PLEDGE AND SECURITY
AGREEMENT
(Membership Interest Pledge
Agreement)
This PLEDGE AND
SECURITY AGREEMENT (as amended and in effect from time to time,
this “Pledge Agreement”), dated as of August 1,
2008, is by each of the undersigned Persons (as defined in the Loan
Agreement, as hereinafter defined) (each a “Pledgor”,
and, collectively, the “Pledgors”) to and in favor of
GENERAL ELECTRIC CAPITAL CORPORATION, a Delaware corporation, in
its capacity as agent (in such capacity, “Pledgee”)
pursuant to the Loan Agreement (as hereinafter defined) acting for
and on behalf of the Lenders (as defined in the Loan
Agreement).
WHEREAS, each
Pledgor is now the direct and beneficial owner of all of the issued
and outstanding Interests (as defined below) of the limited
liability companies listed on Exhibit A hereto (which may be
amended, updated or otherwise modified from time to time pursuant
to the terms hereof);
WHEREAS, Pledgee
and the Lenders have entered into or are about to enter into
financing arrangements pursuant to which Lenders (or Pledgee on
behalf of Lenders) may make loans and advances and provide other
financial accommodations to 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”), and 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”) as set forth in the Loan and Security
Agreement, dated of even date herewith, by and among Borrowers,
certain affiliates of Borrowers, Pledgee and Lenders (as the same
now exists or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced, the “Loan
Agreement”) 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, the Guarantee (as hereinafter defined) and this Pledge
Agreement (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”);
WHEREAS, each
Pledgor has absolutely and unconditionally guaranteed the payment
and performance of the Obligations as set forth in the Guarantee,
dated of even date herewith, by Pledgors in favor of Pledgee and
Lenders (as the same now exists or may hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced,
the “Guarantee”); and
WHEREAS, in order
to induce Pledgee and Lenders to enter into the Loan Agreement and
the other Financing Agreements and to make loans and advances and
provide other financial accommodations to Borrowers pursuant
thereto, each Pledgor has agreed to secure the payment and
performance of the Obligations and to accomplish same by
(i) executing and delivering to
Pledgee this
Pledge Agreement and (ii) delivering to Pledgee any and all
other documents which Pledgee deems necessary to protect
Pledgee’s and Lenders’ interests hereunder.
NOW, THEREFORE, in
consideration of the premises and other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, each Pledgor hereby agrees as follows:
1.
DEFINITIONS All capitalized terms used herein without
definition shall have the meanings ascribed thereto in the Loan
Agreement, and the following terms shall have the following
meanings:
(a)
“Interests” shall mean all limited liability membership
units, together with all voting trust certificates evidencing the
right to vote the foregoing subject to any voting trust.
(b)
“Issuers” shall mean the limited liability companies
now owned or hereafter acquired (whether in connection with any
recapitalization, reclassification or reorganization of the capital
of any such company or any successors in interest thereto) by any
Pledgor, including, without limitation, the limited liability
companies listed on Exhibit A attached hereto.
(c)
“Pledged Interests” shall mean all Interests of the
Issuers, including, without limitation, the Interests listed on
Exhibit A hereto (which may be amended, updated or otherwise
modified from time to time) pledged by the Pledgors pursuant to
this Pledge Agreement.
2. GRANT
OF SECURITY INTEREST
(a) As
collateral security for the prompt performance, observance and
indefeasible payment in full in cash of all of the Obligations,
each Pledgor hereby assigns, pledges, hypothecates, transfers and
sets over to Pledgee and grants to Pledgee, for itself and for the
benefit of Lenders, a security interest in and lien upon the
following (collectively, the “Collateral”): (i) the
Pledged Interests owned by such Pledgor and all other ownership
interests of such Pledgor in any Issuer in which such Pledgor has
an ownership interest, all certificates (if any) at any time
representing or evidencing such ownership interests (including
without limitation the membership certificate described on
Exhibit A hereto) and (A) all of such Pledgor’s
right, title and interest in, to and under any operating agreement
to which such Pledgor is a party with respect to any such Issuer as
set forth on Exhibit A hereto (as the same now exists or may
hereafter be amended, modified, supplemented, extended, renewed,
restated, or replaced, each an “LLC Agreement” and
collectively the “LLC Agreements”), including, without
limitation, all of such Pledgor’s right, title and interest
as a member to participate in the operation or management of any
such Issuer and all of such Pledgor’s ownership interests
under any such LLC Agreement, and (B) all present and future
rights of such Pledgor to receive payment of money or other
distribution of payments arising out of or in connection with the
Pledged Interests owned by such Pledgor and all other ownership
interests and its rights under any such LLC Agreement now or
hereafter owned by such Pledgor, (ii) all additional Interests of
any Issuer in which such Pledgor now has an ownership interest or
any other Person from time to time acquired or formed by such
Pledgor in any manner (which additional Interests shall
be
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deemed part of
the Pledged Interests whether or not Exhibit A has been
updated in accordance with the terms hereof) and any certificates
representing such Interests, (iii) all proceeds of and to any
of the property of such Pledgor described above, including, without
limitation, all causes of action, claims and warranties now or
hereafter held by such Pledgor in respect of any of the items
listed above and (iv) such Pledgor’s books and records
with respect to any of the foregoing.
(b) This
Pledge Agreement is executed only as security for the Obligations
and, therefore, the execution and delivery of this Pledge Agreement
shall not subject Pledgee or any Lender to, or transfer or pass to
Pledgee or any Lender, or in any way affect or modify, the
liability of any Pledgor under any LLC Agreement to which such
Pledgor is a party or any related agreements, documents or
instruments or otherwise. In no event shall the acceptance of this
Pledge Agreement by Pledgee or Lenders or the exercise by Pledgee
or any Lender of any rights hereunder or assigned hereby,
constitute an assumption of any liability or obligation of any
Pledgor to, under or in connection with any such LLC Agreement or
any related agreements, documents or instruments or
otherwise.
(c) Each
Pledgor agrees that the Pledgee may from time to time attach as
Exhibit A hereto an updated list of the Interests,
securities or other equity interests at the time pledged to the
Pledgee hereunder without the consent of any Pledgor
hereunder.
The security
interest, lien and other interests granted to Pledgee (for itself
and on behalf of Lenders) pursuant to this Pledge Agreement shall
secure the prompt performance and payment in full of any and all
Obligations.
4.
REPRESENTATIONS, WARRANTIES AND COVENANTS
Each Pledgor
hereby represents, warrants and covenants with and to Pledgee and
Lenders the following (all of such representations, warranties and
covenants being continuing so long as any of the Obligations are
outstanding):
(a) The
Pledged Interests owned by such Pledgor are duly authorized,
validly existing, fully paid and non-assessable and constitute all
of the issued and outstanding membership interests in any Issuer in
which such Pledgor has an ownership interest, and such Pledgor is
the registered owner of such membership interests. Such Pledgor is
the holder of one hundred (100%) percent of the membership
interests therein and is the sole member of any such
Issuer.
(b) The
Collateral pledged by such Pledgor is directly, legally and
beneficially owned by such Pledgor, free and clear of all claims,
liens, pledges and encumbrances of any kind, nature or description,
except for (i) the pledge, lien and security interest in favor
of Pledgee, for itself and the benefit of Lenders and (ii) the
subordinated lien permitted pursuant to Section 9.8(n) of the
Loan Agreement.
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(c) The
Collateral pledged by such Pledgor is not subject to any
restrictions relative to the transfer thereof and such Pledgor has
the right to transfer and hypothecate such Collateral free and
clear of any liens, encumbrances or restrictions.
(d) The
Collateral pledged by such Pledgor is duly and validly pledged to
Pledgee, for itself and for the benefit of Lenders; no consent or
approval of any governmental or regulatory authority or of any
securities exchange or the like, nor any consent or approval of any
other third party, was or is necessary to the validity and
enforceability of this Pledge Agreement.
(e) Such
Pledgor authorizes Pledgee to: (i) store, deposit and
safeguard the Collateral pledged by such Pledgor, (ii) perform
any and all other acts which Pledgee in good faith deems reasonable
and/or necessary for the protection and preservation of such
Collateral or its value or Pledgee’s security interest
therein, including, without limitation, transferring, registering
or arranging for the transfer or registration of such Collateral to
or in Pledgee’s, or any Lender’s, own name and
receiving the income therefrom as additional security for the
Obligations and (iii) pay any charges or expenses which Pledgee
deems necessary for the foregoing purpose, but without any
obligation to do so. Any obligation of Pledgee for reasonable care
for such Collateral in Pledgee’s possession shall be limited
to the same degree of care which Pledgee uses for similar property
pledged to Pledgee by other Persons.
(f) As
of the date hereof, there are no certificates or other written
instruments evidencing or representing the Pledged Interests owned
by such Pledgor (except for the membership certificate(s) described
on Exhibit A hereto, which certificate(s) is/are being pledged
and delivered to Pledgee herewith, accompanied by an assignment of
such certificate, duly endorsed by such Pledgor in blank). If at
any time after the date hereof such Pledgor shall become entitled
to receive or acquire, or shall receive any other membership
interest certificate, or option or right with respect to any
membership interests of any Issuer in which such Pledgor has an
ownership interest (including without limitation, any certificate
representing a distribution or exchange of or in connection with
reclassification of any Pledged Interest pledged by such Pledgor)
whether as an addition to, in substitution of, or in exchange for
any of the Collateral pledged by such Pledgor or otherwise, such
Pledgor agrees to accept same as Pledgee’s agent, to hold
same in trust for Pledgee and to deliver same forthwith to Pledgee
or Pledgee’s agent or bailee in the form received, with the
endorsement(s) of such Pledgor where necessary and/or appropriate
powers and/or assignments duly executed to be held by Pledgee or
Pledgee’s agent or bailee subject to the terms hereof, as
further security for the Obligations.
(g) The
Collateral pledged by such Pledgor is not and shall not at any time
hereafter be investment property or otherwise subject to
Article 8 of the UCC, except as Pledgee may otherwise
expressly agree.
(h) Such
Pledgor shall keep full and accurate books and records relating to
the Collateral pledged by such Pledgor and stamp or otherwise mark
such books and records in such manner as Pledgee may require in
order to reflect the security interests granted by this Pledge
Agreement.
(i) Such
Pledgor shall not, without the prior consent of Pledgee, directly
or indirectly, sell, assign, transfer, or otherwise dispose of, or
grant any option with respect to the
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Collateral
pledged by such Pledgor, nor shall such Pledgor create, incur or
permit any further pledge, hypothecation, encumbrance, lien,
mortgage or security interest with respect to such
Collateral.
(j) So
long as no Event of Default (as hereinafter defined) has occurred
and is continuing, such Pledgor shall have the right to exercise
all limited liability company rights with respect to the Collateral
pledged by such Pledgor, except as expressly prohibited herein or
in any of the other Financing Agreements, and to receive any
distributions payable in respect of such Collateral (but subject to
terms of the Loan Agreement with respect thereto).
(k) Such
Pledgor has delivered to Pledgee a true, correct and complete copy
of the LLC Agreements to which such Pledgor is a party and the
certificate of formation of any Issuer in which such Pledgor has an
ownership interest. There are and shall be no other agreements
governing the formation, organization or terms of the membership
interests with respect to any such Issuer.
(l) Such
Pledgor shall not permit any Issuer in which such Pledgor has an
ownership interest, directly or indirectly, to (i) issue,
sell, grant, assign, transfer or otherwise dispose of, any
additional membership interests of such Issuer or any option or
warrant with respect to, or other right or security convertible
into, any additional membership interests, now or hereafter
authorized, unless all such additional membership interests,
options, warrants, rights or other such securities are made and
shall remain part of the Collateral pledged by such Pledgor subject
to the pledge and security interest granted herein, (ii) take
any action to withdraw the authority of or to limit or restrict the
authority of the managers or officers of such Issuer to deal and
contract with Pledgee and to bind and obligate such Issuer, or
(iii) pay any interim distribution in cash or other assets to
any member, except as permitted in the Loan Agreement. Any
distribution by such Issuer other than as permitted in the Loan
Agreement shall constitute a “wrongful distribution”
for purposes of applicable law.
(m) Such
Pledgor shall promptly notify Pledgee in writing of the occurrence
of any event specified in any LLC Agreement to which such Pledgor
is a party or the certificate of formation of any Issuer in which
such Pledgor has an ownership interest that may result in such
Issuer’s dissolution or liquidation.
(n) Such
Pledgor shall not, and shall not permit any Issuer in which such
Pledgor has an ownership interest, directly or indirectly, to,
amend, modify or supplement any of the provisions of any LLC
Agreement to which such Pledgor is a party or the certificate of
formation of the applicable Issuer without the prior written
consent of Pledgee if any such amendment, modification or
supplement would or could affect any rights of Pledgee hereunder or
under any of the other Financing Agreements or would limit or
restrict the permissible activities in which such Issuer may
engage.
(o) In
accordance with the LLC Agreement(s) to which such Pledgor is a
party, Pledgor, as the sole member of the applicable Issuer, hereby
acknowledges and agrees that Pledgee or any of its successors,
assigns or designees, shall, at Pledgee’s option upon written
notice to such Pledgor of Pledgee’s intent to be admitted
itself (or to have any such successor, assignee or designee
admitted) as a member of such Issuer at any time an Event of
Default exists
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or has occurred
and is continuing, be admitted as a member of any such Issuer
without any further approval of such Pledgor and without compliance
by Pledgee or any other Person with any of the conditions or other
requirements of such LLC Agreement and without conferring upon any
member thereof any option (whether under such LLC Agreement or
otherwise) to acquire the membership interests so transferred to
Pledgee, its successors, assigns, or designees. Such Pledgor agrees
to take such other action and execute such further documents as
Pledgee may reasonably request from time to time in order to give
effect to the foregoing provisions of this
Section 4.
(p) Such
Pledgor shall pay all charges and assessments of a
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