EXHIBIT 10.17
GUARANTEE
     This GUARANTEE (this “Guarantee”), dated August 1, 2008, is by Hancock
Fabrics, Inc, a Delaware corporation (“Parent”), HF Merchandising, Inc., a
Delaware corporation (“Merchandising”), Hancock Fabrics of MI, Inc., a Delaware
corporation (“Fabrics MI”), hancockfabrics.com, Inc., a Delaware corporation
(“Fabrics.com”), Hancock Fabrics, LLC, a Delaware limited liability company
(“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 (“Enterprises”), and HF Resources,
Inc., a Delaware corporation (“Resources” and together with Enterprises, each
individually a “Guarantor” and, collectively, “Guarantors”), and such other
Persons who may become a party hereto pursuant to Section 17 hereof (such other
Persons, together with Borrowers and Guarantors, are sometimes hereinafter
referred to hereunder individually each, as a “Guaranteeing Party” and
collectively, as “Guaranteeing Parties”) in favor of GENERAL ELECTRIC CAPITAL
CORPORATION, a Delaware corporation, in its capacity as agent (in such capacity,
“Agent”) pursuant to the Loan Agreement (as hereinafter defined).
W I T N E S S E T H:
:
     WHEREAS, Borrowers, Guarantors, Agent and Lenders have entered or are about
to enter into financing arrangements pursuant to which Lenders (or Agent on
behalf of Lenders) may make loans and advances and provide other financial
accommodations to Borrowers as set forth in the Loan and Security Agreement,
dated of even date herewith, by and among Agent, Lenders, Borrowers and
Guarantors (as the same now exists or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced, the “Loan Agreement”;
capitalized terms used herein without definition shall have the meanings
ascribed to such terms therein) and other agreements, documents and instruments
referred to therein or at any time executed and/or delivered in connection
therewith or related thereto, including, but not limited to, this Guarantee (all
of the foregoing, together with the Loan Agreement, as the same now exist or may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced, being collectively referred to herein as the “Financing Agreements”);
and
     WHEREAS, due to the close business and financial relationships among
Borrowers and each Guarantor, in consideration of the benefits which will accrue
to each Guaranteeing Party and as an inducement for and in consideration of
Lenders (or Agent on behalf of Lenders) making loans and advances and providing
other financial accommodations to Borrowers pursuant to the Loan Agreement and
the other Financing Agreements, the Guaranteeing Parties desire to enter into
this Guarantee;
     NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, each Guaranteeing Party hereby jointly and severally agrees in
favor of Agent and Lenders as follows:
     1. Guarantee.

 

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          (a) Each Guaranteeing Party absolutely and unconditionally, jointly
and severally, guarantees and agrees to be liable for the full and indefeasible
payment and performance when due of the following (all of which are collectively
referred to herein as the “Guaranteed Obligations”): (i) the full and punctual
payment when due (whether at stated maturity, by required pre-payment, by
acceleration or otherwise), as well as the performance, of all of the
Obligations including all such which would become due but for the operation of
the automatic stay pursuant to §362(a) of the Bankruptcy Code and the operation
of §§502(b) and 506(b) of the Bankruptcy Code and (ii) all expenses (including,
without limitation, attorneys’ fees and legal expenses) incurred by Agent or any
Lender in connection with the preparation, execution, delivery, recording,
administration, collection, liquidation, enforcement and defense of each
Borrower’s obligations, liabilities and indebtedness as aforesaid to Agent or
any Lender, the rights of Agent or any Lender in any Collateral or under this
Guarantee and all other Financing Agreements or in any way involving claims by
or against Agent or any Lender directly or indirectly arising out of or related
to the relationships between Borrower, any Guarantor or any other Obligor and
Agent or any Lender, whether such expenses are incurred before, during or after
the initial or any renewal term of the Loan Agreement and the other Financing
Agreements or after the commencement of any case with respect to any Borrower or
Guarantor under the Bankruptcy Code or any similar statute. The “Guaranteed
Obligations” shall not, with respect to any Guaranteeing Party that is a
Borrower, be deemed to constitute a guarantee by such Guaranteeing Party of its
own Obligations.
          (b) This Guarantee is a guaranty of payment and performance and not of
collection. Each Guaranteeing Party agrees that Agent and Lenders need not
attempt to collect any Guaranteed Obligations from any Borrower, any Guarantor
or any other Obligor or to realize upon any Collateral, but may require any
Guaranteeing Party to make immediate payment of all of the Guaranteed
Obligations to Agent when due, whether by maturity, acceleration or otherwise,
or at any time thereafter. Agent and Lenders may apply any amounts received in
respect of the Guaranteed Obligations to any of the Guaranteed Obligations, in
whole or in part (including attorneys’ fees and legal expenses incurred by Agent
or any Lender with respect thereto or otherwise chargeable to Borrowers or
Guarantors) and in such order as Agent may elect.
          (c) Payment by Guaranteeing Parties shall be made to Agent at the
office of Agent from time to time on demand as Guaranteed Obligations become
due. Guaranteeing Parties shall make all payments to Agent on the Guaranteed
Obligations free and clear of, and without deduction or withholding for or on
account of, any setoff, counterclaim, defense, duties, taxes, levies, imposts,
fees, deductions, withholding, restrictions or conditions of any kind. One or
more successive or concurrent actions may be brought hereon against any
Guaranteeing Party either in the same action in which any Borrower, Guarantor,
other Guaranteeing Party or any other Obligor is sued or in separate actions. In
the event any claim or action, or action on any judgment, based on this
Guarantee is brought against any Guaranteeing Party, each Guaranteeing Party
agrees not to deduct, set-off, or seek any counterclaim for or recoup any
amounts which are or may be owed by Agent or any other Lender to any
Guaranteeing Party.
          (d) Notwithstanding anything to the contrary contained herein, the
amount of the obligations payable by any Guaranteeing Party under this Guarantee
shall be the aggregate amount of the Guaranteed Obligations unless a court of
competent jurisdiction adjudicates such Guaranteeing Party’s obligations to be
invalid, avoidable or unenforceable for any reason

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(including, without limitation, because of any applicable state or federal law
relating to fraudulent conveyances or transfers), in which case the amount of
the Guaranteed Obligations payable by such Guaranteeing Party hereunder shall be
limited to the maximum amount that could be guaranteed by such Guaranteeing
Party without rendering such Guaranteeing Party’s obligations under this
Guarantee invalid, avoidable or unenforceable under such applicable law.
     2. Waivers and Consents.
          (a) Notice of acceptance of this Guarantee, the making of loans and
advances and providing other financial accommodations to Borrowers and
presentment, demand, protest, notice of protest, notice of nonpayment or default
and all other notices to which any Borrower or any Guarantor are entitled are
hereby waived by each Guaranteeing Party. Each Guaranteeing Party also waives
notice of and hereby consents to, (i) any amendment, modification, supplement,
extension, renewal, or restatement of the Loan Agreement and any of the other
Financing Agreements, including, without limitation, extensions of time of
payment of or increase or decrease in the amount of any of the Guaranteed
Obligations, the interest rate, fees, other charges, or any Collateral, and the
guarantee made herein shall apply to the Loan Agreement and the other Financing
Agreements and the Guaranteed Obligations as so amended, modified, supplemented,
renewed, restated or extended, increased or decreased, (ii) the taking,
exchange, surrender and releasing of Collateral or guarantees now or at any time
held by or available to Agent for itself and the benefit of Lenders for the
obligations of any Obligor, including, without limitation, the surrender or
release by Agent of any Guaranteeing Party hereunder, (iii) the exercise of, or
refraining from the exercise of any rights against any Borrower, Guarantor, any
Guaranteeing Party or any other Obligor or any Collateral, (iv) the settlement,
compromise or release of, or the waiver of any default with respect to, any of
the Guaranteed Obligations and (v) any financing by Agent or any Lender of any
Borrower under Section 364 of the Bankruptcy Code or consent to the use of cash
collateral by Agent or any Lenders under Section 363 of the Bankruptcy Code.
Each Guaranteeing Party agrees that the amount of the Guaranteed Obligations
shall not be diminished and the liability of Guaranteeing Parties hereunder
shall not be otherwise impaired or affected by any of the foregoing.
          (b) No invalidity, irregularity or unenforceability of all or any part
of the Guaranteed Obligations shall affect, impair or be a defense to this
Guarantee, nor shall any other circumstance which might otherwise constitute a
defense available to or legal or equitable discharge of any Borrower in respect
of any of the Guaranteed Obligations, or any Guaranteeing Party in respect of
this Guarantee, affect, impair or be a defense to this Guarantee. Without
limitation of the foregoing, the liability of the Guaranteeing Parties hereunder
shall not be discharged or impaired in any respect by reason of any failure by
Agent to perfect or continue perfection of any lien or security interest in any
Collateral or any delay by Agent in perfecting any such lien or security
interest. As to interest, fees and expenses, whether arising before or after the
commencement of any case with respect to any Borrower under the Bankruptcy Code
or any similar statute, Guaranteeing Parties shall be liable therefor, even if
such Borrower’s liability for such amounts does not, or ceases to, exist by
operation of law. Each Guaranteeing Party acknowledges that Agent has not made
any representations to any Guaranteeing Party with respect to any Borrower,
Guarantor, any other Obligor or otherwise in connection with the execution and
delivery by Guaranteeing Parties of this Guarantee and Guaranteeing Parties are
not in any respect relying upon Agent or any statements by Agent in connection
with this Guarantee.

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          (c) Unless and until the indefeasible payment and satisfaction in full
in cash of all of the Guaranteed Obligations in immediately available funds and
the termination of the financing arrangements of Agent and Lenders with
Borrowers, each Guaranteeing Party hereby irrevocably and unconditionally waives
and relinquishes (i) all statutory, contractual, common law, equitable and all
other claims against any Borrower, any Collateral for the Guaranteed Obligations
or other assets of any Borrower, Guarantor or any other Obligor, for
subrogation, reimbursement, exoneration, contribution, indemnification, setoff
or other recourse in respect to sums paid or payable to Agent or any Lender by
any Guaranteeing Party hereunder and (ii) any and all other benefits which any
Guaranteeing Party might otherwise directly or indirectly receive or be entitled
to receive by reason of any amounts paid by or collected or due from Guarantors,
Borrowers or any other Obligor upon the Guaranteed Obligations or realized from
their property. Each Guaranteeing Party acknowledges and agrees (i) that the
foregoing waiver is intended to benefit Agent and Lenders and shall not limit or
otherwise affect any Guaranteeing Party’s liability hereunder or the
enforceability of this Guarantee, and (ii) that Agent, Lenders and their
respective successors and assigns are intended third party beneficiaries of the
waivers and agreements this Section 2(c) and their rights under this Section
2(c) shall survive payment in full of the Guaranteed Obligations.
     3. Subordination. Payment of all amounts now or hereafter owed to any
Guaranteeing Party by any Borrower, Guarantor or any other Obligor is hereby
subordinated in right of payment to the indefeasible payment in full in cash to
Agent and Lenders of the Guaranteed Obligations and all such amounts and any
security and guarantees therefor are hereby assigned to Agent and Lenders as
security for the Guaranteed Obligations.
     4. Acceleration. Notwithstanding anything to the contrary contained herein
or any of the terms of any of the other Financing Agreements, the liability of
the Guaranteeing Parties for the entire Guaranteed Obligations shall mature and
become immediately due and payable, even if the liability of any Borrower,
Guarantor or any other Obligor therefor does not, upon the occurrence of any
act, condition or event which constitutes an Event of Default; provided, that,
nothing in this Section 4 shall prohibit Parent or Merchandising from making
payments of interest to Resources which are otherwise expressly permitted by the
terms of the Intercompany Subordination Agreement.
     5. Account Stated. The books and records of Agent showing the account
between Agent and Borrowers shall be admissible in evidence in any action or
proceeding against or involving Guaranteeing Parties as prima facie proof of the
items therein set forth.
     6. Termination. This Guarantee is continuing, unlimited, absolute and
unconditional. All Guaranteed Obligations shall be conclusively presumed to have
been created in reliance on this Guarantee. Subject to the last sentence of
Section 6, each Guaranteeing Party shall continue to be liable hereunder until
one of Agent’s officers actually receives a written termination notice from a
Guaranteeing Party sent to Agent at its address set forth above by certified
mail, return receipt requested and thereafter as set forth below. Such notice
received by Agent from any Guaranteeing Party shall not constitute a revocation
or termination of this Guarantee as to any other Guaranteeing Party. Revocation
or termination hereof by any Guaranteeing Party shall not affect, in any manner,
the rights of Agent or any obligations or duties of any Guaranteeing Party
(including the Guaranteeing Party which may have sent such notice) under this
Guarantee with respect to (a) Guaranteed Obligations which have been created,

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contracted, assumed or incurred prior to the receipt by Agent of such written
notice of revocation or termination as provided herein, including, without
limitation, (i) all amendments, extensions, renewals and modifications of such
Guaranteed Obligations (whether or not evidenced by new or additional
agreements, documents or instruments executed on or after such notice of
revocation or termination), (ii) all interest, fees and similar charges accruing
or due on and after revocation or termination, and (iii) all attorneys’ fees and
legal expenses, costs and other expenses paid or incurred on or after such
notice of revocation or termination in attempting to collect or enforce any of
the Guaranteed Obligations against Borrowers, Guaranteeing Parties or any other
Obligor (whether or not suit be brought), or (b) Guaranteed Obligations which
have been created, contracted, assumed or incurred after the receipt by Agent of
such written notice of revocation or termination as provided herein pursuant to
any contract entered into by Agent or any Lender prior to receipt of such
notice. The sole effect of such revocation or termination by any Guaranteeing
Party shall be to exclude from this Guarantee the liability of such Guaranteeing
Party for those Guaranteed Obligations arising after the date of receipt by
Agent of such written notice which are unrelated to Guaranteed Obligations
arising or transactions entered into prior to such date. Without limiting the
foregoing, this Guarantee may not be terminated (and no Guaranteed Obligation
shall be deemed excluded from this Guarantee) and shall continue so long as the
Loan Agreement shall be in effect (whether during its original term or any
renewal, substitution or extension thereof).
     7. Reinstatement. If after receipt of any payment of, or proceeds of
Collateral applied to the payment of, any of the Guaranteed Obligations, Agent
or any Lender is required to surrender or return such payment or proceeds to any
Person for any reason (including, without limitation, any “voidable preference”,
fraudulent conveyance or otherwise) then the Guaranteed Obligations intended to
be satisfied by such payment or proceeds shall be reinstated and continue and
this Guarantee shall continue in full force and effect as if such payment or
proceeds had not been received by Agent or such Lender. Each Guaranteeing Party
shall be liable to pay to Agent and each Lender, and does indemnify and hold
Agent and each Lender harmless for the amount of any payments or proceeds
surrendered or returned. This Section 7 shall remain effective notwithstanding
any contrary action which may be taken by Agent or any Lender in reliance upon
such payment or proceeds. This Section 7 shall survive the termination or
revocation of this Guarantee.
     8. Amendments and Waivers. Neither this Guarantee nor any provision hereof
shall be amended, modified, waived or discharged orally or by course of conduct,
but only by a written agreement signed by an authorized officer of Agent. Agent
shall not by any act, delay, omission or otherwise be deemed to have expressly
or impliedly waived any of its rights, powers and/or remedies unless such waiver
shall be in writing and signed by an authorized officer of Agent. Any such
waiver shall be enforceable only to the extent specifically set forth therein. A
waiver by Agent of any right, power and/or remedy on any one occasion shall not
be construed as a bar to or waiver of any such right, power and/or remedy which
Agent would otherwise have on any future occasion, whether similar in kind or
otherwise.
     9. Existence, Power and Authority. Each Guaranteeing Party is a corporation
or limited liability company duly organized and in good standing under the laws
of its state or other jurisdiction of incorporation or formation and is duly
qualified as a foreign corporation or limited liability company and in good
standing in all states or other jurisdictions where the nature and extent of the
business transacted by it or the ownership of assets makes such qualification

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necessary, except for those jurisdictions in which the failure to so qualify
would not have a material adverse effect on the financial condition, results of
operation or businesses of any Guaranteeing Party or the rights of Agent and
Lenders hereunder or under any of the other Financing Agreements. The execution,
delivery and performance of this Guarantee is within the powers of each
Guaranteeing Party, have been duly authorized and are not in contravention of
law or the terms of the certificates of incorporation or formation, by-laws,
operating agreement or other organizational documentation of any Guaranteeing
Party, or any indenture, agreement or undertaking to which any Guaranteeing
Party is a party or by which any Guaranteeing Party or its property are bound.
This Guarantee constitutes the legal, valid and binding obligation of each
Guaranteeing Party enforceable in accordance with its terms. Any Guaranteeing
Party signing this Guarantee shall be bound hereby whether or not any other
Guaranteeing Party or any other person signs this Guarantee at any time.
     10. Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver.
          (a) The validity, interpretation and enforcement of this Guarantee and
any dispute arising out of the relationship between any Guaranteeing Party and
Agent or any Lender, whether in contract, tort, equity or otherwise, shall be
governed by the internal laws of the State of New York but excluding any
principles of conflicts of law or choice of law (other than Section 5-1401 and
Section 5-1402 of the General Obligations Laws of the State of New York).
          (b) Each Guaranteeing Party hereby irrevocably consents and submits to
the non-exclusive jurisdiction of the Supreme Court of the State of New York in
New York County and the United States District Court for the Southern District
of New York, whichever Agent elects, and waives any objection based on venue or
forum non conveniens with respect to any action instituted therein arising under
this Guarantee or any of the other Financing Agreements or in any way connected
with or related or incidental to the dealings of any Guaranteeing Party and
Agent or any Lender in respect of this Guarantee or any of the other Financing
Agreements or the transactions related hereto or thereto, in each case whether
now existing or hereafter arising and whether in contract, tort, equity or
otherwise, and agrees that any dispute arising out of the relationship between
any Guaranteeing Party or any Borrower and Agent or any Lender or the conduct of
any such persons in connection with this Guarantee, the other Financing
Agreements or otherwise shall be heard only in the courts described above
(except that Agent and Lenders shall have the right to bring any action or
proceeding against any Guaranteeing Party or its property in the courts of any
other jurisdiction which Agent deems necessary or appropriate in order to
realize on Collateral at any time granted by any Borrower or Guaranteeing Party
to Agent or any Lender or to otherwise enforce its rights against any
Guaranteeing Party or its property).
          (c) Each Guaranteeing Party hereby waives personal service of any and
all process upon it and consents that all such service of process may be made by
U.S. certified mail (return receipt requested) directed to its address set forth
on the signature pages hereof and service so made shall be deemed to be
completed immediately upon receipt thereof by such Guaranteeing Party, or, at
Agent’s option, by service upon any Guaranteeing Party in any other manner
provided under the rules of any such courts. Within thirty (30) days after such
service, any Guaranteeing Party so served shall appear in answer to such
process, failing which such Guaranteeing Party shall be deemed in default and
judgment may be entered by Agent against the Guaranteeing Parties for the amount
of the claim and other relief requested.

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          (d) EACH GUARANTEEING PARTY HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY
OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS GUARANTEE
OR ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY CONNECTED WITH OR
RELATED OR INCIDENTAL TO THE DEALINGS OF ANY OF THE GUARANTEEING PARTIES AND
AGENT OR ANY LENDER IN RESPECT OF THIS GUARANTEE OR ANY OF THE OTHER FINANCING
AGREEMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER
NOW EXISTING OR HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR
OTHERWISE. EACH GUARANTEEING PARTY HEREBY AGREES AND CONSENTS THAT ANY SUCH
CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT
A JURY AND THAT ANY GUARANTEEING PARTY OR ANY LENDER OR AGENT MAY FILE AN
ORIGINAL COUNTERPART OF A COPY OF THIS GUARANTEE WITH ANY COURT AS WRITTEN
EVIDENCE OF THE CONSENT OF GUARANTEEING PARTIES AND LENDERS AND AGENT TO THE
WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
          (e) Agent and Lenders shall not have any liability to the Guaranteeing
Parties (whether in tort, contract, equity or otherwise) for losses suffered by
the Guaranteeing Parties in connection with, arising out of, or in any way
related to the transactions or relationships contemplated by this Guarantee, or
any act, omission or event occurring in connection herewith, unless it is
determined by a final and non-appealable judgment or court order binding on
Agent or such Lender that the losses were the result of acts or omissions
constituting gross negligence or willful misconduct. In any such litigation,
Agent and Lenders shall be entitled to the benefit of the rebuttable presumption
that each acted in good faith and with the exercise of ordinary care in the
performance by each of the terms of the Loan Agreement and the other Financing
Agreements.
     11. Notices. All notices, requests and demands 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 by deposit (postage
prepaid) in the U.S. Mail. All notices, requests and demands upon the parties
are to be given to the following addresses (or to such other address as any
party may designate by notice in accordance with this Section):

     
If to any Guaranteeing Party:
  Hancock Fabrics, Inc.
One Fashion Way
Baldwyn, MS 38824
Attention: Robert Driskell, CFO
Telephone No.: (662) 365-6112
Telecopy No.: (662) 365-6025
 
   
with a copy to:
  Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
165 Madison Avenue
First Tennessee Building

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  Memphis, TN 38103
Attention: Sam D. Chafetz, Esq.
Telephone No.: (901) 577-2148
Telecopy No.: (901) 577-0854

 
   
If to Agent and Lenders:
  General Electric Capital Corporation
401 Merritt 7, P.O. Box 5201
Norwalk, CT 06856-5201
Attention: Hancock Fabrics Account Manager
Telephone No.: (203) 956-4598
Telecopy No.: (203) 956-4002
 
   
with a copy to
  Bingham McCutchen LLP
One Federal Street
Boston, MA 02110
Attention: Robert A. J. Barry, Esq.
Telephone No.: (617) 951-8624
Telecopy No.: (617) 951-8736

     12. Partial Invalidity. If any provision of this Guarantee is held to be
invalid or unenforceable, such invalidity or unenforceability shall not
invalidate this Guarantee as a whole, but this Guarantee shall be construed as
though it did not contain the particular provision held to be invalid or
unenforceable and the rights and obligations of the parties shall be construed
and enforced only to such extent as shall be permitted by applicable law.
     13. Entire Agreement. This Guarantee, the other Financing Agreements and
any other document referred to herein or therein represents the entire agreement
and understanding of this parties concerning the subject matter hereof, and
supersedes all other prior agreements, understandings, negotiations and
discussions, representations, warranties, commitments, proposals, offers and
contracts concerning the subject matter hereof, whether oral or written.
     14. Successors and Assigns. This Guarantee shall be binding upon each
Guaranteeing Party and their respective successors and assigns and shall inure
to the benefit of Agent and each Lender and their respective successors,
endorsees, transferees and assigns. The liquidation, dissolution or termination
of any Guaranteeing Party shall not terminate this Guarantee as to such entity
or as to any of the other Guaranteeing Parties.
     15. Construction. All references to the term “Guaranteeing Parties”
wherever used herein shall mean each and all of the Guaranteeing Parties and
their respective successors and assigns, individually and collectively, jointly
and severally (including, without limitation, any receiver, trustee or custodian
for any of the Guaranteeing Parties or any of their respective assets or any of
the Guaranteeing Parties in its capacity as debtor or debtor-in-possession under
the Bankruptcy Code). All references to the term “Agent” wherever used herein
shall mean Agent and its successors and assigns, all references to the term
“Borrowers” “Guarantors” or

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“Obligors” wherever used herein shall mean each and all of Borrowers, Guarantors
or Obligors and their respective successors and assigns, individually and
collectively, jointly and severally (including, without limitation, any
receiver, trustee or custodian for any Borrower, Guarantor or Obligor or any of
their respective assets or any Borrower, Guarantor or Obligor in its capacity as
debtor or debtor-in-possession under the Bankruptcy Code), and all references to
the term “Lenders” wherever used herein shall mean Lenders and their respective
successors and assigns. All references to the term “Person” or “person” wherever
used herein shall mean any individual, sole proprietorship, partnership,
corporation (including, without limitation, any corporation which elects
subchapter S status under the Code), limited liability company, limited
liability partnership, business trust, unincorporated association, joint stock
corporation, trust, joint venture or other entity or any government or any
agency or instrumentality of political subdivision thereof. All references to
the plural shall also mean the singular and to the singular shall also mean the
plural.
     16. Counterparts. This Guarantee 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 Guarantee 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 Guarantee. Any party delivering an executed
counterpart of this Guarantee 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 this Guarantee.
     17. Additional Guarantors. New Subsidiaries of the Guaranteeing Parties or
other entities (each an “Additional Guaranteeing Party”) may hereafter become
parties to this Guarantee by executing a counterpart hereof or, alternatively,
by executing a joinder agreement in form and substance satisfactory to Agent,
and there shall be no need to re-execute, amend or restate this Guarantee in
connection therewith. Upon such execution and delivery by any Additional
Guaranteeing Party, such Additional Guaranteeing Party shall be bound by all of
the terms, covenants and conditions hereof to the same extent as if such
Additional Guaranteeing Party had executed this Guarantee as of the Closing
Date, and Agent and the Lenders shall be entitled to all of the benefits of such
Additional Guaranteeing Party’s obligations hereunder.
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     IN WITNESS WHEREOF, each Guaranteeing Party has executed and delivered this
Guarantee as of the day and year first above written.

                  GUARANTEEING PARTY    
 
                HANCOCK FABRICS, INC.      
 
  By:   /s/ Robert W. Driskell    
 
     
 
Name: Robert W. Driskell    
 
      Title: Senior Vice President and Chief Financial Officer    
 
                HF MERCHANDISING, INC.      
 
  By:   /s/ Robert W. Driskell    
 
           
 
      Name: Robert W. Driskell    
 
      Title: Senior Vice President and Chief Financial Officer    
 
                HANCOCK FABRICS OF MI, INC.      
 
  By:   /s/ Robert W. Driskell    
 
           
 
      Name: Robert W. Driskell    
 
      Title: Senior Vice President and Chief Financial Officer    
 
                HANCOCKFABRICS.COM, INC.      
 
  By:   /s/ Robert W. Driskell    
 
           
 
      Name: Robert W. Driskell    
 
      Title: Treasurer    
 
                HANCOCK FABRICS, LLC      
 
  By:   /s/ Larry D. Fair    
 
           
 
      Name: Larry D. Fair    
 
      Title: Treasurer    
 
                HF ENTERPRISES, INC.      
 
  By:   /s/ Robert W. Driskell    
 
           
 
      Name: Robert W. Driskell    
 
      Title: Vice President    
 
                HF RESOURCES, INC.      
 
  By:   /s/ Robert W. Driskell    
 
           
 
      Name: Robert W. Driskell    
 
      Title: Vice President    

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