PLEDGE AND SECURITY
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 shares of capital stock of the Persons 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,
(ii) delivering to Pledgee the Pledged Securities which
are
registered in
the name of such Pledgor, together with appropriate powers duly
executed in blank by such Pledgor, and (iii) 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) “Issuers”
shall mean the corporations now owned or hereafter acquired
(whether in connection with any recapitalization, reclassification
or reorganization of the capital of any such corporation or any
successors in interest thereto) by any Pledgor, including, without
limitation, those corporations listed on Exhibit A attached
hereto.
(b) “Pledged
Securities” shall mean all capital stock of the Issuers,
including, without limitation, the capital stock 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
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: (a) the Pledged
Securities owned by such Pledgor, together with all cash dividends,
stock dividends, interests, profits, redemptions, warrants,
subscription rights, stock, securities options, substitutions,
exchanges and other distributions now or hereafter distributed by
any Issuer in which such Pledgor owns capital stock of such Issuer
or which may hereafter be delivered to the possession of such
Pledgor or Pledgee with respect thereto, (b) such
Pledgor’s records with respect to the foregoing, (c) all
additional capital stock of any Issuer owned by such Pledgor or any
capital stock of any other Person from time to time acquired by
such Pledgor in any manner (which additional capital stock shall be
deemed part of the Pledged Securities whether or not Exhibit A
has been updated in accordance with the terms hereof) and (d) the
proceeds of all of the foregoing (all of the foregoing being
collectively referred to herein as the “Pledged
Property”). Each Pledgor agrees that the Pledgee may from
time to time attach as Exhibit A hereto an updated list
of the Pledged Securities, securities or other capital stock 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.
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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
Securities owned by such Pledgor are duly authorized, validly
issued, fully paid and non-assessable capital stock of each
applicable Issuer and constitute such Pledgor’s entire
interest in each such Issuer, and are not registered, nor has such
Pledgor authorized the registration thereof, in the name of any
person or entity other than such Pledgor or Pledgee.
(b) The Pledged
Property 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 and security interest in favor of
Pledgee, for itself and for the benefit of Lenders, and
(ii) the subordinated lien permitted pursuant to
Section 9.8(n) of the Loan Agreement.
(c) The Pledged
Property 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 Pledged Property free and clear of
any liens, encumbrances or restrictions.
(d) The Pledged
Property pledged by such Pledgor is duly and validly pledged to
Pledgee, for itself and for the benefit of Lenders, and 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
Pledged Property 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 Pledged
Property or its value or Pledgee’s security interest therein,
including, without limitation, transferring, registering or
arranging for the transfer or registration of such Pledged Property
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 Pledged Property 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) If such
Pledgor shall become entitled to receive or acquire, or shall
receive any stock certificate, or option or right with respect to
the capital stock of any Issuer owned by such Pledgor (including
without limitation, any certificate representing a dividend or a
distribution or exchange of or in connection with reclassification
of the Pledged Securities owned by such Pledgor) whether as an
addition to, in substitution of, or in exchange for any of the
Pledged Property 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
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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) Such Pledgor
shall not, without the prior written consent of Pledgee, directly
or indirectly, sell, assign, transfer, or otherwise dispose of, or
grant any option with respect to the Pledged Property 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 Pledged Property.
(h) So long as no
Event of Default (as hereinafter defined) has occurred and is
continuing, such Pledgor shall have the right to vote and exercise
all corporate rights with respect to the Pledged Securities owned
by such Pledgor, except as expressly prohibited herein, and to
receive any dividends (payable in cash or in property) in respect
of the Pledged Securities owned by such Pledgor and to receive any
other distributions with respect to such Pledged Securities that
are permitted by the Loan Agreement.
(i) Such Pledgor
shall not permit any Issuer in which such Pledgor owns capital
stock, directly or indirectly, to issue, sell, grant, assign,
transfer or otherwise dispose of, any additional shares of capital
stock of such Issuer or any option or warrant with respect to, or
other right or security convertible into, any additional shares of
capital stock of such Issuer, now or hereafter authorized, unless
all such additional shares, options, warrants, rights or other such
securities are made and shall remain part of the Pledged Property
pledged by such Pledgor subject to the pledge and security interest
granted herein.
(j) Such Pledgor
shall pay all charges and assessments of any nature against the
Pledged Property pledged by such Pledgor or with respect thereto
prior to said charges and/or assessments being
delinquent.
(k) Such Pledgor
shall promptly reimburse Pledgee and Lenders on demand, together
with interest at the rate then applicable to the Obligations set
forth in the Loan Agreement, for any charges, assessments or
expenses paid or incurred by Pledgee or any Lender in
Pledgee’s discretion for the protection, preservation and
maintenance of the Pledged Property pledged by such Pledgor and the
enforcement of Pledgee’s or Lenders’ rights hereunder,
including, without limitation, attorneys’ fees and legal
expenses incurred by Pledgee or any Lender in seeking to protect,
collect or enforce its rights in such Pledged Property or otherwise
hereunder. Any such amounts paid or incurred by Pledgee shall
constitute part of the Obligations under the Loan Agreement and may
be charged by Pledgee to any loan account of the Borrowers
maintained by Pledgee, at its option.
(l) Such Pledgor
shall furnish, or cause to be furnished, to Pledgee such
information concerning any Issuer in which such Pledgor owns
capital stock and the Pledged Property pledged by such Pledgor as
may from time to time be required under the Loan
Agreement.
(m) Pledgee may
notify any Issuer in which such Pledgor owns capital stock or the
appropriate transfer agent of the Pledged Securities owned by such
Pledgor to register the
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security
interest and pledge granted herein and honor the rights of Pledgee
and Lenders under this Pledge Agreement.
(n) Such Pledgor
waives: (i) all rights to require Pledgee or any Lender to
proceed against any other Person, entity or collateral or to
exercise any remedy, (ii) the defense of the statute of
limitations in any action upon any of the Obligations,
(iii) any right of subrogation or interest in the Obligations
or the Pledged Property until all Obligations have been
indefeasibly paid in full in cash, (iv) any rights to notice
of any kind or nature whatsoever, unless specifically required in
this Pledge Agreement or non-waivable under any applicable law, and
(v) to the extent
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