<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 11, 1998
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 11, 1998
at 10:00 a.m. (local time), or as soon thereafter as a quorum shall be present,
for the following purposes:
1. To elect one director; 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, 1998 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 27, 1998
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 11, 1998 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 27, 1998. This solicitation
is made by the Company.
Only shareholders of record at the close of business on April 15, 1998 will
be entitled to vote at the meeting. On that date, the outstanding stock of the
Company consisted of 21,266,587 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 1997 Annual Report
are first sent to shareholders is April 27, 1998.
VOTING
Each shareholder is entitled to one vote per share respecting the 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 nominee
named below to serve until 2001 (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> <C> <C>
Common Stock FMR Corp.
82 Devonshire 1,335,000 6.277%
Street Boston, MA 02109
- -----------------------------------------------------------------------------------------------------
Common Stock Lincluden Management 1,098,200 5.164%
Limited
1275 N. Service Rd.W.
Suite 607 Oakville,
Ontario L6M 3G4
- -----------------------------------------------------------------------------------------------------
Common Stock Manning & Napier 2,578,716 12.126%
Advisors, Inc.
1100 Chase Square
Rochester, NY 14604
- -----------------------------------------------------------------------------------------------------
Common Stock T. Rowe Price 1,714,700 8.063%
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, 1998.
The following table provides information, as of April 15, 1998, 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> <C> <C>
Jack W. Busby, Jr. 220,087(1) 1.028%
- -----------------------------------------------------------------------
R. Randolph Devening 1,833 .009%
- -----------------------------------------------------------------------
Don L. Fruge 17,606 .083%
- -----------------------------------------------------------------------
Larry G. Kirk 250,957(1) 1.172%
- -----------------------------------------------------------------------
Donna L. Weaver 19,187 .090%
- -----------------------------------------------------------------------
Bruce D. Smith 43,390(1) .204%
- -----------------------------------------------------------------------
All Directors and Executive
Officers as a Group 553,060(1) 2.564%
- -----------------------------------------------------------------------
</TABLE>
(1) Includes 153,600, 140,800 and 10,000
shares with respect to which Mr. Kirk,
Mr. Busby and Mr. Smith, respectively,
have the right to acquire beneficial
ownership on or before June 14, 1998.
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, with respect to
the time for which they severally hold office, into two classes of two each and
one class of one. The nominee will be elected to hold office until the annual
meeting of shareholders in 2001 or until election and qualification of a
successor. The shares represented by proxies will be voted for the election of
the nominee named below, but if the nominee should be unable to serve, those
shares will be voted for such replacement as the Board may designate. The
Company has no reason to expect that the nominee will be unable to serve.
The following table provides information about the nominee and each
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>
NOMINEE TO SERVE UNTIL 2001
- -----------------------------------------------------------------------------------------------------
R. Randolph Devening Chairman of the Board, Chief Executive Officer and 1995
(56) President, Foodbrands America, Inc., Oklahoma
City, Oklahoma. Formerly Vice Chairman and Chief
Financial Officer, Fleming Companies, Inc.,
Oklahoma City, Oklahoma
- -----------------------------------------------------------------------------------------------------
DIRECTORS TO SERVE UNTIL 2000
- -----------------------------------------------------------------------------------------------------
Don L. Fruge Chief Executive Officer and President, University 1987
(52) of Mississippi Foundation, Vice Chancellor for
University Advancement and Professor of Law,
University of Mississippi, University, Mississippi
and Attorney at Law, Oxford, Mississippi. Formerly
Vice Chancellor for University Affairs, University
of Mississippi, University, Mississippi
- -----------------------------------------------------------------------------------------------------
Larry G. Kirk Chairman and Chief Executive Officer. Formerly 1990
(51) President, Chief Financial Officer, Senior Vice
President and Secretary. Director of BancorpSouth
Bank, Tupelo, Mississippi
- -----------------------------------------------------------------------------------------------------
DIRECTORS TO SERVE UNTIL 1999
- -----------------------------------------------------------------------------------------------------
Jack W. Busby, Jr. President and Chief Operating Officer. Formerly 1997
(55) Executive Vice President
- -----------------------------------------------------------------------------------------------------
Donna L. Weaver Chairman of Weaver, Field & London, Inc., Investor 1987
(54) Relations and Corporate Communications, San
Francisco, California. Director of Ross Stores,
Inc., Newark, California and Crown Vantage, Inc.,
Oakland, California
- -----------------------------------------------------------------------------------------------------
</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 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 the 1997 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 Larry G. Kirk
(Chair), Jack W. Busby, Jr. and Don L. Fruge. The Executive Committee did not
meet during the Company's latest fiscal year.
The Board met six times during the Company's latest fiscal year. All of the
directors attended at least 75% of the meetings of the Board and of all
committees on which he or she served.
4
<PAGE> 7
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, under the provisions of
the respective plans.
COMPENSATION POLICIES
The goals of the Company's compensation program are to align compensation
with business performance and the interest of shareholders, and to enable the
Company to attract, motivate and retain management that can 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 1997 to the base
salaries of the executive officers, including the Chief Executive Officer, the
Committee considered all of the above criteria.
INCENTIVE COMPENSATION
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 the Company's
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 1997, including the Chief Executive Officer (whose
compensation is discussed below), increased from fiscal year 1996 based on the
improvement in those earnings over the prior year.
5
<PAGE> 8
LONG-TERM INCENTIVES
To more closely align the interest of the Company's shareholders and the
executive officers, and to focus management's attention on long-term strategic
objectives which will enhance shareholder value, the Committee grants stock
options and awards restricted stock. All grants and awards contain vesting
provisions of one to five years to encourage continued employment with the
Company and continued attention to long-term objectives and share appreciation.
The exercise price for the stock options granted is equal to the fair market
value of the underlying stock on the date of grant. Therefore, 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 and awards restricted stock annually to the executive
officers in amounts based on the recipient's level of responsibility.
Based on these Committee guidelines, the Chief Executive Officer and other
executive officers received stock option grants and restricted stock awards, as
detailed in the summary compensation table (see the SUMMARY COMPENSATION TABLE).
COMPANY PERFORMANCE AND COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
The Chief Executive Officer's base salary, incentive compensation 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 1997, based on the improvement in the Company's operating
earnings before taxes, was $87,225. During the latest fiscal year, Mr. Kirk was
granted options for 60,000 shares. Mr. Kirk was also awarded 12,000 shares of
restricted stock.
Management Review and
Compensation Committee
Donna L. Weaver, Chair
R. Randolph Devening
Don L. Fruge
6
<PAGE> 9
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table provides certain summary information concerning
compensation paid or accrued by the Company and its subsidiaries, to or on
behalf of the Company's Chief Executive Officer and each of the Company's other
executive officers (determined as of the end of the latest fiscal year) for the
fiscal years ended February 1, 1998, February 2, 1997 and January 28, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG-TERM COMPENSATION
- -------------------------------------------------------------------------------------------------------
RESTRICTED SECURITIES
STOCK UNDERLYING
SALARY BONUS AWARDS(1) OPTIONS/SARS(2)
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Larry G. Kirk 1997 228,808 87,225 151,500 60,000
Chairman of the Board and 1996 198,961 82,225 91,438 50,000
Chief Executive Officer 1995 138,000 44,238 84,550 73,600
- -------------------------------------------------------------------------------------------------------
Jack W. Busby, Jr. 1997 177,962 65,418 113,625 40,000
President and 1996 168,193 61,668 91,438 30,000
Chief Operating Officer 1995 138,000 44,238 84,550 100,800
- -------------------------------------------------------------------------------------------------------
Bruce D. Smith 1997 117,115 34,889 378,750 12,000
Senior Vice President, 1996 28,750 6,250 0 20,000
Chief Financial Officer and
Treasurer(3)
- -------------------------------------------------------------------------------------------------------
Morris O. Jarvis 1997 227,405 0 0 0
Retired, Formerly 1996 158,654 44,318 169,400 0
Chairman of the Board(4) 1995 265,385 84,759 156,863 219,200
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) Restricted stock awards generally vest five years and one day following the
date of award. The award made to Mr. Smith in 1997 will vest as to 20% of
the shares awarded in one year and one day from the date of award and as to
20% of the shares on each anniversary of the vesting date. 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 30, 1998, 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. Kirk, 42,500 shares, $661,406; Mr. Busby, 42,500 shares,
$661,406; and Mr. Smith, 30,000 shares, $466,875.
(2) The Company does not grant stock appreciation rights ("SARs").
(3) 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.
(4) Mr. Jarvis retired as Chairman of the Board in June 1997. No grants of stock
options or awards of restricted stock were made to Mr. Jarvis during 1997.
See "EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF
CONTROL ARRANGEMENTS" for a description of the related agreement with Mr.
Jarvis.
7
<PAGE> 10
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)
- --------------------------------------------------------------------------------------------------------
5%
-------------------------
% OF
TOTAL
# OF OPTIONS
SECURITIES GRANTED
UNDERLYING TO
OPTIONS/SARS EMPLOYEES EXERCISE OR
GRANTED(2) IN FISCAL BASE PRICE EXPIRATION STOCK PRICE
NAME (#) YEAR (PER SHARE) DATE (PER SHARE)(3) GAIN(4)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Larry G. Kirk 60,000 9.21 $13.125 June 12, 2007 $21.38 $495,255
- --------------------------------------------------------------------------------------------------------
Jack W. Busby, Jr. 40,000 6.14 13.125 June 12, 2007 21.38 330,170
- --------------------------------------------------------------------------------------------------------
Bruce D. Smith 12,000 1.84 13.125 June 12, 2007 21.38 99,050
- --------------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------
10%
----------------------------------------
STOCK PRICE
NAME (PER SHARE)(3) GAIN(4)
- ---------------------------------------------------------------
<S> <C> <C>
Larry G. Kirk $34.04 $1,255,072
- ---------------------------------------------------------------
Jack W. Busby, Jr. 34.04 836,715
- ---------------------------------------------------------------
Bruce D. Smith 34.04 251,014
- ---------------------------------------------------------------
</TABLE>
(1) All options shown here were granted under the Company's 1996 Stock Option
Plan.
(2) All options shown here as granted to Mr. Kirk, Mr. Busby and Mr. Smith were
granted on June 12, 1997 (the "Grant Date"), and 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. 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, $13.125, at a 5% annual rate ($21.38) and a 10%
annual rate ($34.04), as prescribed by the Securities and Exchange
Commission rules.
(4) No gain to the optionee is possible without an increase in the stock price,
which will benefit all shareholders.
8
<PAGE> 11
OPTION EXERCISES AND HOLDINGS
The following table provides information, with respect to the executive
officers, concerning the exercise of options during the latest fiscal year and
unexercised options held as of the end of the latest fiscal year:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
VALUE REALIZED UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
(MARKET PRICE AT OPTIONS AT FISCAL YEAR-END OPTIONS AT FISCAL YEAR-END
SHARES ACQUIRED EXERCISE LESS (#) ($)
ON EXERCISE EXERCISE PRICE) -----------------------------------------------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Larry G. Kirk 21,200 198,725 98,600 85,000 661,463 260,313
- ---------------------------------------------------------------------------------------------------------------------------
Jack W. Busby, Jr. 3,600 22,050 115,800 55,000 818,138 165,938
- ---------------------------------------------------------------------------------------------------------------------------
Bruce D. Smith 0 0 4,000 28,000 25,750 132,250
- ---------------------------------------------------------------------------------------------------------------------------
Morris O. Jarvis 219,200 1,520,700 0 0 0 0
- ---------------------------------------------------------------------------------------------------------------------------
</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 continuing named
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: (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.
If Mr. Kirk, Mr. Busby and Mr. Smith 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
$91,356, $84,747 and $38,187, respectively. These estimates are computed using,
for all future years of credited service, the compensation levels in effect for
calendar year 1997 (the most recent Plan year) and the Social Security maximum
wage base in effect for calendar year 1998.
9
<PAGE> 12
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 continuing 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. Busby and Mr. Smith are substantially similar to the Kirk Deferred
Agreement except that (i) employment for Mr. Busby and Mr. Smith is required
until age 60 and (ii) the annual payments for the 15-year period are $40,000 for
Mr. Busby and $25,000 for Mr. Smith.
The Company has entered into contingent severance arrangements with each of
the continuing 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 Agreement with Mr. Smith
provides 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 Agreement with Mr. Smith provides
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 and Mr.
Busby 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
10
<PAGE> 13
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 continuing 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 and 1996 Stock Option Plans, upon a
change of control of the Company (as defined in the plans), 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 and 1995 Restricted Stock Plans,
restrictions on stock awarded under the plans, 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 plans) 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."
Mr. Jarvis, who retired as Chairman of the Board on June 12, 1997 (the
"Retirement Date"), had entered into a Retirement Agreement (the "Retirement
Agreement") with the Company. Under the Retirement Agreement, the Company paid
Mr. Jarvis a salary of $227,405 for his services through the Retirement Date.
Upon the Retirement Date, the Management Review and Compensation Committee of
the Board of Directors removed 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. Mr. Jarvis also received $211,539 for vacation earned but not taken
in prior years and $29,360 under his Deferred Agreement.
11
<PAGE> 14
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.
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. ("FCA") and Rag Shops,
Inc. ("RAGS") for all five years shown, together with House of Fabrics, Inc.
("HFAB") for only the first three years shown (because it was reorganized under
Chapter 11 of the United States Bankruptcy Code). The graph assumes $100
invested on January 31, 1993.
Note: The historical stock price performance shown on the graph below is
not necessarily indicative of future price performance.
<TABLE>
<CAPTION>
Measurement Period Hancock Fabrics,
(Fiscal Year Covered) Inc. Peer Group S&P 500
<S> <C> <C> <C>
1993 100.00 100.00 100.00
1994 74.00 76.00 113.00
1995 85.00 62.00 113.00
1996 80.00 119.00 157.00
1997 114.00 148.00 199.00
1998 141.00 223.00 252.00
- -----------------------------------------------------------------------------------------------------
Fiscal Years ended
February 1 1993 1994 1995 1996 1997 1998
- -----------------------------------------------------------------------------------------------------
Hancock Fabrics, Inc. $100 $ 74 $ 85 $ 80 $114 $141
- -----------------------------------------------------------------------------------------------------
Peer Group 100 76 62 119 148 223
- -----------------------------------------------------------------------------------------------------
S&P 500 100 113 113 157 199 252
- -----------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
SHAREHOLDER PROPOSALS FOR 1999 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, 1998.
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
13
<PAGE> 16
APPENDIX A
HANCOCK FABRICS, INC.
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS -- JUNE 11, 1998
The undersigned acknowledges receipt of the Notice and Proxy Statement dated
April 27, 1998 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 11, 1998 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 THE
NOMINEE LISTED, AND DISCRETIONARY AUTHORITY UNDER ITEM 2 WILL BE DEEMED TO HAVE
BEEN GRANTED.
1. Election of director to serve until 2001. A VOTE FOR THE NOMINEE, R. RANDOLPH
DEVENING, IS RECOMMENDED BY THE BOARD OF DIRECTORS.
FOR NOMINEE [ ] WITHHOLD VOTE [ ]
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 THE
NOMINEE 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 , 1998
-------------------
PLEASE DATE AND SIGN YOUR
PROXY AND RETURN PROMPTLY IN
THE ACCOMPANYING ENVELOPE.
