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Preliminary Proxy Statement

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Confidential, For Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

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Definitive Proxy Statement

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Definitive Additional Materials

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Soliciting Material Under §240.14a-12

HANCOCK FABRICS, INC. 

(Name of Registrant as Specified In Its Charter)

Not applicable

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

1)

Title of each class of securities to which transaction applies:

2)

Aggregate number of securities to which transaction applies:

3)

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

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Fee paid previously with preliminary materials.

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Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

1)

Amount previously paid:

2)

Form, Schedule or Registration Statement No.:

3)

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4)

Date Filed:

1.

Purpose.

2.

Administration.

3.

Stock Subject to the Plan.

4.

Eligibility to Receive Awards.

5.

Form of Awards.

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).

(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.

(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.

(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 1/12^th 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;

(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.

(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.

(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.

8.

General Restrictions.

9.

Single or Multiple Agreements.

10.

Rights of the Shareholder.

11.

Rights to Terminate Employment.

12.

Withholding.

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.

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):

(A)

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

(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;

(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.

(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.

17.

Adjustments.

18.

Amendment.

19.

Effect on Other Plans.

20.

Effective Date and Duration of the Plan.

21.

Unfunded Plan.

22.

Governing Law.

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