ex10-3.htm


    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.

              


      

       

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      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.

              


      

       

       

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      
 

      
        	
                (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.

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      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.


       

      


       

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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