Document:

EX-10.44

 

EXHIBIT 10.44

AMENDMENT NO. 1 TO RATIFICATION AND AMENDMENT AGREEMENT AND

AMENDMENT NO. 7 TO LOAN AND SECURITY AGREEMENT

     AMENDMENT NO. 1 TO RATIFICATION AND AMENDMENT AGREEMENT AND AMENDMENT NO. 7 TO LOAN AND
SECURITY AGREEMENT, dated as of April 19, 2007 (this “First Ratification Amendment”), 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, Borrowers, Guarantors, Agent and Lenders have entered into financing arrangements
pursuant to which Agent and Lenders may make loans and advances and provide other financial
accommodations to Borrowers as set forth in 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, as further amended by the Ratification and
Amendment Agreement, dated March 22, 2007 (as amended hereby and as may hereafter be further
amended, modified, supplemented, extended, renewed, restated or replaced the “Loan Agreement”, and
together with all agreements, documents and instruments at any time executed and/or delivered in
connection therewith or related thereto, as from time to time amended, modified, supplemented,
extended, renewed, restated or replaced, collectively, the “Financing Agreements”);

     WHEREAS, each Debtor 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 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; and

 

 

     WHEREAS, Debtors have requested that Agent and Lenders make certain amendments to the Loan
Agreement and Agent and Lenders are willing to agree to such request, subject to the terms and
conditions contained herein; and

     WHEREAS, by this First Ratification Amendment, Agent, Lenders and Debtors intend to evidence
such consent and amendments;

     WHEREAS, this First Ratification Amendment has been authorized by the Bankruptcy Court
pursuant to an Order entered by the Bankruptcy Court authorizing Borrowers and Guarantors to
execute and deliver this First Ratification Amendment;

     NOW, THEREFORE, in consideration of the premises and covenants set forth herein and other good
and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto agree as follows:

     1. DEFINITIONS.

          (a) Additional Definitions. As used herein, the following terms shall have the
meanings given to them below and the Loan Agreement and the other Financing Agreements are hereby
amended to include, in addition and not in limitation, the following definitions:

               (i) “First Ratification Amendment” shall mean this Amendment No. 1 to Ratification and
Amendment Agreement and Amendment No. 7 to Loan and Security Agreement, as the same now exists and
may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced.

               (ii) “BancorpSouth Deposit Account Control Agreement” shall mean the Deposit Account Control
Agreement, dated June 29, 2005, by and among Parent, Bancorp South Bank and Agent, as the same now
exists and may hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced.

               (iii) “GOB Stores” shall have the meaning set forth in the Final Order Under 11 U.S.C. §§
105, 327, 328, 363, 365 and 554 (I) Authorizing Debtors To Conduct Going-Out-Of-Business Sales And
To Close Certain Stores, (II) Authorizing The Assumption Of Consulting Agreement With And Retention
Of Consultant And (III) Granting Related Relief, dated April 5, 2007, as in effect on the date
hereof.

               (iv) “Nova” shall mean NOVA Information Systems, Inc.

               (v) “Nova Event” shall mean (i) the sending by Nova to Parent of the notice of termination,
dated March 2, 2007, with respect to the Processing Agreement, (ii) the extension of the date of
termination of the Processing Agreement from time to time and the amendment and continuation of the
Processing Agreement, as the case may be, and (iii) the establishment of the $1,890,000 reserve
held by Nova in accordance with the terms of the Processing Agreement (in such form as such reserve
may be held from time to time, including, without limitation, cash on deposit, certificate of
deposit or letter of credit).

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               (vi) “Processing Agreement” shall mean the Merchant Processing Agreement, dated September 21,
2004, between Nova, Regions Bank and Parent, as the same now exists and may hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced.

          (b) Amendments to Definitions.

               (i) ERISA Event. All references to the term “ERISA Event” in the Loan Agreement and
the other Financing Agreements shall be deemed, and each such reference is hereby amended, to add
at the end thereof: “provided, that, the following shall not constitute an ERISA
Event: (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,
or (iii) the delisting of the stock of Parent or any of its Subsidiaries from the New York Stock
Exchange.”

               (ii) Material Adverse Effect. All references to the term “Material Adverse Effect,”
“material adverse effect” and “material adverse change” in the Loan Agreement and the other
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 or as
provided in Section 3 of the First Ratification Amendment.”

          (c) Interpretation. For purposes of this First Ratification Amendment, unless
otherwise defined herein, all capitalized terms used herein shall have the meanings assigned
thereto in the Loan Agreement unless otherwise defined herein.

     2. AMENDMENTS.

          (a) Limitation on Certain Fees. Section 7.4(b)(ii) of the Ratification Agreement is
hereby deleted in its entirety and the following substituted therefor:

     “(ii) the aggregate amount of consulting fees payable by Borrowers for the consultants
(including Huron Consulting) retained by Borrowers at the request of Agent shall not exceed
$200,000 in any twelve (12) month period.”

          (b) Collateral Reporting.

               (i) Section 7.1(a)(ii)(C) of the Loan Agreement is hereby amended by deleting such Section in
its entirety and replacing it with the following:

     “a certificate of an authorized officer of the Administrative Borrower certifying that
sales and use tax collections, deposits and payments are current.”

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               (ii) Section 7.1(a)(iii)(D) of the Loan Agreement is hereby amended by deleting such Section
in its entirety.

               (iii) Section 7.1(a)(iv) of the Loan Agreement is hereby amended by deleting “fifteen (15)”
and replacing it with “forty-five (45)”.

               (iv) Section 7.1(a)(v) of the Loan Agreement is hereby amended by adding “reasonable” after
the word “Agent”.

               (v) Section 7.1(a)(vi) of the Loan Agreement is hereby amended by adding “reasonable” after
the word “Agent”.

               (vi) Section 7.1(a)(vii) of the Loan Agreement is hereby amended by adding “reasonably” after
the word “shall”.

          (c) Inventory Covenants.

               (i) Section 7.3(a) of the Loan Agreement is hereby amended by deleting “itemizing and” and
replacing it with “reasonably”.

               (ii) Section 7.3(c) of the Loan Agreement is hereby amended by adding “except as provided in
Section 3 of the First Ratification Amendment” after the word “Agent”.

          (d) Qualification as Certain Representations and Warranties. Section 7.8(iv) of the
Ratification Agreement is hereby amended to add at the end thereof: “except as provided in Section
3 of the First Ratification Amendment.”

          (e) Sale of Assets, Consolidation, Merger, Disabilities, Etc. Section 7.10 of the
Ratification Agreement is hereby deleted in its entirety and the following substituted therefor:

     “7.10 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 except as provided in Section 3 of the First
Ratification Amendment.”

          (f) Waiver. Section 8.1 of the Ratification Agreement is hereby deleted in its
entirety and the following substituted therefor:

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     “8.1 Subject to the terms and conditions set forth herein, Agent and Lenders hereby
waive (A) the Event of Default arising under Section 10.1(a)(iii) of the Loan Agreement as a
result of 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, (B) the Event of Default arising under Section 10.1(a)(iii)
of the Loan Agreement as a result of 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, (C) the Event of Default which may arise under Section
10.1(k) of the Loan Agreement as a result of the sending by BancorpSouth Bank to Agent and
Administrative Borrower of the notice of termination, dated March 20, 2007, with respect to
the BancorpSouth Deposit Account Control Agreement, and (D) the Event of Default arising
under Section 10.1(i) or 10.1(j) of the Loan Agreement as a result of the Nova Event (the
foregoing clauses (A), (B), (C) and (D) are collectively referred to herein as the “Subject
Defaults”).

          (g) Events of Default.

               (i) Section 10.1(i) of the Loan Agreement is hereby deleted in its entirety and the following
substituted therefor:

               “(i) any default (other than any default resulting from (A) the commencement
of the Chapter 11 Cases, (B) the financial condition of the Borrowers and Guarantors
immediately prior to the Petition Date as disclosed to Agent and Lenders in writing,
(C) the delisting of the stock of Parent or any of its Subsidiaries from the New
York Stock Exchange, or (D) Borrowers closing certain of their store locations with
the prior written consent of Agent with respect to such store closures or as
otherwise provided in Section 3 of the First Ratification Amendment) by any Borrower
or Guarantor under any agreement, document or instrument relating to any
Indebtedness owing to any person other than Lenders, or any capitalized lease
obligations, contingent indebtedness in connection with any guarantee, letter of
credit, indemnity or similar type of instrument in favor of any person other than
Lenders, in an amount in excess of $750,000 which default continues for more than
the applicable cure period, if any, with respect thereto, or any default (other than
any default resulting from (A) the commencement of the Chapter 11 Cases, (B) the
financial condition of the Borrowers and Guarantors immediately prior to the
Petition Date as disclosed to Agent and Lenders in writing, (C) the delisting of the
stock of Parent or any of its Subsidiaries from the New York Stock Exchange, or (D)
Borrowers closing certain of their store locations with the prior written consent of
Agent with respect to such store closures or as otherwise provided in Section 3 of
the First Ratification Amendment) by any Borrower or Guarantor under any Material
Contract, which default continues for more than the applicable cure period, if any,
with respect thereto and/or is not waived in writing by the other parties thereto
or, other than in connection with the Nova Event, any Credit Card Issuer or Credit

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Card Processor withholds payment of amounts otherwise payable to a Borrower to
fund a reserve account or otherwise hold as collateral, or shall require a Borrower
to pay funds into a reserve account or for such Credit Card Issuer or Credit Card
Processor to otherwise hold as collateral, or any Borrower shall provide a letter of
credit, guarantee, indemnity or similar instrument to or in favor of such Credit
Card Issuer or Credit Card Processor such that in the aggregate all of such funds in
the reserve account, other amounts held as collateral and the amount of such letters
of credit, guarantees, indemnities or similar instruments shall exceed $750,000 or
any such Credit Card Issuer or Credit Card Processor shall debit or deduct any
amounts in excess of $750,000 in the aggregate in any fiscal year of Borrowers and
Guarantors from any deposit account of any Borrower;”

               (ii) Section 10.1(j) of the Loan Agreement is hereby amended to add at the beginning thereof:
“other than in connection with the Nova Event.”

               (iii) Section 10.1(k) of the Loan Agreement is hereby amended to add at the end thereof:
“unless (in the case of any of the foregoing), Borrower or Guarantor shall have entered into
arrangements with such person or other persons within thirty (30) days of such failure.”

               (iv) Section 10.1(p) of the Loan Agreement is hereby deleted in its entirety and the following
substituted therefor:

               “(p) Intentionally omitted.”

               (v) Section 10.1(r) of the Loan Agreement is hereby deleted in its entirety and the following
substituted therefor.

               “(r) the termination or non-renewal of the Financing Agreements other than as
provided for in the Financing Order.

               (vi) Section 10.1(t) of the Loan Agreement is hereby amended by adding the following
immediately prior to the period at the end of such Section: “provided, that, Agent
shall give notice of the Event of Default in accordance with the Financing Order that shall
identify such act, condition or event giving rise to the Event of Default.”

               (vii) Section 10.1(w) of the Loan Agreement is hereby deleted in its entirety and the
following substituted therefor:

               “(w) the grant by any Person 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 the 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);

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               (viii) Section 10.2(a) of the Loan Agreement is hereby amended by deleting the first sentence
of such Section and replacing it with the following:

               “(a) At any time an Event of Default has occurred and is continuing, Agent and
Lenders shall have all rights and remedies provided in this Agreement, the other
Financing Agreements, the UCC and other applicable law, all of which rights and
remedies may be exercised without notice to or consent by any Borrower or Guarantor,
except as such notice or consent is expressly provided for hereunder or under the
Financing Order or required by applicable law.”

          (h) Term. 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 benefit of Lenders, upon the
effective date of such termination, an early termination fee in the amount equal to
        .25% of Maximum Credit; provided, that, such early termination fee
shall not be payable if such termination arises in connection with the Bankruptcy
Court confirming a plan of reorganization in the Chapter 11 Cases (which plan is in
form and substance acceptable to Agent) pursuant to which Agent is providing exit
financing to the reorganized Borrowers on terms and conditions acceptable to Agent.”

     3. CONSENT TO LIQUIDATION OF CERTAIN LEASEHOLD INTERESTS AND STORE CLOSINGS.
Notwithstanding any provision to the contrary contained in the Loan Agreement or any Financing
Agreement:

          (a) No consent of Agent or any Lender shall be required with respect to either (i) the closing
of a GOB Store or (ii) the sale or other disposition of leasehold real property interests
associated with a GOB Store.

          (b) No consent of Agent or any Lender shall be required with respect to the closing of an
additional thirteen (13) store locations (in addition to the GOB Stores) to be selected by the
Borrowers and Guarantors; provided, that, if applicable, Agent’s consent shall be
required to the sale of the leasehold real property interests associated with such closed store.

          (c) No consent of Agent or any Lender shall be required in connection with the closing of a
store by Borrowers or Guarantors in which all inventory and other assets of Borrowers or Guarantors
located in such closed store are moved to a new, operating store location; provided,
that, if applicable, consent shall be required to the sale of the leasehold real property
interests associated with the closed store.

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     4. ADDITIONAL REPRESENTATIONS, WARRANTIES AND COVENANTS. Borrowers and Guarantors
hereby represent, warrant and covenant with and to Agent and Lenders as follows, which
representations, warranties and covenants are continuing and shall survive the execution and
delivery of this First Ratification Amendment, the truth and accuracy of, or compliance with each,
together with the representations, warranties and covenants in the other Financing Agreements,
being a condition of the effectiveness of this First Ratification Amendment and a continuing
condition of the making or providing of any Loans or Letter of Credit Accommodations by Agent and
Lenders to Borrowers and Guarantors:

          (a) This First Ratification Amendment has been duly authorized, executed and delivered by
Borrowers and Guarantors and the agreements and obligations of Borrowers and Guarantors contained
herein constitute legal, valid and binding obligations of Borrowers and Guarantors enforceable
against Borrowers and Guarantors in accordance with their respective terms.

          (b) No Event of Default or act, condition or event which with notice or passage of time or
both would constitute an Event of Default exists or has occurred as of the date of this First
Ratification Amendment.

     5. CONDITIONS PRECEDENT. The amendments contained herein shall only be effective upon
the satisfaction of each of the following conditions precedent, each in a manner satisfactory to
Agent:

          (a) Agent shall have received this First Ratification Amendment, duly authorized, executed and
delivered by Borrowers, Guarantors and the Required Lenders;

          (b) The Bankruptcy Court shall have entered the Permanent Financing Order authorizing
Borrowers and Guarantors to execute and deliver this First Ratification Amendment; and

          (c) No Default or Event of Default shall have occurred and be continuing after giving effect
to this First Ratification Amendment.

     6. ADDITIONAL EVENTS OF DEFAULT. The parties hereto acknowledge, confirm and agree
that the failure of a Borrowers or Guarantors to comply with the covenants, conditions and
agreements contained herein shall constitute an Event of Default under the Loan Agreement and the
other Financing Agreements (subject to the applicable cure period, if any, with respect thereto
provided for in the Loan Agreement as in effect on the date hereof).

     7. MISCELLANEOUS.

          (a) Amendments and Waivers. Neither this First Ratification Amendment 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.

          (b) Binding Effect. This First Ratification Amendment shall be binding upon and inure
to the benefit of each of the parties hereto and their respective successors and assigns.

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          (c) Further Assurances. Borrowers and Guarantors shall execute and deliver such
additional documents and take such additional action as may be reasonably requested by Agent to
effectuate the provisions and purposes of this First Ratification Amendment.

          (d) Headings. The headings listed herein are for convenience only and do not
constitute matters to be construed in interpreting this First Ratification Amendment.

          (e) Counterparts. This First Ratification Amendment (i) may be executed in separate
counterparts, each of which when taken together shall constitute one and the same agreement, and
(ii) may be executed and delivered by telecopier with the same force and effect as if it were a
manually executed and delivered counterpart. In making proof of this First Ratification Amendment,
it shall not be necessary to produce or account for more than one counterpart thereof signed by
each of the parties hereto.

[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

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     IN WITNESS WHEREOF, the parties hereto have caused this First Ratification Amendment to be
duly executed and delivered by their authorized officers as of the date 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]

 

 

[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:	 	 	 	 
	 

	 	 	 	 

	 	 
	 
	 	 	 	 	 	 
	 	 	WELLS FARGO RETAIL FINANCE, LLC	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 

	 	 
	 

	 	Title:EX-10.45

 

EXHIBIT 10.45

May 9, 2007

Kathleen Kennedy

2519 Woodgreen Dr.

Belden, MS 38826

     Severance Agreement

Dear Kathleen:

Effective with the close of business on Wednesday, May 9, 2007, your “Severance Date”) your
employment with Hancock Fabrics, Inc. (the “Company”) is terminated.

Subject to the terms and conditions of this Severance Agreement and for, and in consideration of
the release and other obligations contained in this letter, you will be entitled to $95,000.00 of
separation pay and other benefits, all as described in more detail in Schedule A. The separation
pay will be paid at regular payroll intervals as soon as administratively practicable following the
date this letter agreement becomes effective.

By signing this Severance Agreement, you release and forever discharge Hancock Fabrics, Inc. and
its parent corporations, subsidiaries and affiliates, and their shareholders, officers, employees,
agents, representatives, independent contractors, successors, assigns and benefit plans (the
“Company”) from any and all claims, actions, liabilities and suits, whether known or unknown,
whether existing now or arising, accruing, or maturing later, arising out of anything that has
occurred up through the date you sign this Severance Agreement, or your Severance Date, which ever
is later, including but not limited to any claims that arise from your employment with the Company,
the Severance Agreement for Kathleen Kennedy dated March 15, 2006 or your offer letter of
employment as Senior Vice President Marketing dated February 6, 2006, but excluding any claim for
vested benefits from a retirement plan in which you are a participant.

Without limiting the generality of the foregoing, you are agreeing that, by signing this Severance
Agreement, you are releasing and waiving any and all claims that you ever had or may have as of the
date you sign this Severance Agreement for age discrimination under the Age Discrimination in
Employment Act, 29 U.S.C. §§ 621, et seq. You are advised to consult with an attorney before
signing this Severance Agreement; that the consideration you receive in exchange for signing this
Severance Agreement is in addition to amounts to which you were already entitled; and that you may,
before signing this Severance Agreement, consider this Severance Agreement for a period of
21 calendar days. You may revoke this Severance Agreement within 7 calendar days from the date of
the signing of this Severance Agreement. This Severance Agreement is not effective until 7
calendar days following its signing.

By signing this Severance Agreement, you also agree to provide to the Company, upon request,
(i) information concerning your employment with the Company, and (ii) reasonable assistance
relating to your previous employment with the Company, including but not limited to providing

 

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truthful testimony in any legal action pursued or defended by the Company in which you have
information or knowledge.

You acknowledge that information, observations and data obtained by you while employed by the
Company (“Confidential Information”) are the property of the Company. By signing this Severance
Agreement, you agree not to disclose to any unauthorized person, or use for your own purpose, any
Confidential Information without the prior written consent of the Company, unless and to the extent
that the aforementioned matters become generally known to and available for use by the public other
than as a result of your acts or omissions.

You acknowledge that all inventions, innovations, improvements, developments, methods, designs,
analyses, drawings, reports and all similar or related information (whether patentable or not)
which relate to the Company’s actual or anticipated business, research and development or existing
or future products or services and which are conceived, developed or made by you while employed by
the Company (“Work Products”) belong to the Company. You shall promptly disclose such Work
Products to the Company and perform all actions reasonably requested by the Company (whether during
of after employment) to establish and confirm such ownership.

Notwithstanding the obligations set forth in the above two paragraphs, after termination of your
employment with the Company, you are free to use Residuals of the Company’s Confidential
Information and Work Products for any purpose subject only to the obligations with respect to
disclosure set forth herein and any copyrights of patents of the Company. The term “Residuals”
means information in non-tangible form that may be retained in your unaided memory derived form the
Company’s Confidential Information and Work Product to which you had access during your employment
with the Company. You may not retain or use the documents and any other tangible materials
containing the Company’s Confidential Information or Work Product after the termination of your
employment with the Company.

By signing this Severance Agreement, you agree that for the duration of the Severance Period, you
will not directly or indirectly own any interest in, manage, control, participate in, work for,
consult with or render any services for any Material Competitor of the Company. “Material
Competitor” is defined as a retailer of both fabrics and home décor items on a national or
multi-state scale. Examples of such competitors include, but are not limited to Jo-Ann Stores,
Hobby Lobby and Michaels. Nothing in this paragraph shall prohibit you from being a passive owner
of not more than 2% of the outstanding stock of any class of a corporation which is publicly traded
so long as you have no active participation in the business of such corporation. The Company
reserves the right to enforce this provision in any state in which it is enforceable.

By signing this Severance Agreement, you agree that for the duration of the Severance Period, you
will not directly or indirectly through another entity 1) induce or attempt to induce any employee
of the Company to leave the employ of the Company or in any way interfere with the relationship
between the Company and any employee thereof, 2) hire any person who was an employee of the Company
at any time of his/her employment history, or 3) induce or attempt to induce any customer,
supplier, licensee, licenser, franchisee or other business relation of the Company to cease doing
business with the Company or in any way interfere with the relationship between such supplier,
licensee, licenser, franchisee or other business relation and the Company

 

Page 3 of 5

(including, without limitation, making negative statements or communications about the Company).

This Severance Agreement contains the entire understanding between you and the Company concerning
the termination of your employment and may only be amended by a written instrument signed by both
parties.

You have 21 days from the date of receipt to sign this Severance Agreement in the space provided
below and return it to the Company. After such 21-day period, the offer contained in this letter
is withdrawn. You may revoke this Severance Agreement within 7 calendar days from the date of the
signing of this Severance Agreement. This Severance Agreement is not effective until 7 calendar
days following its signing.

Sincerely,

Jim Britz

VP-Human Resources

I hereby agree to and accept the terms contained in this Severance Agreement.

	 	 	 	 	 	 	 
	Date

	 	 	 	Signature	 	 
	 
	 	 	 	 	 	 
	 

	 	 	 	 

	 	 

 

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SCHEDULE A

SEVERANCE BENEFITS

     You will receive the following amounts as described below:

1. Severance and Other Payments.

     (a) Severance Payment. You will receive separation pay at your regular base pay at regular
payroll intervals for a period of 26 weeks, less applicable taxes and withholdings. The total
gross amount of these payments is $95,000.00. The number of weeks will be referred to in this
Schedule A and in the Severance Agreement as your “Severance Period.” The Severance Period begins
on the Severance Date of Wednesday, May 9, 2007 and ends November 7. 2007.

     (b) Vacation and Bonus Benefit. You will receive a one-time lump-sum payment, less applicable
taxes and withholdings, equal to the value of (i) your total earned, unused and outstanding
vacation days, and (ii) your bonuses earned, all determined as of your Severance Date.

     (c) Life Insurance Benefit. Subject to the terms of the underlying plans and any applicable
insurance policies, you may continue your group life insurance benefits during your Severance
Period.

     (d) Restricted Stock Award. To the extent that you have a grant(s) of restricted stock under
the Hancock Fabrics, Inc. Stock Incentive Plan and are not vested as of the end of your Severance
Date in shares of that stock, the Company will pay you the cash equivalent of the fair market value
of your unvested, outstanding, restricted stock grants that would have vested as of the end of the
Severance Period had your employment continued. Payment will be in an amount equal to the per
share closing price for each share of unvested restricted stock on your Severance Date. The
Company will pay this amount in a single lump-sum payment.

2. Health Benefit.

     (a) COBRA Coverage. You will have the opportunity to elect continuation coverage of your
medical and dental benefits for yourself, your spouse and/or eligible dependents if you are
participating in the Company’s plans for those benefits as of your Severance Date, in accordance
with the provisions of COBRA. If elected in a timely manner, COBRA coverage generally will end on
the last day of the 18th month following your Severance Date (unless an earlier end date
or an extension is required under COBRA).

     (b) Company Subsidy of COBRA Coverage. If and to the extent you timely elect COBRA
continuation coverage, you and the Company will share the cost of COBRA coverage for yourself, your
spouse and/or eligible dependents during your Severance Period. During that period, you will be
responsible for paying the same amount for coverage as a similarly-situated active employee. The
Company will pay the remaining costs on your behalf. To the extent you continue COBRA continuation
coverage after your Severance Period, you will be responsible for

 

Page 5 of 5

paying the full cost of the COBRA continuation coverage in accordance with the procedures of
the Company generally applicable to all qualified beneficiaries receiving COBRA continuation
coverage.

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