<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
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] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(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 LOGO]
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
JUNE 12, 1997
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 12, 1997
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; and
2. 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, 1997 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: April 22, 1997
By order of the Board of Directors,
Ellen J. Kennedy
Secretary
<PAGE> 3
PROXY STATEMENT
OF
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 12, 1997 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 April 22, 1997. This solicitation
is made by the Company.
Only shareholders of record at the close of business on April 15, 1997 will
be entitled to vote at the Meeting. On that date the outstanding stock of the
Company consisted of 21,575,702 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 1996 Annual Report
are first sent to shareholders is April 22, 1997.
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 2000 (see "ELECTION OF DIRECTORS") 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.
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's transfer agent will assist the
Company in its communications. In addition, directors, officers and employees
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>
- -----------------------------------------------------------------------------------------------------
NAME AND ADDRESS OF NUMBER OF SHARES PERCENT OF
TITLE OF CLASS BENEFICIAL OWNER(1) BENEFICIALLY OWNED(1) CLASS(2)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock FMR Corp. 82 Devonshire 2,300,054 10.660%
Street Boston, MA 02109
- ------------------------------------------------------------------------------------------------
Common Stock Manning & Napier 2,592,926 12.018%
Advisors, Inc. 1100
Chase Square Rochester,
NY 14604
- ------------------------------------------------------------------------------------------------
Common Stock T. Rowe Price 1,530,450 7.093%
Associates, Inc. 100 E.
Pratt Street Baltimore,
MD 21202
- ------------------------------------------------------------------------------------------------
</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, 1997.
The following table provides information, as of April 15, 1997, 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>
- -----------------------------------------------------------------------
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF
NAME OF BENEFICIAL OWNER OWNERSHIP CLASS
- ---------------------------------------------------------------------
<S> <C> <C>
R. Randolph Devening 500 .002%
- ---------------------------------------------------------------------
Don L. Fruge 15,399 .071%
- ---------------------------------------------------------------------
Morris O. Jarvis 458,491(1) 2.104%
- ---------------------------------------------------------------------
Larry G. Kirk 196,493(1) .906%
- ---------------------------------------------------------------------
Donna L. Weaver 16,980 .079%
- ---------------------------------------------------------------------
Jack W. Busby, Jr. 190,830(1) .880%
- ---------------------------------------------------------------------
Larry D. Fair 37,940(1) .176%
- ---------------------------------------------------------------------
Bruce D. Smith 30,300(1) .140%
- ---------------------------------------------------------------------
All Directors and Executive
Officers as a Group 946,933(1) 4.295%
- ---------------------------------------------------------------------
</TABLE>
(1) Includes 219,200, 119,800, 119,400 and
14,600 shares with respect to which Mr.
Jarvis, Mr. Kirk, Mr. Busby and Mr.
Fair, respectively, have the right to
acquire beneficial ownership on or
before June 14, 1997. There are no such
shares to report with respect to Mr.
Smith.
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 2000 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 2000
- ----------------------------------------------------------------------------------------------------
Don L. Fruge Vice Chancellor for University Advancement and 1987
(51) Professor of Law, University of Mississippi, and
Executive Vice President and Chief Executive
Officer, University of Mississippi Foundation,
University, Mississippi
- ----------------------------------------------------------------------------------------------------
Larry G. Kirk President and Chief Executive Officer. Formerly 1990
(50) Chief Financial Officer, 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
(55) and President, Foodbrands America, Inc.,
Oklahoma City, Oklahoma.
Formerly Vice Chairman, Executive Vice President
and Chief Financial Officer, Fleming Companies,
Inc., Oklahoma City, Oklahoma
- ----------------------------------------------------------------------------------------------------
DIRECTORS TO SERVE UNTIL 1999
- ----------------------------------------------------------------------------------------------------
Morris O. Jarvis Chairman of the Board. Formerly President and 1987
(56) Chief Executive Officer
- ----------------------------------------------------------------------------------------------------
Donna L. Weaver Chairman of Weaver, Field & London, Inc., 1987
(53) Investor Relations and Corporate Communications,
San Francisco, California. Director of Ross
Stores, Inc., Newark, California and Crown
Vantage, Inc.,
Oakland, California
- ----------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 6
As disclosed in the proxy statement for use at last year's annual meeting
of shareholders, Mr. Jarvis has announced his intention to resign as a director
of the Company, effective upon the adjournment of this year's Annual Meeting of
Shareholders. The Board of Directors intends to fill the vacancy that will be
created by Mr. Jarvis' resignation, pursuant to authority provided in the
By-Laws of the Company, by appointing Jack W. Busby, Jr., Executive Vice
President and Chief Operating Officer, to hold that office until the annual
meeting of shareholders in 1999.
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 six 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 met once during
the Company's latest fiscal year.
The Board met six 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.
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 Company's other
executive officers (determined as of the end of the latest fiscal year) for the
fiscal years ended February 2, 1997, January 28, 1996 and January 29, 1995.
4
<PAGE> 7
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 1996 $158,654 $44,318 $169,400 0
Chairman of the Board(3) 1995 265,385 84,759 156,863 219,200
1994 250,000 82,776 154,938 27,400
- -------------------------------------------------------------------------------------------------------
Larry G. Kirk 1996 198,961 82,225 91,438 50,000
Chief Executive Officer and 1995 138,000 44,238 84,550 73,600
President 1994 113,000 43,201 65,325 18,000
- -------------------------------------------------------------------------------------------------------
Jack W. Busby, Jr. 1996 168,193 61,668 91,438 30,000
Executive Vice President and 1995 138,000 44,238 84,550 100,800
Chief Operating Officer 1994 126,923 43,201 80,400 18,000
- -------------------------------------------------------------------------------------------------------
Larry D. Fair 1996 50,847 26,311 0 7,600
Vice President(4)
- -------------------------------------------------------------------------------------------------------
Bruce D. Smith 1996 28,750 6,250 0 20,000
Senior Vice President
Chief Financial Officer and
Treasurer(5)
- -------------------------------------------------------------------------------------------------------
</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 31, 1997, 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, 77,000 shares, $991,375; Mr. Kirk, 36,600 shares,
$471,225; Mr. Busby, 40,800 shares, $525,300; and Mr. Fair, 2,000 shares,
$25,750. Mr. Smith did not hold any such shares subject to restrictions.
(2) The Company does not grant stock appreciation rights ("SARs").
(3) Mr. Jarvis is retiring as Chairman of the Board in June 1997. See
"EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS" for a description of the related agreement with Mr. Jarvis.
(4) Mr. Fair served as Chief Financial Officer and Treasurer from June 13, 1996
through March 13, 1997, and information in the table and throughout this
statement is included for only that portion of the year during which he was
an executive officer.
(5) Mr. Smith joined the Company on November 4, 1996, and information in the
table and throughout this statement is included for only that portion of the
year commencing on that date.
5
<PAGE> 8
STOCK OPTIONS
The following table contains information about the grant of stock options,
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(1) (10 YEARS)(4)
- --------------------------------------------------------------------------------------------------------------
5%
---------------------------
% OF
TOTAL
# OF OPTIONS
SECURITIES GRANTED
UNDERLYING TO
OPTIONS/SARS EMPLOYEES EXERCISE OR
GRANTED(2) IN FISCAL BASE PRICE STOCK PRICE
NAME (#) YEAR (PER SHARE) EXPIRATION DATE (PER SHARE)(3) GAIN(5)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Larry G. Kirk 50,000 11.28% $11.00 June 13, 2006 $17.92 $346,000
- --------------------------------------------------------------------------------------------------------------
Jack W. Busby, Jr. 30,000 6.77% 11.00 June 13, 2006 17.92 207,600
- --------------------------------------------------------------------------------------------------------------
Larry D. Fair 7,600 1.71% 11.00 June 13, 2006 17.92 52,592
- --------------------------------------------------------------------------------------------------------------
Bruce D. Smith 20,000 4.51% 9.125 December 9, 2006 14.86 114,700
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
10%
-----------------------
STOCK PRICE
(PER
NAME SHARE)(3) GAIN(5)
- ------------------------------------------------
<S> <C> <C>
Larry G. Kirk $28.53 $876,500
- ------------------------------------------------
Jack W. Busby, Jr. 28.53 525,900
- ------------------------------------------------
Larry D. Fair 28.53 133,228
- ------------------------------------------------
Bruce D. Smith 23.67 290,900
- ------------------------------------------------
</TABLE>
(1) All options shown here were granted under the Company's 1987 Stock Option
Plan. During the latest fiscal year, no stock options were granted to Mr.
Jarvis.
(2) All options shown here as granted to Mr. Kirk, Mr. Busby and Mr. Fair were
granted on June 13, 1996, and all options shown here as granted to Mr. Smith
were granted on December 9, 1996. The term "Grant Date" as used in the table
and this proxy statement refers to the applicable grant date. 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, except that the options granted to Mr.
Smith become exercisable as to 20% of the shares subject to the option one
year and one day following the Grant Date and as to an additional 20% on
each annual return of the date on which the first option increment became
exercisable. 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.
(3) The stock price (per share) is computed based on 10 years of appreciation in
the option exercise price shown, $11.00, except in Mr. Smith's case $9.125,
at a 5% annual rate ($17.92 and in Mr. Smith's case $14.86) and a 10% annual
rate ($28.53 and in Mr. Smith's case $23.67).
(4) 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%, $150,162,007 using the $11.00
price and $123,283,156 using the $9.125 price; and at 10%, $380,395,951
using the $11.00 price and $312,668,440 using the $9.125 price. The gain
shown is computed based on the difference between the market price on the
Grant Date, which is the same as the exercise or base price (per share)
shown, and the assumed stock price, multiplied by the number of shares
outstanding on that date.
(5) All gains are shown on a pretax basis.
6
<PAGE> 9
OPTION EXERCISES AND HOLDINGS
The following table provides information, with respect to the executive
officers, concerning the exercise of options during the latest fiscal year and
unexercised options held as of the end of the latest fiscal year:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
VALUE REALIZED UNDERLYING UNEXERCISED IN-THE-MONEY
(MARKET PRICE AT OPTIONS AT FISCAL YEAR-END OPTIONS AT FISCAL YEAR-END
SHARES ACQUIRED EXERCISE LESS (#) ($)
ON EXERCISE EXERCISE PRICE) ------------------------------------------------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Morris O. Jarvis 119,600 $885,664 205,500 13,700 $976,125 $ 65,075
- ----------------------------------------------------------------------------------------------------------------------------------
Larry G. Kirk 0 0 85,800 59,000 469,800 136,500
- ----------------------------------------------------------------------------------------------------------------------------------
Jack W. Busby, Jr. 20,400 127,500 95,400 39,000 459,900 99,000
- ----------------------------------------------------------------------------------------------------------------------------------
Larry D. Fair 0 0 10,000 8,400 49,000 18,050
- ----------------------------------------------------------------------------------------------------------------------------------
Bruce D. Smith 0 0 0 20,000 0 75,000
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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
except Mr. Smith participates in the Plan. Mr. Smith will become eligible to
participate on January 1, 1998.
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: (1) 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 (2) 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.
7
<PAGE> 10
If Mr. Kirk, Mr. Busby and Mr. Fair 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
$76,485, $80,024 and $26,177, respectively. Assuming Mr. Smith's participation
on January 1, 1998 (the date he will first meet the Plan's eligibility
requirements), such estimated annual retirement benefit so payable to him would
be $28,077. These estimates are computed using, for all future years of credited
service, the compensation levels in effect for calendar year 1996 (the most
recent Plan year) and the Social Security maximum wage base in effect for
calendar year 1997. Mr. Smith's compensation rate for 1996 has been annualized
to compute the estimate given for him. The estimated annual retirement benefit
payable to Mr. Jarvis upon his early retirement will decrease from $176,113 (the
benefit at normal retirement age) to $117,935.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
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. Kirk
(the "Kirk Deferred Agreement"), the right to payment is conditioned on Mr.
Kirk's full-time employment until age 55 or earlier death, his 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. Kirk's right to payments
under the Kirk Deferred Agreement has vested, Mr. Kirk 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 Kirk 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 Kirk
Deferred Agreement either is or becomes vested, as explained below (and if Mr.
Kirk 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 Kirk
Deferred Agreement, to serve as security for those payments. Unless the letter
of credit is established and renewed on a timely basis, Mr. Kirk (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 Kirk Deferred Agreement
provides for payment at some later date or requires some future performance. The
Deferred Agreements with Mr. Jarvis, Mr. Busby, Mr. Fair and Mr. Smith are
substantially similar to the Kirk Deferred Agreement except that (i) annual
payments for Mr. Jarvis will begin as provided in the Retirement Agreement
entered into with him and described below, (ii) employment for Mr. Busby, Mr.
Fair and Mr. Smith is required until age 60 and (iii) the annual payments for
the 15-year period are $40,000 for Mr. Busby and $25,000 for Mr. Fair and Mr.
Smith.
8
<PAGE> 11
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
(except that the Severance Agreements with Mr. Fair and Mr. Smith provide that
the multiplier is one rather than two) 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 (except
that the Severance Agreements with Mr. Fair and Mr. Smith provide a continuation
period of one rather than two years). 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
Agreement. The Severance Agreements with Mr. Kirk, Mr. Busby and Mr. Jarvis 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 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 and 1996 Stock Option
Plans, 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.
9
<PAGE> 12
With respect to the Company's 1989 Restricted Stock and 1995 Restricted
Stock Plans, 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."
The Company has entered into a Retirement Agreement (the "Retirement
Agreement") with Mr. Jarvis. Under the Retirement Agreement, Mr. Jarvis will
retire from the office of Chairman of the Board of the Company upon the
adjournment of the 1997 Annual Meeting of Shareholders (the "Retirement Date").
The Company will pay Mr. Jarvis a salary at the rate of $275,000 per year for
his services through the Retirement Date. 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.
Provided the conditions described above under his Deferred Agreement are met,
payments of $50,000 a year for 15 years will begin following the Retirement
Date.
COMPENSATION OF DIRECTORS
Each nonemployee director receives quarterly fees of $12,000 with no
additional fees for meetings attended or chaired. 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. 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.
10
<PAGE> 13
STOCK PRICE PERFORMANCE GRAPH
The following graphs set forth the Company's cumulative total shareholder
return (assuming reinvestment of dividends) as compared to the S&P 500 and the
peer groups described below over the five-year period commencing February 3,
1992 and ending February 2, 1997. Each graph assumes $100 invested on February
3, 1992.
In the first graph, the peer group consists of Fabri-Centers of America,
Inc. ("FCA") and Rag Shops, Inc. ("RAGS") for all five years shown, together
with House of Fabrics, Inc. ("HFAB") for only the first four years shown. In
every stock performance graph in the Company's previous proxy statements, the
peer group consisted of only FCA and HFAB. RAGS has been added to the peer group
to replace HFAB. HFAB was reorganized under Chapter 11 of the United States
Bankruptcy Code effective July 31, 1996, and as a result HFAB's stock price is
no longer on a comparable basis to prior years. Accordingly, HFAB has been
deleted from the peer groups for the last year shown in both graphs. In the
second graph, the peer group consists of FCA and HFAB for the years described
above, and RAGS has not been added to the peer group. Note: The historical stock
price performance shown on the graphs below is not necessarily indicative of
future price performance.
<TABLE>
<CAPTION>
Measurement Period Hancock Fabrics
(Fiscal Year Covered) Inc. S&P 500 Peer Group
<S> <C> <C> <C>
1992 100.00 100.00 100.00
1993 78.54 110.57 51.29
1994 57.84 124.76 39.05
1995 66.67 125.41 31.65
1996 63.05 173.85 61.10
1997 89.40 219.61 76.13
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
Measurement Period Hancock Fabrics
(Fiscal Year Covered) Inc. S&P 500 Peer Group
<S> <C> <C> <C>
1992 100.00 100.00 100.00
1993 78.54 110.57 49.80
1994 57.84 124.76 39.44
1995 66.67 125.41 23.72
1996 63.05 173.85 39.41
1997 89.40 219.61 46.28
</TABLE>
12
<PAGE> 15
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 1996 to the base
salaries of the other executive officers as well as the Chief Executive Officer,
the Committee considered all of the above criteria. During 1996 the Committee
made adjustments to the base salaries of the executive officer group that
reflected changes in levels of responsibility within the group. The current
Chief Executive Officer's base salary was adjusted as a result of his promotion
to that office.
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 1996, including the Chief Executive Officer (whose compensation
is discussed below), increased from fiscal year 1995 based on the improvement in
those earnings over the prior year.
13
<PAGE> 16
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. The exercise price
for the stock options granted was equal to the fair market value of the
underlying stock on the date of grant. 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. 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 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 or restricted
stock holdings in the aggregate of the Chief Executive Officer or executive
officers when making grants and awards.
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
1996, based on the improvement in corporate operating earnings before taxes, was
$82,225. During the latest fiscal year, Mr. Kirk was granted options for 50,000
shares. Mr. Kirk was also awarded 9,500 shares of restricted stock, an award
made prior to his promotion to his current office.
Management Review and
Compensation Committee
Donna L. Weaver, Chair
R. Randolph Devening
Don L. Fruge
14
<PAGE> 17
SHAREHOLDER PROPOSALS FOR 1998 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, 1997.
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.
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,
Ellen J. Kennedy
Secretary
15
<PAGE> 18
APPENDIX A
HANCOCK FABRICS, INC.
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS -- JUNE 12, 1997
The undersigned acknowledges receipt of the Notice and Proxy Statement dated
April 22, 1997 and hereby appoints Larry D. Fair and Bruce D. Smith, 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 12, 1997 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, AND DISCRETIONARY AUTHORITY UNDER ITEM 2 WILL BE DEEMED TO HAVE
BEEN GRANTED.
1. Election of directors to serve until 2000. A VOTE FOR BOTH NOMINEES, DON L .
FRUGE AND LARRY G. KIRK, 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. 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 [ ]
Continued and to be signed on reverse side.
UNLESS OTHERWISE INDICATED, THIS PROXY WILL BE VOTED FOR THE ELECTION OF BOTH
NOMINEES LISTED, AND DISCRETIONARY AUTHORITY UNDER ITEM 2 WILL BE DEEMED TO HAVE
BEEN GRANTED.
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 , 1997
-------------------
PLEASE DATE AND SIGN YOUR
PROXY AND RETURN PROMPTLY IN
THE ACCOMPANYING ENVELOPE.
