HANCOCK FABRICS INC, DEF 14A, 1996-05-03

HANCOCK FABRICS INC
DEF 14A, 1996-05-03
MISCELLANEOUS SHOPPING GOODS STORES

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<PAGE> 1

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )

Filed by the Registrant /X/

Filed by a Party other than the Registrant / /

Check the appropriate box:

<TABLE>
<S> <C>
/ / Preliminary Proxy Statement / / Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>

Hancock Fabrics, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

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

Payment of Filing Fee (Check the appropriate box):

/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.

/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).

/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) 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):

(4) Proposed maximum aggregate value of transaction:

(5) Total fee paid:

/ / Fee paid previously with preliminary materials.

/ / 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) Filing Party:

(4) Date Filed:
<PAGE> 2

[HANCOCK FABRICS, INC. LOGO]

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

JUNE 13, 1996

NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Hancock
Fabrics, Inc. will be held at the Stennis Center, 3400 West Main Street, Tupelo,
Mississippi (adjacent to the Company's headquarters) on Thursday, June 13, 1996
at 10:00 a.m. (local time), or as soon thereafter as a quorum shall be present,
for the following purposes:

1. To elect two directors;

2. To consider and vote upon a proposal to approve the Hancock Fabrics,
Inc. 1996 Stock Option Plan;

3. To consider and vote upon a proposal to approve the Hancock Fabrics,
Inc. 1995 Restricted Stock Plan; and

4. To consider and vote upon such other matters as may properly come before
the Meeting or any adjournment thereof.

Only shareholders of record on the books of the Company at the close of
business on April 15, 1996 will be entitled to vote at the Meeting.

Shareholders are cordially invited to attend the Meeting.

PLEASE COMPLETE, SIGN AND DATE THE ACCOMPANYING PROXY AND RETURN IT
PROMPTLY IN THE ENCLOSED ENVELOPE.

Dated: May 3, 1996

By order of the Board of Directors,

Larry D. Fair
Secretary
<PAGE> 3

PROXY STATEMENT

HANCOCK FABRICS, INC.

This Proxy Statement is furnished in connection with the solicitation of
proxies for use at the Annual Meeting of Shareholders of Hancock Fabrics, Inc.
and at any adjournment thereof. The Meeting will be held on June 13, 1996 at
10:00 a.m. (local time) at the Stennis Center, 3400 West Main Street, Tupelo,
Mississippi (adjacent to the Company's headquarters) for the purposes set forth
in the preceding Notice of the Meeting dated May 3, 1996. This solicitation is
made by the Company.

Only shareholders of record at the close of business on April 15, 1996 will
be entitled to vote at the Meeting. On that date the outstanding stock of the
Company consisted of 21,588,272 shares of common stock.

The mailing address of the principal executive offices of the Company is
P.O. Box 2400, Tupelo, Mississippi 38803-2400. The approximate date on which
this Proxy Statement, the accompanying form of proxy and the 1995 Annual Report
are first sent to shareholders is May 3, 1996.

VOTING

Each shareholder is entitled to one vote per share respecting each Board
seat to be filled and on each other matter voted on at the meeting. A proxy,
when executed and not revoked, will be voted in accordance with the
specifications it contains. Unless the accompanying form of proxy contains
instructions to the contrary, it will be voted for the election of the nominees
shown, to serve until 1999 (see "ELECTION OF DIRECTORS"), to approve the Hancock
Fabrics, Inc. 1996 Stock Option Plan (see "PROPOSAL TO APPROVE THE 1996 STOCK
OPTION PLAN"), to approve the Hancock Fabrics, Inc. 1995 Restricted Stock Plan
(see "PROPOSAL TO APPROVE THE 1995 RESTRICTED STOCK PLAN"), and in the
discretion of the proxyholders upon such other matters as may properly come
before the meeting.

The required quorum for the transaction of business at the Annual Meeting
is a majority of the shares of common stock issued and outstanding on the record
date. Abstentions and broker non-votes are counted for purposes of determining
the presence or absence of a quorum for the transaction of business. Abstentions
are counted in tabulations of the votes cast on proposals presented to
shareholders, whereas broker non-votes are not counted for purposes of
determining whether a proposal has been approved.

REVOCABILITY OF PROXIES

A shareholder who executes a proxy may revoke it at any time before it is
voted. Proxies may be revoked by (i) filing with the Secretary of the Company,
at or before the Meeting, a written notice of revocation relating to the proxy,
(ii) duly executing a subsequent proxy bearing a later date relating to the same
shares and delivering it to the Secretary at or before the Meeting, or (iii)
voting in person at the Meeting. Any written notice revoking a proxy should be
sent to Hancock Fabrics, Inc., P.O. Box 2400, Tupelo, Mississippi 38803-2400,
Attention: Secretary.

SOLICITATION

The Company will bear the cost of soliciting these proxies. Brokers,
nominees, fiduciaries and other custodians will be reimbursed for their
reasonable expenses incurred in sending proxy material to principals and
obtaining their instructions. The Company has retained the services of Morrow &
Co., Inc. to assist the Company in its communications; a fee of $6,000 plus
out-of-pocket expenses, will be paid for those services. In addition, directors,
officers, employees and the Company's transfer agent may solicit proxies in
person, by telephone or in writing.
<PAGE> 4

The following table provides information about the persons known to the
Company to be the beneficial owners of more than 5% of any class of the
Company's securities:

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
NUMBER OF SHARES PERCENT OF
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIALLY OWNED(1) CLASS(2)
BENEFICIAL OWNER(1)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock FMR Corp. 2,135,000 9.890%
82 Devonshire Street
Boston, MA 02109
- ----------------------------------------------------------------------------------------------
Common Stock Manning & Napier 2,345,915 10.867%
Advisors, Inc.
1100 Chase Square
Rochester, NY 14604
- ----------------------------------------------------------------------------------------------
</TABLE>

(1) Information concerning beneficial ownership and the number
of shares beneficially owned is based on reports filed by
the shareholders with the Securities and Exchange
Commission.

(2) As of April 15, 1996.

The following table provides information, as of April 15, 1996, about the
beneficial ownership of the Company's common stock by each of the Company's
directors, named executive officers and all directors and executive officers as
a group:

<TABLE>
<CAPTION>
---------------------------------------------------------------------
PERCENT OF
NAME OF BENEFICIAL OWNER AMOUNT AND NATURE CLASS
OF BENEFICIAL
OWNERSHIP
- ---------------------------------------------------------------------
<S> <C> <C> <C>
R. Randolph Devening 500 .002%
- ---------------------------------------------------------------------
Don L. Fruge 11,186 .052%
- ---------------------------------------------------------------------
Morris O. Jarvis 517,860(1) 2.363%
- ---------------------------------------------------------------------
Larry G. Kirk 159,893(1) .738%
- ---------------------------------------------------------------------
Donna L. Weaver 12,736 .059%
- ---------------------------------------------------------------------
Jack W. Busby, Jr. 180,745(1) .833%
- ---------------------------------------------------------------------
All Directors and Executive
Officers as a Group 882,920(1) 3.992%
- ---------------------------------------------------------------------
</TABLE>

(1) Includes 325,100, 85,800 and 115,800
shares with respect to which Messrs.
Jarvis, Kirk and Busby, respectively,
have the right to acquire beneficial
ownership on or before June 14, 1996.

2
<PAGE> 5

ITEM 1 -- ELECTION OF DIRECTORS

The By-Laws of the Company provide that the number of directors shall be
fixed from time to time exclusively by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of directors the Company
would have if there were no vacancies (the "Whole Board"). The Whole Board has
fixed that number at five. The directors have been classified, effective with
respect to the time for which they severally hold office, into two classes of
two each and one class of one. Two nominees will be elected, to hold office
until the annual meeting of shareholders in 1999 or until election and
qualification of a successor. It is intended that the shares represented by
proxies in the accompanying form be voted for the election of the nominees named
below. If a nominee should be unable to serve, it is intended that those shares
be voted for such replacement as the Board may designate, unless the number of
directors has been reduced so that no vacancy exists. The Company has no reason
to expect that either nominee will be unable to serve.

The following table provides information about each nominee and continuing
director, including the business experience of each during at least the past
five years:

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
NAME DIRECTOR
(AGE) PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE SINCE
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
NOMINEES TO SERVE UNTIL 1999
- ----------------------------------------------------------------------------------------------
Morris O. Jarvis Chairman of the Board and Chief Executive 1987
(55) Officer. Formerly President
- ----------------------------------------------------------------------------------------------
Donna L. Weaver Chairman of Weaver, Field & London, Inc., 1987
(52) Investor Relations and Corporate Communications,
San Francisco, California. Director of Ross
Stores, Inc., Newark, California and Crown
Vantage, Inc.,
Oakland, California
- ----------------------------------------------------------------------------------------------
DIRECTORS TO SERVE UNTIL 1997
- ----------------------------------------------------------------------------------------------
Don L. Fruge Vice Chancellor for University Advancement and 1987
(50) Professor of Law, University of Mississippi, and
Executive Vice President, University of
Mississippi Foundation, University, Mississippi
- ----------------------------------------------------------------------------------------------
Larry G. Kirk President and Chief Financial Officer. Formerly 1990
(49) Senior Vice President, Vice President, Treasurer
and Secretary. Director of Bank of Mississippi,
Tupelo, Mississippi
- ----------------------------------------------------------------------------------------------
DIRECTOR TO SERVE UNTIL 1998
- ----------------------------------------------------------------------------------------------
R. Randolph Devening Chairman of the Board, Chief Executive Officer 1995
(54) and President, Foodbrands America, Inc.
(formerly Doskocil Companies, Inc.),
Oklahoma City, Oklahoma.
Formerly Vice Chairman, Executive Vice President
and Chief Financial Officer, Fleming Companies,
Inc., Oklahoma City, Oklahoma
- ----------------------------------------------------------------------------------------------
</TABLE>

3
<PAGE> 6

The Audit Committee of the Board of Directors, which met twice during the
Company's latest fiscal year, is charged with recommending the engaging of the
Company's independent accountants, reviewing their reports, authorizing their
services and fees, reviewing their independence, reviewing the Company's
procedures for internal auditing and the adequacy of its system of internal
accounting controls, and reporting to the Board with respect thereto. The Audit
Committee is composed of Don L. Fruge (Chair), R. Randolph Devening and Donna L.
Weaver.

The Management Review and Compensation Committee of the Board of Directors,
which met four times during the Company's latest fiscal year, is charged with
determining the base salaries of all executive officers of the Company,
administering the Retirement Plans, Stock Option Plans, Restricted Stock Plans,
Extra Compensation Plan and Bonus Plan for Store Management, and making
recommendations to the Board respecting policies of the Board dealing with such
Plans. The Management Review and Compensation Committee is composed of Donna L.
Weaver (Chair), R. Randolph Devening and Don L. Fruge.

When the Board is not in session, the Executive Committee of the Board may
exercise the powers vested in the Board (except certain enumerated major powers
such as the power to declare dividends, amend the By-Laws and fill vacancies on
the Board and certain powers reserved to the Board under Delaware law). In
practice, the function of the Executive Committee is to act on matters arising
between Board meetings that have special time value but do not appear to warrant
a special Board meeting. The Executive Committee is composed of Morris O. Jarvis
(Chair), Don L. Fruge and Larry G. Kirk. The Executive Committee did not meet
during the Company's latest fiscal year.

The Board met four times during the Company's latest fiscal year. None of
the directors attended less than 75% of the meetings of the Board and of all
committees on which he or she served.

4
<PAGE> 7

COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS

SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION

The following table provides certain summary information concerning
compensation paid or accrued by the Company and its subsidiary, to or on behalf
of the Company's Chief Executive Officer and each of the two other executive
officers of the Company (determined as of the end of the latest fiscal year) for
the fiscal years ended January 28, 1996, January 29, 1995 and January 30, 1994.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL
COMPENSATION LONG-TERM COMPENSATION
- ------------------------------------------------------------------------------------------------------

RESTRICTED SECURITIES
STOCK UNDERLYING
SALARY BONUS AWARDS(1) OPTIONS/SARS(2)
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Morris O. Jarvis 1995 $265,385 $84,759 $ 156,863 219,200(4)
Chairman of the Board and 1994 250,000 82,776 154,938 27,400
Chief Executive Officer(3) 1993 250,000 72,927 177,125 27,400
- ------------------------------------------------------------------------------------------------------
Larry G. Kirk 1995 138,000 44,238 84,550 73,600(4)
President and 1994 113,000 43,201 65,325 18,000
Chief Financial Officer(3) 1993 85,800 29,181 76,300 10,000
- ------------------------------------------------------------------------------------------------------
Jack W. Busby, Jr. 1995 138,000 44,238 84,550 100,800(4)
Executive Vice President and 1994 126,923 43,201 80,400 18,000
Chief Operating Officer 1993 125,000 38,062 92,650 18,000
- ------------------------------------------------------------------------------------------------------
</TABLE>

(1) Restricted stock awards generally vest five years and one day following the
date of award. Prior to vesting, restricted shares are not negotiable or
otherwise transferable and are subject to forfeiture if employment
terminates. Dividends are paid on shares subject to restrictions. See
"EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS" for a description of circumstances under which the vesting
schedule may be accelerated.

As of the end of the latest fiscal year (specifically, January 26, 1996, the
last trading day prior to fiscal year end), the executive officers held the
following number of shares subject to restrictions, with the following
market values: Mr. Jarvis, 69,200 shares, $674,700; Mr. Kirk, 30,900 shares,
$301,275; and Mr. Busby, 35,500 shares, $346,125.

(2) The Company does not grant stock appreciation rights ("SARs").

(3) The Company has announced, that at the June 13, 1996 meeting of the Board of
Directors, Mr. Kirk will become Chief Executive Officer and President and
that Mr. Jarvis will continue as Chairman of the Board until June 1997 and
retire as Chairman thereafter. See "EMPLOYMENT CONTRACTS AND TERMINATION OF
EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS" for a description of the
related agreement with Mr. Jarvis.

(4) During the latest fiscal year, certain options previously granted under the
Company's 1987 Stock Option Plan to optionees, including the executive
officers, that were exercisable at prices which exceeded the current market
value of the stock were canceled and options for an equal number of shares
having an exercise price of current market value were granted in
substitution therefor (the "Substitute Options"). Included for the executive
officers are the following number of shares subject to Substitute Options
granted to the executive officers: Mr. Jarvis, 191,800 shares; Mr. Kirk,
55,600 shares; and Mr. Busby, 82,800 shares.

5
<PAGE> 8

STOCK OPTIONS

The following table contains information about the grant of stock options
under the Company's 1987 Stock Option Plan, during the Company's latest fiscal
year, to the executive officers:

OPTION/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
RATES OF STOCK
PRICE APPRECIATION
FOR OPTION TERM
INDIVIDUAL GRANTS (10 YEARS)(3)
- ---------------------------------------------------------------------------------------------------------------------------------

5% 10%
-------------------------------------------------------
% OF
TOTAL
# OF OPTIONS
SECURITIES GRANTED
UNDERLYING TO
OPTIONS/SARS EMPLOYEES EXERCISE OR STOCK PRICE
GRANTED(1) IN FISCAL BASE PRICE EXPIRATION STOCK PRICE (PER
NAME (#) YEAR (PER SHARE) DATE (PER SHARE)(2) GAIN(4) SHARE)(2) GAIN(4)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Morris O. Jarvis 219,200 11.74 % $ 8.125 June 7, 2005 $13.23 $1,119,016 $ 21.07 $2,837,544
- ---------------------------------------------------------------------------------------------------------------------------------
Larry G. Kirk 73,600 3.94 % 8.125 June 7, 2005 13.23 375,728 21.07 952,752
- ---------------------------------------------------------------------------------------------------------------------------------
Jack W. Busby,
Jr. 100,800 5.40 % 8.125 June 7, 2005 13.23 514,584 21.07 1,304,856
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) All options disclosed here were granted on June 7, 1995 (the "Grant Date").
Options other than Substitute Options become exercisable as to 50% of the
shares subject to the options one year and one day following the Grant Date
and as to the remaining shares two years and one day following the Grant
Date. Substitute Options become exercisable one year and one day following
the Grant Date. See "EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND
CHANGE OF CONTROL ARRANGEMENTS" for a description of circumstances under
which the vesting schedule may be accelerated. The Company does not grant
SARs.

(2) The stock price shown is computed based on 10 years of appreciation in the
option exercise price ($8.125) at a 5% ($13.23) and a 10% ($21.07) annual
rate.

(3) The potential realizable value at the assumed annual rates of stock price
appreciation for the option term for all shareholders would result in gains
on a pretax basis of the following: at 5%, $109,769,274; and at 10%,
$278,512,628. The gain shown is computed based on the difference between the
market price on the Grant Date ($8.125) and the assumed stock price,
multiplied by the number of shares outstanding on that date.

(4) All gains are shown on a pretax basis.

6
<PAGE> 9

OPTION EXERCISES AND HOLDINGS

The following table provides information, with respect to the executive
officers, concerning the exercise of options during the latest fiscal year and
unexercised options held as of the end of the latest fiscal year:

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
VALUE REALIZED UNDERLYING UNEXERCISED IN-THE-MONEY
(MARKET PRICE AT OPTIONS AT FISCAL YEAR-END OPTIONS AT FISCAL YEAR-END
SHARES ACQUIRED EXERCISE LESS (#) ($)
ON EXERCISE EXERCISE PRICE) ---------------------------------------------------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Morris O.
Jarvis 0 $0 119,600 219,200 $ 706,264 $ 356,200
- ------------------------------------------------------------------------------------------------------------------------------
Larry G. Kirk 0 0 21,200 73,600 96,700 119,600
- ------------------------------------------------------------------------------------------------------------------------------
Jack W.
Busby, Jr. 0 0 24,000 100,800 109,500 163,800
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>

TEN-YEAR OPTION/SAR REPRICINGS

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------
NUMBER OF LENGTH OF
SECURITIES ORIGINAL
UNDERLYING MARKET PRICE OF EXERCISE PRICE OPTION TERM
OPTIONS/SARS STOCK AT TIME AT TIME OF NEW REMAINING AT
NAME AND REPRICED OR OF REPRICING OR REPRICING OR EXERCISABLE DATE OF
PRINCIPAL AMENDED AMENDMENT(1) AMENDMENT PRICE REPRICING OR
POSITION DATE (#) ($) ($) ($) AMENDMENT(2)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Morris O. Jarvis June 9, 1988 27,400 $ 8.125 $ 8.440 $ 8.125 36 Months(3)
Chairman of the June 8, 1989 27,400 8.125 13.630 8.125 48 Months(4)
Board and June 14, 1990 27,400 8.125 19.570 8.125 60 Months(5)
Chief Executive June 13, 1991 27,400 8.125 22.875 8.125 72 Months(6)
Officer June 11, 1992 27,400 8.125 10.750 8.125 84 Months(7)
June 10, 1993 27,400 8.125 10.000 8.125 96 Months(8)
June 9, 1994 27,400 8.125 8.250 8.125 108 Months(9)
- ------------------------------------------------------------------------------------------------------------------------------
Larry G. Kirk June 9, 1988 3,200 8.125 8.440 8.125 36 Months(3)
President and June 8, 1989 3,200 8.125 13.630 8.125 48 Months(4)
Chief Financial June 14, 1990 4,000 8.125 19.570 8.125 60 Months(5)
Officer June 13, 1991 8,600 8.125 22.875 8.125 72 Months(6)
June 11, 1992 8,600 8.125 10.750 8.125 84 Months(7)
June 10, 1993 10,000 8.125 10.000 8.125 96 Months(8)
June 9, 1994 18,000 8.125 8.250 8.125 108 Months(9)
- ------------------------------------------------------------------------------------------------------------------------------
Jack W. Busby, Jr. June 9, 1988 3,600 8.125 8.440 8.125 36 Months(3)
Executive Vice June 8, 1989 3,600 8.125 13.630 8.125 48 Months(4)
President and June 14, 1990 3,600 8.125 19.570 8.125 60 Months(5)
Chief Operating June 13, 1991 18,000 8.125 22.875 8.125 72 Months(6)
Officer June 11, 1992 18,000 8.125 10.750 8.125 84 Months(7)
June 10, 1993 18,000 8.125 10.000 8.125 96 Months(8)
June 9, 1994 18,000 8.125 8.250 8.125 108 Months(9)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) As of June 6, 1995.
(2) Substitute Options become exercisable one year and one day following the
grant date thereof, June 7, 1995.
(3) The original option term expires on June 9, 1998.
(4) The original option term expires on June 8, 1999.
(5) The original option term expires on June 14, 2000.
(6) The original option term expires on June 13, 2001.
(7) The original option term expires on June 11, 2002.
(8) The original option term expires on June 10, 2003.
(9) The original option term expires on June 9, 2004.

7
<PAGE> 10

PENSION PLANS

The Company maintains a noncontributory retirement program under which
retirement benefits are provided by a qualified defined benefit pension plan
supplemented by a nonqualified unfunded plan affording certain benefits that
cannot be provided by the qualified plan. In this description the qualified and
nonqualified plans are treated as one "Plan." Each of the executive officers
participates in the Plan.

For each year of credited service a Plan participant accrues a retirement
benefit calculated under a formula based on covered compensation for that year.
Covered compensation is defined in the Plan documents. It includes, generally,
all wages, salary and bonus actually received, plus contributions that the
participant elects to be made on his or her behalf pursuant to a "cafeteria
plan" (under Internal Revenue Code section 125) or to a "qualified cash or
deferred arrangement" (under Internal Revenue Code section 401(k)).

Under the Plan formula applicable to the executive officers, the annual
retirement benefit payable at normal retirement age (age 65) as a straight life
annuity is the sum of: (i) for years of credited service through 1992, 1.00% of
average annual compensation during the five years ending December 31, 1992
multiplied by years of credited service through 1992, plus 0.33% of such average
annual compensation in excess of $50,640 multiplied by years of credited service
through 1992 up to a maximum of 30 years, and (ii) for each year of credited
service following 1992, 1% of annual compensation for that year, plus (for years
of credited service up to a maximum of 30 years) 0.33% of such annual
compensation in excess of the Social Security maximum wage base for that year.

If Messrs. Jarvis, Kirk and Busby continue in their present positions the
estimated annual retirement benefit payable to them under the Plan upon the
normal retirement age of 65 in the form of a straight life annuity would be
$184,969, $67,997 and $77,170, respectively. These estimates are computed using,
for all future years of credited service, the compensation levels in effect for
calendar year 1995 (the most recent Plan year) and the Social Security maximum
wage base in effect for calendar year 1996. The estimated annual retirement
benefit above payable to Mr. Jarvis will decrease upon his retirement prior to
reaching normal retirement age, and the amount of the decreased benefit cannot
be determined at present.

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS

The Company has entered into a Retirement Agreement (the "Retirement
Agreement") with Mr. Jarvis. Under the Retirement Agreement and as contemplated
in the Company's plan of succession, Mr. Jarvis will retire from the office of
Chief Executive Officer of the Company at the June 13, 1996 meeting of the Board
of Directors of the Company and retire as an employee of the Company upon the
adjournment of the 1997 Annual Meeting of Shareholders (the "Retirement Date").
Until the Retirement Date Mr. Jarvis will continue as Chairman of the Board and
in such capacity will preside over Board meetings, perform special assignments
for the Company, and assist in the transition and succession of management. The
Company will pay Mr. Jarvis a salary at the rate of $275,000 per year for his
services through the Retirement Date, and he will remain eligible to participate
in the Extra Compensation Plan in respect of the portion of the current fiscal
year during which he serves as Chief Executive Officer. Under the Retirement
Agreement, no additional grants of stock options or awards of restricted stock
will be made to Mr. Jarvis. Upon the Retirement Date, the Management Review and
Compensation Committee of the Board of Directors will remove the restrictions on
all restricted stock previously granted to Mr. Jarvis under the Restricted Stock
Plan and will reimburse Mr. Jarvis for payments that he is required to make
prior to age 65 in order to maintain coverage for his wife and himself under the
Company's group health plan.

8
<PAGE> 11

The Company has entered into deferred compensation agreements (the
"Deferred Agreements") with each of the executive officers to ensure that their
services remain available to the Company and that they not be attracted by other
employers seeking their services. Under the Deferred Agreement with Mr. Jarvis
(the "Jarvis Deferred Agreement"), the right to payment is conditioned on Mr.
Jarvis' availability as a consultant to the Company and his not engaging in
activities competitive with the business of the Company. Provided such
conditions are satisfied, payments of $50,000 a year for 15 years will begin
upon cessation of his employment. Upon his death, the payments may be made to a
designated beneficiary. If neither a change of control of the Company has
occurred nor Mr. Jarvis' right to payments under the Jarvis Deferred Agreement
has vested, Mr. Jarvis may elect that, upon such occurrence and vesting, he (or,
in certain cases, his designated beneficiary) will receive in a cash lump sum
the present value of all payments that would become payable, regardless of the
fact that the Jarvis Deferred Agreement provides for payment at some later date
or requires some future performance. If a change of control of the Company
occurs and the right to payments under the Jarvis Deferred Agreement either is
or becomes vested, as explained below (and if Mr. Jarvis has not elected to
receive a lump sum payment as described in the preceding sentence), the Company
is required to establish an irrevocable letter of credit in an amount equal to
the largest sum of all payments to be paid under the Jarvis Deferred Agreement,
to serve as security for those payments. Unless the letter of credit is
established and renewed on a timely basis, Mr. Jarvis (or, in certain cases, his
designated beneficiary) will then receive in a cash lump sum the total of those
payments, regardless of the fact that the Jarvis Deferred Agreement provides for
payment at some later date or requires some future performance. The Deferred
Agreements with Messrs. Kirk and Busby are substantially similar to the Jarvis
Deferred Agreement except that (i) employment is required until age 60 and (ii)
the annual payments for the 15-year period are $25,000.

The Company has entered into contingent severance arrangements with each of
the executive officers (collectively the "Severance Agreements"). Each Severance
Agreement is effective until May 4, 1999 and provides that, if during the three
years following a change of control of the Company (as defined in the Severance
Agreement) the employment of the individual is terminated by the employer other
than for cause, disability or death or the individual terminates employment for
good reason (as defined in the Severance Agreement), the individual will receive
a lump sum payment equal to the sum of (i) the individual's annual base salary
through the termination date (to the extent not yet paid) and (ii) two times the
sum of (a) the individual's annual base salary at the rate in effect when
employment was terminated or, if higher, at the highest rate in effect within 90
days preceding the change of control and (b) the highest bonus paid or payable
to the individual within the five years preceding the change of control. The
individual is also entitled to a continuation of health and insurance benefits
for two years and to certain supplemental retirement benefits in respect of that
continuation period. The Severance Agreements further provide, in the event that
the individual is entitled to payment thereunder, that he will be deemed to have
satisfied the service requirement under his Deferred Agreements. The Severance
Agreements also provide that if the individual remains in the employ of the
Company for the 12-month period following the change of control and voluntarily
terminates employment for any reason (other than for good reason, in which case
the formula set out above will be applicable) during the 30-day period following
that 12-month period, he will receive a lump sum payment equal to the sum of (i)
his annual base salary through the termination date (to the extent not yet paid)
and (ii) the sum of (a) his annual base salary at the rate in effect when
employment was terminated, or, if higher, at the highest rate in effect within
90 days preceding the change of control and (b) the highest bonus paid or
payable to him within the five years preceding the change of control; and he
will be entitled to a continuation of health and insurance benefits for one year
and to certain supplemental retirement benefits in respect of that continuation
period. The Severance Agreements also provide that if any tax under Section 4999
of the Internal Revenue Code of 1986, as amended, or any comparable provision (a
"Penalty Tax") is imposed on any

9
<PAGE> 12

payment made or benefit provided to the individual, then the amount of such
payment or benefit will be increased to the extent necessary to compensate the
individual fully for the imposition of such Penalty Tax.

The Company has entered into Agreements to Secure Certain Contingent
Payments with each of the executive officers (the "Contingent Agreements"). Upon
a change of control of the Company, the Contingent Agreements require the
Company to establish an irrevocable letter of credit in favor of such
individuals securing certain benefits payable under the Severance Agreements and
any lump sum payment elected under the Deferred Agreements. The amount of the
letters of credit will be calculated initially, and recalculated quarterly, by
an independent accounting firm. Failure to establish and renew the letters of
credit prior to expiration will cause the amounts intended to be secured by the
letters of credit to become immediately payable to the individuals.

With respect to the Company's 1987 Stock Option Plan, upon a change of
control of the Company (as defined in the plan), options become fully
exercisable and, with certain exceptions, remain exercisable by the optionee,
including each of the executive officers, for a period of 90 days following
termination of the optionee's employment if such termination occurs within one
year of the change of control. See footnotes to the SUMMARY COMPENSATION TABLE
and the table OPTION/SAR GRANTS IN LAST FISCAL YEAR.

With respect to the Company's 1989 Restricted Stock Plan, restrictions on
stock awarded under the plan, including stock awarded to executive officers,
lapse upon the occurrence of certain events related to a change of control of
the Company (as defined in the plan) and the stock is not thereafter
forfeitable. See footnotes to the SUMMARY COMPENSATION TABLE.

With respect to the Company's noncontributory retirement program, under
certain circumstances related to a change of control of the Company (as defined
in the program documents), part of the benefit to a participant will be paid in
a lump sum. See "PENSION PLANS."

COMPENSATION OF DIRECTORS

Prior to June 9, 1995, each nonemployee director received fees of $3,000
per quarter and $1,000 for each Board or committee meeting attended, and the
chair of a committee of the Board received an additional fee of $250 for each
committee meeting attended.

Under the 1991 Stock Compensation Plan for Nonemployee Directors, each
eligible director may elect annually to defer receipt of his or her annual
compensation for services rendered as a director, later receiving it in the form
of shares of the Company's common stock, subject to certain restrictions. In
consideration of foregoing cash compensation and receiving shares subject to
restrictions, the amount deferred was increased by 25% for purposes of
determining the number of shares to be credited. Effective June 8, 1995, the
Plan was amended to delete that provision for an increase.

Since June 9, 1995, each nonemployee director receives quarterly fees of
$12,000 with no additional fees for meetings attended or chaired. For the latest
fiscal year, two of the eligible directors elected to receive 100% of their
compensation in stock.

After June 13, 1996, when current irrevocable elections as to the form of
payment expire, all nonemployee directors have elected to receive 50% of their
compensation in shares of the Company's stock and 50% in cash.

Directors who are employees of the Company receive no fees.

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<PAGE> 13

STOCK PRICE PERFORMANCE GRAPH

The following graph sets forth the Company's cumulative total shareholder
return (assuming reinvestment of dividends) as compared to the S&P 500 and a
peer group consisting of Fabri-Centers of America, Inc. and House of Fabrics,
Inc. over the five-year period commencing February 1, 1991 and ending January
26, 1996. The graph assumes $100 invested on February 1, 1991.

Note: The historical stock price performance shown on the graph below is not
necessarily indicative of future price performance.

[GRAPH]

<TABLE>
<CAPTION>
Measurement Period Hancock
(Fiscal Year Covered) Fabrics S&P 500 Peer Group(1)
<S> <C> <C> <C>
1991 100.00 100.00 100.00
1992 85.16 122.96 174.10
1993 67.01 135.96 86.70
1994 49.37 152.45 68.66
1995 55.55 154.22 41.29
1996 55.97 208.86 68.61
</TABLE>

- ---------------

(1) Figures shown have been adjusted to include only the value of Class A shares
of Fabri-Centers of America, Inc.

11
<PAGE> 14

BOARD COMPENSATION COMMITTEE REPORT

The Management Review and Compensation Committee of the Board of Directors
(the "Committee") is composed of the three independent nonemployee directors.
The Committee considers the performance of the executive officers, determines
their salaries, administers the Extra Compensation Plan and is responsible for
granting stock options and awarding restricted stock.

COMPENSATION POLICIES

The compensation programs of the Company are designed to align compensation
with business performance and with shareholder return, and to enable the Company
to attract, motivate and retain executives who contribute to the Company's
long-term success. Therefore, the executive compensation program includes base
salary, annual incentive cash bonus (the Extra Compensation Plan) and long-term
incentives in the form of stock options and restricted stock. The Chief
Executive Officer's compensation is determined in the same manner as that of the
other executive officers and members of corporate management.

SECTION 162(M) OF THE INTERNAL REVENUE CODE -- DEDUCTIBILITY LIMITATION

Section 162(m) of the Internal Revenue Code of 1986 imposes a limit, with
certain exceptions, on the amount that a publicly held corporation may deduct
for federal income tax purposes in any year for the compensation paid or accrued
with respect to its executive officers. It is the Committee's policy to seek to
preserve the tax deductibility of all executive compensation under Section
162(m) to the extent consistent with the overall objectives of the executive
compensation program in attracting, motivating and retaining its executives. The
Committee believes that it is unlikely that Section 162(m) will affect the
deductibility of the executive compensation of any of the executive officers in
the Company's current fiscal year.

BASE SALARY

The Committee annually reviews the base salaries of the Chief Executive
Officer and the other executive officers and members of corporate management.
When reviewing base salary and possible adjustments to base salary, the
Committee subjectively considers individual performance, Company performance
(which is not defined as any specific financial measure or measures), employee
retention, changes in level of responsibility and economic conditions in the
retail fabric industry. In determining the adjustments made in 1995 to the base
salaries of the other executive officers as well as the Chief Executive Officer,
the Committee considered all of the above criteria. The Committee sought to
enhance the Company's ability to retain and continue to motivate the executive
officer group, which has not received an adjustment in base salary since 1991
with the exception of a cost of living increase and a promotion. The Chief
Executive Officer's base salary has not been adjusted for fiscal years 1992
through 1994.

PERFORMANCE PAY

The Committee believes that executive compensation should be linked to
business performance. In order to link annual cash compensation to Company
performance, the Committee awards bonuses under the Extra Compensation Plan to
the executive officers and other eligible employees based on corporate operating
earnings before taxes. The approach used in calculating the bonuses is the same
for all eligible employees. The aggregate bonus payments to executive officers
for fiscal year 1995, including the Chief Executive Officer (whose compensation
is discussed below), increased from fiscal year 1994 based on the improvement in
those earnings over the prior year.

12
<PAGE> 15

LONG-TERM INCENTIVES

To more closely link the interest of the Company's shareholders and the
executive officers and focus management's attention on successful long-term
strategic management of the business and appreciation in shareholder value, the
Committee grants stock options and awards restricted stock. All grants and
awards contained vesting provisions of one to five years to encourage continued
employment with the Company and continued attention to long-term management and
share appreciation. The ultimate value of these equity incentives to the
executive officers and other recipients is directly related to the market value
of the common stock and to the common stock dividend yield.

The Committee has established a policy which generally grants stock options
annually to the executive officers in amounts based on the recipient's level of
responsibility. In 1995 the Committee implemented the cancellation of certain
option grants held by employees, including the executive officers, the retention
and incentive components of which had been adversely affected by the prices for
the Company's common stock, and the Committee granted Substitute Options, as
described below.

Under Committee policy, the amount of the restricted stock awarded to the
executive officers is principally related to the recipient's total cash
compensation and level of responsibility.

Based on these Committee guidelines, the Chief Executive Officer and other
executive officers received stock options grants (including grants of Substitute
Options, as described below) and restricted stock awards, both as detailed in
the summary compensation table (see the SUMMARY COMPENSATION TABLE). The
Committee did not consider the outstanding options (with the exception of the
Substitute Options) or restricted stock holdings in the aggregate of the Chief
Executive Officer or executive officers when making grants and awards.

In connection with Substitute Options and grants of options, the Committee
considered conditions in the retail fabric industry over the last several years.
During this period, the retail fabric industry has been under extreme
competitive pressure as a result of excess expansion by several fabric chains,
not including Hancock, and the subsequent correction of that excess capacity. In
the process, which included irrational price discounting, numerous store
closings and liquidations, and several bankruptcies, earnings and stock prices
declined sharply across the industry.

Cash compensation through bonuses has historically comprised a substantial
component of total cash compensation. Upon reviewing compensation over the
latest and several preceding fiscal years, the Committee determined that bonuses
had become inadequate to retain, and maintain desired incentives for, employees
in store management, middle management and senior management, including
executive officers. In addition, due to changes in the prices for the Company's
common stock, certain options previously granted under the Company's 1987 Stock
Option Plan to employees, including the executive officers, were exercisable at
prices some of which substantially exceeded the then current market value of the
common stock. Under these circumstances, the value of options to retain and
provide incentives had diminished. Therefore, on June 7, 1995, the Committee
implemented the cancellation of those outstanding options and granted options
having an exercise price of the then current market value in substitution
therefor (the "Substitute Options"). The purpose of canceling those outstanding
options and granting the Substitute Options is to reinstate the value of
outstanding stock options, thereby retaining the incentive for employees at all
levels, including the executive officers, to remain with and to continue to work
for the success of the Company. The Substitute Options have an exercise price of
$8.125 per share, the closing price of the common stock on June 6, 1995. For the
executive officers, the number of shares subject to Substitute Options were as
follows: Mr. Jarvis, 191,800 shares; Mr. Kirk, 55,600 shares; and Mr. Busby,
82,800 shares.

13
<PAGE> 16

COMPANY PERFORMANCE AND COMPENSATION OF THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER

The Chief Executive Officer's base salary, performance pay and long-term
incentives in the form of stock options and restricted stock are determined in
the same manner as the compensation of the other executive officers and members
of corporate management. The Chief Executive Officer's bonus for fiscal year
1995, based on the improvement in corporate operating earnings before taxes, was
$84,759. During the latest fiscal year, Mr. Jarvis was granted Substitute
Options for 191,800 shares and stock options for 27,400 shares as a 1995 grant
and was awarded 14,100 shares of restricted stock.

Management Review and
Compensation Committee

Donna L. Weaver, Chair
R. Randolph Devening
Don L. Fruge

ITEM 2 -- PROPOSAL TO APPROVE THE 1996 STOCK OPTION PLAN

On April 22, 1996 the Board of Directors adopted the 1996 Stock Option Plan
(the "1996 Stock Option Plan"), subject to the approval of the Plan by the
shareholders.

The Company's 1987 Stock Option Plan, as amended in 1992 ("the 1987 Plan"),
was adopted to foster stock ownership by employees, thereby encouraging their
maximum efforts for the success of the business of the Company. As of April 15,
1996 only 462,060 shares remained available for grants under the 1987 Plan. The
Board believes that broadbased grants of options under the 1987 Plan have played
a key role in enabling the Company to attract, motivate and retain an effective
group of employees in store management, middle management and senior management.
Therefore, to continue this important stock-based incentive compensation, the
Board recommends to shareholders approval of the 1996 Stock Option Plan.

Like the 1987 Plan, the 1996 Stock Option Plan seeks to foster stock
ownership by employees, thereby encouraging their maximum efforts for the
success of the business of the Company, and to provide an incentive for them to
remain in the employ of the Company or its subsidiaries. The 1996 Stock Option
Plan is administered by the Management Review and Compensation Committee (the
"Committee"), none of whose members is eligible to receive an option grant under
the 1996 Stock Option Plan. The provisions of the 1996 Stock Option Plan, and
all actions and transactions under and pursuant to it, are intended to comply
with all applicable conditions of rules promulgated under Section 16 of the
Securities Exchange Act of 1934 (the "Exchange Act"), or its successors, with
respect to persons subject to such Section ("reporting persons"), including the
Company's executive officers. The aggregate number of shares that may be issued
or reserved for issuance pursuant to the 1996 Stock Option Plan shall not exceed
2 million shares (subject to adjustment as provided in the Plan). Shares as to
which options granted under the 1996 Stock Option Plan have expired, been
canceled or otherwise terminated (other than by settlement) become available for
subsequent grants.

Options may be granted only to full-time employees (including officers) of
the Company or its subsidiaries who are considered to be contributing
significantly to the success of the business of the Company. A director who is
not also an employee is not eligible to receive an option. No options may be
granted after September 30, 2001. The 1996 Stock Option Plan contains typical
antidilution provisions, allowing for adjustments in the number of shares in
case of stock dividends and other changes in the Company's capital structure.

14
<PAGE> 17

The 1996 Stock Option Plan permits the granting of nonstatutory stock
options ("NSO's") only, which are not intended to qualify as incentive stock
options within Section 422A of the Code.

The purchase price of the shares of common stock covered by each option is
determined by the Committee at the time of grant. The purchase price of any
shares purchased pursuant to the exercise of an option must be paid in full on
the date of exercise, in cash or, at the discretion of the Committee, in whole
or in part by surrendering shares of the Company already held by the optionee
(valued at the fair market value on that date). The Committee, in its sole
discretion, may also permit extension of credit by the Company to the holder of
an option for the purpose of financing its exercise, subject to certain
restrictions on the amount of credit. Options may be exercised at such times and
in such manner as the Committee determined.

The Committee may provide that, upon a change of control of the Company (as
defined in the 1996 Stock Option Plan), options become fully exercisable and,
with certain exceptions remain exercisable by the optionee for a period of
ninety (90) days following termination of the optionee's employment if such
termination occurs within one year of the change of control.

The Committee, in its discretion, may settle the whole or any part of any
exercisable installment of an option by offering payment in shares of stock, or
in shares and cash, in exchange for the surrender of that installment or partial
installment. The amount of any settlement offered may not exceed the difference
between the option price of the shares subject to the settlement and the fair
market value of those shares on the date of the offer. Options terminate upon
cessation of employment (other than by disability, retirement or death or within
one year of a change of control) and are not transferable, except by will or
pursuant to the laws of succession. In the event of the optionee's disability,
retirement or death, the option is exercisable to a limited extent and for a
limited time.

The Board may amend or terminate the 1996 Stock Option Plan at any time,
subject to certain restrictions. No amendment adopted without approval of the
Company's shareholders shall, as to reporting persons, cause the 1996 Stock
Option Plan to no longer comply with Section 16.

No grants of options or benefits have been allocated under the 1996 Stock
Option Plan, nor are any such grants or benefits now determinable. For
comparison purposes, the grants other than grants of Substitute Options that
were made under the 1987 Plan during the latest fiscal year to the executive
officers as a group totaled 63,400 stock options. In addition, 280,800 stock
options other than Substitute Options were granted to 456 employees, including
all officers who were not executive officers, as a group under the 1987 Plan.
The closing price of the Company's common stock on April 15, 1996 was $10.375
per share.

The following summary is a general guide as to the federal income tax
consequences under current law with respect to the grant and exercise of NSO's.
Recipients of NSO's will not recognize income at the time of grant but will
recognize ordinary income upon the exercise of NSO's to the extent that the
value on the date of exercise of the shares of common stock purchased exceeds
the exercise price paid for the shares. Optionees who exercise NSO's through
payment of the exercise price in shares they already own, or in a combination of
such shares and cash, will recognize ordinary income upon such exercise to the
extent that the value on the date of exercise of the number of shares purchased
exceeds the value of the number of shares surrendered and the amount of any cash
paid upon such exercise. The Company will be entitled to a deduction at the same
time that, and in the same amount as, an optionee recognizes ordinary income.
The ordinary income recognized by the optionee is subject to tax withholding
requirements. The Committee may permit the optionee to satisfy these
requirements by allowing the Company to retain a sufficient number of shares to
cover the amount to be withheld.

15
<PAGE> 18

The affirmative vote of a majority of the shares voting on the proposal to
approve the 1996 Stock Option Plan will constitute approval of the Plan by the
shareholders.

The Board believes that the granting of stock options will continue to
provide significant incentives to eligible employees consistent with the
purposes of the 1996 Stock Option Plan and the compensation policies of the
Committee. THE BOARD THEREFORE RECOMMENDS A VOTE FOR THE APPROVAL OF THE 1996
STOCK OPTION PLAN.

ITEM 3 -- 1995 RESTRICTED STOCK PLAN

On December 6, 1995 the Board of Directors adopted the 1995 Restricted
Stock Plan (the "1995 Restricted Stock Plan"), subject to the approval of the
Plan by the shareholders.

The Company's 1989 Restricted Stock Plan (the "1989 Plan") was adopted to
provide an incentive for key employees to contribute to the growth of the
Company's business by providing opportunities for the ownership of the Company's
common stock and to retain them in the employ of the Company or its
subsidiaries. The reserve of shares available for awards under the 1989 Plan has
been depleted. The Board believes that this stock-based incentive, by enabling
key employees to own the Company's common stock, is an important factor in the
Company's compensation program that aligns compensation with shareholder
interests, as set out in the purposes of the 1989 Plan. Therefore, the Board
recommends to shareholders approval of the 1995 Restricted Stock Plan.

Like the 1989 Plan, the 1995 Restricted Stock Plan is intended to provide
an incentive for key employees to contribute to the growth of the Company's
business by providing opportunities for the ownership of the Company's common
stock and to retain them in the employ of the Company or its subsidiaries. The
1995 Restricted Stock Plan is administered by the Committee. The provisions of
the 1995 Restricted Stock Plan, and all actions and transactions under and
pursuant to it, are intended to comply with all applicable conditions of rules
promulgated under Section 16 of the Exchange Act, or its successors, with
respect to reporting persons, including the Company's executive officers. The
aggregate number of shares that may be issued or reserved for issuance pursuant
to the 1995 Restricted Stock Plan shall not exceed 1 million shares (subject to
adjustment as provided in the Plan). Those shares may consist, in whole or in
part, of authorized but unissued shares or shares reacquired by the Company (and
not reserved for any other purpose) and shares subject to any restricted stock
grant previously awarded under the 1995 Restricted Stock Plan that have been
forfeited. No shares may be awarded under the 1995 Restricted Stock Plan after
December 5, 2005. The Plan contains antidilution provisions, allowing for
adjustments in the number of shares in case of stock dividends and other changes
in the Company's capital structure.

Shares may be awarded only to full-time key employees (including officers)
of the Company or its subsidiaries who are responsible for, and considered to be
contributing significantly to, the growth of the Company business. A director
who is not also an employee is not eligible to receive an award. In determining
the employees to whom shares will be awarded, the number of shares to be covered
by an award and the terms of an award, the Committee may take into account any
factors that it deems relevant in connection with accomplishing the purpose of
the 1995 Restricted Stock Plan.

16
<PAGE> 19

The Committee may impose such restrictions as it deems advisable on shares
awarded under the 1995 Restricted Stock Plan. The restrictions lapse as
determined by the Committee at the time of the award and automatically lapse
upon cessation of employment with the Company or its subsidiaries by retirement
at age 65 (and, if permitted by the Committee, at age 55) or death and upon the
occurrence of certain events related to a change of control. Prior to lapse of
the restrictions, a participant will have the right to receive dividends on and
vote the shares, but no other rights of a shareholder in respect of the shares
will inure to any person. Certificates representing the shares awarded will be
registered in the participant's name, but the Committee may require that such
certificates not be delivered until the restrictions have lapsed. Shares subject
to restrictions are not transferable except by will or pursuant to the laws of
succession and will be forfeited upon cessation of employment with the Company
or its subsidiaries, except upon cessation by retirement at age 65 (and, if
permitted by the Committee, at age 55) or death.

The Board may amend or terminate the 1995 Restricted Stock Plan at any
time. However, to the extent required to maintain the 1995 Restricted Stock
Plan's qualification under Section 16 of the Exchange Act, any such amendment
shall be subject to shareholder approval. No amendment shall affect the rights
of a participant, except with the participant's consent.

The following summary is a general guide as to the federal income tax
consequences under current law with respect to awards of restricted shares under
the 1995 Restricted Stock Plan. On the date that shares awarded thereunder are
no longer subject to restrictions, the participant (other than one who makes a
special election as provided in the Code) must include in income, as
compensation, the fair market value of the shares. A participant may make a
special election to include in income, as compensation, the fair market value of
the shares on the date of the award (determined without regard to the
restrictions). Any dividend with respect to shares subject to restrictions is
included in the participant's income when received and is compensation income
unless the special election is made. The Company will be allowed a deduction
equal to the amount of compensation income to the participant. If an election is
made as to shares that are subsequently forfeited, the participant is not
allowed a deduction to offset the income previously taxed, and the Company must
include in income the amount previously deducted with respect to such shares.

Depending upon surrounding circumstances at the time of a change of
control, the lapse of restrictions could be a "parachute payment" under Section
280G of the Code for the purpose of determining whether a Penalty Tax would be
payable by the participant and whether a deduction to the Company for that
payment would be disallowed. If a Penalty Tax is imposed on a participant
covered by a Severance Agreement, pursuant to the Severance Agreement the
benefit provided to the participant by the restricted stock grant will be
increased to the extent necessary to compensate the participant fully for the
imposition of such Penalty Tax.

No awards or benefits have been allocated to the executive officers under
the 1995 Restricted Stock Plan. While any such awards or benefits are not now
determinable, for comparison purposes, see the awards that were made under the
1989 Plan to the executive officers during the latest fiscal year, shown in the
table SUMMARY COMPENSATION TABLE. In addition to the information shown in that
table, in March 1996, 17,600 shares, 9,500 shares and 9,500 shares were awarded
to Messrs. Jarvis, Kirk and Busby, respectively, under the 1989 Plan. During the
latest fiscal year, 119,500 shares were awarded to 83 employees, including all
current officers who are not executive officers, as a group under the 1989 Plan.
In March 1996, 47,700 shares were awarded to such nonexecutive officers under,
and subject to shareholder approval of, the 1995 Restricted Stock Plan.

17
<PAGE> 20

The affirmative vote of a majority of such shares voting on the proposal to
approve the 1995 Restricted Stock Plan will constitute approval of such Plan by
the shareholders.

The Board believes that awards of restricted shares will continue to
provide significant incentives to key employees consistent with the purposes of
the 1995 Restricted Stock Plan and the compensation policies of the Committee.
THE BOARD THEREFORE RECOMMENDS A VOTE FOR THE APPROVAL OF THE 1995 RESTRICTED
STOCK PLAN.

SHAREHOLDER PROPOSALS FOR 1997 ANNUAL MEETING

If a shareholder desires to present a proposal at next year's annual
meeting of shareholders and to have that proposal included in the proxy
statement and proxy for that meeting, that proposal must be received by the
Company at its principal executive offices by December 24, 1996.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

Based solely upon review of Forms 3, 4 and 5 and any amendments thereto
furnished to the Company with respect to its most recent fiscal year, and
written representations from reporting persons, the Company believes that during
its latest fiscal year, all filing requirements applicable to its directors and
executive officers were met with the following exception. One report, covering a
gift of shares to a charitable institution by Mr. Jarvis, was inadvertently
filed late.

OTHER MATTERS

The Board of Directors has selected Price Waterhouse LLP as the independent
accountants of the Company for the current fiscal year. At the Annual Meeting of
Shareholders, representatives of Price Waterhouse LLP will be present, may make
statements if they desire to do so, and will be available to respond to
appropriate questions.

The Board is not aware that any matters not specified above will be
presented at the Meeting. If other business should properly come before the
Meeting, the persons named in the proxy will vote thereon in their discretion to
the extent that authority to do so is granted in the proxy.

PLEASE COMPLETE, SIGN AND DATE THE ACCOMPANYING PROXY AND RETURN IT
PROMPTLY IN THE ENCLOSED ENVELOPE.

By order of the Board of Directors,

Larry D. Fair
Secretary

18
<PAGE> 21
APPENDIX A

HANCOCK FABRICS, INC.

1995 RESTRICTED STOCK PLAN

1. PURPOSE OF THE PLAN. The Hancock Fabrics, Inc. 1995 Restricted Stock
Plan ("Plan") is intended to provide an incentive for key employees to
contribute to the growth of the Company's business by providing opportunities
for their ownership of shares of the Company's common stock ("Shares") and to
retain them in the employ of the Company or its subsidiaries. The provisions
of this Plan and all actions and transactions under and pursuant to this Plan
are intended to comply with all applicable conditions of Rule 16(b)-3
promulgated under Section 16 of the Securities Exchange Act of 1934 ("Exchange
Act"), or its successors, with respect to persons subject to such Section
("Section 16 reporting persons"). To the extent any provision of, or action
or transaction pursuant to, this Plan fails to so comply, it shall be deemed
null and void to the extent permitted by law and deemed advisable by the Plan
administrators.

2. SCOPE AND DURATION OF THE PLAN. Shares may be awarded from time to
time during the life of the Plan. Unless sooner terminated pursuant to
Paragraph 15, the Plan shall terminate on December 5, 2005 and thereafter no
Shares shall be awarded under the Plan. Termination of the Plan shall have no
effect on awards then outstanding. The aggregate number of Shares that may be
issued or reserved for issuance pursuant to awards under the Plan (including
awards to Section 16 reporting persons) shall not exceed 1,000,000 Shares
(subject to adjustment as provided in the

-1-
<PAGE> 22

Plan). Awards may consist, in whole or in part, of authorized but unissued
Shares or Shares reacquired by the Company and not reserved for any other
purpose and Shares subject to any previous awards under the Plan that are
forfeited.

3. ADMINISTRATION OF THE PLAN. The Board of Directors of the Company
("Board") shall appoint a Restricted Stock Committee ("Committee"), which shall
consist of two or more members of the Board who are not eligible to receive
awards under the Plan and who shall otherwise be "disinterested" as defined in
the regulations promulgated under Section 16 of the Exchange Act. The
Committee may be the Board's Management Review and Compensation Committee. The
Committee shall have full authority in its discretion, but subject to the
express provisions of the Plan: to determine the key employees to whom, and
the time or times at which, Shares shall be awarded; to determine the number of
Shares to be covered by each award; to determine the terms, conditions and
restrictions of the respective award agreements (which need not be identical),
of any legend on any certificate representing Shares awarded pursuant to the
Plan, and of any other instrument or document relating to the Plan, except that
each such document respecting awards to Section 16 reporting persons shall be
written so as to comply with Section 16 of the Exchange Act; to determine
whether and to what extent adjustments shall be made pursuant to the provisions
of Paragraph 12; to interpret the Plan; to prescribe, amend and rescind rules
and regulations relating to the Plan; and to make any other determinations,
deemed necessary to or advisable for the

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<PAGE> 23

administration of the Plan. The Committee may delegate all or any part of such
authority to members of the Board who are not "disinterested" as defined in the
regulations promulgated under Section 16 of the Exchange Act in the case of
awards to persons who are not Section 16 reporting persons. All
determinations, decisions, interpretations and other actions of the Committee
and the Board shall be conclusive and binding upon all persons. No member of
the Committee or of the Board shall have any liability in respect of anything
done or omitted to be done by such member or any other member, except for a
member's own willful misconduct or as expressly provided for by law.

4. ELIGIBILITY FACTORS TO BE CONSIDERED IN AWARDS. Shares may be
awarded only to full-time key employees (including officers) of the Company or
any of its subsidiaries, who are responsible for, and shall be considered by
the Committee to be contributing significantly to, the growth of the Company's
business. A director of the Company who is not also an employee shall not be
eligible to receive an award. In determining the employees to whom Shares
shall be awarded, the number of Shares to be covered by each award, and the
terms, conditions and restrictions of each award, the Committee may take into
account any factors it may deem relevant in connection with accomplishing the
purpose of the Plan. An award of Shares under the Plan to an employee shall
not disqualify that employee for a further award or awards.

5. RESTRICTIONS. The Committee may impose such restrictions on any
award or any Shares awarded pursuant to the

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<PAGE> 24

Plan as it deems advisable (including restrictions on transferability).

6. REMOVAL OF RESTRICTIONS. Except as provided in Paragraphs 11 and 17,
the restrictions imposed by the Committee on any award or any Shares awarded
pursuant to the Plan shall lapse as the Committee shall determine at the time
of the award. Shares as to which restrictions have lapsed shall not thereafter
be forfeitable under any circumstances.

7. PARTICIPANT'S SERVICE. Awards under the Plan shall not be affected
by any change of duties or position so long as the participant continues to be
a key employee of the Company or any of its subsidiaries. The agreement
respecting each award may contain such provisions as the Committee shall
approve with reference to the effect of approved leaves of absence. Nothing in
the Plan or any agreement pursuant to the Plan (whether written or unwritten)
shall confer upon any employee any right to continue in the employment of the
Company or any of its subsidiaries, shall interfere in any way with the right
of the Company or any of its subsidiaries to terminate that employment at any
time, or shall affect in any way the terms or conditions of employment.

8. NONTRANSFERABILITY. Shares subject to restrictions shall not be
transferable other than by will or the laws of descent and distribution. In no
event shall a Section 16 reporting person be entitled to sell or otherwise
dispose of Shares awarded under the Plan for period of six (6) months from the
time of award without the written consent of the Committee.

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<PAGE> 25

9. STOCK CERTIFICATES. The Committee may at any time require the
placement of appropriate legends on any certificate or certificates
representing the Shares subject to restrictions. The Committee may also
require the retention by the Company or the placement in escrow of any such
certificate or certificates until such certificate or certificates shall become
deliverable following the lapse of the restrictions. The Committee may
require, as a condition of any award, that the participant deliver to the
Company a stock power relating to Shares subject to an award, endorsed in blank
and in all other ways satisfactory to the Company (including, without
limitation, as to a valid and appropriate signature guaranty ensuring
transferability of the Shares).

10. TERMINATION OF EMPLOYMENT. Except as provided in Paragraphs 11 and
17, effective as of the date of termination of a participant's employment, for
whatever reason, all or any portion of an award for Shares still subject to
restrictions (including restrictions on transferability) shall automatically be
forfeited. A participant shall have no rights or privileges as a shareholder
or otherwise with respect to Shares that have been forfeited.

11. RETIREMENT OR DEATH OF PARTICIPANT.

(a) In the event that employment shall be terminated by the normal
retirement or death of a participant, the restrictions imposed by the Committee
on any Shares awarded pursuant to the Plan shall lapse upon such termination.

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<PAGE> 26

(b) In the event that employment shall be terminated by the early
retirement of a participant, the Committee may, but shall not be obligated to,
determine that the restrictions imposed by the Committee on any Shares awarded
pursuant to the Plan shall lapse upon such termination.

12. ADJUSTMENTS. The Committee may make such adjustment, as the
Committee determines to be appropriate, in the number of Shares subject to
outstanding awards and in the number of Shares available for awards in order to
compensate for the effect of any change in the Company's capitalization or
structure or in the Shares or outstanding awards (including without limitation
any change arising through the declaration of a stock dividend or stock split
or through a spin-off, spin-out or other distribution of assets of the Company
or any of its subsidiaries to shareholders, whether payable in Shares or other
shares of stock of the Company or any of its subsidiaries, or through
reorganization, recapitalization, partial liquidation, merger, consolidation or
similar event, or through the sale or exchange of all or substantially all of
the Company's assets, or through stock splitups or combinations or exchanges of
Shares or other shares of stock of the Company or any of its subsidiaries) or
of any stock purchase pursuant to a tender offer by the Company or any other
party.

13. APPROVAL OF SHAREHOLDERS. No award may be made hereunder to any
Section 16 reporting person prior to the approval of the Plan by the Company's
shareholders in accordance with the Exchange Act.

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<PAGE> 27

14. EFFECTIVENESS OF AWARDS. Subject to Paragraph 13, the date of the
Committee's approval of the awarding of Shares shall constitute the date of the
award; provided that the effectiveness of any award hereunder shall also be
subject to the execution of a restricted stock agreement and such other
documentation as the Committee may require.

15. AMENDMENT AND TERMINATION OF THE PLAN. The Board may amend or
terminate the Plan at any time. No amendment adopted without approval of the
Company's shareholders shall, as to Section 16 reporting persons, cause the
Plan no longer to comply with Section 16 of the Exchange Act or its successors.
No amendment or termination of the Plan shall affect the rights of a holder of
an award, except with the holder's consent.

16. LISTING AND REGISTRATION OF SHARES. The Plan shall be subject to the
requirement that if at any time the Committee shall determine in its discretion
that the listing, registration or qualification of the Shares upon any
securities exchange or under any state or federal law, or the consent or
approval of any governmental regulatory body, is necessary or desirable as a
condition of or in connection with the issuance or delivery of the Shares or
related certificate pursuant to the Plan, no Shares may be issued and no
certificate representing any Shares may be delivered unless and until the
listing, registration, qualification, consent or approval shall have been
effected or obtained, and maintained, free of any conditions not acceptable to
the Committee.

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<PAGE> 28

17. CHANGE OF CONTROL. Immediately upon the occurrence of a change of
control, the restrictions imposed by the Committee on any Shares previously
awarded pursuant to the Plan shall lapse.

18. WITHHOLDING TAX. The Committee shall have the right to require,
prior to the issuance or delivery of any Shares or any certificates
representing any Shares awarded pursuant to the Plan, that the participant pay
to the Company the amount of any taxes which the Company is required to
withhold with respect to such Shares in such manner as the Committee shall
determine, including without limitation by requiring the Company to retain a
sufficient number of Shares to cover the amount or any portion thereof required
to be withheld.

19. GOVERNING LAW. This Plan shall be governed and construed in
accordance with the laws of the State of Delaware, regardless of the law which
might otherwise govern under applicable Delaware conflicts of laws principles.

20. DEFINITIONS. As used in the Plan, the following terms are defined as
follows:
(a) Company -- Hancock Fabrics, Inc., a Delaware corporation, and
its successors and assigns.

(b) Subsidiary -- A corporation of which the Company owns stock
having fifty percent (50%) or more of the total voting power.

(d) Employment -- Employment by the Company or any of its
subsidiaries.

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<PAGE> 29

(e) Participant -- An employee to whom Shares have been awarded
pursuant to the Plan.

(f) Normal Retirement -- Termination of employment after having
attained age 65 and under circumstances entitling the participant to elect
immediate payment of retirement benefits under the Hancock Fabrics, Inc.
Consolidated Retirement Plan or any successor plan thereto ("Hancock Retirement
Plan").

(g) Early Retirement -- Termination of employment after having
attained age 55 and under circumstances entitling the participant to elect
immediate payment of retirement benefits under the Hancock Fabrics, Inc.
Consolidated Retirement Plan or any successor plan thereto ("Hancock Retirement
Plan").

(h) Change of Control -- A change of control of the Company of a
nature that would be required to be reported in response to Item 1(a) of the
Current Report on Form 8-K, as in effect on the effective date of the Plan,
pursuant to Section 13 or 15(d) of the Exchange Act; provided that, without
limitation a change of control shall be deemed to have occurred if: (i) a
third person, including a "group" as defined in Section 13(d)(3) of the
Exchange Act, becomes the beneficial owner, directly or indirectly, of 20% or
more of the combined voting power of the Company's outstanding voting
securities ordinarily having the right to vote for the election of directors of
the Company; or (ii) individuals who constitute the Board as of the effective
date of the Plan ("incumbent Board") cease for any reason to constitute at
least two-thirds thereof, provided that any person becoming a director
subsequent to the effective date of the Plan

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<PAGE> 30

whose election, or nomination for election by the Company's shareholders, was
approved by a vote of at least three-quarters of (or if less, all but one of)
the directors constituting the incumbent Board (other than an election or
nomination in connection with an actual or threatened election contest relating
to the election of directors of the Company, as such terms are used in Rule
14a-11 of Regulation 14A promulgated under the Exchange Act) shall be, for
purposes of the Plan, considered as though such person were a member of the
incumbent Board.

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<PAGE> 31

APPENDIX B

HANCOCK FABRICS, INC.

1996 STOCK OPTION PLAN

1. PURPOSE OF THE PLAN. The Hancock Fabrics, Inc. 1996 Stock
Option Plan ("Plan") is intended to foster ownership of the Company's common
stock ("Shares") by eligible employees, to encourage their maximum efforts for
the success of the Company's business, and to provide an incentive for them to
remain in the employ of the Company or its subsidiaries. The provisions of
this Plan and all actions and transactions under and pursuant to this Plan are
intended to comply with all applicable conditions of Rule 16(b)-3 promulgated
under Section 16 of the Securities Exchange Act of 1934 ("Exchange Act"), as
amended, or its successors, with respect to persons subject to such Section
("Section 16 reporting persons"). To the extent any provision of, or action or
transaction pursuant to this Plan fails to so comply, it shall be deemed null
and void to the extent permitted by law and deemed advisable by the Plan
administrators.

2. SCOPE AND DURATION OF THE PLAN. Options to purchase Shares
may be granted from time to time during the life of the Plan. Unless sooner
terminated pursuant to Paragraph 16, the Plan shall terminate on September 30,
2001 and thereafter no options shall be granted under the Plan. Termination of
the Plan shall have no effect on options previously granted. Options granted
under the Plan are not intended to qualify as incentive stock options within
the meaning of Section 422A of the Internal Revenue Code of 1986, as amended
("Code"). The aggregate number
<PAGE> 32

of Shares that may be issued or reserved for issuance pursuant to options
granted under the Plan (including grants to Sections 16 reporting persons)
shall not exceed 2,000,000 Shares (subject to adjustment as provided in the
Plan). Shares as to which options granted under the Plan have expired, been
canceled or otherwise terminated (other than by settlement) shall become
available for further option grants under the Plan.

3. ADMINISTRATION OF THE PLAN. The Board of Directors of the
Company ("Board") shall appoint a Stock Option Committee ("Committee"), which
shall consist of two or more members of the Board who are not eligible to
receive grants under the Plan and who shall otherwise be "disinterested" as
defined in the regulations promulgated under Section 16 of the Exchange Act.
The Committee may be the Board's Management Review and Compensation Committee.
The Committee shall have full authority in its discretion, but subject to the
express provisions of the Plan: to determine the purchase price of the Shares
covered by each option; to determine the employees to whom, and the time or
times at which, options shall be granted; to determine the number of Shares to
be covered by each option; to determine the terms and provisions of the
respective option agreements (which need not be identical), including the terms
and conditions respecting the exercise of options (which may be in
installments), of any legend on any certificate representing Shares issued upon
exercise of an option, and of any other instrument or document relating to the
Plan, except that each such document respecting options granted to Section 16
reporting persons shall be written

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<PAGE> 33

so as to comply with Section 16; to determine whether the purchase price upon
exercise of an option may be paid in cash, Shares or any combination thereof;
to determine whether and to what extent adjustments shall be made pursuant to
the provisions of Paragraph 13; to settle options pursuant to the provisions of
Paragraph 8; to interpret the Plan; to prescribe, amend and rescind rules and
regulations relating to the Plan; and to make any other determinations deemed
necessary to or advisable for the administration of the Plan. The Committee
may delegate all or a portion of such authority to members of the Board who are
not "disinterested" persons as defined in the regulations promulgated under
Section 16 for the purpose of granting options to persons who are not Section
16 reporting persons. All determinations, decisions, interpretations and other
actions of the Committee and the Board shall be conclusive and binding upon all
persons. No member of the Committee or of the Board shall have any liability
in respect of anything done or omitted to be done by such member or any other
member, except for a member's own willful misconduct or as expressly provided
by law.

4. ELIGIBILITY FACTORS TO BE CONSIDERED IN GRANTS. Options may
be granted only to full-time employees (including officers) of the Company or
any of its subsidiaries, who shall be considered by the Committee to be
contributing significantly to the success of the business of the Company. A
director of the Company who is not also an employee shall not be eligible to
receive an option. In determining the employees to whom options shall be
granted and the number of Shares to be covered by, and

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<PAGE> 34

the term of, each option, the Committee may take into account the duties of the
respective employees, their present and potential contribution to the success
of the Company, the anticipated number of years of effective service remaining,
and any other factors it may deem relevant in connection with accomplishing the
purpose of the Plan. The granting of an option to an employee shall not
disqualify that employee for a further option grant or grants.

5. OPTION PRICES. The purchase price of the Shares covered by
each option shall be determined by the Committee at the time of grant. The
purchase price of any Shares as to which an option is exercised shall be paid
in full upon exercise. Payment may be in cash or Shares or any combination
thereof, as the Committee shall determine.

6. TERM OF OPTIONS. Except as provided in Paragraphs 11, 12 and
19, each option granted hereunder shall expire at such time as the Committee
shall determine at the time of grant.

7. EXERCISE OF OPTIONS.

(a) Except as provided in Paragraph 19, an option may be
exercised at such times and in such manner as the Committee shall determine.

(b) Except as provided in Paragraphs 11, 12 and 19,
options may be exercised only by the optionee to whom granted and not at any
time after termination of his or her employment.

8. SETTLEMENT OF OPTIONS. The Committee shall have authority in
its sole discretion, subject to the provisions of this Paragraph, to settle the
whole or any part of any exercisa-

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<PAGE> 35

ble installment of any option by offering payment in Shares, or in Shares and
cash, in exchange for surrender of that installment or partial installment by
the holder of the option. Offers to settle may be made at such times and may
remain open for acceptance by the holder during such periods as the Committee
shall determine. The amount offered shall not exceed the difference between
the option price of the Shares subject to the settlement and the fair market
value of those Shares on the date of the offer. Shares as to which options
have been settled shall not be available for further option grants under the
Plan.

9. OPTIONEE'S SERVICE. Options granted under the Plan shall not
be affected by any change of duties or position so long as the optionee
continues to be an employee of the Company or any of its subsidiaries. The
option agreement may contain such provisions as the Committee shall approve
with reference to the effect of approved leaves of absence. Nothing in the
Plan or any agreement pursuant to the Plan (whether written or unwritten) shall
confer upon any employee any right to continue in the employment of the Company
or any of its subsidiaries, shall interfere in any way with the right of the
Company or any of its subsidiaries to terminate that employment at any time, or
shall affect in any way the terms or conditions of employment.

10. NONTRANSFERABILITY. An option granted under the Plan to a
Section 16(b) reporting person shall be nontransferable to the extent required
to comply with Section 16(b)-3 of the Exchange Act other than by will or the
laws of descent and distribution. In no event shall a reporting person be
entitled

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<PAGE> 36

to sell or otherwise dispose of Shares acquired under the Plan for a period of
six (6) months from the time of grant without the written consent of the
Committee.

11. TERMINATION OF EMPLOYMENT. Except as provided in Paragraphs
12 and 19, and unless an option agreement shall otherwise provide, an option
granted to an optionee shall terminate upon the termination of his or her
employment, for whatever reason.

12. RETIREMENT, DISABILITY OR DEATH OF OPTIONEE. In the event
that employment shall be terminated by the retirement or death of an optionee
or affected by the disability of an optionee, or that an optionee shall die
during the one-year period immediately following the date of retirement or
disability, the option rights of the optionee may be exercised as provided in
this Paragraph 12.

(a) To the extent provided in subparagraph (d) of this
Paragraph 12, in the case of termination by retirement, any option may be
exercised during the one-year period immediately following the date of
retirement but in no event beyond the expiration of the stated term of such
stock option, unless permitted by the Company. Should any optionee die within
that one-year period, having unexercised any option exercisable (or to become
exercisable pursuant to subparagraph (d) of this Paragraph 12), the time for
exercise of an option by the legal representative of the optionee or by any
person to whom the option has been transferred by will or the laws of descent
and distribution shall be extended for an additional 180 days beyond

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<PAGE> 37

the date that would have been the last permissible date for exercise by the
optionee, if living.

(b) To the extent provided in subparagraph (d) of this
Paragraph 12, in the case of disability, any option may be exercised during the
one-year period immediately following the date of disability but in no event
beyond the expiration of the stated term of such stock option, unless permitted
by the Company. Should any optionee die within that one-year period, having
unexercised any option exercisable (or to become exercisable pursuant to
subparagraph (d) of this Paragraph 12), the time for exercise of an option by
the legal representative of the optionee or by any person to whom the option
has been transferred by will or the laws of descent and distribution shall be
extended for an additional 180 days beyond the date that would have been the
last permissible date for exercise by the optionee, if living.

(c) To the extent provided in subparagraph (d) of this
Paragraph 12, in the case of termination by death, any option may be exercised
during the one-year period immediately following the date of death by the legal
representative of the optionee or by any person to whom the option has been
transferred by will or the laws of descent and distribution.

(d) An option may be exercised to the extent that the
option was exercisable at the date of termination of employment by retirement
or death or at the date of disability and to the extent of additional option
installments not then exercisable, if any, as the Committee may determine.

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<PAGE> 38

13. ADJUSTMENTS. The Committee may make such adjustment, as the
Committee determines to be appropriate, of the number and prices of the Shares
subject to outstanding options and of the number of Shares available for
option, in order to compensate for the effect of any change in the Company's
capitalization or structure or in the Shares or outstanding options (including
without limitation any change arising through the declaration of a stock
dividend or stock split or through a spin-off, spin-out or other distribution
of assets of the Company or any of its subsidiaries to shareholders, whether
payable in Shares or other shares of stock of the Company or any of its
subsidiaries, or through reorganization, recapitalization, partial liquidation,
merger, consolidation or similar event, or through the sale or exchange of all
or substantially all of the Company's assets, or through stock splitups or
combinations or exchanges of Shares or other shares of stock of the Company or
any of its subsidiaries) or of any stock purchase pursuant to a tender offer by
the Company or any other party.

14. APPROVAL OF SHAREHOLDERS. No options may be granted hereunder
to any Section 16 reporting person prior to the approval of the Plan by the
Company's shareholders in accordance with the Exchange Act.

15. EFFECTIVENESS OF OPTION GRANTS. Subject to Paragraph 14, the
Committee's approval of the granting of an option shall constitute the granting
of the option.

16. AMENDMENT AND TERMINATION OF THE PLAN. The Board may amend or
terminate the Plan at any time. No amendment adopted

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<PAGE> 39

without approval of the Company's shareholders shall, as to Section 16
reporting persons, cause the Plan no longer to comply with Section 16 of the
Exchange Act or its successors. No amendment or termination of the Plan shall
affect the rights of the holder of any option theretofore granted under the
Plan, except with the holder's consent.

17. LISTING AND REGISTRATION OF SHARES. The Plan shall be subject
to the requirement that if at any time the Committee shall determine in its
discretion that the listing, registration or qualification of the options or
the Shares upon any securities exchange or under any state or federal law, or
the consent or approval of any governmental regulatory body, is necessary or
desirable as a condition of or in connection with the granting of options or
the issuance, sale or offering for sale of the Shares or issuance or delivery
of a related certificate pursuant to the Plan, no option may be exercised, in
whole or in part, no Shares may be issued and no certificate representing any
shares may be delivered unless and until the listing, registration,
qualification, consent or approval shall have been effected or obtained, and
maintained, free of any conditions not acceptable to the Committee.

18. FINANCING OF EXERCISE OF OPTIONS. At the time of exercise of
any option, the Committee may permit the extension of credit by the Company to
assist the holder of the option in the purchase and retention of the Shares
then issued. Such credit shall be secured by the Shares and shall be in an
amount not greater than the lesser of (x) the option price of the Shares and

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<PAGE> 40

(y) the amount of credit permitted by applicable regulations of the Federal
Reserve Board. The terms of that credit and provisions for release of the
security interest in the Shares shall be as determined by the Committee, at the
time the credit is extended, in accordance with the regulations of the Federal
Reserve Board.

19. CHANGE OF CONTROL.

(a) Unless an option agreement provides or the Committee
determines otherwise, immediately upon the occurrence of a change of control
(as defined below), all outstanding options, whether or not theretofore
exercisable, shall become exercisable.

(b) If the Company shall terminate the optionee's
employment for any reason other than for Cause (as defined below), or the
optionee shall terminate his or her employment for Good Reason (as defined
below), within one year of a change of control, such optionee's options shall
be exercisable during the 90-day period immediately following the date of
termination but in no event beyond the expiration of the stated term of such
option, unless permitted by the Company.

20. WITHHOLDING TAX. Where the holder of an option is entitled to
receive Shares pursuant to the exercise of an option, the Committee shall have
the right to require that the holder of the option pay to the Company the
amount of any taxes which the Company is required to withhold with respect to
such Shares, prior to the issuance or delivery of any Shares or any certificate
representing Shares, in such manner as the Committee

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<PAGE> 41

shall determine, including without limitation by requiring the Company to
retain a sufficient number of such Shares to cover the amount or any portion
thereof required to be withheld.

21. GOVERNING LAW. The Plan shall be governed and construed in
accordance with the laws of the State of Delaware, regardless of the law that
might otherwise govern under applicable Delaware conflicts of laws principles.

22. DEFINITIONS. As used in the Plan, the following terms are
defined as follows:

(a) Company -- Hancock Fabrics, Inc., a Delaware corporation,
and its successors and assigns.

(b) Subsidiary -- A corporation of which the Company owns
stock having fifty percent (50%) or more of the total voting power.

(d) Employment -- Employment by the Company or any of its
subsidiaries.

(e) Optionee -- An employee to whom an option is granted
pursuant to the Plan.

(f) Retirement -- Termination of employment under
circumstances entitling the participant to elect immediate payment of
retirement benefits under the Hancock Fabrics, Inc. Consolidated Retirement
Plan or any successor plan thereto.

(g) Disability -- Failure to return to full-time performance
of employment duties immediately after the participant has exhausted the short
term disability benefits

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<PAGE> 42

under the then applicable short term disability policy or procedures of the
Company.

(h) Fair market value of the Share on any given date --

(i) The closing price of the Shares or, if there is
no closing price, the average of the lowest and highest selling prices of the
Shares

(A) as reported in "New York Stock
Exchange - Composite Transactions," or

(B) if the Shares are not listed or admitted
to trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the Shares are listed or
admitted to trading, or

(ii) if the Shares are not listed or admitted to
trading on any national securities exchange, the last quoted price or, if not
so quoted, the average of the high bid and low asked prices in the over-the-
counter market, as reported by the National Association of Securities Dealers,
Inc. Automated Quotations System or such other system then in use, or

(iii) if on any such date the Shares are not quoted
by any such organization, the average of the closing bid and asked prices as
furnished by a professional market maker making a market in the Shares selected
by the Committee,

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<PAGE> 43

on such date, or if that date is not a "trading day," on the next preceding
trading day. "Trading day" shall mean a day on which the principal national
securities exchange on which the Shares are listed or admitted to trading is
open for the transaction of business or, if the Shares are not listed or
admitted to trading on any national securities exchange, a Monday, Tuesday,
Wednesday, Thursday or Friday on which banking institutions in the State of New
York are not authorized or obligated by law or executive order to close. If
the Shares are not publicly held or not so listed or traded, the fair market
value of the Shares on that date shall mean the fair value per share as
determined in good faith by the Committee, whose determination shall be final.

(i) Change of Control -- A change of control of the
Company of a nature that would be required to be reported in response to Item
1(a) of the Current Report on Form 8-K, as in effect on the effective date of
the Plan, pursuant to Section 13 or 15(d) of the Exchange Act; provided that,
without limitation, a change of control shall be deemed to have occurred if:
(i) a third person, including a "group" as defined in Section 13(d)(3) of the
Exchange Act, becomes the beneficial owner, directly or indirectly, of 20% or
more of the combined voting power of the Company's outstanding voting
securities ordinarily having the right to vote for the election of directors of
the Company; or (ii) individuals who constitute the Board as of the effective
date of the Plan ("incumbent Board") cease for any reason to constitute at
least two-thirds thereof, provided that any person becoming a director
subsequent to the effective date of the Plan

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<PAGE> 44

whose election, or nomination for election by the Company's shareholders, was
approved by a vote of at least three- quarters of (or if less, all but one of)
the directors constituting the incumbent Board (other than an election or
nomination in connection with an actual or threatened election contest relating
to the election of directors of the Company, as such terms are used in Rule
14a-11 of Regulation 14A promulgated under the Exchange Act) shall be, for
purposes of the Plan, considered as though such person were a member of the
incumbent Board.

(j) Cause -- An act or acts of fraud or misappropriation on
the optionee's part that result in or are intended to result in his or her
personal enrichment at the expense of the Company or any of its subsidiaries or
conviction of a felony. The determination of a majority of the incumbent Board
that cause exists shall be conclusive upon all persons.

(k) Good Reason --

(i) Without the express written consent of the
optionee,

(A) the assignment to the optionee of
any duties inconsistent in any substantial respect with the optionee's
position, authority or responsibilities as in effect during the 90-day period
immediately preceding a change of control, or

(B) any other substantial adverse change
in such position (including titles and reporting requirements), authority or
responsibilities;

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<PAGE> 45

(ii) any failure by the Company to furnish the
optionee (or, where applicable, his or her family) with compensation (including
annual bonus) and benefits at a level equal to or exceeding those received (on
an annual basis) by the optionee from the Company during the 90-day period
preceding the change of control, including a failure by the Company to maintain
the Company's Extra Compensation Plan (including the right to defer the receipt
of payments thereunder) and Supplemental Retirement Benefit Plan, other than an
insubstantial and inadvertent failure remedied by the Company promptly after
receipt of notice thereof given by the optionee; or

(iii) the Company's requiring the optionee to be
based or to perform services at any office or location other than that at which
the optionee is primarily based during the 90-day period preceding the change
of control, except for travel reasonably required in the performance of the
optionee's responsibilities.

Any good faith determination of good reason made by the optionee shall
be conclusive upon all persons.

-15-

<PAGE> 46

APPENDIX C
HANCOCK FABRICS, INC.

PROXY FOR ANNUAL MEETING OF SHAREHOLDERS -- JUNE 13, 1996

The undersigned acknowledges receipt of the Notice and Proxy Statement dated
May 3, 1996 and hereby appoints Larry G. Kirk and Larry D. Fair, with full power
of substitution, the proxies of the undersigned to represent and vote the shares
of the undersigned as indicated on this card at the Annual Meeting of
Shareholders of Hancock Fabrics, Inc. to be held on Thursday, June 13, 1996 at
10:00 a.m. and at any adjournment thereof.

THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS. IT WILL BE VOTED IN
ACCORDANCE WITH THE SPECIFICATIONS INDICATED.

UNLESS OTHERWISE INDICATED, THIS PROXY WILL BE VOTED FOR THE ELECTION OF BOTH
NOMINEES LISTED, FOR THE PROPOSAL TO APPROVE THE 1996 STOCK OPTION PLAN AND FOR
THE PROPOSAL TO APPROVE THE 1995 RESTRICTED STOCK PLAN, AND DISCRETIONARY
AUTHORITY UNDER ITEM 4 WILL BE DEEMED TO HAVE BEEN GRANTED.

1. Election of directors to serve until 1999. A VOTE FOR BOTH NOMINEES, MORRIS
O. JARVIS AND DONNA L. WEAVER, IS RECOMMENDED BY THE BOARD OF DIRECTORS.

FOR / / both nominees / / WITHHOLD VOTE
(except as indicated
to the contrary below)

(To withhold vote for an individual nominee, write that nominee's name in the
following space: )

2. Proposal to approve the 1996 Stock Option Plan. A VOTE FOR IS RECOMMENDED BY
THE BOARD OF DIRECTORS.

FOR / / AGAINST / / ABSTAIN / /

Continued and to be signed on reverse side.

3. Proposal to approve the 1995 Restricted Stock Plan. A VOTE FOR IS RECOMMENDED
BY THE BOARD OF DIRECTORS.

FOR / / AGAINST / / ABSTAIN / /

4. The proxies are authorized to vote, in their discretion, upon such other
matters as may properly come before the Meeting and any adjournment thereof.
A VOTE TO GRANT AUTHORITY IS RECOMMENDED BY THE BOARD OF DIRECTORS.

AUTHORITY GRANTED / / AUTHORITY WITHHELD / /

Signature(s) should correspond
exactly with the name(s) in
which your certificate is
issued. Executors,
conservators, trustees, etc.,
should so indicate when
signing.

------------------------------

Date

----------------------- , 1996

PLEASE DATE AND SIGN YOUR
PROXY AND RETURN PROMPTLY IN
THE ACCOMPANYING ENVELOPE.