Document:

EX-10.17

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.

 

 

          (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

7

 

	 	 	 
	 

	 	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	 	 

[Signature Page to Guarantee]EX-10.18

EXHIBIT 10.18

Information
redacted pursuant to a confidential treatment request.

DEPOSIT ACCOUNT CONTROL AGREEMENT

     THIS DEPOSIT ACCOUNT CONTROL AGREEMENT (this “Agreement”)
is dated August 1, 2008 by and
among BancorpSouth Bank (together with its successors and assigns, “Bank”), Hancock Fabrics, Inc.
(together with its successors and assigns, the “Company”) and General Electric Capital Corporation,
in its capacity as agent (in such capacity, together with its successors and assigns, “Agent”)
pursuant to the Loan Agreement (as hereinafter defined) acting for and on behalf of Lenders (as
defined in the Loan Agreement).

W I T N E S S E T H

     WHEREAS, Bank maintains for the use of the Company the following deposit accounts:

01-210513 (the “Concentration Account”)

01-236083 (the “Operating Account”)

which deposit accounts are hereinafter referred to collectively as the “Deposit Accounts”, and
individually, each as a “Deposit Account”;

     WHEREAS, Bank additionally maintains for the use of the Company the following deposit
accounts:

01-230662 (the “Salaried Payroll Account”)

60-550191 (the “Hourly Payroll Account”)

which deposit accounts are hereinafter referred to collectively as the “Payroll Accounts”, and
individually, each as a “Payroll Account”;

     WHEREAS, the Company maintains numerous deposit accounts with numerous financial institutions
(including Bank) throughout the United States into which are deposited revenues generated by
Company’s various stores, which deposit accounts are hereinafter referred to collectively as the
“Store Accounts”, and individually, each as a “Store Account”;

     WHEREAS, pursuant to the Loan and Security Agreement dated as of
August 1, 2008, by and among the Company, certain of Company’s affiliates and subsidiaries, Agent and Lenders (as amended,
restated, supplemented or otherwise modified and in effect, the “Loan Agreement”), Agent and the
Lenders have a security interest in, among other things, all right, title and interest of the
Company in and to the following, whether now or hereafter existing or arising (collectively, the
“Deposit Account Collateral”): (a) the Deposit Accounts, (b) all cash, checks, money orders,
drafts, instruments, electronic funds transfers and other items and forms of remittances and all
funds and other amounts at any time paid, deposited or credited (whether for collection,
provisionally or otherwise), held or otherwise in the possession or under the control of, or in
transit to, Bank or any agent or custodian thereof for credit to or to be deposited

 

 

in any Deposit Account, (c) all funds and cash balances or other amounts in or attributable to
any Deposit Account, and (d) any and all proceeds of any of the foregoing; and

     WHEREAS, the Company, Agent and Bank desire to enter into this Agreement in order to set forth
their relative rights and duties with respect to the Deposit Account Collateral.

     NOW, THEREFORE, in order for the Company to comply with the requirements of Agent and Lenders
under the Loan Agreement and the other financing arrangements with the Company, the Company, Bank
and Agent agree as follows:

     1. Deposit Account Collateral. Bank hereby represents, warrants and covenants with
and to Agent and Lenders that: Bank has established and will maintain the Deposit Accounts and has
identified the Company as the sole owner of the Deposit Accounts, subject to the rights of Agent
therein as provided herein; the records of Bank do not reflect, and it has not received any notice
of, any assignment or pledge of, or security interest in the Deposit Accounts or any of the other
Deposit Account Collateral (other than the pledge and security interest of Agent referred to
herein), or any notice of any adverse claim with respect to any of the same; Bank has not entered
and will not enter into any agreement with any person other than Agent by which it is obligated for
any reason to comply with instructions from such other person as to the disposition of funds in or
from the Deposit Accounts or with respect to any other dealings with any of the Deposit Account
Collateral; Bank will not agree that any person other than the Company or Agent is Bank’s customer
with respect to any Deposit Account; the Deposit Accounts are each a “deposit account” as such term
is defined in the UCC (as hereinafter defined); Bank acknowledges that it holds and will hold
possession of the Deposit Account Collateral consisting of instruments and money as bailee for
Agent and for the benefit of Agent, subject to the terms and provisions of this Agreement; and Bank
is hereby irrevocably authorized and instructed to change the designation of the customer on any
Deposit Account to Agent upon the request of Agent and Bank shall so change the customer promptly
upon such request by Agent. The Company hereby confirms to Bank that the Company has granted to
Agent, as collateral security for the Company’s obligations to the Agent and Lenders under the Loan
Agreement, a security interest in and Lien on the Deposit Account Collateral, and Bank hereby
acknowledges such security interest in and Lien on the Deposit Account Collateral. This Agreement
shall be inapplicable to any account maintained by Company at Bank other than the Deposit Accounts,
the Payroll Accounts and the Store Accounts.

     2. Control.

     (a) Notwithstanding any term or provision of this Agreement or other agreement between Bank
and the Company or otherwise, the Company hereby irrevocably authorizes and directs the Bank to
comply with, and the Bank hereby agrees to comply with, all instructions originated by the Agent in
accordance with this Agreement, including directing the disposition of funds in any Deposit Account
or as to any other matter relating to any Deposit Account or other Deposit Account Collateral,
without further consent by the Company (which instructions may include the giving of stop payment
orders for any items being presented to a Deposit Account for payment).

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     (b) With respect to the Concentration Account, Bank shall not permit the Company or any of its
affiliates or any other person to withdraw any amounts from, to draw upon or otherwise exercise any
authority or powers with respect to the Concentration Account, and Bank shall not at any time
honor, any instructions with respect to the Concentration Account, other than those approved in
writing by Agent. Notwithstanding the foregoing, until Agent otherwise advises Bank in writing,
Company shall have access to the Concentration Account to the extent expressly provided in
Section 3(d) herein.

     (c) With respect to the Operating Account, until the Agent otherwise advises Bank in writing,
Company shall have access to the Operating Account to the extent expressly provided in Section
3(d) herein.

     3. Remittance of Funds; Use of Cash Management Facilities.

     (a) Unless the Company is otherwise directed by Agent, the Company shall cause all Deposit
Account Collateral to be deposited into the Concentration Account. Each banking day, Bank shall
transfer to Agent all available funds in the Concentration Account by wire to DeutscheBank Trust
Company Americas, ABA #021 011 033; Account Name: General Electric Capital Corporation; Account
Number: 502-795-13; CFN: [___]; Reference: Hancock Fabrics or such other account as Agent may
from time to time designate to Bank pursuant to the terms hereof (the “Agent Payment Account”).

     (b) Unless otherwise agreed to in writing between Agent and the Company, the proceeds of the
loans and advances made by Agent and Lenders to the Company pursuant to the terms and conditions
set forth in the Loan Agreement and related documents, agreements, and instruments that are
deposited into the Operating Account will be utilized by the Company to fund, subject to the terms
and conditions set forth in this Agreement, (i) all transactions made by Company on the Payroll
Accounts and (ii) all other transactions made by Company on the Operating Account. Each banking
day, or so often as may be required, Company, through use of Bank’s cash management facilities,
shall transfer available funds in the Operating Account to the Payroll Accounts in such amounts as
are sufficient, in the Company’s determination, to fund all transactions made on the Payroll
Accounts. Nothing contained in this subsection (b) or any other provision contained in
this Agreement or otherwise shall or shall be construed to obligate or create in any way any
liability or responsibility on the part of Agent or any Lender to fund or to ensure that the
Company has sufficient funds to make the payments specified in this subsection or any other
payments related to the operation of the Company’s business.

     (c) Bank will permit transactions on the Deposit Accounts and the Payroll Accounts only to the
extent that sufficient funds are available therein. Bank may reject any ACH Debit Entry for the
Payroll Accounts if sufficient funds are not available therein at least two (2) banking days prior
to the Effective Entry Date. As used in this subsection (c), the terms “ACH”, “Debit”, “Entry” and
“Effective Entry Date” shall have the respective meanings ascribed in Bank’s cash management
agreements with the Company.

     (d) Notwithstanding any provision of this Agreement to the contrary, until Agent otherwise
advises Bank in writing, Company shall have access to the Deposit Accounts via Bank’s cash
management facilities solely for the following purposes (with reference

3

 

parenthetically to the name of Bank’s cash management products which may be used by Customer
to accomplish such purposes):

     (i) Concentration Account: Company may deposit Deposit Account Collateral into
the Concentration Account (Express Deposit Services). Company may originate ACH entries to
transfer funds to the Concentration Account from any Store Account (InView).

     (ii) Operating Account: Company may make transfers from the Operating Account
and may originate outgoing wires from the Operating Account (InView). Company may run
fraud, error detection and reconciliation cash management products on the Operating Account
(Positive Pay).

     (iii) Payroll Accounts: Company may make transfers from the Payroll Accounts.
Company may run fraud, error detection and reconciliation cash management products on the
Payroll Accounts (Positive Pay).

     (iv) All Accounts: In addition, with regard to all Deposit Accounts, including
the Concentration Account, all Payroll Accounts, and all Store Accounts maintained at Bank,
Company may view all transactions on all such accounts and may retrieve all balance
information concerning all such accounts (InView).

     4. Indemnity; Bank’s Responsibility. The Company agrees to indemnify, defend and hold
harmless Bank against any loss, liability or expense (including reasonable fees and disbursements
of counsel) incurred in connection with this Agreement, including any action taken by Bank pursuant
to the instructions of Agent, except to the extent due to the gross negligence or willful
misconduct of Bank or breach of any of the provisions hereof. The Company confirms and agrees that
neither Bank nor Agent or Lenders shall have any liability to the Company for wrongful dishonor of
any items or transaction as a result of any instructions of Agent or otherwise in accordance with
the terms of this Agreement. Bank shall have no duty to inquire or determine whether the
obligations of the Company to Agent or Lenders are in default, or whether Agent or Lenders are
authorized by the Loan Agreement, applicable law or otherwise to take any action, or whether Agent
is entitled to give any such instructions, and Bank is fully entitled to rely upon such
instructions from Agent (even if such instructions are contrary or inconsistent with any
instructions or demands given by the Company).

     5. Statements, Confirmations and Notices of Adverse Claims. At such time or times as
Agent may request, Bank will promptly report to Agent the amounts received in and held in the
Deposit Accounts and will furnish to Agent any copies of bank statements, deposit tickets,
deposited items, debit and credit advices and other records maintained by Bank under the terms of
its arrangements with the Company (as in effect on the date hereof). Agent will reimburse Bank for
its reasonable expenses in providing such items to Agent. Upon receipt of notice of any lien,
encumbrance or adverse claim against any Deposit Account Collateral, Bank will promptly notify
Agent and the Company thereof.

4

 

     6. Subordination of Bank’s Security Interest; Setoff Rights; Bank’s Fees and Expenses.

     (a) In the event that at any time Bank has a security interest in or lien upon any of the
Deposit Account Collateral, such security interest and lien of Bank shall be subject and
subordinate to the security interest and lien of Agent therein. Bank shall not for any reason
charge, debit, deduct or offset, or exercise any security interest or lien rights, against any
checks, automated clearinghouse transfers or other form of remittances at any time deposited in or
credited to any Deposit Account, except that Bank may setoff against funds in the
Deposit Accounts (i) for all amounts due to Bank in respect of its fees and expenses as provided in
Section 6(c) hereof that are unpaid and outstanding, (ii) for the amount of any checks,
automated clearinghouse transfers, items or other form of remittances that have been credited to
any Deposit Account and subsequently returned unpaid or lawfully demanded to be refunded by any
paying or collecting bank(whether for insufficient funds or any other reason), (iii) for the amount
of any checks, automated clearinghouse transfers, items or other form of remittances which have
been credited to any Deposit Account incorrectly by reason of inadvertent error which is corrected
as soon as practicable after the discovery of such error, and (iv) for any overdrafts arising as a
result of any of the foregoing; provided, that, Bank shall first setoff for such
amounts due to it against funds held in the Operating Accounts before any other Deposit Account.

     (b) In the event that the funds in the Operating Account or any other Deposit Account are
insufficient to reimburse Bank for any amounts specified in Section 6(a) above, Agent shall
reimburse Bank upon demand for all such amounts; provided, that, (i) in respect of
amounts specified under clause (i) of Section 6(a) above, Agent shall have first
received written demand from Bank for payment of such fees and expenses prior to the date that is
60 days after the date such fees or expenses were due and payable to Bank, and (ii) in respect of
amounts specified in clauses (ii), (iii) and (iv) of Section 6(a)
above, Agent received final payment in respect thereof and Agent has received notice of failure of
the Company to pay Bank prior to the date that is 90 days after such check, automated clearinghouse
transfer items, or other form of remittance is returned to Bank or such demand is made to Bank or
such error was discovered by Bank. The Company shall reimburse Agent for any amounts paid by Agent
to Bank under this Section 6(b) or otherwise under this Agreement promptly upon demand by
Agent (without inquiry as to, and regardless of, any dispute between the Company and Bank). Such
amounts shall be paid to Agent by Company (or at Agent’s option, Agent may charge any loan account
of the Company or its affiliates maintained by Agent) without offset, defense or counterclaim.

     (c) As compensation for Bank’s services rendered to Agent and to Company under this Agreement,
Bank shall be entitled to the fees and expenses set forth in Exhibit “A” hereto.

     7. Termination.

     (a) This Agreement may be terminated by Bank at any time on not less than thirty (30) days’
prior written notice to each of the Company and Agent. This Agreement may be terminated by Agent
at any time upon receipt by Bank of Agent’s written notice of termination. This Agreement may not
be terminated by the Company without the express prior written consent of Agent and, in that case,
Agent and the Company shall jointly notify Bank in writing of such termination.

5

 

     (b) In the event that this Agreement is terminated for any reason, unless otherwise instructed
by Agent, Bank will, on the effective dated of such termination, transfer all available funds in
the Deposit Accounts to the Agent Payment Account.

     8. Notices. All notices hereunder to Bank shall be in writing, sent by telecopier and
by nationally recognized overnight courier with instructions to deliver the next business day, and
shall be deemed to have been given or made when Bank has had a reasonable period of time to act
thereon (but in no event longer than two business days after Bank has received such notice). All
notices to any other party hereunder shall be in writing and deemed to have been given or made: if
delivered in person, immediately upon delivery; if by telex, telegram or facsimile transmission,
immediately upon sending and upon confirmation of receipt; if by nationally recognized overnight
courier service with instructions to deliver the next business day, one (1) business day after
sending; and if by certified mail, return receipt requested, five (5) days after mailing. All
notices to any party shall be given to its address set forth below (or to such other address as any
party may designate by notice in accordance with this Section).

     9. Customer Agreements. This Agreement supplements all other agreements between the
Company and Bank with respect to the Deposit Accounts, as such agreements may now exist or may
hereafter be amended and whether now existing or hereafter arising, including, but not limited to,
all agreements pertaining to use of Bank’s cash management facilities and the daily transmission
limits set forth therein. No consent of Agent or the Lenders shall be required to amend any such
other agreement or for the Company and Bank to enter into any additional agreement. In the event
of any inconsistency between this Agreement and the terms of such other agreements of the Company
or its affiliates with Bank, the terms of this Agreement control.

     10. Governing Law. This Agreement shall be governed by the laws of the State of New
York. Notwithstanding anything to the contrary contained in any other agreement among any of the
parties hereto, for purposes of the UCC, the State of New York shall be deemed to be Bank’s
jurisdiction within the meaning of Section 9-304 of the UCC. All references to the “UCC” herein
shall mean the Uniform Commercial Code as in effect on the date hereof in the State of New York.

     11. Counterparts. This Agreement may be executed in any number of counterparts, each
of which shall be an original, but all of which taken together shall constitute one and the same
agreement. Delivery of an executed counterpart of this Agreement by telefacsimile or other means of
electronic transmission shall have the same force and effect as the delivery of an original
executed counterpart of this Agreement. Any party delivering an executed counterpart of any such
agreement by telefacsimile or other means of electronic transmission shall also deliver an original
executed counterpart, but the failure to do so shall not affect the validity, enforceability or
binding effect of such agreement.

     12. Successors and Assigns. Agent and Lenders are relying upon this Agreement in
providing financing to the Company and this Agreement shall be binding upon the Company and Bank
and their respective successors and assigns and inure to the benefit of Agent and Lenders and their
respective successors and assigns.

[SIGNATURE PAGE FOLLOWS]

6

 

DEPOSIT ACCOUNT CONTROL AGREEMENT

SIGNATURE PAGE

HANCOCK FABRICS, INC.

	 	 	 	 
	By:	 	/s/ Robert W. Driskell	 
	Name:	 	Robert W. Driskell	 
	Title:	 	Senior Vice President and 
Chief Financial Officer	 

Address for Notices:

One Fashion Way

Baldwyn, MS 38824

Attention: Larry D. Fair

Telecopy: 662-365-6025

GENERAL ELECTRIC CAPITAL

CORPORATION, as Agent

	 	 	 	 
	By:	 	/s/ Charles D. Chiodo	 
	Name:	 	Charles D. Chiodo	 
	Title:	 	Its Duly Authorized Signatory	 

Address for Notices:

401 Merritt 7 P.O. Box 5201

Norwalk, CT 06856-5201

Attn:Hancock Fabrics Account Manager

Telecopy: 203-956-4002

BANCORPSOUTH BANK

	 	 	 	 
	By:	 	/s/ Coy Livingston	 
	Name:	 	Coy Livingston	 
	Title:	 	Executive Vice President	 

Address for Notices:

Corporate Banking Department

201 South Spring Street

Tupelo, Mississippi 38804

Attention: Corporate Banking Dept.

Telecopy: 662-680-2261

with a copy to:

Cash Management Department

6363 Poplar Avenue, Suite 429

Memphis, Tennessee 38119

Attention: Cash Management Department

Telecopy: 901-374-0860

with a copy to:

Cash Management Department

2830 West Jackson Street, Building B

Tupelo, Mississippi 38801

Attention: Cash Management Dept.

Telecopy: 662-620-4029

7

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