Document:

EXHIBIT 10.35

HANCOCK FABRICS, INC.

2001 STOCK INCENTIVE PLAN

(AS AMENDED AND RESTATED EFFECTIVE

AS OF JANUARY 30, 2011)

 

	
1.

	
Purpose.

 

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

 

	
2.

	
Administration.

 

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

 

	
3.

	
Stock Subject to the Plan.

 

The Company may grant awards under the Plan with respect to not more than a total of 6,300,000 shares of $.01 par value common stock of the Company (the “Shares”), (subject to adjustment as provided in Section 17, below). Such Shares may be authorized and unissued Shares or treasury Shares. Except as otherwise provided herein, if, for any reason, any Shares awarded or subject to purchase under the Plan are not delivered or purchased, or are reacquired by the Company, for reasons including, but not limited to, a forfeiture of Restricted Stock or termination, expiration or cancellation of an Option, Stock Appreciation Right, or Restricted Stock Units (“Returned Shares”), such Returned Shares shall not be charged against the aggregate number of Shares available for issuance pursuant to awards under the Plan and shall again be available for issuance pursuant to an award under the Plan.

 

  

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4.

	
Eligibility to Receive Awards.

 

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

 

	
5.

	
Form of Awards.

 

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

 

	
6.

	
Options and SARs.

 

	
  

	
(a)

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

 

	
  

	
(i)

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

 

	
  

	
(ii)

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

 

  

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(iii)

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

 

	
  

	
(iv)

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

 

  

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(v)

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

 

	
  

	
(vi)

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

 

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

 

  

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(c)

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

 

	
  

	
(i)

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

 

	
  

	
(ii)

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

 

	
  

	
(iii)

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

 

	
  

	
(iv)

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

 

  

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(v)

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

 

	
  

	
(vi)

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

 

	
7.

	
Restricted Stock Awards; Restricted Stock Units.

 

	
  

	
(a)

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

 

	
  

	
(i)

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

 

	
  

	
(ii)

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

 

  

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(iii)

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

 

	
  

	
(iv)

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

 

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

 

	
  

	
(i)

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

 

	
  

	
(ii)

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

 

	
  

	
(iii)

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

 

	
  

	
(iv)

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

 

  

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8.

	
General Restrictions.

 

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

 

	
9.

	
Single or Multiple Agreements.

 

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

 

	
10.

	
Rights of the Shareholder.

 

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

 

	
11.

	
Rights to Terminate Employment.

 

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

 

	
12.

	
Withholding.

 

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

 

  

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13.

	
Non-Assignability.

 

	
  

	
(a)

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

 

	
  

	
(b)

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

 

	
14.

	
Non-Uniform Determinations.

 

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

 

	
15.

	
Change In Control Provisions.

 

	
  

	
(a)

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

 

  

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(A) 

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

 

	 	
(B) 

	
Any restrictions and deferral limitations applicable to any restricted stock or RSUs to the extent not already vested under the Plan, shall lapse and such shares shall be deemed fully vested.

 

	 	
(C) 

	
The value of all outstanding Options, SARs or RSUs, and restricted stock, in each case to the extent vested, shall, unless otherwise determined by the Committee in its sole discretion at or after grant but prior to any Change in Control, be cashed out on the basis of the Change in Control Price (as defined) as of the date such Change in Control is determined to have occurred or such other date as the Committee may determine prior to the Change in Control.

 

	
  

	
(b)

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

 

	
  

	
(i)

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

 

	
  

	
(ii)

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

 

  

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(iii)

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

 

	
  

	
(iv)

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

 

	
  

	
(v)

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

 

  

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(c)

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

 

	
16.

	
Non-Competition Provision.

 

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

 

	
17.

	
Adjustments.

 

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

 

	
18.

	
Amendment.

 

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

 

  

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19.

	
Effect on Other Plans.

 

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

 

	
20.

	
Effective Date and Duration of the Plan.

 

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

 

	
21.

	
Unfunded Plan.

 

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

 

	
22.

	
Governing Law.

 

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

 

  

13

  

 

	
23.

	
Section 409A Compliance.

 

	
  

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

 

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

 

	
By:

	  

 

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

 

  

14

  

APPENDIX A

 

DEFINITION OF RETIREMENT

 

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

	  	 	
Years

	  	 	
Of

	
Age

	 	
Service*

	
55

	 	
15 or more

	
56

	 	
14 or more

	
57

	 	
13 or more

	
58

	 	
11 or more

	
59

	 	
  9 or more

	
60

	 	
  7 or more

	
61

	 	
  7 or more

	
62

	 	
  7 or more

	
63

	 	
  7 or more

	
64

	 	
  7 or more

	
65 or older

	 	
  7 or more

  

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

  

15EXHIBIT 10.36

 

HANCOCK FABRICS, INC.

 

SHORT TERM INCENTIVE PLAN

 

Effective as of January 30, 2011

 

	
1.

	
ESTABLISHMENT AND EFFECTIVE DATE OF PLAN

 

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

 

	
2.

	
PURPOSE OF THE PLAN

 

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

 

	
3.

	
DEFINITIONS

 

	
  

	
(a)

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

 

	
  

	
(b)

	
“Board of Directors” means the Board of Directors of the Corporation.

 

	
  

	
(c)

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

 

	
  

	
(d)

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

 

	
  

	
(e)

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

 

  

  

  

 

	
  

	
(f)

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

 

	
  

	
(g)

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

 

	
  

	
(h)

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

 

	
  

	
(i)

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

 

	
  

	
(j)

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

 

	
  

	
(k)

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

 

	
  

	
(l)

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

 

	
  

	
(m)

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

 

	
  

	
(n)

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

 

	
  

	
(o)

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

 

	
  

	
(p)

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

 

	
  

	
(q)

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

 

  

2

  

 

	
4.

	
ADMINISTRATION OF THE PLAN

 

The Plan will be administered by the Committee, subject to its right to delegate responsibility for administration of the Plan to employees of the Corporation.  The Committee will have authority to establish Plan Rules with respect to the following matters for the Plan Year, subject to the right of the Board of Directors to ratify such Plan Rules as provided in this Section 4:

 

	
  

	
(a)

	
the employees of the Corporation, its Operating Units and affiliates who are Participants in the Plan;

 

	
  

	
(b)

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

 

	
  

	
(c)

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

 

	
  

	
(d)

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

 

	
  

	
(e)

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

 

The Plan Rules will be adopted by the Committee prior to, or as soon as practical after, the commencement of each Plan Year.  Subject to the provisions of the Plan and the Committee’s right to delegate its responsibilities, the Committee will also have the discretionary authority to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, and to make all other determinations deemed necessary or advisable in administering the Plan.  The determinations of the Committee on the matters referred to in paragraphs (a) through (e) of this Section 4 with respect to such Participants as the Committee may determine shall be submitted at least annually to the Board of Directors for its consideration and ratification.  The Committee may in its discretion (i) establish performance measures and criteria not listed in this Section 4; and (ii) during a Plan Year revise the performance targets and measurement criteria to the extent the Committee believes necessary to achieve the purposes of the Plan in light of any unexpected or unusual circumstances.

 

  

3

  

 

The Committee may specify in the Plan Rules or awards for any Plan Year that the Participant’s rights, payments, and benefits with respect to an award shall be subject to reduction, cancellation, forfeiture, or recoupment upon the occurrence of specified events, in addition to any otherwise applicable performance conditions of an award.  Such events may include, but shall not be limited to, the requirement for, or decision to make, a financial statement restatement, termination of service for cause or any act by a Participant (including violation of confidentiality agreements and restrictive covenants), whether before or after termination of service, that could constitute cause for termination of service.

 

	
5.

	
PARTICIPATION

 

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

 

	
6.

	
INCENTIVE AWARDS

 

	
  

	
6.1

	
Determination of the Amount of Incentive Awards

 

At or after the end of each Plan Year, the Committee or its designee shall certify the extent to which the performance targets and measurement criteria established pursuant to Section 4 have been achieved for such Plan Year based upon financial information provided by the Corporation and, where applicable, the Participant’s individual performance.  A Participant’s Incentive Award shall be computed by the Committee based upon the achievement of the established performance targets, measurement criteria and the requirements of the Plan.  In addition to any adjustments provided by the Incentive Award, the Committee may in determining whether performance targets have been met adjust the Corporation’s financial results to exclude the effect of unusual charges or income items or other events, including acquisitions or dispositions of businesses or assets, stock dividends, stock splits, recapitalizations or other changes in the capital structure of the Corporation, reorganizations, restructurings, reductions in force, currency fluctuations or changes in accounting, which are distortive of results for the year (either on a segment or consolidated basis); provided, that for purposes of determining the Incentive Awards that are intended to qualify as performance-based compensation under Code Section 162(m), the Committee shall exclude unusual items whose exclusion has the effect of increasing Relative Performance if such items constitute “extraordinary items” under generally accepted accounting principles or are unusual events or items.  In addition, the Committee will adjust its calculations to exclude the unanticipated effect on financial results of changes in the Code or other tax laws, or the regulations relating thereto.

 

  

4

  

 

The Committee may, in its discretion, decrease the amount of a Participant’s Incentive Award for any reason, including the Committee’s judgment that the performance targets have become an inappropriate measure of achievement, a change in the employment status, position or duties of the Participant, unsatisfactory performance of the Participant, or for such other reasons as the Committee deems appropriate.

 

In the event that the Corporation’s or an Operating Unit’s performance is below the anticipated performance thresholds for the Plan Year and the Incentive Awards are below expectations or not earned at all, the Committee may in its discretion grant Incentive Awards (or increase the otherwise earned Incentive Awards) to deserving Participants, except for Incentive Awards to Participants that are intended to qualify as performance-based compensation under Code Section 162(m).

 

To the extent applicable, the Plan Rules and Incentive Awards under the Plan shall be administered in a manner to qualify payments under the Plan to Participants for the performance-based exception under Code Section 162(m) and the regulations thereunder, except where the Compensation Committee or the Board of Directors determines such compliance is not necessary.

 

	
  

	
6.2

	
Eligibility for Payment of Incentive Award

 

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

 

  

5

  

 

	
  

	
6.3

	
Payment of Awards

 

Payment of the Incentive Awards will be made as soon as practicable after their determination pursuant to Sections 6.1 and 6.2 (but in no event later than the later of March 15th of the calendar year following the calendar year in which such Incentive Awards become vested or the fifteenth day of the third month following the end of the Corporation’s fiscal year in which the Incentive Awards became vested), subject to the Committee’s right to allow a Participant to defer payment pursuant to an applicable deferred compensation plan of the Corporation.  Payment will generally be made in a lump sum in cash, in options to purchase Common Stock of the Corporation, in stock appreciation rights, or in restricted stock or restricted stock units, or in a combination of such awards, as determined by the Committee either at the time Awards are established or when they are paid (which may be different for different groups of Participants).

 

	
  

	
6.4

	
Section 409A Compliance.

 

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

 

  

6

  

 

	
7.

	
DELEGATION OF AUTHORITY BY THE COMMITTEE

 

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

 

	
8.

	
CHANGE IN CONTROL

 

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

 

	
9.

	
BENEFICIARY

 

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

 

	
10.

	
WITHHOLDING OF TAXES

 

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

 

	
11.

	
EMPLOYMENT

 

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

 

  

7

  

 

	
12.

	
SUCCESSORS

 

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

 

	
13.

	
TERMINATION AND AMENDMENT OF THE PLAN

 

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

 

	
14.

	
GOVERNING LAW.

 

The Plan shall be interpreted and construed under the laws of the State of Delaware.

 

AS APPROVED BY THE BOARD OF DIRECTORS OF THE CORPORATION ON THE _____ DAY OF _______________, 2011.

 

  

8

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