EXHIBIT 10.43
[Execution]
RATIFICATION AND AMENDMENT AGREEMENT
     This RATIFICATION AND AMENDMENT AGREEMENT (this “Ratification Agreement”),
dated as of March ___, 2007, is by and among HANCOCK FABRICS, INC., a Delaware
corporation, as Debtor and Debtor-in-Possession (“Parent”), HF MERCHANDISING,
INC., a Delaware corporation, as Debtor and Debtor-in-Possession
(“Merchandising”), HANCOCK FABRICS OF MI, INC., a Delaware corporation, as
Debtor and Debtor-in-Possession (“Fabrics MI”), HANCOCKFABRICS.COM, INC., a
Delaware corporation, as Debtor and Debtor-in-Possession (“Fabrics.com”),
HANCOCK FABRICS, LLC, a Delaware limited liability company, as Debtor and
Debtor-in-Possession (“Fabrics LLC”, and together with Parent, Merchandising,
Fabrics MI and Fabrics.com, each individually a “Borrower” and collectively,
“Borrowers”), HF ENTERPRISES, INC., a Delaware corporation, as Debtor and
Debtor-in-Possession (“Enterprises”), HF RESOURCES, INC., a Delaware
corporation, as Debtor and Debtor-in-Possession (“Resources”, and together with
Enterprises, each individually a “Guarantor” and collectively, “Guarantors”),
the financial institutions from time to time party to the Loan Agreement (as
hereinafter defined) as lenders (each individually, a “Lender” and collectively,
“Lenders”), and WACHOVIA BANK, NATIONAL ASSOCIATION, a national banking
association, in its capacity as agent acting for and on behalf of the Lenders
(in such capacity, “Agent”).
W I T N E S S E T H:
     WHEREAS, each Borrower and Guarantor (collectively, the “Debtors”) has
commenced a case under Chapter 11 of Title 11 of the United States Code in the
United States Bankruptcy Court for the District of Delaware, and each Borrower
and Guarantor has retained possession of its assets and each is authorized under
the Bankruptcy Code to continue the operation of its businesses as a
debtor-in-possession;
     WHEREAS, prior to the commencement of the Chapter 11 Cases (as hereinafter
defined), Agent and Lenders made loans and advances and provided other financial
accommodations to Borrowers secured by substantially all of the assets and
properties of Borrowers and Guarantors as set forth in the Existing Financing
Agreements (as hereinafter defined) and the Existing Guarantor Documents (as
hereinafter defined);
     WHEREAS, the Bankruptcy Court (as hereinafter defined) has entered a
Financing Order (as hereinafter defined) pursuant to which Agent and Lenders may
make post-petition loans and advances and provide other financial
accommodations, to Borrowers secured by substantially all the assets and
properties of Borrowers and Guarantors as set forth in the Financing Order and
the Financing Agreements (as hereinafter defined);
     WHEREAS, the Financing Order provides that as a condition to the making of
such post-petition loans, advances and other financial accommodations, Borrowers
and Guarantors shall execute and deliver this Ratification Agreement;
     WHEREAS, Borrowers and Guarantors desire to reaffirm their obligations to
Agent and Lenders pursuant to the Existing Financing Agreements and acknowledge
their continuing

 

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liabilities to Agent and Lenders thereunder in order to induce Agent and Lenders
to make such post-petition loans and advances and provide such other financial
accommodations to Borrowers; and
     WHEREAS, Borrowers and Guarantors have requested that Agent and Lenders
make post-petition loans and advances and provide other financial accommodations
to Borrowers and make certain amendments to the Loan Agreement, and Agent and
Lenders are willing to do so, subject to the terms and conditions contained
herein.
     NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and
agreements contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Agent, Lenders,
Borrowers and Guarantors mutually covenant, warrant and agree as follows:
     1. DEFINITIONS.
          1.1 Additional Definitions. As used herein, the following terms shall
have the respective meanings given to them below and the Loan Agreement and the
other Financing Agreements shall be deemed and are hereby amended to include, in
addition and not in limitation, each of the following definitions:
          (a) “Bankruptcy Court” shall mean the United States Bankruptcy Court
for the District of Delaware or the United States District Court for the
District of Delaware.
          (b) “Chapter 11 Cases” shall mean the Chapter 11 cases of Borrowers
and Guarantors which are being jointly administered under the Bankruptcy Code
and are pending in the Bankruptcy Court.
          (c) “Bankruptcy Code” shall mean the United States Bankruptcy Code,
being Title 11 of the United States Code as enacted in 1978, as the same has
heretofore been or may hereafter be amended, recodified, modified or
supplemented, together with all rules, regulations and interpretations
thereunder or related thereto.
          (d) “Budget” shall mean the initial budget of Borrowers and Guarantors
to be delivered to Agent and Lenders in accordance with Section 5.3(a) hereof
setting forth the Projected Information for the periods covered thereby,
together with any subsequent or amended budget(s) thereto delivered to Agent and
Lenders pursuant Section 5.3(b) hereof.
          (e) “DIP Fee Letter” shall mean the letter agreement, dated of even
date herewith, by and among Borrowers and Agent, setting forth certain fees
payable by Borrowers in connection with the Credit Facility, as the same now
exists or may hereafter be amended, modified, supplemented, extended, renewed,
restated or replaced.
          (f) “Excluded Collateral Items” shall have the meaning set forth
Section 1.1(o) hereof.

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          (g) “Existing Financing Agreements” shall mean the Financing
Agreements (as defined in the Existing Loan Agreement), including, without
limitation, the Existing Guarantor Documents (as defined below), in each case as
in effect immediately prior to the Petition Date.
          (h) “Existing Guarantor Documents” shall mean, collectively, (i) the
Guarantee, dated June 29, 2005, by Borrowers and Guarantors in favor of Agent
and Lenders, (ii) the Pledge and Security Agreement, dated June 29, 2005, by
Resources in favor of Agent and Lenders with respect to the Capital Stock of
Merchandising and Enterprises, (iii) the Pledge and Security Agreement, dated
June 29, 2005, by Enterprises in favor of Agent and Lenders with respect to
membership interests of Fabrics LLC, (iv) the Trademark Collateral Assignment
and Security Agreement, dated June 29, 2005, by and between Enterprises and
Agent, and (v) the Affiliate Subordination Agreement, dated June 29, 2005, by
and among Agent, Resources and Enterprises, as acknowledged and agreed to by
Parent and Merchandising, in each case as in effect immediately prior to the
Petition Date.
          (i) “Existing Loan Agreement” shall mean the Loan and Security
Agreement, dated June 29, 2005, by and among Borrowers, Guarantors, Agent and
Lenders, as amended by Amendment No. 1 to Loan and Security Agreement, dated as
of July 26, 2005, Amendment No. 2 to Loan and Security Agreement, dated as of
December 31, 2005, Amendment No. 3 to Loan and Security Agreement, dated as of
April 25, 2006, Amendment No. 4 to Loan and Security Agreement, dated as of
June 14, 2006, Amendment No. 5 to Loan and Security Agreement, dated as of
October 31, 2006, and Amendment No. 6 to Loan and Security Agreement, dated as
of December 29, 2006, and otherwise as in effect immediately prior to the
Petition Date.
          (j) “Financing Order” shall mean the Interim Financing Order, the
Permanent Financing Order and such other orders relating thereto or authorizing
the granting of credit by Agent and Lenders to Borrowers on an emergency,
interim or permanent basis pursuant to Section 364 of the Bankruptcy Code as may
be issued or entered by the Bankruptcy Court in the Chapter 11 Cases.
          (k) “Guarantor Documents” shall mean, collectively, the Existing
Guarantor Documents, as amended by this Ratification Agreement, in each
instance, as the same now exists or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced.
          (l) “Interim Financing Order” shall have the meaning set forth in
Section 10.8 hereof.
          (m) “Permanent Financing Order” shall have the meaning set forth in
Section 10.9 hereof.
          (n) “Petition Date” shall mean the date of the commencement of the
Chapter 11 Cases.

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          (o) “Post-Petition Collateral” shall mean, collectively, all now
existing and hereafter acquired real and personal property of each Debtor’s
estate, wherever located, of any kind, nature or description, including any such
property in which a lien is granted to Agent pursuant to the Financing
Agreements, the Financing Order or any other order entered or issued by the
Bankruptcy Court, and shall include, without limitation:
               (i) all of the Pre-Petition Collateral;
               (ii) all Accounts;
               (iii) all general intangibles, including, without limitation, all
Intellectual Property;
               (iv) all goods, including, without limitation, all Inventory and
all Equipment;
               (v) all Real Property and fixtures;
               (vi) all chattel paper, including, without limitation, all
tangible and electronic chattel paper;
               (vii) all instruments, including, without limitation, all
promissory notes;
               (viii) all documents;
               (ix) all deposit accounts;
               (x) all letters of credit, banker’s acceptances and similar
instruments and including all letter-of-credit rights;
               (xi) all supporting obligations and all present and future liens,
security interests, rights, remedies, title and interest in, to and in respect
of Receivables and other Collateral, including, without limitation, (A) rights
and remedies under or relating to guaranties, contracts of suretyship, letters
of credit and credit and other insurance related to the Collateral, (B) rights
of stoppage in transit, replevin, repossession, reclamation and other rights and
remedies of an unpaid vendor, lienor or secured party, (C) goods described in
invoices, documents, contracts or instruments with respect to, or otherwise
representing or evidencing, Receivables or other Collateral, including returned,
repossessed and reclaimed goods, and (D) deposits by and property of account
debtors or other persons securing the obligations of account debtors;
               (xii) all (A) investment property (including securities, whether
certificated or uncertificated, securities accounts, security entitlements,
commodity contracts or commodity accounts) and (B) monies, credit balances,
deposits and other property of Borrowers and Guarantors now or hereafter held or
received by or in transit to Agent, any Lender or their respective Affiliates or
at any other depository or other

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institution from or for the account of Borrowers or Guarantors, whether for
safekeeping, pledge, custody, transmission, collection or otherwise;
               (xiii) all commercial tort claims;
               (xiv) to the extent not otherwise described above, all
Receivables;
               (xv) all Records; and
               (xvi) all products and proceeds of the foregoing, in any form,
including insurance proceeds and all claims against third parties for loss or
damage to or destruction of or other involuntary conversion of any kind or
nature of any or all of the other Collateral.
Notwithstanding anything to the contrary contained in this Agreement or the
other Financing Agreements, the Post-Petition Collateral shall not include the
following (collectively, the “Excluded Collateral Items”): (i) any leasehold
real property interests of Borrowers or Guarantors existing as of the date of
this Ratification Agreement (collectively, the “Real Property Leasehold
Interests”), (ii) any actions maintained or taken pursuant to Sections 544, 545,
547, 548, 549, 550, 551 and 553 of the Bankruptcy Code, and (iii) any proceeds
of the items referred to in clauses (i), (ii) of this paragraph and
post-petition loans or other financial accommodations obtained by Borrowers and
Guarantors other than from Agent or any Lender that are secured solely by the
Real Property Leasehold Interests or other Excluded Collateral Items; provided,
that all such proceeds referenced in this clause (iii) shall at all times be
segregated by Borrowers and Guarantors from the proceeds of Agent’s and Lenders’
Collateral and the Loans and Letters of Credit provided by Agent and Lenders to
Borrowers.
          (p) “Post-Petition Obligations” shall mean all Loans, Letter of Credit
Obligations and other loans, advances, letter of credit accommodations, debts,
obligations, liabilities, covenants and duties of Borrowers and Guarantors to
Agent and Lenders of every kind and description, however evidenced, whether
direct or indirect, absolute or contingent, joint or several, secured or
unsecured, due or not due, primary or secondary, liquidated or unliquidated,
arising on and after the Petition Date and whether arising on or after the
conversion or dismissal of the Chapter 11 Cases, or before, during and after the
confirmation of any plan of reorganization in the Chapter 11 Cases, and whether
arising under or related to this Ratification Agreement, the Loan Agreement, the
Guarantor Documents, the other Financing Agreements, a Financing Order, by
operation of law or otherwise, and whether incurred by such Borrower or
Guarantor as principal, surety, endorser, guarantor or otherwise and including,
without limitation, all principal, interest, financing charges, letter of credit
fees, unused line fees, servicing fees, line increase fees, debtor-in-possession
facility fees, early termination fees, other fees, commissions, costs, expenses
and attorneys’, accountants’ and consultants’ fees and expenses incurred in
connection with any of the foregoing.
          (q) “Pre-Petition Collateral” shall mean, collectively, (i) all
“Collateral” as such term is defined in the Existing Loan Agreement as in effect
immediately prior to

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the Petition Date, (ii) all “Collateral” as such term is defined in each of the
Existing Guarantor Documents as in effect immediately prior to the Petition
Date, and (iii) all other security for the Pre-Petition Obligations as provided
in the Existing Loan Agreement, the Existing Guarantors Documents and the other
Existing Financing Agreements immediately prior to the Petition Date.
          (r) “Pre-Petition Obligations” shall mean all Loans, Letter of Credit
Obligations and other loans, advances, letter of credit accommodations, debts,
obligations, liabilities, indebtedness, covenants and duties of Borrowers and
Guarantors to Agent and Lenders of every kind and description, however
evidenced, whether direct or indirect, absolute or contingent, joint or several,
secured or unsecured, due or not due, primary or secondary, liquidated or
unliquidated, arising before the Petition Date under or related to the Existing
Loan Agreement, the Existing Guarantor Documents, the other Existing Financing
Agreements, by operation of law or otherwise, and whether incurred by such
Borrower or Guarantor as principal, surety, endorser, guarantor or otherwise and
including, without limitation, all principal, interest, financing charges,
letter of credit fees, unused line fees, servicing fees, line increase fees,
early termination fees, other fees, commissions, costs, expenses and attorneys’,
accountants’ and consultants’ fees and expenses incurred in connection with any
of the foregoing.
          (s) “Projected Information” shall have the meaning set forth in
Section 5.3(a) hereof.
          (t) “Ratification Agreement” shall mean this Ratification and
Amendment Agreement by and among Borrowers, Guarantors, Agent and Lenders, as
the same now exists or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced.
          (u) “Real Property Leasehold Interests” shall have the meaning set
forth in Section 1.1(o) hereof.
          1.2 Amendments to Definitions.
               (a) Collateral. All references to the term “Collateral” in the
Loan Agreement and the other Financing Agreements, or any other term referring
to the security for the Pre-Petition Obligations, shall be deemed, and each such
reference is hereby amended to mean, collectively, the Pre-Petition Collateral
and the Post-Petition Collateral.
               (b) Debtors. All references to Debtors, including, without
limitation, to the terms “Borrower,” “Borrowers,” “Guarantor” or “Guarantors” in
the Loan Agreement and the other Financing Agreements, shall be deemed, and each
such reference is hereby amended, to mean and include the Debtors as defined
herein, and their respective successors and assigns (including any trustee or
other fiduciary hereafter appointed as its legal representative or with respect
to the property of the estate of such corporation whether under Chapter 11 of
the Bankruptcy Code or any subsequent Chapter 7 case and its successor upon
conclusion of the Chapter 11 Case of such corporation).

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               (c) Financing Agreements. All references to the term “Financing
Agreements” in the Loan Agreement and the other Financing Agreements shall be
deemed, and each such reference is hereby amended, to include, in addition and
not in limitation, this Ratification Agreement and all of the Existing Financing
Agreements, as ratified, assumed and adopted by each Borrower and Guarantor
pursuant to the terms hereof, as amended and supplemented hereby, and the
Financing Order, as each of the same now exists or may hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced.
               (d) Interest Rate. The definition of “Interest Rate” set forth in
Section 1.72 of the Loan Agreement is hereby amended by deleting such definition
in its entirety and replacing it with the following:
               “1.72 ‘Interest Rate’ shall mean,
          (a) Subject to clause (b) of this definition below:
                    (i) as to Prime Rate Loans, a rate equal to one quarter
(1/4%) percent per annum in excess of the Prime Rate, and
                    (ii) as to Eurodollar Rate Loans, a rate equal to one and
three-quarters (13/4%) percent per annum in excess of the Adjusted Eurodollar
Rate (in each case, based on the London Interbank Offered Rate applicable for
the Interest Period selected by a Borrower, or by Administrative Borrower on
behalf of such Borrower, as in effect two (2) Business Days prior to the
commencement of the Interest Period, whether such rate is higher or lower than
any rate previously quoted to any Borrower or Guarantor).
          (b) Notwithstanding anything to the contrary contained in clause
(a) of this definition, Agent may, at its option, and Agent shall, at the
direction of the Required Lenders, without notice, increase the Interest Rate to
the rate of two and one-quarter (21/4 %) percent per annum in excess of the
Prime Rate as to Prime Rate Loans and the rate of three and three-quarters (33/4
%) percent per annum in excess of the Adjusted Eurodollar Rate as to Eurodollar
Rate Loans either (i) for the period (A) from and after the effective date of
termination or non-renewal hereof until Agent and Lenders have received full and
final payment of all outstanding and unpaid Obligations which are not contingent
and cash collateral or letter of credit, as Agent may specify, in the amounts
and on the terms required under Section 13.1 hereof for contingent Obligations
(notwithstanding entry of a judgment against any Borrower or Guarantor), or
(B) from and after the date of the occurrence of an Event of Default and for so
long as such Event of Default is continuing as determined by Agent and (ii) on
Revolving Loans at any time outstanding in excess of the Borrowing Base (whether
or not such excess(es) arise or are made without the knowledge or consent of
Agent or any Lender and whether made before or after an Event of Default).”

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               (e) Letter of Credit Limit. The definition of “Letter of Credit
Limit” set forth in Section 1.79 of the Loan Agreement is hereby amended by
deleting such definition in its entirety and replacing it with the following:
               “1.79 ‘Letter of Credit Limit’ shall mean $25,000,000.”
               (f) Loan Agreement. All references to the term “Loan Agreement”
in the Loan Agreement and the other Financing Agreements shall be deemed, and
each such reference is hereby amended, to mean the Existing Loan Agreement, as
amended by this Ratification Agreement and as ratified, assumed and adopted by
each Borrower and Guarantor pursuant to the terms hereof and the Financing
Order, as the same now exists or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced.
               (g) Material Adverse Effect. All references to the term “Material
Adverse Effect,” “material adverse effect” and “material adverse change” in the
Loan Agreement, this Ratification Agreement and the Financing Agreements, shall
be deemed, and each such reference in the Financing Agreements is hereby
amended, to add at the end thereof: “provided, that, the following shall not
constitute a material adverse effect: (i) the commencement of the Chapter 11
Cases, (ii) the financial condition of the Borrowers and Guarantors immediately
prior to the Petition Date as disclosed to Agent and Lenders in writing,
(iii) the delisting of the stock of Parent or any of its Subsidiaries from the
New York Stock Exchange, or (iv) Borrowers closing certain of their store
locations with the prior written consent of Agent with respect to such store
closures.”.
               (h) Maximum Credit. The definition of “Maximum Credit” set forth
in Section 1.88 of the Loan Agreement is hereby amended by deleting such
definition in its entirety and replacing it with the following:
               “1.88 ‘Maximum Credit” shall mean the amount of $105,000,000.”
               (i) Obligations. All references to the term “Obligations” in the
Loan Agreement, this Ratification Agreement and the Financing Agreements shall
be deemed, and each such reference in the Financing Agreements is hereby
amended, to mean both the Pre-Petition Obligations and the Post-Petition
Obligations.
               (j) Real Property Availability. The definition of “Real Property
Availability” set forth in Section 1.109 of the Loan Agreement is hereby amended
by deleting such definition in its entirety and replacing it with the following:
     “1.109 ‘Real Property Availability’ shall mean the amount equal to sixty
(60%) percent of the fair market value of Eligible Real Property as set forth in
the most recent acceptable appraisal (or acceptable updates of existing
appraisals) of such Real Property received by Agent in accordance with
Section 4.1 or 7.4 hereof.”
               (k) Reserves. The definition of “Reserves” in Section 1.114 of
the Loan Agreement is hereby amended by:

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                    (i) adding the following clause (e) immediately prior to the
period at the end of the first sentence of such definition:
     “or (e) to establish the reserve provided for in Section 2.4 of the
Financing Order.”; and
     (ii) deleting the “.” at the end of the last sentence of such definition
and adding the following at the end thereof:
     “; provided, however, that the amount of any Reserve established by Agent
during the Chapter 11 Case shall have a reasonable relationship to the event,
condition or other matter which is the basis for such Reserve as Agent shall
determine in its reasonable discretion. Notwithstanding the foregoing, Borrowers
and Guarantors shall acknowledge and agree that Agent shall have the right in
its sole discretion to establish Reserves in respect of (i) the Carve Out
Expenses (as defined in the Financing Order), (ii) the amount of any senior
liens or claims in or against the Collateral that, in Agent’s reasonable
determination, have priority over the liens and claims of Agent and Lenders, and
(iii) the amount of priority or administrative expense claims that require
payment during the Chapter 11 Case, provided, that (A) Agent will consult with
Borrowers or their consultant prior to the establishment of such Reserve and
(B) upon payment or satisfaction of such claims, the Reserve established in
respect thereof shall be released by Agent.”
               (l) Specified Amount. The definition of “Specified Amount” set
forth in Section 1.121 of the Loan Agreement is hereby amended by deleting such
definition in its entirety and replacing it with the following:
     “1.121 ‘Specified Amount’ shall mean $15,000,000; provided, that, (a) the
Specified Amount shall be reduced to $10,000,000 on the date (if any) that each
of the following conditions precedent shall have been satisfied: (i) Agent and
each Lender shall have received a certified copy of the Permanent Financing
Order as entered in the Chapter 11 Case, and (ii) Agent and each Lender shall
have received a statement filed with the Bankruptcy Court setting forth the
Borrowers’ and Guarantors’ plan to close ninety (90) or more specified retail
store locations and outlining the commencement and completion dates of such
store closures; and (b) the Specified Amount may be reduced by up to $5,000,000
commencing on the date (if any) that Agent and each Lender shall have received
evidence that Borrowers have implemented and tested a management information
system with respect to Inventory which is satisfactory to Agent and each
Lender.”
          1.3 Interpretation.
               (a) For purposes of this Ratification Agreement, unless otherwise
defined or amended herein, including, but not limited to, those terms used
and/or defined in the

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recitals hereto, all terms used herein shall have the respective meanings
assigned to such terms in the Loan Agreement.
               (b) All references to the term “Agent,” “Lender,” “Borrower,”
“Guarantor,” “Debtor” or any other person pursuant to the definitions in the
recitals hereto or otherwise shall include its respective successors and
assigns.
               (c) All references to any term in the singular shall include the
plural and all references to any term in the plural shall include the singular
unless the context of such usage requires otherwise.
               (d) All terms not specifically defined herein which are defined
in the Uniform Commercial Code, as in effect in the State of New York as of the
date hereof, shall have the meaning set forth therein, except that the term
“Lien” or “lien” shall have the meaning set forth in § 101(37) of the Bankruptcy
Code.
     2. ACKNOWLEDGMENT.
          2.1 Pre-Petition Obligations. Borrowers and Guarantors hereby
acknowledge, confirm and agree that, as of March 21, 2007, Borrowers are
indebted to Agent and Lenders in respect of all Pre-Petition Obligations in the
aggregate principal amount of not less than $64,936,402.70, consisting of
(a) Revolving Loans made pursuant to the Existing Financing Agreements in the
aggregate principal amount of not less than $56,095,894.94, together with
interest accrued and accruing thereon, and (b) Letter of Credit Obligations in
the amount of not less than 8,840,507.76, together with interest accrued and
accruing thereon, and all costs, expenses, fees (including attorneys’ fees and
legal expenses) and (c) other charges now or hereafter owed by Borrowers to
Agent and Lenders, all of which are unconditionally owing by Borrowers to Agent
and Lenders, without offset, defense or counterclaim of any kind, nature and
description whatsoever.
          2.2 Guaranteed Obligations. Each Guarantor hereby acknowledges,
confirms and agrees that:
               (a) all obligations of such Guarantor under the Guarantor
Documents are unconditionally owing by such Guarantor to Agent and Lenders
without offset, defense or counterclaim of any kind, nature and description
whatsoever, and
               (b) the absolute and unconditional guarantee of the payment of
the Pre-Petition Obligations by such Guarantor pursuant to the Guarantor
Documents extends to all Post-Petition Obligations, subject only to the
limitations set forth in the Guarantor Documents.
          2.3 Acknowledgment of Security Interests. Borrowers and Guarantors
hereby acknowledge, confirm and agree that Agent, for the benefit of itself and
the other Lenders, has and shall continue to have valid, enforceable and
perfected first priority and senior security interests in and liens upon all
Pre-Petition Collateral (other than the Excluded Collateral Items) heretofore
granted to Agent and Lenders pursuant to the Existing Financing Agreements as in
effect immediately prior to the Petition Date to secure all of the Obligations,
as well as valid and enforceable first priority and senior security interests in
and liens upon all Post-Petition

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Collateral granted to Agent, for the benefit of itself and the other Lenders,
under the Financing Order or hereunder or under any of the other Financing
Agreements or otherwise granted to or held by Agent and Lenders, in each case,
subject only to liens or encumbrances expressly permitted by the Loan Agreement
and any other liens or encumbrances expressly permitted by the Financing Order
that may have priority over the liens in favor of Agent and Lenders.
          2.4 Binding Effect of Documents. Each Borrower and Guarantor hereby
acknowledges, confirms and agrees that: (a) each of the Existing Financing
Agreements to which it is a party was duly executed and delivered to Agent and
Lenders by such Borrower or Guarantor and each is in full force and effect as of
the date hereof, (b) the agreements and obligations of such Borrower or
Guarantor contained in the Existing Financing Agreements constitute the legal,
valid and binding obligations of such Borrower or Guarantor enforceable against
it in accordance with the terms thereof, and such Borrower or Guarantor has no
valid defense, offset or counterclaim to the enforcement of such obligations,
and (c) Agent and Lenders are and shall be entitled to all of the rights,
remedies and benefits provided for in the Financing Agreements and the Financing
Order.
     3. ADOPTION AND RATIFICATION
     Each Borrower and Guarantor hereby (a) ratifies, assumes, adopts and agrees
to be bound by all of the Existing Financing Agreements to which it is a party
and (b) agrees to pay all of the Pre-Petition Obligations in accordance with the
terms of such Existing Financing Agreements, as amended by this Ratification
Agreement, and in accordance with the Financing Order. All of the Existing
Financing Agreements are hereby incorporated herein by reference and hereby are
and shall be deemed adopted and assumed in full by Borrowers and Guarantors,
each as Debtor and Debtor-in-Possession, and considered as agreements between
such Borrowers or Guarantors, on the one hand, and Agent and Lenders, on the
other hand. Each Borrower and Guarantor hereby ratifies, restates, affirms and
confirms all of the terms and conditions of the Existing Financing Agreements,
as amended and supplemented pursuant hereto and the Financing Order, and each
Borrower and Guarantor agrees to be fully bound, as Debtor and
Debtor-in-Possession, by the terms of the Financing Agreements to which such
Borrower or Guarantor is a party.
     4. GRANT OF SECURITY INTEREST.
     As collateral security for the prompt performance, observance and payment
in full of all of the Obligations (including the Pre-Petition Obligations and
the Post-Petition Obligations), Borrowers and Guarantors, each as Debtor and
Debtor-in-Possession, hereby grant, pledge and assign to Agent, for the benefit
of itself and the other Lenders, and also confirm, reaffirm and restate the
prior grant to Agent and Lenders of, continuing security interests in and liens
upon, and rights of setoff against, all of the Collateral.
     5. REPRESENTATIONS, WARRANTIES AND COVENANTS.
     Except as specifically modified or superseded pursuant to the terms hereof
and the Financing Order, and to the extent not prohibited by the Bankruptcy Code
or as would otherwise require authorization by the Bankruptcy Court not provided
in the Financing Order, Borrowers and Guarantors hereby reaffirm the continuing
representations, warranties and covenants

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heretofore and hereafter made by Borrowers and Guarantors to Agent and Lenders,
whether pursuant to the Financing Agreements or otherwise. In addition, and not
in limitation thereof, each Borrower and Guarantor hereby represents, warrants
and covenants to Agent and Lenders the following (which shall survive the
execution and delivery of this Ratification Agreement), the truth and accuracy
of which, or compliance with, to the extent such compliance does not violate the
terms and provisions of the Bankruptcy Code, shall be a continuing condition of
the making of Loans by Agent and Lenders:
          5.1 Financing Order. The Interim Financing Order (and, following the
expiration of the Interim Financing Period defined therein, the Permanent
Financing Order) has been duly entered, is valid, subsisting and continuing and
has not been vacated, modified, reversed on appeal, or vacated or modified by
any order of the Bankruptcy Court (other than as consented to by Agent) and is
not subject to any pending appeal or stay.
          5.2 Use of Proceeds. All Loans and Letters of Credit provided by Agent
or any Lender to Borrowers pursuant to the Financing Orders, the Loan Agreement
or otherwise, shall be used by Borrowers for general operating and working
capital purposes in the ordinary course of business of Borrowers.
Notwithstanding anything to the contrary contained in the Loan Agreement or the
other Financing Agreement, unless authorized by the Bankruptcy Court and
approved by Agent in writing, no portion of any claims against any Borrower or
Guarantor existing or created prior to the Petition Date, or of any
administrative expense claim or other claim relating to the Chapter 11 Cases,
shall be paid with the proceeds of such Loans or Letters of Credit provided by
Agent and Lenders to Borrowers, other than allowed professional fees of
Borrowers and Guarantors (but subject to the terms and conditions relating to
the payment of such fees contained in the Financing Agreement and the Financing
Order) and those administrative expense claims and other claims relating to the
Chapter 11 Cases directly attributable to the post-petition operation of the
business of any Borrower or Guarantor in the ordinary course of such business in
accordance with the Financing Agreements. Notwithstanding anything to the
contrary contained in this Section 5.2 or otherwise, such proceeds shall not be
used by Borrowers or Guarantors to affirmatively commence or support, or to pay
any professional fees incurred in connection with, any adversary proceeding,
motion or other action that seeks to challenge, contest or otherwise seek to
impair or object to the validity, extent, enforceability or priority of Agent’s
and Lenders’ pre-petition and/or post-petition liens, claims and rights
          5.3 Budget.
               (a) Borrowers have prepared and delivered to Agent and Lenders,
in form satisfactory to Agent, an initial thirteen (13) week Budget. The initial
Budget has been thoroughly reviewed by the Borrowers and their management and
sets forth for the periods covered thereby: (i) projected weekly operating cash
receipts for each week commencing with the week ending March 24, 2007, (ii)
projected weekly operating cash disbursements for each week commencing with the
week ending March 24, 2007, (iii) projected aggregate principal amount of
outstanding Loans and Letter of Credit Obligations for each week commencing with
the week ending as of March 24, 2007, and (iv) projected weekly amounts of Loans
and Letters of Credit available to Borrowers under the terms, conditions and
formulae of the Loan

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Agreement for each week commencing with the week ending March 24, 2007
(collectively, the “Projected Information”).
               (b) In addition to the initial Budget, (1) by no later than 5:00
p.m. (Eastern time) on the Friday of each week commencing on March 30, 2007,
Borrowers shall furnish to Agent and Lenders, in form satisfactory to Agent, a
report that sets forth for the immediately preceding week a comparison of the
actual cash receipts, cash disbursements, loan balance and loan availability to
the Projected Information for such weekly periods set forth in the Budget on a
cumulative, weekly roll-forward basis, (2) by no later than 5:00 p.m. on
April 13, 2007 and on the Friday of each fourth week thereafter, Borrowers shall
prepare and present to Agent and Lenders, in form satisfactory to Agent, a
subsequent thirteen (13) week Budget.
               (c) Notwithstanding any approval by Agent or any Lender of the
initial Budget or any subsequent or amended Budget(s), Agent and Lenders will
not, and shall not be required to, provide any Loans or Letters of Credit to
Borrowers pursuant to the Budget, but shall only provide Loans and Letters of
Credit in accordance with the terms and conditions set forth in the Loan
Agreement as amended by this Ratification Agreement, the other Financing
Agreements and the Financing Order.
          5.4 Ratification of Blocked Account Agreement. To the extent Agent
deems it necessary in its discretion and upon Agent’s request, Borrower and
Guarantors shall promptly provide Agent with evidence, in form and substance
satisfactory to Agent, that the Blocked Account Agreement (as defined in the
Financing Order) and other deposit account arrangements provided for under
Section 6.3 of the Loan Agreement have been ratified and amended by the parties
thereto, or their respective successors in interest, in form and substance
satisfactory to Agent, to reflect the commencement of the Chapter 11 Cases, that
each Borrower and Guarantor, as Debtor and Debtor-in-Possession, is the
successor in interest to such Borrower or Guarantor, that the Obligations
include both the Pre-Petition Obligations and the Post-Petition Obligations,
that the Collateral includes both the Pre-Petition Collateral and the
Post-Petition Collateral as provided for.
          5.5 ERISA. Each Borrower and Guarantor hereby represents and warrants
with, to and in favor of Agent and Lenders that (a) there are no liens, security
interests or encumbrances upon, in or against any assets or properties of any
Borrower or Guarantor arising under ERISA, whether held by the Pension Benefit
Guaranty Corporation (the “PBGC”) or the contributing sponsor of, or a member of
the controlled group thereof, any pension benefit plan of any Borrower or
Guarantor and (b) no notice of lien has been filed by the PBGC (or any other
Person) pursuant to ERISA against any assets or properties of any Borrower or
Guarantor.
     6. DIP FACILITY FEE.
          In addition to all other fees, charges, interest and expenses payable
by Borrowers to Agent and Lenders under the Loan Agreement, the Fee Letter and
the other Financing Agreements, in connection with the execution and delivery of
this Ratification Agreement, Borrowers agree to pay to Agent the fees and other
amounts set forth in the DIP Fee Letter in the amounts and at the times
specified therein.

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     7. AMENDMENTS TO LOAN AGREEMENT.
          7.1 Letter of Credit Fees. Section 2.2(b) of the Loan Agreement is
hereby amended by deleting such Section in its entirety and replacing it with
the following:
     “(b) In addition to any charges, fees or expenses charged by any bank or
issuer in connection with the Letters of Credit, Borrowers shall pay to Agent,
for the benefit of Lenders, monthly a letter of credit fee at a rate equal to
equal to one (1%) percent per annum on the daily outstanding balance of the
Commercial Letters of Credit and equal to one and three-quarters (13/4%) percent
per annum on the daily outstanding balance of the Standby Letters of Credit
during the immediately preceding month (or part thereof), payable in arrears as
of the first of each succeeding month, except that Agent may, and upon the
written direction of Required Lenders shall, require Borrowers to pay to Agent,
for the benefit of Lenders, such letter of credit fee, at a rate equal to three
(3%) percent per annum on the daily outstanding balance of the Commercial
Letters of Credit and equal to three and three-quarters (33/4%) percent per
annum on the daily outstanding balance of the Standby Letters of Credit for:
(i) the period (A) from and after the effective date of termination or
non-renewal hereof until Agent and Lenders have received full and final payment
of all outstanding and unpaid Obligations which are not contingent and cash
collateral or a letter of credit, as Agent may specify, in the amounts and on
the terms required under Section 13.1 hereof for contingent Obligations
(notwithstanding entry of a judgment against any Borrower or Guarantor) and
(B) from and after the date of the occurrence of an Event of Default and for so
long as such Event of Default is continuing as determined by Agent and (ii) on
the Letters of Credit at any time outstanding in excess of the Letter of Credit
Limit (whether or not such excess(es) arise or are issued with or without the
knowledge or consent of Agent or any Lender and whether issued before or after
an Event of Default). Such letter of credit fee shall be calculated on the basis
of a three hundred sixty (360) day year and actual days elapsed and the
obligation of Borrowers to pay such fee shall survive the termination of this
Agreement.”
          7.2 Increase or Decrease in Maximum Credit. Section 2.3 of the Loan
Agreement is hereby amended by deleting such Section in its entirety and
replacing it with the following:
     “2.3 [Intentionally Deleted.]”
          7.3 Limits and Sublimits. Section 2 of the Loan Agreement is hereby
amended by adding the following new Section 2.4 at the end of such Section:
     “2.4 All limits and sublimits set forth in this Agreement, and any formula
or other provision to which a limit or sublimit may apply, shall be determined
on an aggregate basis considering together both the Pre-Petition Obligations and
the Post-Petition Obligations.”

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               7.4 Fees.
                    (a) Unused Line Fee. Section 3.2(a) of the Loan Agreement is
hereby amended by deleting such Section in its entirety and replacing it with
the following:
     “(a) Borrowers shall pay to Agent, for the account of Lenders, monthly an
unused line fee at a rate equal to .35% per annum calculated upon the amount by
which the Maximum Credit exceeds the average daily principal balance of the
outstanding Revolving Loans and Letters of Credit during the immediately
preceding month (or part thereof) while this Agreement is in effect and for so
long thereafter as any of the Obligations are outstanding. Such fee shall be
payable on the first day of each month in arrears and shall be calculated based
on a three hundred sixty (360) day year and actual days elapsed.”
                    (b) Limitation on Certain Fees. Notwithstanding the
provisions of the Loan Agreement, the Fee Letter or any of the other Financing
Agreements to the contrary, so long as no Default or Event of Default exists or
has occurred and is continuing, (i) the aggregate amount of (A) the servicing
fees payable by Borrowers to Agent pursuant to Section 2 of the Fee Letter,
(B) the unused line fees payable by Borrowers to Agent pursuant to
Section 3.2(a) of the Loan Agreement, and (C) audit fees and appraisal fees
payable by Borrowers under Section 9.22 of the Loan Agreement, shall not exceed
$300,000 in any twelve (12) month period and (ii) the aggregate amount of
consulting fees payable by Borrowers for the consultants retained by Borrowers
at the request of Agent shall not exceed $200,000 in any twelve (12) month
period.
               7.5 Payments. Section 6.4 of the Loan Agreement is hereby amended
by adding the following at the end of such Section:
     “Without limiting the generality of the foregoing, Agent may, in its
discretion, apply any such payments or proceeds first to the Pre-Petition
Obligations until all Pre-Petition Obligations are paid and satisfied in full.”
               7.6 Cash Management; Collection of Collateral Proceeds.
Section 6.3(c) of the Loan Agreement is hereby amended by deleting the reference
to “at any time that a Cash Dominion Event occurs” and replacing it with “at any
time”.
               7.7 Power of Attorney. Section 7.5(b) of the Loan Agreement is
hereby amended by deleting each reference to “if a Cash Dominion Event has
occurred”.
               7.8 Compliance with Other Agreements and Applicable Laws..
Section 8.7(a) of the Loan Agreement is hereby amended to delete the first
sentence of such section in its entirety and substitute the following therefor:
“(a) Borrowers and Guarantors are not in default (other than a default
occasioned by or solely as a result of the commencement of the Chapter 11 Cases
and which default is unenforceable pursuant to the Bankruptcy Code) in any
respect under, or in violation in any respect of the terms of, any material
agreement, contract, instrument, lease or other commitment to which it is a
party or by which it or any of its assets are bound.”

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          7.9 Material Contracts. The last sentence of Section 8.15 of the Loan
Agreement is hereby deleted in its entirety and the following substituted
therefor:
“Borrowers and Guarantors are not in breach or in default in any material
respect of or under any Material Contract (other than a default occasioned by or
solely as a result of the commencement of the Chapter 11 Cases and which default
is unenforceable pursuant to the Bankruptcy Code) and have not received any
notice of the intention of any other party thereto to terminate any Material
Contract.”
          7.10 Additional Financial Reporting Requirements.
                    (a) Section 9.6(a)(ii) of the Loan Agreement is hereby
amended to delete each reference to “audited”.
                    (b) Section 9.6 of the Loan Agreement is hereby amended by
adding the following new Section 9.6(e) at the end of such Section:
                    “(e) Each Borrower and Guarantor shall provide Agent and
Lenders with copies of all financial reports, schedules and other materials and
information at any time furnished by or on behalf of any Borrower or Guarantor
to the Bankruptcy Court, or the U.S. Trustee or to any creditors’ committee
appointed in the Chapter 11 Cases or to such Borrower’s or Guarantor’s
shareholders, concurrently with the delivery thereof to the Bankruptcy Court,
U.S. Trustee, creditors’ committee or shareholders, as the case may be.”
          7.11 Sale of Assets, Consolidation, Merger, Disabilities, Etc.
Notwithstanding anything to the contrary contained in Section 9.7(b) of the Loan
Agreement or any other provision of the Loan Agreement or any of the other
Financing Agreements, Borrowers and Guarantors shall not, directly or
indirectly, sell, transfer, lease, encumber, return or otherwise dispose of any
portion of the Collateral, including, without limitation, enter into any
agreement to return Inventory to any vendor, whether pursuant to section 546 of
the Bankruptcy Code or otherwise or, on and after the occurrence of an Event of
Default, assume, reject, assign or pledge as collateral security any real
property leasehold interest or use the proceeds thereof, without, in each
instance, the prior written consent of Agent (and no such consent shall be
implied, from any action, inaction or acquiescence by Agent or any Lender)
except for sales of Borrowers’ and Guarantors’ Inventory in the ordinary course
of their respective businesses, and “going out of business” or store closing
sales of Borrowers’ and Guarantors’ Inventory conducted at certain store
locations with respect to which sales Agent has previously consented in writing.
          7.12 Minimum Excess Availability. Section 9.19 of the Loan Agreement
is hereby amended by deleting such Section in its entirety and replacing it with
the following:
                    “9.19 Minimum Excess Availability. Borrowers shall at all
times maintain Excess Availability of not less than the Specified Amount plus
$7,500,000 (it being understood that, solely for purposes of calculating this
Section 9.19, the amount of Excess Availability shall be determined as if the
Maximum Credit were equal to the Maximum Credit plus the Specified Amount).”

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          7.13 Events of Default.
                    (a) Sections 10.1(g) and (h) of the Loan Agreement are
hereby amended to delete all references to “any Borrower or Guarantor” and
substitute “any Obligor (other than Debtors)” therefor.
                    (b) Section 10.1 of the Loan Agreement is hereby amended by
(i) deleting the reference to the word “or” at the end of Section 10.1(o),
(ii) replacing the period at the end of Section 10.1(p) with a semicolon, and
(iii) adding the following at the end of such Section:
                    “(q) the occurrence of any condition or event which permits
Agent and Lenders to exercise any of the remedies set forth in the Financing
Order, including, without limitation, any “Event of Default” (as defined in the
Financing Order);
                    (r) the termination or non-renewal of the Financing
Agreements as provided for in the Financing Order;
                    (s) any Borrower or Guarantor suspends or discontinues or is
enjoined by any court or governmental agency from continuing to conduct all or
any material part of its business, or a trustee, receiver or custodian is
appointed for any Borrower or Guarantor, or any of its properties;
                    (t) any act, condition or event occurring after the Petition
Date that has or would reasonably expect to have a Material Adverse Effect upon
the assets of any Borrower or Guarantor, or the Collateral or the rights and
remedies of Agent and Lenders under the Loan Agreement or any other Financing
Agreements or the Financing Order;
                    (u) the conversion of any of the Chapter 11 Cases to a
Chapter 7 case under the Bankruptcy Code;
                    (v) the dismissal of any of the Chapter 11 Cases or any
subsequent Chapter 7 case, either voluntarily or involuntarily;
                    (w) the grant of a lien on or other interest in any of the
Collateral other than a lien or encumbrance permitted by Section 9.8 hereof or
by the Financing Order or an administrative expense claim other than an
administrative expense claim permitted by the Financing Order or this
Ratification Agreement by the grant of or allowance by the Bankruptcy Court
which is superior to or ranks in parity with Agent’s security interest in or
lien upon the Collateral or their Superpriority Claim (as defined in the
Financing Order);
                    (x) the Financing Order shall be modified, reversed,
revoked, remanded, stayed, rescinded, vacated or amended on appeal or by the
Bankruptcy Court without the prior written consent of Agent (and no such consent
shall be implied from any other authorization or acquiescence by Agent or any
Lender);

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     (y) the appointment of a trustee pursuant to Sections 1104(a)(1) or
1104(a)(2) of the Bankruptcy Code;
     (z) the appointment of an examiner with special powers pursuant to Section
1104(a) of the Bankruptcy Code;
     (aa) the filing of a plan of reorganization by or on behalf of any Borrower
or Guarantor to which Agent has not consented in writing, which does not provide
for payment in full of all Obligations on the effective date thereof in
accordance with the terms and conditions contained herein; or
     (bb) the confirmation of any plan of reorganization in the Chapter 11 Case
of any Borrower or Guarantor to which Agent has not consented to in writing,
which does not provide for payment in full of all Obligations on the effective
date thereof in accordance with the terms and conditions contained herein.”
          7.14 Governing Law; Choice of Forum; Service of Process; Jury Trial
Waiver. Section 11.1(a) of the Loan Agreement is hereby amended by adding the
following immediately prior to the period at the end of such Section:
     “, except to the extent that the provisions of the Bankruptcy Code are
applicable and specifically conflict with the foregoing.”
          7.15 Term.
     (a) Section 13.1(a) of the Loan Agreement is hereby amended by deleting the
first two sentences of such Section and replacing them with the following:
     “This Agreement and the other Financing Agreements shall become effective
as of the date set forth on the first page hereof and shall continue in full
force and effect for a term ending on the earlier to occur of (i) March 22,
2009, (ii) the confirmation of a plan of reorganization for Borrowers and
Guarantors in the Chapter 11 Cases, or (iii) the last termination date set forth
in the Interim Financing Order, unless the Permanent Financing Order has been
entered prior to such date, and in such event, then the last termination date
set forth in the Permanent Financing Order (the earlier to occur of clauses (i),
(ii) and (iii) referred to herein as the “Maturity Date”); provided, that, this
Agreement and all other Financing Agreements must be terminated simultaneously.”
     (b) Section 13.1(c) of the Loan Agreement is hereby amended by deleting the
first sentence of such Section and replacing it with the following:
     “If for any reason this Agreement is terminated prior to the second
anniversary of the date of the Ratification Agreement, in view of the
impracticality and extreme difficulty of ascertaining actual damages and by
mutual agreement of the parties as to a reasonable calculation of Agent’s and
each Lender’s lost profits as a result thereof, Borrowers agree to pay to Agent,
for the

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benefit of Lenders, upon the effective date of such termination, an early
termination fee in the amount equal to .25% of Maximum Credit.”
          7.16 Notices. Section 13.3 of the Loan Agreement is hereby amended by
adding that any notices, requests and demands also be sent to the following
parties:

         
 
  If to Borrowers or Guarantors:   Hancock Fabrics, Inc.
 
      One Fashion Way
 
      Baldwyn, MS 38824
 
      Facsimile No.: (662) 365-6025
 
      Attention: Jeff Nerland
 
      Attention: Jane Aggers
 
       
 
  with a copy to:   Morris, Nichols, Arsht & Tunnell LLP
 
      Chase Manhattan Centre, 18th Floor
 
      1201 North Market Street
 
      P.O. Box 1347
 
      Wilmington, DE 19899-1347
 
      Facsimile No.: 302.425.4673
 
      Attention: Robert J. Dehney, Esq.
 
       
 
  If to Agent:   Wachovia Bank, National Association
 
      Heritage Square II, Suite 1050
 
      5001 LBJ Freeway
 
      Dallas, TX 75244
 
      Facsimile No.: (214) 748-9118
 
      Attention: Portfolio Manager
 
       
 
  with a copy to:   Otterbourg, Steindler, Houston & Rosen, P.C.
 
      230 Park Avenue
 
      New York, New York 10169
 
      Facsimile No.: (212) 682-6104
 
      Attn: Jonathan N. Helfat, Esq.
 
                 Daniel F. Fiorillo, Esq.

     8. WAIVER.
          8.1 Subject to the terms and conditions set forth herein, Agent and
Lenders hereby waive the Events of Default arising under Section 10.1(a)(iii) of
the Loan Agreement as a result of (A) the failure of Debtors to comply with the
provisions of Section 9.6(a)(i) of the Loan Agreement due to Debtors failure to
deliver to Agent by February 28, 2007 the unaudited consolidated financial
statements and unaudited consolidating financial statements for Parent and its
Subsidiaries for the fiscal quarters ending on or about April 29, 2006, July 29,
2006 and October 28, 2006, and (B) the failure of Borrowers to comply with the
minimum Excess Availability covenant as set forth in Section 9.19 of the Loan
Agreement at various times prior to the date hereof (the foregoing clauses
(A) and (B) are collectively referred to herein as the “Subject Defaults”).

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          8.2 Agent and Lenders have not waived, are not hereby waiving, and
have no intention of waiving any Event of Default which may have occurred on or
prior to the date hereof, whether or not continuing on the date hereof, or which
may occur after the date hereof (whether the same or similar to the Event of
Default referred to above or otherwise), other than the Subject Defaults as and
to the extent set forth in this Section 8. The foregoing waiver shall not be
construed as a bar to or a waiver of any other or further Event of Default on
any future occasion, whether similar in kind or otherwise and shall not
constitute a waiver, express or implied, of any of the rights and remedies of
Agent or Lenders arising under the terms of the Financing Order, Loan Agreement
or any other Financing Agreements on any future occasion or otherwise.
     9. RELEASE.
          9.1 Release of Pre-Petition Claims.
                    (a) Upon the earlier of (i) the entry of the Permanent
Financing Order or (ii) the entry of an Order extending the term of the Interim
Financing Order beyond thirty (30) calendar days after the date of the Interim
Financing Order, in consideration of the agreements of Agent and Lenders
contained herein and the making of any Loans by Agent and Lenders, each Borrower
and Guarantor, pursuant to the Loan Agreement, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, on
behalf of itself and its respective successors, assigns, and other legal
representatives, hereby absolutely, unconditionally and irrevocably releases,
remises and forever discharges Agent, each Lender and their respective
successors and assigns, and their present and former shareholders, affiliates,
subsidiaries, divisions, predecessors, directors, officers, attorneys, employees
and other representatives (Agent, each Lender and all such other parties being
hereinafter referred to collectively as the “Releasees” and individually as a
“Releasee”), of and from all demands, actions, causes of action, suits,
covenants, contracts, controversies, agreements, promises, sums of money,
accounts, bills, reckonings, damages and any and all other claims,
counterclaims, defenses, rights of set-off, demands and liabilities whatsoever
(individually, a “Pre-Petition Released Claim” and collectively, “Pre-Petition
Released Claims”) of every name and nature, known or unknown, suspected or
unsuspected, both at law and in equity, which any Borrower or Guarantor, or any
of their respective successors, assigns, or other legal representatives may now
or hereafter own, hold, have or claim to have against the Releasees or any of
them for, upon, or by reason of any nature, cause or thing whatsoever which
arises at any time on or prior to the day and date of this Agreement, including,
without limitation, for or on account of, or in relation to, or in any way in
connection with the Loan Agreement, as amended and supplemented through the date
hereof, and the other Financing Agreements.
                    (b) Upon the earlier of (i) the entry of the Permanent
Financing Order or (ii) the entry of an Order extending the term of the Interim
Financing Order beyond thirty (30) calendar days after the date of the Interim
Financing Order, each Borrower and Guarantor, on behalf of itself and its
successors, assigns, and other legal representatives, hereby absolutely,
unconditionally and irrevocably, covenants and agrees with each Releasee that it
will not sue (at law, in equity, in any regulatory proceeding or otherwise) any
Releasee on the basis of any Pre-Petition Released Claim released, remised and
discharged by each Borrower and Guarantor pursuant to this Section 9.1. If any
Borrower or Guarantor violates the foregoing covenant,

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Borrowers and Guarantors agree to pay, in addition to such other damages as any
Releasee may sustain as a result of such violation, all attorneys’ fees and
costs incurred by any Releasee as a result of such violation.
          9.2 Release of Post-Petition Claims. Upon (a) the receipt by Agent, on
behalf of itself and the other Lenders, of payment in full of all Obligations in
cash or other immediately available funds, plus cash collateral or other
collateral security acceptable to Agent to secure any Obligations that survive
or continue beyond the termination of the Financing Agreements, and (b) the
termination of the Financing Agreements (the “Payment Date”), in consideration
of the agreements of Agent and Lenders contained herein and the making of any
Loans by Agent and Lenders, each Borrower and Guarantor hereby covenants and
agrees to execute and deliver in favor of Agent and Lenders a valid and binding
termination and release agreement, in form and substance satisfactory to Agent.
If Borrower or any Guarantor violates such covenant, Borrowers and Guarantors
agree to pay, in addition to such other damages as any Releasee may sustain as a
result of such violation, all attorneys’ fees and costs incurred by any Releasee
as a result of such violation.
          9.3 Releases Generally.
                    (a) Each Borrower and Guarantor understands, acknowledges
and agrees that the releases set forth above in Sections 9.1 and 9.2 hereof may
be pleaded as a full and complete defense and may be used as a basis for an
injunction against any action, suit or other proceeding which may be instituted,
prosecuted or attempted in breach of the provisions of such releases.
                    (b) Each Borrower and Guarantor agrees that no fact, event,
circumstance, evidence or transaction which could now be asserted or which may
hereafter be discovered shall affect in any manner the final and unconditional
nature of the releases set forth in Section 9.1 hereof and, when made,
Section 9.2 hereof.
     10. CONDITIONS PRECEDENT.
     In addition to any other conditions contained herein or the Loan Agreement,
as in effect immediately prior to the Petition Date, with respect to the Loans
and other financial accommodations available to Borrowers (all of which
conditions, except as modified or made pursuant to this Ratification Agreement
shall remain applicable to the Loans and be applicable to other financial
accommodations available to Borrowers), the following are conditions to Agent’s
and Lenders’ obligation to extend further loans, advances or other financial
accommodations to Borrowers pursuant to the Loan Agreement:
          10.1 Borrowers and Guarantors shall furnish to Agent and Lenders all
financial information, projections, budgets, business plans, cash flows and such
other information as Agent and Lenders shall reasonably request from time to
time;
          10.2 as of the Petition Date, the Existing Financing Agreements shall
not have been terminated;

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          10.3 no trustee, examiner or receiver or the like shall have been
appointed or designated with respect to any Borrower or Guarantor, as Debtor and
Debtor-in-Possession, or its respective business, properties and assets and no
motion or proceeding shall be pending seeking such relief;
          10.4 the execution and delivery of this Ratification Agreement and all
other Financing Agreements to be delivered in connection herewith by Borrowers
and Guarantors in form and substance satisfactory to Agent;
          10.5 the Interim Financing Order or other Order(s) of the Bankruptcy
Court shall ratify and amend the Blocked Account Agreement and deposit account
arrangements of Borrowers and Guarantors to reflect the commencement of the
Chapter 11 Cases, that each Debtor, as Debtor and Debtor-in-Possession, is the
successor in interest to such Borrower or Guarantor, as the case may be, that
the Obligations include both the Pre-Petition Obligations and the Post-Petition
Obligations, that the Collateral includes both the Pre-Petition Collateral and
the Post-Petition Collateral as provided for in this Ratification Agreement;
          10.6 the execution or delivery to Agent and Lenders of all other
Financing Agreements, and other agreements, documents and instruments which, in
the good faith judgment, of Agent are necessary or appropriate. The
implementation of the terms of this Ratification Agreement and the other
Financing Agreements, as modified pursuant to this Ratification Agreement, all
of which contains provisions, representations, warranties, covenants and Events
of Default, as are satisfactory to Agent and its counsel;
          10.7 satisfactory review by counsel for Agent of legal issues
attendant to the post-petition financing transactions contemplated hereunder;
          10.8 Each Borrower and Guarantor shall comply in full with the notice
and other requirements of the Bankruptcy Code and the applicable Bankruptcy
Rules with respect to any relevant Financing Order in a manner acceptable to
Agent and its counsel, and an Interim Financing Order shall have been entered by
the Bankruptcy Court (the “Interim Financing Order”) authorizing the secured
financing under the Financing Agreements as ratified and amended hereunder on
the terms and conditions set forth in this Ratification Agreement and, among
other things, modifying the automatic stay, authorizing and granting the senior
security interest in liens in favor of Agent and Lenders described in this
Ratification Agreement and in the Financing Order, and granting super-priority
expense claims to Agent and Lenders with respect to all obligations due Agent
and Lenders. The Interim Financing Order shall authorize post-petition financing
under the terms set forth in this Ratification Agreement in an amount acceptable
to Agent and Lenders, in their sole discretion, and it shall contain such other
terms or provisions as Agent and its counsel shall require;
          10.9 with respect to further credit after expiration of the Interim
Financing Order, on or before the expiration of the Interim Financing Order, the
Bankruptcy Court shall have entered a Permanent Financing Order authorizing the
secured financing on the terms and conditions set forth in this Ratification
Agreement, granting to Agent and Lenders the senior security interests and liens
described above and super-priority administrative expense claims described above
(except as otherwise specifically provided in the Interim Financing Order), and

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modifying the automatic stay and other provisions required by Agent and its
counsel (“Permanent Financing Order”). Neither Agent nor any Lender shall
provide any Loans (or other financial accommodations) other than those
authorized under the Interim Financing Order unless, on or before the expiration
of the Interim Financing Order, the Permanent Financing Order shall have been
entered, and there shall be no appeal or other contest with respect to either
the Interim Financing Order or the Permanent Financing Order and the time to
appeal to contest such order shall have expired;
          10.10 other than the voluntary commencement of the Chapter 11 Cases,
no material impairment of the priority of Agent’s and Lenders’ security
interests in the Collateral shall have occurred from the date of the latest
field examinations of Agent and Lenders to the Petition Date; and
          10.11 other than the Events of Default identified in the letter by
Agent to Borrowers and Guarantors, dated March 19, 2007, re: Notice of Default,
no Event of Default shall have occurred or be existing under any of the Existing
Financing Agreements, as modified pursuant hereto, and assumed by Borrowers and
Guarantors.
     11. MISCELLANEOUS.
          11.1 Amendments and Waivers. Neither this Ratification Agreement nor
any other instrument or document referred to herein or therein may be changed,
waived, discharged or terminated orally, but only by an instrument in writing
signed by the party against whom enforcement of the change, waiver, discharge or
termination is sought.
          11.2 Further Assurances. Each Borrower and Guarantor shall, at its
expense, at any time or times duly execute and deliver, or shall use its best
efforts to cause to be duly executed and delivered, such further agreements,
instruments and documents, including, without limitation, additional security
agreements, collateral assignments, UCC financing statements or amendments or
continuations thereof, landlord’s or mortgagee’s waivers of liens and consents
to the exercise by Agent and Lenders of all the rights and remedies hereunder,
under any of the other Financing Agreements, any Financing Order or applicable
law with respect to the Collateral, and do or use its best efforts to cause to
be done such further acts as may be reasonably necessary or proper in Agent’s
opinion to evidence, perfect, maintain and enforce the security interests of
Agent and Lenders, and the priority thereof, in the Collateral and to otherwise
effectuate the provisions or purposes of this Ratification Agreement, any of the
other Financing Agreements or the Financing Order. Upon the request of Agent, at
any time and from time to time, each Borrower and Guarantor shall, at its cost
and expense, do, make, execute, deliver and record, register or file updates to
the filings of Agent and Lenders with respect to the Intellectual Property with
the United States Patent and Trademark Office, the financing statements,
mortgages, deeds of trust, deeds to secure debt, and other instruments, acts,
pledges, assignments and transfers (or use its best efforts to cause the same to
be done) and will deliver to Agent and Lenders such instruments evidencing items
of Collateral as may be requested by Agent.
          11.3 Headings. The headings used herein are for convenience only and
do not constitute matters to be considered in interpreting this Ratification
Agreement.

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          11.4 Counterparts. This Ratification Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original, but all
of which shall together constitute one and the same agreement. In making proof
of this Ratification Agreement, it shall not be necessary to produce or account
for more than one counterpart thereof signed by each of the parties hereto.
Delivery of an executed counterpart of this Ratification Agreement by
telefacsimile shall have the same force and effect as delivery of an original
executed counterpart of this Ratification Agreement. Any party delivering an
executed counterpart of this Ratification Agreement by telefacsimile also shall
deliver an original executed counterpart of this Ratification Agreement, but the
failure to deliver an original executed counterpart shall not affect the
validity, enforceability, and binding effect of this Ratification Agreement as
to such party or any other party.
          11.5 Additional Events of Default. The parties hereto acknowledge,
confirm and agree that the failure of any Borrower or Guarantor to comply with
any of the covenants, conditions and agreements contained in this Ratification
Agreement or in any other agreement, document or instrument executed on or after
the date hereof by such Borrower or Guarantor in connection with this
Ratification Agreement shall constitute an Event of Default under the Financing
Agreements; provided, that, in the event Borrowers fail to comply with the
requirements of Section 5.3(b) herein, Borrowers shall be have an additional two
(2) business days in which to comply with the requirements of such section (the
“Reporting Grace Period”); provided, further, that, unless otherwise consented
to in writing by Agent, Borrowers shall not be entitled to more than two
(2) Reporting Grace Periods during any calendar month. This Section 11.5 shall
not, and shall not be construed to, supersede or otherwise replace Section
10.1(a) of the Loan Agreement.
          11.6 Costs and Expenses. Borrowers shall pay to Agent and Lenders on
demand all costs and expenses that Agent or Lenders pay or incurs in connection
with the negotiation, preparation, consummation, administration, enforcement,
and termination of this Ratification Agreement and the other Financing
Agreements and the Financing Order, including, without limitation:
(a) reasonable attorneys’ and paralegals’ fees and disbursements of counsel to,
and reasonable fees and expenses of consultants, accountants and other
professionals retained by, Agent and Lenders; (b) costs and expenses (including
reasonable attorneys’ and paralegals’ fees and disbursements) for any amendment,
supplement, waiver, consent, or subsequent closing in connection with this
Ratification Agreement, the other Financing Agreements, the Financing Order and
the transactions contemplated thereby; (c) taxes, fees and other charges for
recording any agreements or documents with any governmental authority, and the
filing of UCC financing statements and continuations, and other actions to
perfect, protect, and continue the security interests and liens of Agent and
Lenders in the Collateral; (d) sums paid or incurred to pay any amount or take
any action required of Borrowers and Guarantors under the Financing Agreements
or the Financing Order that Borrowers and Guarantors fail to pay or take;
(e) costs of appraisals, inspections and verifications of the Collateral and
including travel, lodging, and meals for inspections of the Collateral and the
Debtors’ operations by Agent or its agent and to attend court hearings or
otherwise in connection with the Chapter 11 Cases; (f) costs and expenses of
preserving and protecting the Collateral; (g) all out-of-pocket expenses and
costs heretofore and from time to time hereafter incurred by Agent during the
course of periodic field examinations of the Collateral and Debtors’ operations,
plus a per diem charge at the rate of $850 per person per day for Agent’s
examiners in the field and office; and (h) costs and expenses

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(including attorneys’ and paralegals’ fees and disbursements) paid or incurred
to obtain payment of the Obligations, enforce the security interests and liens
of Agent and Lenders, sell or otherwise realize upon the Collateral, and
otherwise enforce the provisions of this Ratification Agreement, the other
Financing Agreements and the Financing Order, or to defend any claims made or
threatened against Agent or any Lender arising out of the transactions
contemplated hereby (including, without limitation, preparations for and
consultations concerning any such matters). The foregoing shall not be construed
to limit any other provisions of the Financing Agreements regarding costs and
expenses to be paid by Borrowers. All sums provided for in this Section 11.6
shall be part of the Obligations, shall be payable on demand, and shall accrue
interest after demand for payment thereof at the highest rate of interest then
payable under the Financing Agreements. Agent is hereby irrevocably authorized
to charge any amounts payable hereunder directly to any of the account(s)
maintained by Agent with respect to any Borrower or Guarantor.
          11.7 Effectiveness. This Ratification Agreement shall become effective
upon the execution hereof by Agent and Lenders and the entry of the Interim
Financing Order.
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     IN WITNESS WHEREOF, the parties hereto have caused this Ratification
Agreement to be duly executed as of the day and year first above written.

                  BORROWERS
 
                HANCOCK FABRICS, INC., as Debtor and Debtor-in-Possession
 
           
 
  By:        
 
     
 
   
 
  Title:        
 
     
 
   
 
                HF MERCHANDISING, INC., as Debtor and Debtor-in-Possession
 
           
 
  By:        
 
     
 
   
 
  Title:        
 
     
 
   
 
                HANCOCK FABRICS OF MI, INC. , as Debtor and Debtor-in-Possession
 
           
 
  By:        
 
     
 
   
 
  Title:        
 
     
 
   
 
                HANCOCKFABRICS.COM, INC. , as Debtor and Debtor-in-Possession
 
           
 
  By:        
 
     
 
   
 
  Title:        
 
     
 
   
 
                HANCOCK FABRICS, LLC, as Debtor and Debtor-in-Possession
 
           
 
  By:        
 
     
 
   
 
  Title:        
 
     
 
   

[SIGNATURES CONTINUE ON NEXT PAGE]

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[SIGNATURES CONTINUED FROM PREVIOUS PAGE

                  GUARANTORS    
 
                HF ENTERPRISES, INC. , as Debtor and Debtor-in-Possession
 
           
 
  By:        
 
     
 
   
 
  Title:        
 
     
 
   
 
                HF RESOURCES, INC., as Debtor and Debtor-in-Possession
 
           
 
  By:        
 
     
 
   
 
  Title:        
 
     
 
   
 
                AGENT    
 
                WACHOVIA BANK, NATIONAL ASSOCIATION    
 
           
 
  By:        
 
     
 
   
 
  Title:        
 
     
 
   
 
                LENDER    
 
                WACHOVIA BANK, NATIONAL ASSOCIATION    
 
           
 
  By:        
 
     
 
   
 
  Title: