EXHIBIT 10.2
 
[*]=Information redacted pursuant to a confidential treatment request.  Such
information has been filed separately with the Securities and Exchange
Commission.
 
N.B.  THE RIGHTS GRANTED TO THE TRUSTEE IDENTIFED HEREIN, INCLUDING, WITHOUT
LIMITATION THE AUTHORITY GRANTED TO THE TRUSTEE TO DIRECT THE BANK (AS DEFINED
BELOW) WITH RESPECT TO THE DEPOSIT ACCOUNT COLLATERAL (AS DEFINED BELOW) AS
HEREIN PROVIDED, SHALL BE LIMITED AS HEREIN PROVIDED.  THIS SECOND LIEN DEPOSIT
ACCOUNT CONTROL AGREEMENT IS SUBJECT TO THE TERMS OF THE FIRST LIEN AGREEMENT
REFERRED TO BELOW AND IN THE EVENT OF ANY INCONSISTENCIES BETWEEN THIS AGREEMENT
AND THE FIRST LIEN AGREEMENT, THE FIRST LIEN AGREEMENT SHALL CONTROL.
 
SECOND LIEN DEPOSIT ACCOUNT CONTROL AGREEMENT
 
THIS DEPOSIT ACCOUNT CONTROL AGREEMENT (as amended and in effect from time to
time, this “Agreement”) is dated as of July 24, 2009 and effective for all
purposes as of August 1, 2008, by and among BancorpSouth Bank (together with its
successors and assigns, “Bank”), Hancock Fabrics, Inc. (together with its
successors and assigns, the “Company”) and Deutsche Bank National Trust Company,
in its capacity as trustee (in such capacity, together with its successors and
assigns, “the Trustee”) pursuant to the Indenture (as hereinafter defined)
acting for itself and on behalf of the Holders (as defined in the Indenture).
 
WITNESSETH
 
WHEREAS, Bank maintains for the use of the Company the following deposit
account:
 
[*] (the “Elavon Designated Deposit Account”)

which deposit account is hereinafter referred to as the “Deposit Account”;
 
WHEREAS, Bank additionally maintains for the use of the Company the following
deposit account (among others):
 
[*]  (the “Concentration Account”)

which deposit account is hereinafter referred to as the “Concentration Account”;
 
WHEREAS, Bank additionally maintains for the use of the Company the following
deposit account (among others):
 
[*]  (the “Operating Account”)

which deposit account is hereinafter referred to as the “Operating Account”;

 

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

 
 
WHEREAS, pursuant to the Loan and Security Agreement dated as of August 1, 2008,
by and among the Company, certain of Company’s affiliates and subsidiaries,
General Electric Capital Corporation, in its capacity as agent (together with
its successors and assigns, the “Agent”) and the lenders identified therein (the
“Lenders”) (as amended, restated, supplemented or otherwise modified and in
effect, the “Loan Agreement”), Agent and the Lenders have a first priority
security interest in, among other things, all right, title and interest of the
Company in and to the following, whether now or hereafter existing or arising
(collectively, the “Deposit Account Collateral”):  (a) the Deposit Account, (b)
all cash, checks, money orders, drafts, instruments, electronic funds transfers
and other items and forms of remittances and all funds and other amounts at any
time paid, deposited or credited (whether for collection, provisionally or
otherwise), held or otherwise in the possession or under the control of, or in
transit to, Bank or any agent or custodian thereof for credit to or to be
deposited in the Deposit Account, (c) all funds and cash balances or other
amounts in or attributable to the Deposit Account, and (d) any and all proceeds
of any of the foregoing;
 
WHEREAS, in order to perfect the first priority security interest in the Deposit
Account Collateral of the Agent and the Lenders, the Agent, the Bank and the
Company entered into a Deposit Account Control Agreement dated August 1, 2008
(as amended and as in effect from time to time, the “First Lien Agreement”),
 
WHEREAS, pursuant to the Indenture dated as of June 18, 2008, between the
Company and the Trustee, the Trustee and the Holders have a second priority
security interest in, among other things, all right title and interest of the
Company in and to the Deposit Account Collateral.
 
WHEREAS, the Company, the Trustee and Bank desire to enter into this Agreement
in order to set forth their relative rights and duties with respect to, and to
perfect its second lien security interest in, the Deposit Account Collateral.
 
NOW, THEREFORE, in order for the Company to comply with the requirements of the
Trustee and the Holders under the Indenture and the other financing arrangements
with the Company, the Company, Bank and the Trustee agree as follows:
 
1.           Deposit Account Collateral.  Bank hereby represents, warrants and
covenants with and to the Trustee and the Holders that:  Bank has established
and will maintain the Deposit Account and has identified the Company as the sole
owner of the Deposit Account, subject to the rights therein of the Agent and the
Lenders under the First Lien Agreement, and of the Trustee and the Holders as
provided herein; the records of Bank do not reflect, and it has not received any
notice of, any assignment or pledge of, or security interest in, the Deposit
Account or any of the other Deposit Account Collateral (other than the pledge
and security interest of Agent and the Lenders referred to in the First Lien
Agreement and of the Trustee and the Holders referred to herein), or any notice
of any adverse claim with respect to any of the same; Bank has not entered and
will not enter into any agreement with any person, other than Agent pursuant to
the First Lien  Agreement or the Trustee as set forth herein, by which it is
obligated for any reason to comply with instructions from such other person as
to the disposition of funds in or from the Deposit Account or with respect to
any other dealings with any of the Deposit Account Collateral; Bank will not
agree that any person other than the Company, Agent or the Trustee is Bank’s
customer with respect to the Deposit Account; the Deposit Account is a “deposit
account” as such term is defined in the UCC (as hereinafter defined); Bank
acknowledges that it holds and will hold possession of the Deposit Account
Collateral consisting of instruments and money as bailee for Agent for the
benefit of Agent and the Lenders, and for the Trustee and for the benefit of
itself and the Holders, subject to the terms and provisions of the First Lien
Agreement and of this Agreement; Bank is hereby irrevocably authorized and
instructed to change the designation of the customer on the Deposit Account to
Agent upon the request of Agent and Bank shall so change the customer
designation promptly upon such request by Agent; and Bank is hereby irrevocably
authorized and instructed to change the designation of the customer on the
Deposit Account to the Trustee upon the request of the Trustee and Bank shall so
change the customer designation promptly upon such request by the Trustee;
provided, however, that the Trustee agrees that the Bank shall have no duty to
comply with any such request until the Bank has received written notice from
Agent that states the Agent has terminated the First Lien Agreement and
identifies such written notice as a “Termination Notice” (such written notice
from the Agent to the Bank hereinafter referred to as  a “Termination
Notice”).  The Company hereby confirms to Bank that the Company has granted to
the Trustee, as collateral security for the Company’s obligations to the Trustee
and the Holders under the Indenture, a second priority security interest in and
Lien on the Deposit Account Collateral, and Bank hereby acknowledges such second
priority security interest in and Lien on the Deposit Account Collateral.  This
Agreement shall be inapplicable to any account maintained by Company at Bank
other than the Deposit Account, the Payroll Accounts and the Store Accounts.

 
2

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

 
 
2.           Control.
 
(a)          Notwithstanding any term or provision of this Agreement or other
agreement between Bank and the Company or otherwise, other than in respect of
the First Lien Agreement, following the receipt by the Bank of a Termination
Notice, the Company hereby irrevocably authorizes and directs the Bank to comply
with, and the Bank hereby agrees to comply with, all instructions originated by
the Trustee in accordance with this Agreement, including directing the
disposition of funds in the Deposit Account or as to any other matter relating
to the Deposit Account or other Deposit Account Collateral, without further
consent by the Company (which instructions may include the giving of stop
payment orders for any items being presented to the Deposit Account for
payment).
 
(b)          With respect to the Deposit Account, Bank shall not permit the
Company or any of its affiliates or any other person (other than Agent prior to
the delivery of a Termination Notice) to withdraw any amounts from, to draw upon
or otherwise exercise any authority or powers with respect to the Deposit
Account, and Bank shall not at any time honor, any instructions with respect to
the Deposit Account, other than, prior to receipt by the Bank of a Termination
Notice, those approved in writing by Agent, and following its receipt of a
Termination Notice, those approved in writing by the Trustee.  Notwithstanding
the foregoing, until the Trustee otherwise advises Bank in writing following the
Bank’s receipt of a Termination Notice, any entity identified by ACH company
identification number 1841010148 (such entity being Elavon, Inc. f/k/a NOVA
Information Systems, Inc. as of the date of this Agreement) (hereinafter
referred to as “Elavon”) shall have access to the Deposit Account to the extent
expressly provided in the Loan Agreement, the First Lien Agreement and Section
3(b) herein.

 
3

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

 
 
3.           Remittance of Funds; Use of Cash Management Facilities.
 
(a)          Unless the Bank is otherwise directed by Agent prior to the Bank’s
receipt of a Termination Notice, or by the Trustee following the Bank’s receipt
of a Termination Notice, the Bank shall cause all Deposit Account Collateral in
excess of $200,000 in the aggregate to be deposited into the Concentration
Account in immediately available funds.
 
(b)          Notwithstanding any provision of this Agreement to the contrary,
until Agent otherwise advises Bank in writing following the Bank’s receipt of a
Termination Notice, Elavon shall have access to the Deposit Account via ACH
Debit Entry (assuming sufficient funds are available therein on the Effective
Entry Date).  As used in this subsection (b), the terms “ACH”, “Debit”, “Entry”
and “Effective Entry Date” shall have the respective meanings ascribed in Bank’s
cash management agreements with the Company.
 
(c)          Until Agent otherwise advises Bank in writing following the Bank’s
receipt of a Termination Notice, Company shall have access to the Deposit
Account via Bank’s cash management facilities solely for the purposes of viewing
all transactions on the Deposit Account and for retrieving all balance
information concerning the Deposit Account.
 
4.           Indemnity; Bank’s Responsibility.  The Company agrees to indemnify,
defend and hold harmless Bank against any loss, liability or expense (including
reasonable fees and disbursements of counsel) incurred in connection with this
Agreement, including any action taken by Bank pursuant to the instructions of
the Trustee, except to the extent due to the gross negligence or willful
misconduct of Bank or breach of any of the provisions hereof.  The Company
confirms and agrees that neither Bank nor the Trustee or the Holders shall have
any liability to the Company for wrongful dishonor of any items or transaction
as a result of any instructions of the Trustee or otherwise in accordance with
the terms of this Agreement.  Bank shall have no duty to inquire or determine
whether the obligations of the Company to the Trustee or the Holders are in
default, or whether the Trustee or the Holders are authorized by the Indenture,
applicable law or otherwise to take any action, or whether the Trustee is
entitled to give any such instructions, and Bank is fully entitled to rely upon
such instructions from the Trustee (even if such instructions are contrary or
inconsistent with any instructions or demands given by the Company).
 
5.           Statements, Confirmations and Notices of Adverse Claims.  At such
time or times as the Trustee may request, Bank will promptly report to the
Trustee the amounts received in and held in the Deposit Account and will furnish
to the Trustee any copies of bank statements, deposit tickets, deposited items,
debit and credit advices and other records maintained by Bank under the terms of
its arrangements with the Company (as in effect on the date hereof).  The
Trustee will reimburse Bank for its reasonable expenses in providing such items
to the Trustee.  Upon receipt of notice of any lien, encumbrance or adverse
claim against the Deposit Account Collateral, Bank will promptly notify the
Trustee and the Company thereof.

 
4

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

 
 
6.           Subordination of Bank’s Security Interest; Setoff Rights; Bank’s
Fees and Expenses.
 
(a)          In the event that at any time Bank has a security interest in or
lien upon any of the Deposit Account Collateral, such security interest and lien
of Bank shall be subject and subordinate to the security interest and lien of
the Trustee therein.  Bank shall not for any reason charge, debit, deduct or
offset, or exercise any security interest or lien rights, against any checks,
automated clearinghouse transfers or other form of remittances at any time
deposited in or credited to the Deposit Account, except that Bank may setoff
against funds in the Deposit Account (i) for all amounts due to Bank in respect
of its fees and expenses as provided in Section 6(b) hereof that are unpaid and
outstanding, (ii) for the amount of any checks, automated clearinghouse
transfers, items or other form of remittances that have been credited to the
Deposit Account and subsequently returned unpaid or lawfully demanded to be
refunded by any paying or collecting bank(whether for insufficient funds or any
other reason), (iii) for the amount of any checks, automated clearinghouse
transfers, items or other form of remittances which have been credited to the
Deposit Account incorrectly by reason of inadvertent error which is corrected as
soon as practicable after the discovery of such error, and (iv) for any
overdrafts arising as a result of any of the foregoing; provided, that, Bank
shall first setoff for such amounts due to it against funds held in the
Operating Accounts before the Deposit Account.
 
(b)         Prior to the receipt by the Bank of a Termination Notice, Bank shall
be entitled to such fees and expenses as are set forth in the First Lien
Agreement.  Following receipt by the Bank of a Termination Notice, as
compensation for Bank’s services rendered to the Trustee and to Company under
this Agreement, Bank shall be entitled to the fees and expenses set forth in
Exhibit “A” hereto.
 
7.           Termination.
 
(a)          This Agreement may be terminated by Bank at any time on not less
than thirty (30) days’ prior written notice to each of the Company and the
Trustee.  This Agreement may be terminated by the Trustee at any time upon
receipt by Bank of the Trustee’s written notice of termination.  This Agreement
may not be terminated by the Company without the express prior written consent
of the Trustee and, in that case, the Trustee and the Company shall jointly
notify Bank in writing of such termination.
 
(b)          In the event that this Agreement is terminated for any reason
following the Bank’s receipt of a Termination Notice, unless otherwise
instructed by the Trustee, Bank will, on the effective date of such termination,
transfer all available funds in the Deposit Account to the Trustee Payment
Account.
 
8.           Notices.  All notices hereunder to Bank shall be in writing, sent
by telecopier and by nationally recognized overnight courier with instructions
to deliver the next business day, and shall be deemed to have been given or made
when Bank has had a reasonable period of time to act thereon (but in no event
longer than two business days after Bank has received such notice).  All notices
to any other party hereunder shall be in writing and deemed to have been given
or made: if delivered in person, immediately upon delivery; if by telex,
telegram or facsimile transmission, immediately upon sending and upon
confirmation of receipt; if by nationally recognized overnight courier service
with instructions to deliver the next business day, one (1) business day after
sending; and if by certified mail, return receipt requested, five (5) days after
mailing.  All notices to any party shall be given to its address set forth below
(or to such other address as any party may designate by notice in accordance
with this Section).

 
5

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

 
 
9.           Customer Agreements.  Other than in respect of the First Lien
Agreement, this Agreement supplements all other agreements between the Company
and Bank with respect to the Deposit Account, as such agreements may now exist
or may hereafter be amended and whether now existing or hereafter arising,
including, but not limited to, all agreements pertaining to use of Bank’s cash
management facilities and the daily transmission limits set forth therein.  No
consent of the Trustee or the Holders shall be required to amend the First Lien
Agreement or any such other agreement or for the Company and Bank to enter into
any additional agreement.  In the event of any inconsistency between this
Agreement and the terms of such other agreements (other than in respect of the
First Lien Agreement) of the Company or its affiliates with Bank, the terms of
this Agreement control.  In the event of any inconsistency between this
Agreement and the terms of the First Lien Agreement, the terms of the First Lien
Agreement control.
 
10.           Governing Law. This Agreement shall be governed by the laws of the
State of Mississippi. Notwithstanding anything to the contrary contained in any
other agreement among any of the parties hereto, for purposes of the UCC, the
State of Mississippi shall be deemed to be Bank’s jurisdiction within the
meaning of Section 9-304 of the UCC. All references to the “UCC” herein shall
mean the Uniform Commercial Code as in effect on the date hereof in the State of
Mississippi.
 
11.           Counterparts.  This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which taken
together shall constitute one and the same agreement. Delivery of an executed
counterpart of this Agreement by telefacsimile or other means of electronic
transmission shall have the same force and effect as the delivery of an original
executed counterpart of this Agreement.  Any party delivering an executed
counterpart of any such agreement by telefacsimile or other means of electronic
transmission shall also deliver an original executed counterpart, but the
failure to do so shall not affect the validity, enforceability or binding effect
of such agreement.
 
12.           Successors and Assigns.  The Trustee and the Holders are relying
upon this Agreement in providing financing to the Company and this Agreement
shall be binding upon the Company and Bank and their respective successors and
assigns and inure to the benefit of the Trustee and the Holders and their
respective successors and assigns.
 
13.           Third Party Beneficiary.  Until such time as the Bank has received
a Termination Notice from the Agent, the Agent for the benefit of itself and the
Lenders shall be a third party beneficiary of this Agreement.
 
14.           Amendments.  Any amendments or other modifications to the terms of
this Agreement shall be in writing and signed by the Bank, the Customer and the
Trustee.  Notwithstanding the foregoing, no such amendment or modification shall
be or become effective prior to the Bank’s receipt of a Termination Notice
unless the Agent has given its written consent to such amendment or
modification.

 
6

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[SIGNATURE PAGE FOLLOWS]

 
7

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DEPOSIT ACCOUNT CONTROL AGREEMENT
 
(ELAVON DESIGNATED DEPOSIT ACCOUNT)
 
SIGNATURE PAGE
 
HANCOCK FABRICS, INC.
 
BANCORPSOUTH BANK
     
By:
    
By:
            
Name:
    
Name
            
Title:
    
Title:
        
Address for Notices:
 
Address for Notices:
     
One Fashion Way
 
Corporate Banking Department
Baldwyn, MS 38824
 
201 South Spring Street
Attention: Larry D. Fair
 
Tupelo, Mississippi 38804
Telecopy:  662-365-6025
 
Attention:  Corporate Banking Dept.
   
Telecopy: 662-680-2261
         
with a copy to:
     
DEUTSCHE BANK NATIONAL
 
Cash Management Department
TRUST COMPANY, as the Trustee
 
6363 Poplar Avenue, Suite 429
   
Memphis, Tennessee 38119
By:
   
Attention:  Cash Management Dept.
     
Telecopy:  901-374-0866
Title:
                   
with a copy to:
       
By:
   
Cash Management Department
     
2830 West Jackson Street, Building B
Title:
   
Tupelo, Mississippi 38801
   
Attention:  Cash Management Dept.
   
Telecopy:  662-620-4029

Address for Notices:

Deutsche Bank National Trust Company
Corporate Trust and Securities Services
222 South Riverside Plaza, 25 Floor, MS CH 105-2502
Chicago, IL 60606-5808
Telecopy:  312-537-1009

 
8

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EXHIBIT “A”
TO
DEPOSIT ACCOUNT CONTROL AGREEMENT
 
(ELAVON DESIGNATED DEPOSIT ACCOUNT)
 
[BANK TO UPDATE/CONFIRM.]
 
GENERAL ACCT SERVICES
             
DDA Account Maintenance
[*]
 
Per Account
       
FDIC
[*]
 
Per Avg. Balance
       
Zero Balance Account - Master
[*]
 
Operating Account
       
Zero Balance Account - Sub
[*]
 
Per Account
       
Deposits/Credits
[*]
 
Per Item
       
Checks Paid
[*]
 
Per Item
       
Cash Management Special Handling Fee
[*]
 
Operating Account
       
Account Analysis Automated Transmission
[*]
 
Per Account
       
ACH Return Item
[*]
 
Per Item
       
ACH Notification of Change
[*]
 
Per Item
       
Deposit Correction Fee
[*]
 
Per Item
       
DEPOSITORY SERVICES
             
Currency Straps Out
[*]
 
Per Item
       
Wrapped Coin Out
[*]
 
Per Item
       
Deposit Verification (per $100 < $5,000)
[*]
 
Per Item
       
Items Deposited On-Us
[*]
 
Per Item
       
Government Items Deposited
[*]
 
Per Item
       
Local Items Deposited
[*]
 
Per Item
       
City Items Deposited
[*]
 
Per Item
       
RCPC Items Deposited
[*]
 
Per Item

[*]=Information redacted pursuant to a confidential treatment request.  Such
information
has been filed separately with the Securities and Exchange Commission.

 
9

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

 

Country Items
[*]
 
Per Item
       
City Items Deposited - Other Fed
[*]
 
Per Item
       
RCPC Items Deposited - Other Fed
[*]
 
Per Item
       
Country Items Deposited - Other Fed
[*]
 
Per Item
       
Non-U.S. Item
[*]
 
Per Item
       
Deposited Item Returned
[*]
 
Per Item
       
Return Items Redeposited
[*]
 
Per Item
       
ExpressDeposit Monthly Maint STD Deadline
[*]
 
Operating Account
       
ExpressDeposit Monthly Maint EXT Deadline
[*]
 
Operating Account
       
ExpressDeposit - Addt'l Location
[*]
 
Per Account
       
ExpressDeposit - Addt'l DDA Settlement Acct
[*]
 
Per Account
       
ExpressDeposit - Per Items
[*]
 
Per Item
       
PAPER DISBURSEMENT SERVICES
             
Controlled Disbursement Maintenance Fee
[*]
 
Operating Account
       
Controlled Disbursement Notification - E-mail
[*]
 
Operating Account
       
Controlled Disbursement - FED Charge
[*]
 
Operating Account
       
Controlled Disbursement - Each Addt'l Acct
[*]
 
Per Account
       
Positive Pay - Primary Account
[*]
 
Operating Account
       
Positive Pay - Additional Account
[*]
 
Per Account
       
DISBURSEMENT RECONCILIATION
             
ARP Partial Maintenance
[*]
 
Per Account
       
ARP Additional Accts Each
[*]
 
Per Account
       
ARP Partial Per Item
[*]
 
Per Item
       
CD ROM Monthly Fee
[*]
 
Per Account

[*]=Information redacted pursuant to a confidential treatment request.  Such
information
has been filed separately with the Securities and Exchange Commission.

 
10

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

 

CD ROM - Per Item
[*]
 
Per Item
       
CD ROM - Deposited Items
[*]
 
Per Item
       
CD ROM - Additional Account
[*]
 
Per Account
       
CD ROM - Additional CD
[*]
 
Per CD
       
GENERAL ACH SERVICES
             
ACH Received Debit
[*]
 
Per Item
       
ACH Received Credit
[*]
 
Per Item
       
ACH Return Item Debit/Credit
[*]
 
Per Item
       
EDI PAYMENT SERVICES
             
EDI Remittance Advising - Term/Email
[*]
 
Operating Account
       
INFORMATION SERVICES
             
BAI Rptg - File Download
[*]
 
Operating Account
       
InView - Base Charge  (5 Accounts)
[*]
 
Operating Account
       
InView - Stop Payment
[*]
 
Operating Account
       
InView Stop Payment (per item)
[*]
 
Per Item
       
InView ACH - Base Charge
[*]
 
Operating Account
       
InView ACH (Per Item)
[*]
 
Per Item
       
InView - Wire
[*]
 
Operating Account
       
InView Wire (per item)
[*]
 
Per Item
       
Wire Notification - Fax
[*]
 
Per Account

[*]=Information redacted pursuant to a confidential treatment request.  Such
information
has been filed separately with the Securities and Exchange Commission.

 
11

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

 

OTHER
             
Official Check
[*]
 
Per Item
       
Overdraft/Insufficient Item
[*]
 
Per Item
       
Research Fees
[*]
 
Per Hour
       
Research Photocopies
[*]
 
Per Item

 
The above does not include all banking services.  Additional prices will be
quoted on request.  Prices are subject to change without notification.
 
If any account becomes the subject of legal proceedings, or if Bank is required
to respond, appear or provide records in any legal proceedings, Bank shall be
entitled to reimbursement of all costs and expenses, including reasonable
attorney's fees, incurred by it in connection with such proceedings.
 
Service Charge Offset Credit:  A credit based on the 90-day Treasury bill will
be earned on the investable balance less 10% (10% Federal Reserve
requirement).  Accounts with a negative average collected balance are subject to
a monthly charge not to exceed 5% above the current Federal Reserve Discount
Rate.
 
[*]=Information redacted pursuant to a confidential treatment request.  Such
information
has been filed separately with the Securities and Exchange Commission.

 
12

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