Document:

EXHIBIT 10.32

 

HANCOCK FABRICS, INC.

2001 STOCK INCENTIVE PLAN 

(As Amended and Restated)

 

NONQUALIFIED STOCK OPTION AGREEMENT

 

	Employee/Optionee:	_____________________
	 	 
	Number of Shares:	_____________Shares
	 	 
	Option Exercise Price:	$______________Per Share
	 	 
	Date of Grant:	______________
	 	 
	Vesting Schedule:	As provided in Section 3 below

 

THIS OPTION AGREEMENT
(the “Agreement”) is entered into as of the ___ day of ________ 201X, by and between HANCOCK
FABRICS, INC., a Delaware corporation (the “Company”), and the employee designated above (the “Optionee”).

 

WITNESSETH:

 

WHEREAS,
the Company maintains the Hancock Fabrics, Inc. 2001 Stock Incentive Plan, as amended and restated (the “Plan”);
and

 

WHEREAS,
as of the date hereof, the Committee responsible for administration of the Plan granted the Option as provided herein;

 

NOW, THEREFORE,
the parties agree as follows:

 

1.            Grant
of Option.

 

1.1           Option.
An option to purchase shares of the Company’s Common Stock, par value $.01 per share (the “Shares”), is
hereby granted to the Optionee (the “Option”).

 

1.2           Number
of Shares. The number of Shares that the Optionee can purchase upon exercise of the Option and the dates upon which the Option
can first be exercised are set forth above and in Section 3 below.

 

1.3           Option
Exercise Price. The price the Optionee must pay to exercise the Option (the “Option Exercise Price”) is
set forth above.

 

    	 

    	 

    

 

1.4           Date
of Grant. The date the Option is granted (the “Date of Grant”) is set forth above.

 

1.5           Type
of Option. The Option is intended to be a Nonqualified Stock Option. It is not intended to qualify as an Incentive Stock Option
within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended from time to time, or any successor provision
thereto.

 

1.6           Construction.
This Agreement shall be construed in accordance and consistent with, and subject to, the provisions of the Plan (the provisions
of which are incorporated herein by reference) and, except as otherwise expressly set forth herein, the capitalized terms used
in this Agreement shall have the same definitions as set forth in the Plan.

 

1.7           Condition.
The Option is conditioned on the Optionee’s execution of this Agreement. If this Agreement is not executed by the Optionee,
it may be canceled by the Committee.

 

2.            Duration.

 

The Option shall be
exercisable to the extent and in the manner provided herein for a period of seven (7) years from the Grant Date (the “Exercise
Term”); provided, however, that the Option may be earlier terminated as provided in Section 1.7 and Section
5.

 

3.            Vesting.

 

Subject to earlier
termination of the Option as provided in Section 1.7 and Section 5, the Option shall vest, and may be exercised, with respect to
the Shares, as follows: the Option is vested and exercisable to the extent of 25% of the Shares covered by this Option on or after
the first annual anniversary of the Grant Date; further vested and exercisable to the extent of 1/36th of the remaining
Shares covered by this Option on or after the last day of the thirteenth month from the Grant Date; and on or after the last day
each additional month thereafter, such that all of the Shares covered by this Option will be fully vested and exercisable on the
fourth (4th) annual anniversary of the Grant Date. The Option may earlier vest as provided in Section 5.
 The right to purchase the Shares as they become vested shall be cumulative and shall continue during the Exercise Term
unless sooner terminated as provided herein.

 

4.            Manner
of Exercise and Payment.

 

4.1           Delivery.
To exercise the Option, the Optionee must deliver a completed copy of an Option Exercise Form, in such form and manner as
provided by the Committee. The Option may be exercised in whole or in part with respect to the vested Shares; provided, however,
the Committee may establish a minimum number of Shares (e.g., 100) for which an Option may be exercised at a particular time. Within
thirty (30) days of delivery of the Option Exercise Form, the Company shall deliver certificates evidencing the Shares to the Optionee,
duly endorsed for transfer to the Optionee, free and clear of all liens, security interests, pledges or other claims or charges.
Contemporaneously with the delivery of the Option Exercise Form, Optionee shall tender the Option Exercise Price to the Company,
by cash, check, wire transfer, delivery of, or attestation to, Shares already owned or a cashless exercise, or such other payment
method as may be acceptable to the Committee pursuant to the Plan.

 

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4.2           No
Rights as Shareholder. The Optionee shall not be deemed to be the holder of, or to have any of the rights of a holder with
respect to any Shares subject to the Option until (i) the Option shall have been exercised pursuant to the terms of this Agreement
and the Optionee shall have paid the full purchase price for the number of Shares in respect of which the Option was exercised,
(ii) the Company shall have issued and delivered the Shares to the Optionee, and (iii) the Optionee’s name shall have been
entered as a shareholder of record on the books of the Company, whereupon the Optionee shall have full voting and other ownership
rights with respect to such Shares.

 

5.           Termination
of Employment.

 

5.1           Termination
by Death or Disability. In the event the Optionee dies while actively employed by the Company or Optionee’s employment
is terminated by reason of Disability, all outstanding unvested Options granted to the Optionee shall immediately vest, and thereafter
all vested Options shall remain exercisable at any time prior to the end of the Exercise Term, or for one (1) year after the date
of death or the date of termination for Disability, whichever period is shorter. In the event of death, the Option shall be exercisable
by such person(s) as shall have been named as the Optionee’s beneficiary, or in the absence of a designated beneficiary,
by the executor or representative of the Optionee’s estate.

 

5.2           Termination
for Retirement. In the event Optionee’s employment is terminated by Optionee’s Retirement, all outstanding unvested
Options shall be forfeited and all vested Options shall remain exercisable at any time prior to the end of the Exercise Term or
for one (1) year after the date of Retirement, whichever period is shorter.

 

5.3           Other
Terminations. If the Optionee’s employment with the Company is terminated by the Company or by Optionee for reasons other
than death, Disability or Retirement, all outstanding unvested Options granted to the Optionee shall be immediately forfeited,
and the Optionee’s right to exercise any then outstanding Options (whether or not vested) shall terminate immediately upon
the date that the Committee determines is the Optionee’s date of termination of employment.

 

5.4           Employment
with a Subsidiary. For purposes of this Section and Section 9, employment with the Company includes employment with
any Subsidiary of the Company.

 

6.           Nontransferability.

 

The Option shall not
be transferable other than by will or by the laws of descent and distribution, and during the lifetime of the Optionee, the Option
shall be exercisable only by the Optionee. Notwithstanding the foregoing, any portion or all of the Option which is vested may
be transferred, in whole or in part, without consideration, to Optionee’s Immediate Family. Appropriate evidence of any such
transfer to a member of Optionee’s Immediate Family shall be delivered to the Company on such forms as the Committee or Company
shall prescribe and shall comply with and indicate the Optionee’s (if during the lifetime of the Optionee) and the member
of the Immediate Family’s agreement to abide by the Company’s then current stock option transfer guidelines. If all
or part of the Option is transferred to a member of Optionee’s Immediate Family, the member of Optionee’s Immediate
Family shall remain subject to all terms and conditions applicable to such Option prior to the transfer.

 

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7.           Restrictions
on the Options; Restrictions on the Shares.

 

The Option may not
be exercised at any time unless, in the opinion of counsel for the Company, the issuance and sale of the Shares issued upon such
exercise is exempt from registration under the Securities Act of 1933, as amended, or any other applicable federal or state securities
law, rule or regulation, or the Shares have been duly registered under such laws. The Company intends to register the Shares issuable
upon the exercise of the Option; however, until the Shares have been registered under all applicable laws, the Optionee shall represent,
warrant and agree, as a condition to the exercise of the Option, that the Shares are being purchased for investment only and without
a view to any sale or distribution of such Shares and that such Shares shall not be transferred or disposed of in any manner without
registration under such laws, unless it is the opinion of counsel for the Company that such a disposition is exempt from such registration.
The Optionee acknowledges that an appropriate legend giving notice of the foregoing restrictions shall appear conspicuously on
all certificates evidencing the Shares issued upon the exercise of the Option.

 

8.           Effect
of Change in Control.

 

8.1           Vesting.
Upon a Change in Control, all outstanding unvested Options shall become immediately and fully exercisable, and shall remain exercisable
as otherwise provided in this Agreement.

 

8.2           Termination
of Options. The Committee, in its discretion, may terminate the Options upon a Change in Control; provided, however, that at
least 30 days prior to the Change in Control, the Committee notifies the Optionee that the Options will be terminated and provides
the Optionee, either, at the election of the Committee, (i) a cash payment equal to the difference between the Fair Market Value
of the vested Options (including Options that would become vested upon the Change in Control in accordance with Section 8.1
above) and the Exercise Price for such Options, computed as of the date of the Change in Control and to be paid no later than 3
business days after the Change in Control, or (ii) the right to exercise all vested Options (including Options that would become
vested upon the Change in Control in accordance with Section 8.1 above) immediately prior to the Change in Control.

 

9.           No
Right to Continued Employment.

 

Nothing in this Agreement
or the Plan shall be interpreted or construed to confer upon the Optionee any right with respect to continuance of employment by
the Company or any Subsidiary, nor shall this Agreement or the Plan interfere in any way with the right of the Company or a Subsidiary
to terminate the Optionee’s employment at any time.

 

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10.          Employment
Covenants. In consideration of the receipt of the Option granted pursuant to this Agreement
and Optionee’s continued employment with the Company, Optionee hereby agrees to the following covenants:

 

10.1         Covenant
Against Competition. While Optionee is employed with the Company or its affiliates, and for a period of two (2) years
after Optionee’s employment with the Company terminates for any reason, Optionee will not, directly or indirectly, provide
Services within the United States of America, whether as an owner, investor, lender, employee, director, officer, independent contractor,
or consultant to any Competitor. Each of the following entities shall be deemed to be a “Competitor” under this
Agreement: A.C. Moore Arts & Crafts, Inc., Jo-Ann Stores, Inc., Calico
Corners, Inc., Hobby Lobby Stores, Inc., and Michaels Stores, Inc. The Optionee acknowledges that the United States of America
comprises the geographic territory in which Optionee performs Services on behalf of the Company. “Services”
means the provision of management and strategic business advice, direction and guidance.

 

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

 

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10.3         Nondisparagement.
Optionee agrees not to make any statements, written or verbal, or cause or encourage others to make any statements, written or
verbal, that defame, disparage or in any way criticize the personal or business reputation, practices, or conduct of the Company,
its employees, directors, and officers. Optionee acknowledges and agrees that this prohibition extends to statements, written or
verbal, made to anyone, including but not limited to, the news media, investors, potential investors, any board of directors or
advisory board or directors, industry analysts, competitors, strategic partners, vendors, employees (past and present), and customers.
Optionee understands that this nondisparagement provision does not apply on occasions when Optionee is subpoenaed or ordered by
a court or other governmental authority to testify or give evidence and must, of course, respond truthfully, or to conduct or testimony
in the context of enforcing this Agreement or other rights, powers, privileges, or claims. Optionee also understands that the foregoing
nondisparagement provision does not apply on occasions when Optionee provides truthful information in good faith to any federal,
state, or local governmental body, agency, or official investigating an alleged violation of any employment-related law or otherwise
gathering information or evidence pursuant to any official investigation, hearing, trial, or proceeding.

 

10.4         Cancellation
and Rescission. If, at any time, (i) during Optionee’ employment with the Company or a Subsidiary or (ii) during
the period after Optionee’s termination of employment with the Company or any Subsidiary for any reason, but not to exceed
24 months following Optionee’s termination of employment, Optionee engages in any “Detrimental Activity” (as
defined below), the Committee may, notwithstanding any other provision in this Agreement to the contrary, cancel, rescind, suspend,
withhold or otherwise restrict or limit this grant of the Option as of the first date Optionee engaged in the Detrimental Activity,
as determined by the Committee.  Without limiting the generality of the foregoing, the Committee may also require Optionee
to pay to the Company any gain realized by Optionee from the Shares subject to this grant of the Option during the period beginning
six months prior to the date on which Optionee engaged or began engaging in Detrimental Activity. As used in this Agreement, “Detrimental
Activity” means the breach or violation by the Optionee of any of the covenants of the Optionee in this Section 10.

 

11.          Adjustments.

 

In the event of a change
in capitalization as provided in Section 17 of the Plan, the Committee shall make appropriate adjustments to the number and class
of Shares or other stock or securities subject to the Option and the Option Exercise Price for such Shares or other stock or securities.
The Committee’s adjustments shall be made in accordance with the provisions of Section 17 of the Plan and shall be
effective and final, binding and conclusive for all purposes of the Plan and this Agreement.

 

12.          Withholding
of Taxes.

 

The Company shall have
the right to deduct from any distribution of cash to the Optionee an amount equal to the federal, state and local income taxes
and other amounts as may be required by law to be withheld (the “Withholding Taxes”) with respect to the Option.
If the Optionee is entitled to receive Shares upon exercise of the Option, the Optionee shall pay the Withholding Taxes (if any)
to the Company in cash prior to the issuance of such Shares. In satisfaction of the Withholding Taxes, the Optionee may make a
written election (the “Tax Election”) to have withheld a portion of the Shares issuable to him or her upon exercise
of the Option, having an aggregate Fair Market Value equal to the withholding Taxes, provided that, if the Optionee may be subject
to liability under Section 16(b) of the Exchange Act, the election must comply with the requirements applicable to Share transactions
by such Optionee.

 

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13.          Modification
of Agreement.

 

Except as provided
in Section 8, this Agreement may be modified, amended, suspended or terminated, and any terms or conditions may be waived,
only by a written instrument executed by the parties hereto.

 

14.          Severability.

 

Should any provision
of this Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions
of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms.

 

15.          Governing
Law.

 

The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of the State of Delaware without giving effect to
the conflicts of laws principles thereof.

 

16.          Successors
in Interest.

 

This Agreement shall
inure to the benefit of and be binding upon each successor corporation to the Company. This Agreement shall inure to the benefit
of the Optionee’s legal representatives. All obligations imposed upon the Optionee and all rights granted to the Company
under this Agreement shall be final, binding and conclusive upon the Optionee’s heirs, executors, administrators and successors.

 

17.          Resolution
of Disputes.

 

Any dispute or disagreement
which may arise under, or as a result of, or in any way relate to, the interpretation, construction or application of this Agreement
shall be determined by the Committee. Any determination made hereunder shall be final, binding and conclusive on the Optionee and
the Company for all purposes.

 

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IN WITNESS WHEREOF,
the parties have executed this Agreement effective as of the date first above written.

 

	 		HANCOCK FABRICS, INC.
	 	 	 
	 	By:	 
	 	Name:	Steven R. Morgan
	 	Title:	Chief Executive Officer

 

By signing below, Optionee
hereby accepts the Option subject to all its terms and provisions and agrees to be bound by the terms and provisions of the Plan.
Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee responsible
for administration of the Plan, upon any questions arising under the Plan. Optionee authorizes the Company to withhold, in accordance
with applicable law, from any compensation payable to him or her, any taxes required to be withheld by federal, state or local
law as a result of the grant, existence or exercise of the Option.

 

	 	 	OPTIONEE
	 	 	 
	 	Signature:	 
	 	Name:	 

 

    	8EXHIBIT 10.33

 

HANCOCK FABRICS, INC.

2001 STOCK INCENTIVE PLAN 

(As Amended And Restated)

 

NONQUALIFIED STOCK OPTION AGREEMENT

(Performance Vesting)

 

	Employee/Optionee:	 	 
	 	 	 
	Number of Shares:	 	Shares
	 	 	 
	Option Exercise Price:	$	Per Share
	 	 	 
	Date of Grant:	 	 
	 	 	 
	Vesting Schedule:	As provided in Section 3 below

  

THIS OPTION AGREEMENT
(the “Agreement”) is entered into as of the ______  day of __________, 201X,
by and between HANCOCK FABRICS, INC., a Delaware corporation (the “Company”), and the employee designated
above (the “Optionee”).

 

WITNESSETH:

 

WHEREAS,
the Company maintains the Hancock Fabrics, Inc. 2001 Stock Incentive Plan, as amended and restated (the “Plan”);
and

 

WHEREAS,
as of the date hereof, the Committee responsible for administration of the Plan granted the Option as provided herein;

 

NOW, THEREFORE,
the parties agree as follows:

 

1.            Grant
of Option.

 

1.1           Option.
An option to purchase shares of the Company’s Common Stock, par value $.01 per share (the “Shares”), is
hereby granted to the Optionee (the “Option”).

 

1.2           Number
of Shares. The number of Shares that the Optionee can purchase upon exercise of the Option and the dates upon which the Option
can first be exercised are set forth above and in Section 3 below.

 

1.3           Option
Exercise Price. The price the Optionee must pay to exercise the Option (the “Option Exercise Price”) is
set forth above.

 

    	 

    	 

    

 

1.4           Date
of Grant. The date the Option is granted (the “Date of Grant”) is set forth above.

 

1.5           Type
of Option. The Option is intended to be a Nonqualified Stock Option. It is not intended to qualify as an Incentive Stock Option
within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended from time to time, or any successor provision
thereto.

 

1.6           Construction.
This Agreement shall be construed in accordance and consistent with, and subject to, the provisions of the Plan (the provisions
of which are incorporated herein by reference) and, except as otherwise expressly set forth herein, the capitalized terms used
in this Agreement shall have the same definitions as set forth in the Plan.

 

1.7           Condition.
The Option is conditioned on the Optionee’s execution of this Agreement. If this Agreement is not executed by the Optionee,
it may be canceled by the Committee.

 

2.            Duration.

 

The Option shall be
exercisable to the extent and in the manner provided herein for a period of seven (7) years from the Grant Date (the “Exercise
Term”); provided, however, that the Option may be earlier terminated as provided in Section 1.7 and Section
5.

 

3.            Vesting/Forfeiture.

 

Subject to earlier
termination of the Option as provided in Section 1.7 and Section 5, the Option shall vest, and may be exercised,
with respect to the number of Shares, on the vesting dates, and subject to the conditions indicated below.

 

	# of Shares	 	Vesting Date	 	# that Vest and # that are Forfeited
	 	 	 	 	Determined under (i), (ii) or (iii) below

 

(i)          if
the business plan minimum target levels approved by the Board of Directors for the fiscal year ended most recently within the 365
day period prior to the specified vesting date are satisfied at or greater than 85% but less than 100% of such target levels, then
the number of Shares subject to the Option that will vest on the relevant vesting date shall equal the number of Shares shown above
for such vesting date multiplied by the greater of (A) the actual percentage of achievement of such target levels, multiplied by
the Optionee’s percentage of achievement of personal goals (up to 100%), or (B) the percentage determined by the Board of
Directors in its discretion; and any remaining Shares subject to the Option that could otherwise have vested as of such date shall
be forfeited;

 

(ii)         if
the business plan minimum target levels approved by the Board of Directors for the relevant year are satisfied at 100% or more,
then the number of Shares subject to the Option that will vest on the specified vesting date above shall equal the number of Shares
shown for such vesting date, multiplied by the Optionee’s percentage of achievement of personal goals (up to 100%); and any
remaining Shares subject to the Option that could otherwise have vested as of such date shall be forfeited; or

 

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 (iii)        if
the business plan minimum target levels approved by the Board of Directors for the relevant year are satisfied at less than 85%,
then all Shares subject to the Option that could otherwise have become vested on the relevant date shall be forfeited.

All options may vest
or be terminated earlier as provided in Section 5.  The right to exercise the Option and to purchase the Shares as
they become vested shall be cumulative and shall continue during the Exercise Term unless sooner terminated as provided herein.

 

4.            Manner
of Exercise and Payment.

 

4.1           Delivery.
To exercise the Option, the Optionee must deliver a completed copy of an Option Exercise Form, in such form and manner as
provided by the Committee. The Option may be exercised in whole or in part with respect to the vested Shares; provided, however,
the Committee may establish a minimum number of Shares (e.g., 100) for which an Option may be exercised at a particular time. Within
thirty (30) days of delivery of the Option Exercise Form, the Company shall deliver certificates evidencing the Shares to the Optionee,
duly endorsed for transfer to the Optionee, free and clear of all liens, security interests, pledges or other claims or charges.
Contemporaneously with the delivery of the Option Exercise Form, Optionee shall tender the Option Exercise Price to the Company,
by cash, check, wire transfer, delivery of, or attestation to, Shares already owned or a cashless exercise, or such other payment
method as may be acceptable to the Committee pursuant to the Plan.

 

4.2           No
Rights as Shareholder. The Optionee shall not be deemed to be the holder of, or to have any of the rights of a holder with
respect to any Shares subject to the Option until (i) the Option shall have been exercised pursuant to the terms of this Agreement
and the Optionee shall have paid the full purchase price for the number of Shares in respect of which the Option was exercised,
(ii) the Company shall have issued and delivered the Shares to the Optionee, and (iii) the Optionee’s name shall have been
entered as a shareholder of record on the books of the Company, whereupon the Optionee shall have full voting and other ownership
rights with respect to such Shares.

 

5.            Termination
of Employment.

 

5.1           Termination
by Death or Disability. In the event the Optionee dies while actively employed by the Company or Optionee’s employment
is terminated by reason of Disability, all outstanding unvested Options granted to the Optionee shall immediately vest, and thereafter
all vested Options shall remain exercisable at any time prior to the end of the Exercise Term, or for one (1) year after the date
of death or the date of termination for Disability, whichever period is shorter. In the event of death, the Option shall be exercisable
by such person(s) as shall have been named as the Optionee’s beneficiary, or in the absence of a designated beneficiary,
by the executor or representative of the Optionee’s estate.

 

5.2           Termination
for Retirement. In the event Optionee’s employment is terminated by Optionee’s Retirement, all outstanding unvested
Options shall be forfeited and all vested Options shall remain exercisable at any time prior to the end of the Exercise Term or
for one (1) year after the date of Retirement, whichever period is shorter.

 

5.3           Other
Terminations. If the Optionee’s employment with the Company is terminated by the Company or by Optionee for reasons other
than death, Disability or Retirement, all outstanding unvested Options granted to the Optionee shall be immediately forfeited,
and the Optionee’s right to exercise any then outstanding Options (whether or not vested) shall terminate immediately upon
the date that the Committee determines is the Optionee’s date of termination of employment.

 

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5.4           Employment
with a Subsidiary. For purposes of this Section and Section 9, employment with the Company includes employment with
any Subsidiary of the Company.

 

6.            Nontransferability.

 

The Option shall not
be transferable other than by will or by the laws of descent and distribution, and during the lifetime of the Optionee, the Option
shall be exercisable only by the Optionee. Notwithstanding the foregoing, any portion or all of the Option which is vested may
be transferred, in whole or in part, without consideration, to Optionee’s Immediate Family. Appropriate evidence of any such
transfer to a member of Optionee’s Immediate Family shall be delivered to the Company on such forms as the Committee or Company
shall prescribe and shall comply with and indicate the Optionee’s (if during the lifetime of the Optionee) and the member
of the Immediate Family’s agreement to abide by the Company’s then current stock option transfer guidelines. If all
or part of the Option is transferred to a member of Optionee’s Immediate Family, the member of Optionee’s Immediate
Family shall remain subject to all terms and conditions applicable to such Option prior to the transfer.

 

7.            Restrictions
on the Options; Restrictions on the Shares.

 

The Option may
not be exercised at any time unless, in the opinion of counsel for the Company, the issuance and sale of the Shares issued upon
such exercise is exempt from registration under the Securities Act of 1933, as amended, or any other applicable federal or state
securities law, rule or regulation, or the Shares have been duly registered under such laws. The Company intends to register the
Shares issuable upon the exercise of the Option; however, until the Shares have been registered under all applicable laws, the
Optionee shall represent, warrant and agree, as a condition to the exercise of the Option, that the Shares are being purchased
for investment only and without a view to any sale or distribution of such Shares and that such Shares shall not be transferred
or disposed of in any manner without registration under such laws, unless it is the opinion of counsel for the Company that such
a disposition is exempt from such registration. The Optionee acknowledges that an appropriate legend giving notice of the foregoing
restrictions shall appear conspicuously on all certificates evidencing the Shares issued upon the exercise of the Option.

 

8.            Effect
of Change in Control.

 

8.1           Vesting.
Upon a Change in Control, all outstanding unvested Options shall become immediately and fully exercisable, and shall remain exercisable
as otherwise provided in this Agreement.

 

8.2           Termination
of Options. The Committee, in its discretion, may terminate the Options upon a Change in Control; provided, however, that at
least 30 days prior to the Change in Control, the Committee notifies the Optionee that the Options will be terminated and provides
the Optionee, either, at the election of the Committee, (i) a cash payment equal to the difference between the Fair Market Value
of the vested Options (including Options that would become vested upon the Change in Control in accordance with Section 8.1
above) and the Exercise Price for such Options, computed as of the date of the Change in Control and to be paid no later than 3
business days after the Change in Control, or (ii) the right to exercise all vested Options (including Options that would become
vested upon the Change in Control in accordance with Section 8.1 above) immediately prior to the Change in Control.

 

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9.            No
Right to Continued Employment.

 

Nothing in this Agreement
or the Plan shall be interpreted or construed to confer upon the Optionee any right with respect to continuance of employment by
the Company or any Subsidiary, nor shall this Agreement or the Plan interfere in any way with the right of the Company or a Subsidiary
to terminate the Optionee’s employment at any time.

 

10.          Employment
Covenants. In consideration of the receipt of the Option granted pursuant to this Agreement
and Optionee’s continued employment with the Company, Optionee hereby agrees to the following covenants:

 

10.1         Covenant
Against Competition. While Optionee is employed with the Company or its affiliates, and for a period of two (2) years
after Optionee’s employment with the Company terminates for any reason, Optionee will not, directly or indirectly, provide
Services within the United States of America, whether as an owner, investor, lender, employee, director, officer, independent contractor,
or consultant to any Competitor. Each of the following entities shall be deemed to be a “Competitor” under this
Agreement: A.C. Moore Arts & Crafts, Inc., Jo-Ann Stores, Inc., Calico
Corners, Inc., Hobby Lobby Stores, Inc., and Michaels Stores, Inc. The Optionee acknowledges that the United States of America
comprises the geographic territory in which Optionee performs Services on behalf of the Company. “Services”
means the provision of management and strategic business advice, direction and guidance.

 

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

 

    	5

    	 

    

  

10.3         Nondisparagement.
Optionee agrees not to make any statements, written or verbal, or cause or encourage others to make any statements, written or
verbal, that defame, disparage or in any way criticize the personal or business reputation, practices, or conduct of the Company,
its employees, directors, and officers. Optionee acknowledges and agrees that this prohibition extends to statements, written or
verbal, made to anyone, including but not limited to, the news media, investors, potential investors, any board of directors or
advisory board or directors, industry analysts, competitors, strategic partners, vendors, employees (past and present), and customers.
Optionee understands that this nondisparagement provision does not apply on occasions when Optionee is subpoenaed or ordered by
a court or other governmental authority to testify or give evidence and must, of course, respond truthfully, or to conduct or testimony
in the context of enforcing this Agreement or other rights, powers, privileges, or claims. Optionee also understands that the foregoing
nondisparagement provision does not apply on occasions when Optionee provides truthful information in good faith to any federal,
state, or local governmental body, agency, or official investigating an alleged violation of any employment-related law or otherwise
gathering information or evidence pursuant to any official investigation, hearing, trial, or proceeding.

 

10.4         Cancellation
and Rescission. If, at any time, (i) during Optionee’ employment with the Company or a Subsidiary or (ii) during
the period after Optionee’s termination of employment with the Company or any Subsidiary for any reason, but not to exceed
24 months following Optionee’s termination of employment, Optionee engages in any “Detrimental Activity” (as
defined below), the Committee may, notwithstanding any other provision in this Agreement to the contrary, cancel, rescind, suspend,
withhold or otherwise restrict or limit this grant of the Option as of the first date Optionee engaged in the Detrimental Activity,
as determined by the Committee.  Without limiting the generality of the foregoing, the Committee may also require Optionee
to pay to the Company any gain realized by Optionee from the Shares subject to this grant of the Option during the period beginning
six months prior to the date on which Optionee engaged or began engaging in Detrimental Activity. As used in this Agreement, “Detrimental
Activity” means the breach or violation by the Optionee of any of the covenants of the Optionee in this Section 10.

 

11.          Adjustments.

 

In the event of a change
in capitalization as provided in Section 17 of the Plan, the Committee shall make appropriate adjustments to the number and class
of Shares or other stock or securities subject to the Option and the Option Exercise Price for such Shares or other stock or securities.
The Committee’s adjustments shall be made in accordance with the provisions of Section 17 of the Plan and shall be
effective and final, binding and conclusive for all purposes of the Plan and this Agreement.

 

    	6

    	 

    

 

12.          Withholding
of Taxes. 

 

The Company shall have
the right to deduct from any distribution of cash to the Optionee an amount equal to the federal, state and local income taxes
and other amounts as may be required by law to be withheld (the “Withholding Taxes”) with respect to the Option.
If the Optionee is entitled to receive Shares upon exercise of the Option, the Optionee shall pay the Withholding Taxes (if any)
to the Company in cash prior to the issuance of such Shares. In satisfaction of the Withholding Taxes, the Optionee may make a
written election (the “Tax Election”) to have withheld a portion of the Shares issuable to him or her upon exercise
of the Option, having an aggregate Fair Market Value equal to the withholding Taxes, provided that, if the Optionee may be subject
to liability under Section 16(b) of the Exchange Act, the election must comply with the requirements applicable to Share transactions
by such Optionee.

 

13.         Modification
of Agreement.

 

Except as provided
in Section 8, this Agreement may be modified, amended, suspended or terminated, and any terms or conditions may be waived,
only by a written instrument executed by the parties hereto.

 

14.         Severability.

 

Should any provision
of this Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions
of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms.

 

15.         Governing
Law.

 

The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of the State of Delaware without giving effect to
the conflicts of laws principles thereof.

 

16.         Successors
in Interest.

 

This Agreement shall
inure to the benefit of and be binding upon each successor corporation to the Company. This Agreement shall inure to the benefit
of the Optionee’s legal representatives. All obligations imposed upon the Optionee and all rights granted to the Company
under this Agreement shall be final, binding and conclusive upon the Optionee’s heirs, executors, administrators and successors.

 

17.         Resolution
of Disputes.

 

Any dispute or disagreement
which may arise under, or as a result of, or in any way relate to, the interpretation, construction or application of this Agreement
shall be determined by the Committee. Any determination made hereunder shall be final, binding and conclusive on the Optionee and
the Company for all purposes.

 

    	7

    	 

    

 

IN WITNESS WHEREOF,
the parties have executed this Agreement effective as of the date first above written.

 

	 	 	HANCOCK FABRICS, INC.
	 	 	 
	 	By:	 
	 	Name:	Steven R. Morgan
	 	Title:	Chief Executive Officer

 

By signing below, Optionee
hereby accepts the Option subject to all its terms and provisions and agrees to be bound by the terms and provisions of the Plan.
Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee responsible
for administration of the Plan, upon any questions arising under the Plan. Optionee authorizes the Company to withhold, in accordance
with applicable law, from any compensation payable to him or her, any taxes required to be withheld by federal, state or local
law as a result of the grant, existence or exercise of the Option.

 

	 	 	OPTIONEE
	 	 	 
	 	Signature:	 
	 	Name:	 

  

    	8

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