Exhibit 10.3
 
FORBEARANCE AGREEMENT

THIS FORBEARANCE AGREEMENT (this “Forbearance Agreement”) effective as of
January 31, 2009 among AEROGROW INTERNATIONAL, INC., a Nevada corporation
(“Borrower”), Jack J. Walker, a Colorado resident (“Guarantor”; Borrower and
Guarantor are sometimes referred to herein individually as an “Obligor” and
collectively as “Obligors”), and FCC, LLC, d/b/a First Capital, a Florida
limited liability company (“Lender”).
 
WITNESSETH:
 
WHEREAS, Borrower and Lender are parties to that certain Loan and Security
Agreement dated as of June 23, 2008 (as amended, restated or otherwise modified
from time to time, the “Loan Agreement”), pursuant to which Lender agreed to
extend certain financial accommodations to Borrower; and
 
WHEREAS, pursuant to the Loan Agreement, Borrower agreed, among other things, to
comply with certain financial covenants; and
 
WHEREAS, Borrower has failed to provide certain information and has violated
such financial covenants; and
 
WHEREAS, Borrower’s agreement to comply with such financial covenants was a
material inducement to Lender’s agreement to enter into the Loan Agreement, and
Lender would not have agreed to make loans available to Borrower without the
assurance that Borrower would provide such information and comply with such
covenants; and
 
WHEREAS, as a result of such material defaults by Borrower, Lender has the
right, as set forth in the Loan Agreement and the other Loan Documents, to
immediately exercise all of its rights and remedies with respect to the
Collateral, Borrower and Guarantors, all without notice to Borrower, Guarantors
or any other Person; and
 
WHEREAS, Obligors have asked Lender to temporarily forbear from exercising its
rights and remedies with respect to the defaults described above, as more
particularly described herein; and
 
WHEREAS, Lender is willing to grant such temporary forbearance, subject to the
terms and conditions set forth herein; and
 
WHEREAS, Borrower and Lender desire to amend the Loan Agreement as set forth
herein.
 
NOW, THEREFORE, in consideration of the foregoing premises, and other good and
valuable consideration, the receipt and legal sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
 
1.           All capitalized terms used herein and not otherwise expressly
defined herein shall have the respective meanings given to such terms in the
Loan Agreement.
 
2.           Borrower acknowledges and agrees that (i) Borrower has failed to
comply with each of the financial covenants set forth in Item 21 of the Schedule
as required in Section 6 of the Loan Agreement and (ii) the foregoing failures
to comply with the Loan Agreement constitute Defaults under the Loan Agreement
and are referred to herein as the “Existing Defaults.”
 
3.           In order to induce Lender to enter into this Forbearance Agreement
and to grant the forbearance contemplated hereby, Borrower and Guarantors hereby
acknowledge and agree with Lender as follows:

 
(a)
The facts set forth in the recitals to this Forbearance Agreement are true and
correct in all material respects.

 
 
(b)
The Loan Agreement, the Guarantees and the other Loan Documents constitute the
valid, binding and enforceable obligations of each Obligor party thereto to
Lender, Lender has a valid and perfected security interest in and to the
Collateral, and each Obligor hereby reaffirms such Obligor’s obligations to
Lender under each of the Loan Documents to which such Obligor is a party.

 
 
(c)
As of the date hereof, the outstanding principal balance of the loans
outstanding under the Loan Agreement is $6,784,906.69.  Such amount, together
with all accrued interest thereon, is validly owing by Borrower and Guarantor to
Lender and is not subject to any right of offset, claim or counterclaim in favor
of Borrower, Guarantor or any other Person.

 
 

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4.           In consideration of Borrower’s timely and strict compliance with
Borrower’s agreements set forth in the Loan Agreement and in this Forbearance
Agreement, and in reliance upon the representations, warranties, agreements and
covenants of Obligors, other than by Guarantor, set forth herein, Lender agrees
to forbear until the Forbearance Termination Date (as defined below) from
exercising its rights and remedies under the Loan Agreement and the other Loan
Documents as a result of the Existing Defaults.  Lender reserves its rights and
remedies at all times with respect to any Default under the Loan Agreement, the
Guarantees, this Forbearance Agreement or any other Loan Document other than the
Existing Defaults, whether presently existing or occurring hereafter.  At any
time on or after the Forbearance Termination Date, Lender may exercise any and
all of its rights and remedies under or with respect to the Loan Agreement, the
Guarantees, this Forbearance Agreement and the other Loan Documents, whether
relating to the Existing Defaults or otherwise.  As used herein, “Forbearance
Termination Date” means the earlier of (x) June 30, 2009, (y) the date of the
occurrence of a Default other than an Existing Default (whether any such Default
first occurred or arose on, prior or after the date hereof), and (z) the default
or breach by any Obligor of any of the covenants, agreements, representations
and warranties set forth in this Agreement.
 
5.           In conjunction with the forbearance contemplated in this
Forbearance Agreement, from the date of this Forbearance Agreement through and
including the Forbearance Termination Date, the Loan Agreement is amended by
deleting Item 1(a)(ii) of the Schedule to the Agreement and replacing it with
the following:
 
(ii)           the sum of :
 
(A)  
85% of the dollar amount of Eligible Accounts; plus

 
(B)  
the lesser of:

 
(1)  
$6,000,000, or

 
(2)  
80% of the dollar value (determined at the lower of cost or market value) of
Eligible Inventory.

 
provided, however, that the aggregate principal amount available to be borrowed
against Eligible Inventory under this clause (B) shall not exceed 80% of the
Obligations outstanding at any time;
 
On July 1, 2009, the amendment to Item 1(a)(ii) of the Schedule set forth above
shall cease to be effective, and the terms of Item 1(a)(ii) of the Schedule
shall revert back to those terms otherwise in effect under the Loan Agreement.
 
           6.           In consideration of the accommodations made by Lender
hereunder, Borrower agrees as follows:

(a)  
Beginning with the month of February 2009 and for each following month through
and including June 2009, Borrower will pay to Lender a fee (“Forbearance Fee”)
in the amount of Five Thousand and No/100 Dollars ($5,000) per month, which
Forbearance Fee is a fee for services rendered and is not interest or a charge
for the use of money.  The Forbearance Fee will be due and payable monthly in
arrears on the first day of each calendar month.

(b)  
Beginning with the month of February 2009 and for each following month through
and including June 2009, Borrower will pay to Lender a fee (“Amendment Fee”) in
the amount of one and one-half percent (1.5%) per month of the Increase (as
hereinafter defined), which Amendment Fee is a fee for services rendered and is
not interest or a charge for the use of money.  The Amendment Fee will be due
and payable monthly in arrears on the first day of each calendar
month.  (“Increase” means the difference between (x) the average daily
outstanding balance of loans under the Loan Agreement applying the amendment to
the Loan Agreement in Section 5 of this Forbearance Agreement and (y) the
average daily outstanding balance of loans under the Loan Agreement if Item
1(a)(ii)(B)(2) of the Schedule were “60% of the dollar value (determined at the
lower of cost or market value) of Eligible Inventory”.

(c)  
Borrower will pay to Lender on demand all reasonable costs and expenses of
Lender in connection with the preparation, execution, delivery and enforcement
of this Forbearance Agreement and any other transactions contemplated hereby and
thereby, including, without limitation, the reasonable fees and out-of-pocket
expenses of legal counsel to Lender.

(d)  
On or before February 20, 2009, Borrower will issue to Lender warrants for the
purchase of not less than 250,000 shares of the common stock of Borrower for an
amount of $1.00 per share.

(e)  
On or before February 10, 2009, Borrower will cause Jack J. Walker to execute
and deliver to Lender a First Amendment to Limited Guaranty of Individual in
form and substance similar to Exhibit A attached hereto.  On July 1, 2009, if,
and only if, (i) Borrower has complied with all terms and conditions of this
Forbearance Agreement from the date of the Forbearance Agreement through and
including the Forbearance Termination Date, and (ii) Borrower is not in Default
under the terms of the Loan Agreement then in effect on July 1, 2009 following
the expiration of this Forbearance Agreement, then Lender will terminate Jack J.
Walker’s Limited Guaranty of Individual and release Jack J. Walker from his
liabilities thereunder.

 
 
 

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(f)  
 Starting on February 9, 2009, and on the first Business Day of each calendar
week thereafter, Borrower will provide to Lender a 13-week rolling cash flow
projection.  In the event that Borrower fails to meet its  total liquidity
forecast by more than 10% for any week, such failure will constitute a Default
under the Loan Agreement and under this Forbearance Agreement.

(g)  
Beginning with the date of this Forbearance Agreement through and including the
Forbearance Termination Date, in the event that the Dilution (as hereinafter
defined) in the Accounts exceeds 10% during any calendar month (after deducting
any reserves held by Lender), such event will be a Default under the Loan
Agreement and under this Forbearance Agreement.  (“Dilution” means any and all
non-cash deductions to Accounts, including but not limited to credit memos and
other non-cash adjustments.)

(h)  
Beginning with the date of this Forbearance Agreement through and including the
Forbearance Termination Date, Lender will establish and maintain a reserve under
the Borrowing Base for expected Customer chargebacks against the Accounts
(“Special Reserve”), which will be in the beginning amount of
$1,900,000.  Borrower will provide to Lender a detailed listing (in form and
substance satisfactory to Lender) of such expected Customer chargebacks
(“Chargeback List”).  Borrower will provide an updated Chargeback List on the
first Business Day of each week listing the expected timing and amount for
future chargebacks.  As the expected Customer chargebacks are realized,  Lender
will match actual credits against the Accounts to the expected chargebacks
listed by Borrower in the Chargeback List.  The Special Reserve will be reduced
by the amount of such actual credits that were included in the Chargeback List,
and so on, until the expiration of the Forbearance Termination Date.

7.           Each Obligor acknowledges that (a) except as expressly set forth
herein, Lender has not agreed to (and has no obligation whatsoever to discuss,
negotiate or agree to) any restructuring, modification, amendment, waiver or
forbearance with respect to the Obligations or any of the terms of the Loan
Documents, (b) no understanding with respect to any other restructuring,
modification, amendment, waiver or forbearance with respect to the Obligations
or any of the terms of the Loan Documents shall constitute a legally binding
agreement or contract, or have any force or effect whatsoever, unless and until
reduced to writing and signed by authorized representatives of each Obligor and
Lender, and (c) the execution and delivery of this Forbearance Agreement has not
established any course of dealing between the parties hereto or created any
obligation or agreement of Lender with respect to any future restructuring,
modification, amendment, waiver or forbearance with respect to the Obligations
or any of the terms of the Loan Documents.
 
8.           To induce Lender to enter into this Forbearance Agreement and grant
the accommodations set forth herein, each Obligor (a) acknowledges and agrees
that no right of offset, defense, counterclaim, claim or objection exists in
favor of any Obligor against Lender arising out of or with respect to the Loan
Agreement, the Guarantees, any other Loan Document, the Obligations, or any
other arrangement or relationship between Lender and any Obligor, and (b)
releases, acquits, remises and forever discharges Lender and its affiliates and
all of their past, present and future officers, directors, employees, agents,
attorneys, representatives, successors and assigns from any and all claims,
demands, actions and causes of action, whether at law or in equity, and whether
known or unknown, which any Obligor may have by reason of any manner, cause or
things to and including the date of this Forbearance Agreement with respect to
matters arising out of or with respect to the Loan Agreement, the Guarantees,
any other Loan Document, the Obligations, or any other arrangement or
relationship between Lender and any Obligor.
 
9.           To induce Lender to enter into this Forbearance Agreement, each
Obligor hereby represents and warrants that, as of the date hereof, and after
giving effect to the terms hereof, there exists no Default under the Loan
Agreement or any of the other Loan Documents, other than the Existing Defaults.
 
10.           Borrower hereby restates, ratifies, and reaffirms each and every
term, condition, representation and warranty, with the exception of item
4(a)(ix) of the Loan Agreement, heretofore made by it under or in connection
with the execution and delivery of the Loan Agreement, as amended hereby, and
the other Loan Documents, as fully as though such representations and warranties
had been made on the date hereof and with specific reference to this Forbearance
Agreement and the other Loan Documents.
 
11.           Except as expressly set forth herein, the Loan Agreement shall be
and remain in full force and effect as originally written, and shall constitute
the legal, valid, binding and enforceable obligations of Borrower to
Lender.  Guarantor acknowledges and agrees that his Guarantee remains in full
force and effect after giving effect to this Forbearance Agreement and
constitutes the legal, valid, binding and enforceable obligations of Guarantor
to Lender.
 
12.           Each Obligor hereby acknowledges that Lender shall not be
obligated to release its security interest in any Collateral unless and until
the Obligations have been paid in full in cash and the Loan Agreement has been
terminated.
 
13.           This Forbearance Agreement constitutes a Loan Document, and any
breach of any representation, warranty, covenant, agreement or obligation of
Borrower or Guarantors hereunder shall constitute a Default, which shall
terminate Lender’s obligation to forbear hereunder and entitle Lender to
exercise all of its rights and remedies under the Loan Agreement, the Guarantees
and the other Loan Documents.
 
14.           Each Obligor hereby knowingly, intelligently and voluntarily
renounces and waives any and all notice or right to notice, including without
limitation any and all rights that Borrower or Guarantors may have under Section
9-601 et seq. of the Uniform Commercial Code to notice of Lender’s intended
disposition of any or all of the Collateral, and Lender may, on or after the
Forbearance Termination date, dispose of the Collateral or any portion thereof
without further notice to Borrower or Guarantors, if Borrower is in
default.  THE WAIVER OF NOTICE AS PROVIDED IN THIS PARAGRAPH IS KNOWINGLY AND
INTELLIGENTLY GIVEN AFTER DEFAULT UNDER ONE OR MORE OF THE LOAN DOCUMENTS AND IS
ACKNOWLEDGED TO BE COMMERCIALLY REASONABLE IN ALL RESPECTS.
 

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15.           Each Obligor agrees to take such further action as Lender shall
reasonably request in connection herewith to evidence the amendments herein
contained to the Loan Agreement.
 
16.           This Forbearance Agreement may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which, when so executed and delivered, shall be deemed to be an original and all
of which counterparts, taken together, shall constitute but one and the same
instrument.
 
17.           This Forbearance Agreement shall be binding upon and inure to the
benefit of the successors and permitted assigns of the parties hereto.
 
18.           This Forbearance Agreement shall be governed by, and construed in
accordance with, the laws of the State of Oklahoma.

 

 
[SIGNATURES FOLLOW ON NEXT PAGE]
 

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IN WITNESS WHEREOF, Borrower, Guarantors and Lender have caused this Forbearance
Agreement to be duly executed as of the date first above written.
 

 
FCC, LLC d/b/a FIRST CAPITAL

By:_______________________________________                                                                           
Lee E. Elmore, Senior Vice President

AEROGROW INTERNATIONAL, INC.

By: _______________________________________                                                                          
Jervis B. Perkins, Chief Executive Officer

Attest:

__________________________________________
Elizabeth Stagg, Secretary

(Corporate Seal)

__________________________________________
JACK J. WALKER