distribution Date, the associated Common
      Stock certificate) is registered as the absolute owner thereof and of the Rights
      evidenced thereby (notwithstanding any notations of ownership or writing on
      the
      Right Certificates or the associated Common Stock certificate made my anyone
      other than the Company or the Rights Agent) for all purposes whatsoever, and
      neither the Company nor the Rights Agent shall be affected by any notice to
      the
      contrary; and

     

    (iv)  he
      has
      waived his right to receive any fractional Rights or any fractional shares
      of
      stock upon exercise of a Right.

     

    (b)  No
      holder, as such, of any Right Certificate shall be entitled to vote, receive
      dividends or be deemed for any purpose the holder of Common Stock or any other
      securities of the Company which may at any time be issuable on the exercise
      of
      the Rights represented thereby, nor shall anything contained herein or in any
      Right Certificate be construed to confer upon the holder of any Right
      Certificate, as such, any of the rights of a stockholder of the Company or
      any
      right to vote for the election of directors or upon any matter submitted to
      stockholders at any meeting thereof, or to receive notice of meetings or other
      actions affecting stockholders (except as provided in Section 14 hereof), or
      to
      receive dividends or subscription rights, or otherwise, until the Right or
      Rights evidenced by such Right Certificate shall have been exercised in
      accordance with the provisions hereof.

     

    (c)  Each
      person in whose name any certificate for Common Stock is issued upon the
      exercise of Rights shall for all purposes be deemed to have become the holder
      of
      record of the Common Stock represented thereby on, and such certificate shall
      be
      dated, the date upon which the Right Certificate evidencing such Rights was
      duly
      surrendered and payment of the Purchase Price (and any applicable transfer
      taxes) was made; provided, however, that if the date of such surrender and
      payment is a date upon which the Common Stock transfer books of the Company
      are
      closed, such person shall be deemed to have become the record holder of such
      stock on, and such certificate shall be dated, the next succeeding Business
      Day
      on which the Common Stock transfer books of the Company are open.

     

    
      
        14

      

      
        
        

        
          

        

      

      
        
        

      

    

    (d)  All
      rights of action in respect of this Agreement, except the rights of action
      given
      to the Rights Agent under Section 2 (b) and (c) hereof, are vested in each
      registered holder of a Right Certificate (and, prior to the Distribution Date,
      each registered holder of Common Stock); and any such holder, without the
      consent of the Rights Agent or of the holder of any other Right Certificate
      (or,
      prior to the Distribution Date, of the Common Stock), may, in his own behalf
      and
      for his own benefit, enforce, and may institute and maintain any suit, action
      or
      proceeding against the Company to enforce, this Agreement, or otherwise enforce
      or act in respect of his right to exercise the Rights evidenced by such Right
      Certificate in the manner provided in such Right Certificate and in this
      Agreement. Without limiting the foregoing or any remedies available to the
      holders of Rights, it is specifically acknowledged that the holders of Rights
      would not have an adequate remedy at law for any breach of this Agreement and
      will be entitled to specific performance of the obligations under, and
      injunctive relief against actual or threatened violations of, the obligations
      of
      any Person subject to this Agreement.

     

    Section
      10.  Adjustment
      of Number of Shares; Exchange Option.

     

    (a)  Subject
      to the provisions of paragraph (b) of this Section, in the event any Person
      shall become an Acquiring Person, proper provision shall be made so that each
      holder of a Right, except as provided below, shall thereafter have a right
      to
      receive, upon exercise thereof in accordance with the terms of this Agreement,
      such number of shares of Common Stock as shall equal the result obtained by
      (x)
      multiplying the then-current Purchase Price by the number of shares of Common
      Stock for which a Right is then exercisable and (y) dividing that product by
      50%
      of the current per share market price of the Common Stock (determined pursuant
      to Section 12(d)), on the date such Person became an Acquiring Person. In the
      event that any Person shall become an Acquiring Person and the Rights shall
      then
      be outstanding, the Company shall not take any action that would substantially
      diminish or otherwise eliminate the benefits intended to be afforded by the
      Rights.

     

    (b)  The
      Board
      of Directors of the Company may, at its option, at any time after any Person
      becomes an Acquiring Person, exchange all or part of the then outstanding and
      exercisable Rights (which shall not include Rights that have become void
      pursuant to the provisions of paragraph (c) of this Section) for Common Stock
      at
      an exchange ratio of one share of Common Stock per Right, appropriately adjusted
      to reflect any stock split, stock dividend or similar transaction occurring
      after the date hereof (such exchange ratio being hereinafter referred to as
      the
“Exchange Ratio”). Notwithstanding the foregoing, the Board of Directors shall
      not be empowered to effect such exchange at any time that a majority of the
      members of the Board of Directors shall be Acquiring Persons, Affiliates or
      Associates of an Acquiring Person, or nominees or representatives of any of
      them. Immediately upon the action of the Board of Directors of the Company
      ordering the exchange of any Rights pursuant to this paragraph (b) and without
      any further action and without any notice, the right to exercise such Rights
      shall terminate and the only right thereafter of a holder of such Rights shall
      be to receive that number of shares of Common Stock equal to the number of
      such
      Rights held by such holder multiplied by the Exchange Ratio. The Company shall
      promptly give public notice of any such exchange; provided, however, that the
      failure to give, or any defect in, such notice shall not affect the validity
      of
      such exchange. The Company promptly shall mail a notice of any such exchange
      to
      all of the holders of such Rights at their last addresses as they appear upon
      the registry books of the Rights Agent. Any notice which is mailed in the manner
      herein provided shall be deemed given, whether or not the holder receives the
      notice. Each such notice of exchange will state the method by which the exchange
      of Common Stock for Rights will be effected and, in the event of any partial
      exchange, the number of Rights that will be exchanged. Any partial exchange
      shall be effected pro rata based on the number of Rights (other than Rights
      that
      have become void pursuant to the provisions of paragraph (c) of this Section)
      held by each holder of Rights. In the event that there shall not be sufficient
      shares of Common Stock issued but not outstanding or authorized but unissued
      to
      permit any exchange of Rights as contemplated in accordance with this paragraph
      (b), the Company shall take all such action as may be necessary to authorize
      additional shares of Common Stock for issuance upon exchange of the
      Rights.

     

    
      
        15

      

      
        
        

        
          

        

      

      
        
        

      

    

    (c)  Anything
      in this Agreement to the contrary notwithstanding, from and after the time
      any
      Person becomes an Acquiring Person, any Rights beneficially owned by (i) an
      Acquiring Person or an Associate or Affiliate of an Acquiring Person, (ii)
      a
      transferee of an Acquiring Person (or of any Affiliate or Associate thereof)
      who
      becomes a transferee after the Acquiring Person becomes such, or (iii) a
      transferee of an Acquiring Person (or of any Affiliate or Associate thereof)
      who
      becomes a transferee prior to or concurrently with the Acquiring Person becoming
      such and receives such Rights pursuant to either (A) a transfer (whether or
      not
      for consideration) from the Acquiring Person to holders of equity interests
      in
      such Acquiring Person or to any Person with whom the Acquiring Person has a
      continuing agreement, arrangement or understanding regarding the transferred
      Rights or (B) a transfer which the Board of Directors of the Company has
      determined is part of a plan, arrangement or understanding which has a primary
      purpose or effect the avoidance of this paragraph (c), shall become null and
      void without any further action and no holder of such Rights shall have any
      rights whatsoever with respect to such Rights, whether under any provision
      of
      this Agreement or otherwise. No Right Certificate shall be issued pursuant
      to
      the provisions of this Agreement that represents any Rights beneficially owned
      by any Person whose Rights are void pursuant to the provisions of this paragraph
      (c). The Company shall use all reasonable effortsto ensure that the provisions
      of this paragraph (c) are complied with, but shall have no liability to any
      holder of Right Certificates or other Person as a result of its failure to
      make
      any determinations with respect to an Acquiring Person or its Affiliates,
      Associates or transferees hereunder.

     

    Section
      11.  Consolidation,
      Merger or Sale or Transfer of Assets or Earning Power.

     

    At
      any
      time after a Person shall have become an Acquiring Person, in the event that,
      directly or indirectly, (a) the Company shall consolidate with, or merge with
      and into, any Person, (b) any Person shall consolidate with the Company, or
      merge with and into the Company and the Company shall be the continuing or
      surviving corporation of such merger and, in connection with such merger, all
      or
      part of the Common Stock shall be changed into or exchanged for stock or other
      securities of any other Person (or the Company) or cash or any other property,
      or (c) the Company shall sell or otherwise transfer (or one or more of its
      Subsidiaries shall sell or otherwise transfer), in one or more transactions,
      assets or earning power aggregating more than 50% of the assets or earning
      power
      of the Company and its Subsidiaries (taken as a whole) to any other Person,
      then, and in each such case, proper provision shall be made so that (i) each
      holder of a Right (except as otherwise provided herein) shall thereafter have
      the right to receive, upon the exercise thereof in accordance with the terms
      of
      this Agreement, such number of shares of common stock of such other Person
      (including the Company as successor thereto or as the surviving corporation)
      as
      shall be equal to the result obtained by (x) multiplying the then-current
      Purchase Price by the number of shares of Common Stock for which a Right is
      then
      exercisable (without taking into account any adjustment previously made pursuant
      to Section 10) and (y) dividing that product by 50% of the current per share
      market price of the shares of common stock of such other Person (determined
      pursuant to Section 12(d) hereof) on the date of consummation of such
      consolidation, merger, sale or transfer; (ii) such Person shall thereafter
      be
      liable for, and shall assume, by virtue of such consolidation, merger, sale
      or
      transfer, all the obligations and duties of the Company pursuant to this
      Agreement; (iii) the term “Company” shall thereafter be deemed to refer to such
      Person; and (iv) such Person shall take such steps (including, but not limited
      to, the reservation of a sufficient number of shares of its common stock in
      accordance with Section 8 hereof) in connection with such consummation as may
      be
      necessary to ensure that the provisions hereof shall thereafter be applicable,
      as nearly as reasonably may be, in relation to its common stock thereafter
      deliverable upon the exercise of the Rights. The Company shall not consummate
      any such consolidation, merger, sale or transfer unless prior thereto the
      Company and such Person shall have executed and delivered to the Rights Agent
      a
      supplemental agreement so providing. The Company shall not enter into any
      transaction of the kind referred to in this Section if at the time of such
      transaction there are any rights, warrants, instruments or securities
      outstanding or any agreements or arrangements which, as a result of the
      consummation of such transaction, would substantially diminish or otherwise
      eliminate the benefits intended to be afforded by the Rights. The provisions
      of
      this Section shall similarly apply to successive mergers or consolidations
      or
      sales or other transfers.

     

    
      
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    Section
      12.  Adjustments
      of Purchase Price, Number of Shares or Number of Rights.

     

    (a)  In
      the
      event the Company shall at any time after the date of this Agreement (A) declare
      a dividend on the Common Stock payable in shares of Common Stock, (B) subdivide
      the outstanding shares of Common Stock, (c) combine the outstanding shares
      of
      Common Stock into a smaller number of shares or (D) issue any shares of its
      capital stock in a reclassification of the Common Stock (including any such
      reclassification in connection with a consolidation or merger in which the
      Company is the continuing or surviving corporation), except as otherwise
      provided in Section 10 hereof, the Purchase Price in effect at the time of
      the
      record date for such dividend or of the effective date of such subdivision,
      combination or reclassification, and the number and kind of shares of capital
      stock issuable on such date, shall be proportionately adjusted so that the
      holder of any Right exercised after such time shall be entitled to receive,
      upon
      payment of the Purchase Price then in effect and in compliance with other
      applicable conditions, the aggregate number and kind of shares of capital stock
      which, if such Right had been exercised immediately prior to such date and
      at a
      time when the Common Stock transfer books of the Company were open, he would
      have owned upon such exercise and been entitled to receive by virtue of such
      dividend, subdivision, combination or reclassification. If an event occurs
      that
      would require an adjustment under both this paragraph and Section 10 hereof,
      the
      adjustment provided for in this paragraph shall be in addition to, and shall
      be
      made prior to, any adjustment required pursuant to Section 10
      hereof.

     

    (b)  In
      case
      the Company shall fix a record date for the issuance of rights or warrants
      to
      all holders of Common Stock entitling them (for a period expiring within 45
      calendar days after such record date) to subscribe for or purchase Common Stock
      (or securities convertible into Common Stock) at a price per share of Common
      Stock (or having a conversion price per share of Common Stock, if a security
      convertible into Common Stock) less than the current per share market price
      of
      the Common Stock (as defined in paragraph (d) of this Section) on such record
      date, the Purchase Price to be in effect after such record date shall be
      determined by multiplying the Purchase Price in effect immediately prior to
      such
      record date by a fraction, the numerator of which shall be the number of shares
      of Common Stock outstanding on such record date plus the number of shares of
      Common Stock that the aggregate offering price of the total number of shares
      of
      Common Stock so to be offered (and/or the aggregate initial conversion price
      of
      the convertible securities so to be offered) would purchase at such current
      market price and the denominator of which shall be the number of shares of
      Common Stock outstanding on such record date plus the number of additional
      shares of Common Stock to be offered for subscription or purchase (or into
      which
      the convertible securities so to be offered are initially convertible). In
      case
      such subscription price may be paid in a consideration part or all of which
      is
      in a form other than cash, the value of such consideration shall be as
      determined in good faith by the Board, whose determination shall be described
      in
      a statement filed with the Rights Agent. Common Stock owned by or held for
      the
      account of the Company shall not be deemed outstanding for the purpose of any
      such computation. Such adjustments shall be made successively whenever such
      a
      record date is fixed; and in the event that such rights or warrants are not
      so
      issued, the Purchase Price shall be adjusted to be the Purchase Price which
      would then be in effect if such record date had not been fixed.

     

    
      
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    (c)  In
      case
      the Company shall fix a record date for the making of a distribution to all
      holders of Common Stock (including any such distribution made in connection
      with
      a consolidation or merger in which the Company is the continuing or surviving
      corporation) of evidences of indebtedness or assets (other than a regular
      periodic cash dividend at a rate not in excess of 125% of the rate of the last
      regular periodic cash dividend theretofore paid or a dividend payable in shares
      of Common Stock) or subscription rights or warrants (excluding those referred
      to
      in paragraph (b) of this Section), the Purchase Price to be in effect after
      such
      record date shall be determined by multiplying the Purchase Price in effect
      immediately prior to such record date by a fraction, the numerator of which
      shall be the current per share market price of the Common Stock (as defined
      in
      paragraph (d) of this Section) on such record date, less the fair market value
      (as determined in good faith by the Board, whose determination shall be
      described in a statement filed with the Rights Agent) of the portion of the
      assets or evidences of indebtedness so to be distributed or of such subscription
      rights or warrants applicable to one share of Common Stock and the denominator
      of which shall be such current per share market price of the Common Stock.
      Such
      adjustments shall be made successively whenever such a record date is fixed;
      and
      in the event that such distribution is not so made, the Purchase Price shall
      again be adjusted to be the Purchase Price which would then be in effect if
      such
      record date had not been fixed.

     

    (d)  For
      the
      purpose of any computation hereunder, the “current per share market price” of
      the Common Stock on any date shall be deemed to be the average of the daily
      closing prices (as defined in Section 1(f) hereof) per share of such Common
      Stock for the 30 consecutive Trading Days immediately prior to such date;
      provided, however, that in the event that the current per share market price
      of
      the Common Stock is determined during a period following the announcement by
      the
      issuer of such Common Stock of (i) a dividend or distribution on such Common
      Stock payable in such Common Stock or securities convertible into such Common
      Stock or (ii) any subdivision, combination or reclassification of such Common
      Stock, and prior to the expiration of 30 Trading Days after the ex-dividend
      date
      for such dividend or distribution, or the record date for such subdivision,
      combination or reclassification, then, and in each such case, the “current
      market price” shall be appropriately adjusted to reflect the current market
      price per share of Common Stock equivalent. If the Common Stock is not publicly
      held or not so listed or traded, the “current per share market price” shall mean
      the fair value per share of Common Stock as determined in good faith by the
      Board, whose determination shall be described in a statement filed with the
      Rights Agent.

     

    (e)  An
      adjustment in the Purchase Price requiring an increase or decrease of less
      than
      1% in such price shall not be required immediately following a transaction,
      but
      any such adjustment shall be carried forward and made not later than the earlier
      of the Expiration Date and three years after the date of the transaction or
      shall be taken into account in any subsequent adjustment if prior to the earlier
      of such dates. All calculations under this Section and under Section 10 shall
      be
      made to the nearest cent or to the nearest ten-thousandth of a share as the
      case
      may be.

     

    
      
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    (f)  If
      as a
      result of an adjustment made pursuant to paragraph (a) of this Section or
      Section 10(a), the holder of any Right thereafter exercised shall become
      entitled to receive any shares of capital stock of the Company other than shares
      of Common Stock, thereafter the number of such other shares of stock so
      receivable upon exercise of any Right shall be subject to adjustment from time
      to time in a manner and on terms as nearly equivalent as practicable to the
      provisions with respect to the Common Stock contained in paragraphs (a) through
      (c), inclusive, of this Section, and the provisions of Sections 7, 8, 9(c)
      and
      11 hereof with respect to the Common Stock shall apply on like terms to any
      such
      other shares of stock.

     

    (g)  All
      Rights issued by the Company subsequent to any adjustment to the Purchase Price
      hereunder shall evidence the right to purchase, at the adjusted Purchase Price,
      the number of shares of Common Stock purchasable from time to time hereunder
      upon exercise of the Rights, all subject to further adjustment as provided
      herein.

     

    (h)  Unless
      the Company shall have exercised its election as provided in paragraph (i)
      of
      this Section, upon each adjustment of the Purchase Price as a result of the
      calculations made in paragraphs (b) and (c) of this Section, each Right
      outstanding immediately prior to the making of such adjustment shall thereafter
      evidence the right to purchase, at the adjusted Purchase Price, that number
      of
      shares of stock (calculated to the nearest ten-thousandth) obtained by (i)
      multiplying (x) the number of shares of stock covered by a Right immediately
      prior to this adjustment by (y) the Purchase Price in effect immediately prior
      to such adjustment of the Purchase Price and (ii) dividing the product so
      obtained by the Purchase Price in effect immediately after such adjustment
      of
      the Purchase Price.

     

    (i)  The
      Company may elect on or after the date of any adjustment of the Purchase Price
      to adjust the number of Rights, in substitution for any adjustment in the number
      of shares of Common Stock issuable upon the exercise of a Right. Each of the
      Rights outstanding after such adjustment of the number of Rights shall be
      exercisable for the number of shares of Common Stock for which a Right was
      exercisable immediately prior to such adjustment. Each Right held of record
      prior to such adjustment of the number of Rights shall become that number of
      Rights (calculated to the nearest ten-thousandth) obtained by dividing the
      Purchase Price in effect immediately prior to adjustment of the Purchase Price
      by the Purchase Price in effect immediately after adjustment of the Purchase
      Price. The Company shall make a public announcement of its election to adjust
      the number of Rights, indicating the record date for the adjustment, and, if
      known at the time, the amount of the adjustment to be made. This record date
      may
      be the date on which the Purchase Price is adjusted or any day thereafter,
      but,
      if the Right Certificates have been issued, shall be at least 10 days later
      than
      the date of the public announcement. If Right Certificates have been issued,
      upon each adjustment of the number of Rights pursuant to this paragraph, the
      Company shall, as promptly as practicable, cause to be distributed to holders
      of
      record of Right Certificates on such record date Right Certificates evidencing,
      subject to Section 7(f) hereof, the additional Rights to which such holders
      shall be entitled as a result of such adjustment, or, at the option of the
      Company, shall cause to be distributed to such holders of record in substitution
      and replacement for the Right Certificates held by such holders prior to the
      date of adjustment, and upon surrender thereof, if required by the Company,
      new
      Right Certificates evidencing all the Rights to which such holders shall be
      entitled after such adjustment. Right Certificates so to be distributed shall
      be
      issued, executed and countersigned in the manner provided for herein and shall
      be registered in the names of the holders of record of Right Certificates on
      the
      record date specified in the public announcement.

     

    
      
        19

      

      
        
        

        
          

        

      

      
        
        

      

    

    (j)  Irrespective
      of any adjustment or change in the Purchase Price or the number of shares of
      Common Stock issuable upon the exercise of the Rights, the Right Certificates
      theretofore and thereafter issued may continue to express the Purchase Price
      per
      share of stock and the number of shares of stock that were expressed in the
      initial Right Certificates issued hereunder.

     

    (k)  Before
      taking any action that would cause an adjustment reducing the Purchase Price
      below the then par value, if any, of the Common Stock issuable upon exercise
      of
      the Rights, the Company shall take any corporate action which may, in the
      opinion of its counsel, be necessary in order that the Company may validly
      and
      legally issue fully paid and nonassessable shares of Common Stock at such
      adjusted Purchase Price.

     

    (l)  In
      any
      case in which this Section or Section 10 shall require that an adjustment in
      the
      Purchase Price be made effective as of a record date for a specified event,
      the
      Company may elect to defer until the occurrence of such event the issuing to
      the
      holder of any Right exercised after such record date the Common Stock and other
      capital stock or securities of the Company, if any, issuable upon such exercise
      over and above the Common Stock and other capital stock or securities of the
      Company, if any, issuable upon such exercise on the basis of the Purchase Price
      in effect prior to such adjustment; provided, however, that the Company shall
      deliver to such holder a due bill or other appropriate instrument evidencing
      such holder’s right to receive such additional shares upon the occurrence of the
      event requiring such adjustment.

     

    (m)  Anything
      in this Section or Section 10 to the contrary notwithstanding, the Company
      shall
      be entitled to make such reductions in the Purchase Price, in addition to those
      adjustments expressly required by this Section or Section 10, as and to the
      extent that it in its sole discretion shall determine to be advisable in order
      that any consolidation or subdivision of the shares of the Common Stock,
      issuance wholly for cash of any shares of Common Stock at less than the current
      market price, issuance wholly for cash of Common Stock or securities which
      by
      their terms are convertible into or exchangeable for Common Stock, stock
      dividends or issuance of rights, options or warrants referred to hereinabove
      in
      this Section, hereafter made by the Company to holders of its Common Stock
      shall
      not be taxable to such stockholders.

     

    (n)  Whenever
      an adjustment is made as provided in Sections 10, 11 or 12 hereof, the Company
      shall (a) promptly prepare a certificate setting forth such adjustment, and
      a
      brief statement of the facts accounting for such adjustment, (b) promptly file
      with the Rights Agent and with each transfer agent for the Common Stock a copy
      of such certificate, and (c) mail a brief summary thereof to each holder of
      a
      Right Certificate in accordance with Section 15 hereof. The Rights Agent shall
      be fully protected in relying on any such certificate and on any adjustment
      therein contained and shall not be deemed to have knowledge of any such
      adjustment unless and until it shall have received such
      certificate.

     

    
      
        20

      

      
        
        

        
          

        

      

      
        
        

      

    

    Section
      13.  Redemption.

     

    (a)  The
      Board
      may, at its option, at any time prior to such time as any Person becomes an
      Acquiring Person, redeem all but not less than all the then outstanding Rights
      at a redemption price of $.01 per Right, as such amount may be appropriately
      adjusted to reflect any stock split, stock dividend or similar transaction
      occurring after the date hereof (such amount being hereinafter referred to
      as
      the “Redemption Price”).

     

    (b)  Immediately
      upon the action of the Board ordering the redemption of the Rights, and without
      any further action and without any notice, the right to exercise the Rights
      shall terminate and the only right of the holders of Rights shall be to receive
      the Redemption Price. Within 10 days after the action of the Board ordering
      the
      redemption of the Rights, the Company shall give notice of such redemption
      to
      the holders of the then outstanding Rights by mailing such notice to each such
      holder at its last address as it appears upon the registry books of the Rights
      Agent or, prior to the Distribution Date, on the registry books of the Transfer
      Agent for the Common Stock. Any notice which is mailed in the manner herein
      provided shall be deemed given, whether or not the holder receives the notice.
      Each such notice of redemption shall state the method by which the payment
      of
      the Redemption Price will be made. Neither the Company nor any of its Affiliates
      or Associates may redeem, acquire or purchase for value any Rights at any time
      in any manner other than that specifically set forth in this Section or in
      connection with the purchase of Common Stock prior to the Distribution
      Date.

     

    Section
      14.  Notice
      of
      Certain Events.

     

    In
      case
      the Company shall propose, at any time after the Distribution Date, (a) to
      pay
      any dividend payable in stock of any class to the holders of Common Stock or
      to
      make any other distribution to the holders of Common Stock (other than a regular
      periodic cash dividend at a rate not in excess of 125% of the rate of the last
      regular periodic cash dividend theretofore paid), (b) to offer to the holders
      of
      Common Stock rights or warrants to subscribe for or to purchase any additional
      Common Stock or shares of stock of any class or any other securities, rights
      or
      options, (c) to effect any reclassification of its Common Stock (other than
      a
      reclassification involving only the subdivision of outstanding shares of Common
      Stock), (d) to effect any consolidation or merger into or with, or to effect
      any
      sale or other transfer (or to permit one or more of its Subsidiaries to effect
      any sale or other transfer), in one or more transactions, of more than 50%
      of
      the assets or earning power of the Company and its Subsidiaries (taken as a
      whole) to, any other Person, or (e) to effect the liquidation, dissolution
      or
      winding up of the Company, then, in each such case, the Company shall give
      to
      the Rights Agent and to each holder of a Right Certificate, in accordance with
      Section 15 hereof, a notice of such proposed action, which shall specify the
      record date for the purposes of such stock dividend, distribution of rights
      or
      warrants, or the date on which such reclassification, consolidation, merger,
      sale, transfer, liquidation, dissolution, or winding up is to take place and
      the
      date of participation therein by the holders of the Common Stock, if any such
      date is to be fixed, and such notice shall be so given in the case of any action
      covered by clause (a) or (b) above at least 10 days prior to the record date
      for
      determining holders of the Common Stock for purposes of such action, and in
      the
      case of any such other action, at least 10 days prior to the date of the taking
      of such proposed action or the date of participation therein by the holders
      of
      the Common Stock whichever shall be the earlier.

     

    
      
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    In
      case
      any of the events set forth in Section 10(a) or (b) of this Agreement shall
      occur, then, in any such case, the Company shall as soon as practicable
      thereafter give to the Rights Agent and to each holder of a Right Certificate,
      in accordance with Section 15 hereof, a notice of the occurrence of such event,
      which shall specify the event and the consequences of the event to holders
      of
      Rights under Section 10(a) or (b) hereof.

     

    Section
      15.  Notices.

     

    Notices
      or demands authorized by this Agreement to be given or made by the Rights Agent
      or by the holder of any Right Certificate to or on the Company shall be
      sufficiently given or made if sent by first-class mail, postage prepaid,
      addressed (until another address is filed in writing with the Rights Agent)
      as
      follows:

     

    Hancock
      Fabrics, Inc.

    P.O.
      Box
      2400

    Tupelo,
      Mississippi 38803-2400

    Attention:
      Secretary

     

    Subject
      to the provisions of Section 2(d) hereof, any notice or demand authorized by
      this Agreement to be given or made by the Company or by the holder of any Right
      Certificate to or on the Rights Agent shall be sufficiently given or made if
      sent by first-class mail, postage prepaid, addressed (until another address
      is
      filed in writing with the Company) as follows:

     

    Continental
      Stock Transfer & Trust Company

    2
      Broadway

    New
      York,
      New York 10004

    Attention:
      Investor Services Department

     

    Notices
      or demands authorized by this Agreement to be given or made by the Company
      or
      the Rights Agent to the holder of any Right Certificate shall be sufficiently
      given or made if sent by first-class mail, postage prepaid, addressed to such
      holder at the address of such holder as shown on the registry books of the
      Company.

     

    Section
      16.  Supplements
      and Amendments.

     

    The
      Company and the Rights Agent may from time to time supplement or amend this
      Agreement without the approval of any holders of Right Certificates, so long
      as
      the interests of the holders of the Right Certificates are not adversely
      affected thereby, in order to cure any ambiguity, to correct or supplement
      any
      provision contained herein that the Board may, upon the advice of counsel,
      from
      time to time determine to be defective or inconsistent with any other provisions
      herein or with applicable law, or to make any other provisions in regard to
      matters or questions arising hereunder, which the Company and the Rights Agent
      may deem necessary or desirable, including but not limited to extending the
      Expiration Date and, provided that at the time of such amendment there is no
      Acquiring Person, the period of time during which or the conditions under which
      the Rights may be redeemed.

     

    Section
      17.  Determinations
      and Actions by the Board of Directors.

     

    (a)  The
      Board
      shall have the exclusive power and authority to exercise all rights and powers
      specifically granted to the Board or to the Company, including, without
      limitation, the right and power to (i) interpret the provisions of this
      Agreement, and (ii) make all determinations deemed necessary or advisable to
      carry out the intent of this Agreement (including a determination to redeem
      or
      not redeem the Rights or to amend the Agreement). All such actions,
      calculations, interpretations and determinations done or made by the Board
      in
      good faith shall be final, conclusive and binding on the Company, the Rights
      Agent, the holders of the Rights, and all other parties and shall not subject
      the Board to any liability to the holders of the Rights. 

     

    
      
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    (b)  It
      is
      understood that the TIDE Committee (as described below) of the Board of
      Directors shall review and evaluate this Agreement in order to consider whether
      the maintenance of this Agreement continues to be in the best interests of
      the
      Company, its stockholders and other relevant constituencies of the Company
      at
      least once every three years, or sooner than that if any Person shall have
      made
      a proposal to the Company or its stockholders, or taken any other action that,
      if effective, could cause such Person to become an Acquiring Person hereunder,
      if a majority of the members of the TIDE Committee shall deem such review and
      evaluation appropriate after giving due regard to all relevant circumstances.
      Following each such review, the TIDE Committee shall communicate its conclusions
      to the full Board of Directors, including any recommendation in light thereof
      as
      to whether this Agreement should be modified or the Rights should be redeemed.
      If the Company has a non-executive chairman, the TIDE Committee shall be chaired
      by the non-executive chairman and comprised of all members of the Board of
      Directors who are not officers, employees or Affiliates of the Company. If
      the
      Company does not have a non-executive chairman, the TIDE Committee shall be
      comprised of the members of the Corporate Governance and Nominating Committee
      of
      the Board of Directors (or any successor committee) who are not officers,
      employees or Affiliates of the Company . 

     

    (c)  The
      TIDE
      Committee and the Board of Directors, when considering whether this Agreement
      should be modified or the Rights should be redeemed, shall have the power to
      set
      their own agenda and to retain at the expense of the Company their choice of
      legal counsel, investment bankers and other advisors. The TIDE Committee and
      the
      Board of Directors, when considering whether this Agreement should be modified
      or the Rights should be redeemed, shall have the authority to review all
      information of the Company and to consider any and all factors they deem
      relevant to an evaluation of whether this Agreement should be modified or the
      Rights should be redeemed.

     

    Section
      18.  Successors.

     

    All
      the
      covenants and provisions of this Agreement by or for the benefit of the Company
      or the Rights Agent shall bind and inure to the benefit of their respective
      successors and assigns hereunder.

     

    Section
      19.  Benefits
      of this Agreement.

     

    Nothing
      in this Agreement shall be construed to give to any Person other than the
      Company, the Rights Agent and the registered holders of the Right Certificates
      (and, prior to the Distribution Date, the Common Stock) any legal or equitable
      right, remedy or claim under this Agreement; but this Agreement shall be for
      the
      sole and exclusive benefit of the Company, the Rights Agent and the registered
      holders of the Right Certificates (and, prior to the Distribution Date, the
      Common Stock).

     

    Section
      20.  Severability.

     

    If
      any
      term, provision, covenant or restriction of this Agreement is held by a court
      of
      competent jurisdiction or other authority to be invalid, void or unenforceable,
      the remainder of the terms, provisions, covenants and restrictions of this
      Agreement shall remain in full force and effect and shall in no way be affected,
      impaired or invalidated.

     

    
      
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    Section
      21.  Governing
      Law.

     

    This
      Agreement and each Right Certificate issued hereunder shall be deemed to be
      a
      contract made under the laws of the State of Delaware and for all purposes
      shall
      be governed by and construed in accordance with the laws of such State
      applicable to contracts to be made and performed entirely within such
      State.

     

    Section
      22.  Counterparts.

     

    This
      Agreement may be executed in any number of counterparts and each of such
      counterparts shall for all purposes be deemed to be an original, and all such
      counterparts shall together constitute but one and the same
      instrument.

     

    Section
      23.  Descriptive
      Headings.

     

    Descriptive
      headings of the several Sections of this Agreement are inserted for convenience
      only and shall not control or affect the meaning or construction of any of
      the
      provisions hereof.

     

    IN
      WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
      executed and their respective corporate seals to be hereunto affixed, all as
      of
      the day and year first above written.

     

    HANCOCK
      FABRICS, INC.

     

    By:
      /s/ Larry G. Kirk

    Larry
      G.
      Kirk

    Chief
      Executive Officer

     

    CONTINENTAL
      STOCK TRANSFER & TRUST COMPANY

     

    By:
      /s/ Steven Nelson

    Steven
      Nelson

    Chairman,
      President, Secretary

     

    
      
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    EXHIBIT
      A

     

    [Form
      of
      Right Certificate]

     

    Certificate
      No. R- ______________Rights

     

    NOT
      EXERCISABLE AFTER MARCH 4, 2011 OR EARLIER IF NOTICE OF REDEMPTION IS GIVEN.
      THE
      RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE COMPANY, AT $.01 PER
      RIGHT ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT.

     

    Right
      Certificate

     

    HANCOCK
      FABRICS, INC.

     

    This
      certifies that _________________________, or registered assigns, is the
      registered owner of the number of Rights set forth above, each of which entitles
      the owner thereof, subject to the terms, provisions and conditions of the Rights
      Agreement dated as of March 23, 1987 between Hancock Fabrics, Inc., a Delaware
      corporation (the “Company”), and Continental Stock Transfer & Trust Company,
      as Rights Agent (the “Rights Agent”), and as amended and restated most recently
      on March 4, 2001 (the “Rights Agreement”), to purchase from the Company at any
      time after the Distribution Date (as such term is defined in the Rights
      Agreement) and prior to 5:00 p.m. (Central Time) on March 4, 2011, at the
      principal office of the Rights Agent, or its successors as Rights Agent, in
      the
      Borough of Manhattan in the City of New York, one fully paid, non-assessable
      share of common stock of the Company (the “Common Stock”), at a purchase price
      of $24 per share (the “Purchase Price”), upon presentation and surrender of this
      Right Certificate with the Form of Election to Purchase and certification duly
      executed. The number of Rights evidenced by this Right Certificate (and the
      number of shares of Common Stock that may be purchased upon exercise thereof)
      set forth above, and the Purchase Price set forth above, are the number and
      Purchase Price as of March 4, 2001, based on the Common Stock as constituted
      at
      such date.

     

    As
      provided in the Rights Agreement, the Purchase Price and the number of shares
      of
      Common Stock which may be purchased upon the exercise of the Rights evidenced
      by
      this Right Certificate are subject to modification and adjustment upon the
      happening of certain events.

     

    This
      Right Certificate is subject to all of the terms, provisions and conditions
      of
      the Rights Agreement, which terms, provisions and conditions are hereby
      incorporated herein by reference and made a part hereof and to which Rights
      Agreement reference is hereby made for a full description of the rights,
      limitations of rights, obligations, duties and immunities hereunder of the
      Rights Agent, the Company and the holders of the Right Certificates. Copies
      of
      the Rights Agreement are on file at the principal offices of the Company and
      the
      Rights Agent.

     

    This
      Right Certificate, with or without other Right Certificates, upon surrender
      at
      the principal office of the Rights Agent, may be exchanged for another Right
      Certificate or Right Certificates of like tenor and date evidencing Rights
      entitling the holder to purchase a like aggregate number of shares of Common
      Stock as the Rights evidenced by the Right Certificate or Right Certificates
      surrendered shall have entitled such holder to purchase. If this Right
      Certificate shall be exercised in part, the holder shall be entitled to receive
      upon surrender hereof another Right Certificate or Right Certificates for the
      number of whole Rights not exercised.

     

    
      
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    Subject
      to the provisions of the Rights Agreement, the Rights evidenced by this
      Certificate may be redeemed by the Company at its option at a redemption price
      of $.01 per Right.

     

    No
      fractional shares of Common Stock shall be issued upon the exercise of any
      Right
      or Rights evidenced hereby, but in lieu thereof of a cash payment will be made,
      as provided in the Rights Agreement.

     

    No
      holder
      of this Right Certificate, as such, shall be entitled to vote or receive
      dividends or be deemed for any purpose the holder of Common Stock or of any
      other securities of the Company which may at any time be issuable on the
      exercise hereof, nor shall anything contained in the Rights Agreement or herein
      be construed to confer upon to the holder hereof, as such, any of the rights
      of
      a stockholder of the Company or any right to vote for the election of directors
      or upon any matter submitted to stockholders at any meeting thereof, or to
      receive notice of meetings or other actions affecting stockholders (except
      as
      provided in the Rights Agreement), or to receive dividends or subscription
      rights, or otherwise, until the Right or Rights evidenced by this Right
      Certificate shall have been exercised as provided in the Rights
      Agreement.

     

    The
      Company and the Rights Agent may from time to time supplement or amend the
      Rights Agreement without the approval of any holders of Right Certificates,
      so
      long as the interests of the holders of Right Certificates are not adversely
      affected thereby, in order to cure any ambiguity, to correct or supplement
      any
      provision contained therein that the Board may from time to time determine
      to be
      defective or inconsistent with any other provisions therein or with applicable
      law, or to make any other provisions in regard to matters or questions arising
      thereunder that the Company and the Rights Agent may deem necessary or
      desirable, including but not limited to extending the Expiration Date (as such
      term is defined in the Rights Agreement) and, providing that at the time of
      such
      amendment there is no Acquiring Person (as such term is defined in the Rights
      Agreement), extending the period during which or the conditions under which
      the
      Rights may be redeemed.

     

    If
      any
      term, provision, covenant or restriction of the Rights Agreement is held by
      a
      court of competent jurisdiction or other authority to be invalid, void, or
      unenforceable, the remainder of the terms, provisions, covenants and
      restrictions of the Rights Agreement shall remain in full force and effect
      and
      shall in no way be affected, impaired or invalidated.

     

    This
      Right Certificate shall not be valid or obligatory for any purpose until it
      shall have been countersigned by the Rights Agent.

     

    WITNESS
      the facsimile signature of the proper officers of the Company and its corporate
      seal. Dated as of ________________.

     

    HANCOCK
      FABRICS, INC.

     

    By_______________________________

    Title

     

    By_______________________________

    Title

     

    Countersigned:

     

     

    
      
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    CONTINENTAL
      STOCK TRANSFER & TRUST COMPANY

     

    By_____________________________ Date:
      _____________________________

        Authorized
      Signature

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    
 

    
      
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    [Form
      of
      Reverse Side of Right Certificate]

     

    FORM
      OF
      ASSIGNMENT

     

    (To
      be
      executed by the registered holder if such holder desires to transfer the Right
      Certificates.)

     

    FOR
      VALUE
      RECEIVED _______________________________________ hereby sells, assigns and
      transfers unto______________________________________________________
      ________________________________________________________________________________

     

    (Please
      print name and address of transferee)

     

    this
      Right Certificate and the Rights evidenced thereby, together with all right,
      title and interest therein, and does hereby irrevocably constitute and appoint
      ____________________________ Attorney, to transfer the within Right Certificate
      on the books of the within-named Company, with full power of
      substitution.

     

    Dated:
      _____________________________

     

     

     

     

     

     

     

     

     

     

     

     

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