Document:

<PAGE>
                                                                    Exhibit 10.4

                                                                  EXECUTION COPY

                           MBIA INSURANCE CORPORATION

                       FINANCIAL GUARANTY INSURANCE POLICY

                                December 5, 2002

                                                               Policy No. 39760

Re:                   CarMax Auto Owner Trust 2002-2, Class A-1, Class A-2,
                      Class A-3 and Class A-4 Asset-Backed Notes (collectively,
                      the "Notes") and Asset-Backed Certificates (the
                      "Certificates" and together with the Notes, the
                      "Securities");

Insured               Obligation of CarMax Auto Owner Trust 2002-2 (the "Trust")
Obligation:           to pay servicing fees and interest on and the principal of
                      the Securities.

Beneficiary:          Wells Fargo Bank Minnesota, National Association, as
                      indenture trustee under the Agreement (as defined below)
                      (together with any successor trustee duly appointed and
                      qualified under the Agreement) (the "Indenture Trustee")
                      on behalf of the Noteholders and the Certificateholders.

         MBIA INSURANCE CORPORATION ("MBIA"), for consideration received, hereby
unconditionally and irrevocably guarantees to the Beneficiary, subject only to
the terms of this Policy (the "Policy"), payment of the Insured Obligation. MBIA
agrees to pay to the Beneficiary:

         (x) with respect to any Distribution Date, the sum of (i) Total
Servicing Fee for the preceding Collection Period, (ii) Total Note Interest for
such Distribution Date, and (iii) Total Certificate Interest for such
Distribution Date (in each case, after giving effect to any distributions of
Available Collections and any funds withdrawn from the Reserve Account to pay
such amounts with respect to such Distribution Date); and

         (y) with respect to any Distribution Date, the lesser of (i) the sum of
(a) Monthly Note Principal for such Distribution Date and (b) Monthly
Certificate Principal for such Distribution Date (in each case, after giving
effect to any distributions of Available Collections and any funds withdrawn
from the Reserve Account to pay such principal with respect to such Distribution
Date) and (ii) the Net Principal Policy Amount (after giving effect to any funds
withdrawn from the Reserve Account to pay principal to the Noteholders and the
Certificateholders with respect to such Distribution Date);

provided, however, that no payment under this Policy with respect to any
Distribution Date shall exceed the Policy Amount for such Distribution Date, and
provided further, that with respect to

<PAGE>

an Avoided Payment, the Policy Amount shall be calculated without regard to
clause (x)(A)(i) of the definition thereof. This Policy does not cover
shortfalls, if any, attributable to the liability of the Trust or the Indenture
Trustee for withholding taxes, if any (including interest and penalties in
respect of such liability).

         Capitalized terms used herein and not otherwise defined herein shall
have the meanings assigned to them in the Indenture dated as of December 1, 2002
between the Trust and the Indenture Trustee (the "Agreement"). As used herein,
the term "Policy Amount" shall mean, with respect to any Distribution Date,

         (x) the sum of (A) the lesser of (i) the Note Balance on such
         Distribution Date plus the Certificate Balance on such Distribution
         Date (after giving effect to any distribution of Available Collections
         and any funds withdrawn from the Reserve Account to pay principal to
         the Noteholders or the Certificateholders with respect to such
         Distribution Date) and (ii) the Net Principal Policy Amount on such
         Distribution Date (after giving effect to any funds withdrawn from the
         Reserve Account to pay principal to the Noteholders or the
         Certificateholders with respect to such Distribution Date), plus (B)
         Total Note Interest for such Distribution Date, plus (C) Total
         Certificate Interest for such Distribution Date, plus (D) Total
         Servicing Fee for the preceding Collection Period; less

         (y) all amounts on deposit in and available for withdrawal from the
         Reserve Account on such Distribution Date after giving effect to any
         funds withdrawn from the Reserve Account to pay principal to the
         Noteholders or the Certificateholders with respect to such Distribution
         Date.

         As used herein, the term "Net Principal Policy Amount" shall mean, on
any Distribution Date, the sum of the Note Balance as of the Closing Date plus
the Certificate Balance as of the Closing Date, minus all amounts previously
drawn on the Policy or withdrawn from the Reserve Account in either case with
respect to Monthly Note Principal or Monthly Certificate Principal.

         As used herein, the term "Insurance Agreement" shall mean the Insurance
and Reimbursement Agreement, dated as of December 5, 2002 among Pooled Auto
Securities Shelf LLC (the "Depositor"), CarMax Auto Superstores, Inc.,
individually, as seller (the "Seller") and as servicer (the "Servicer") and
MBIA.

         As used herein, the term "Insolvency Proceeding" means (i) the
commencement, after the date hereof, of any bankruptcy, insolvency, readjustment
of debt, reorganization, marshalling of assets and liabilities or similar
proceedings by or against the Seller, the Servicer, the Depositor or the Trust,
or (ii) the commencement, after the date hereof, of any proceedings by or
against the Seller, the Servicer, the Depositor or the Trust for the winding up
or liquidation of its affairs or (iii) the consent, after the date hereof, to
the appointment of a trustee, conservator, receiver, or liquidator in any
bankruptcy, insolvency, readjustment of debt, reorganization, marshalling of
assets and liabilities or similar proceedings of or relating to the Seller, the
Servicer, the Depositor or the Trust.

         Subject to the foregoing, if any amount paid or required to be paid in
respect of the Insured Obligation is voided (a "Preference Event") under any
applicable bankruptcy, insolvency, receivership or similar law in an Insolvency
Proceeding, and, as a result of such a Preference Event, the Beneficiary, the
Noteholders or the Certificateholders are required to return such voided
payment, or any portion of such voided payment made or to be made in

                                       2

<PAGE>

respect of the Notes or the Certificates, respectively (an "Avoided Payment"),
MBIA will pay an amount equal to each such Avoided Payment, irrevocably,
absolutely and unconditionally and without the assertion of any defenses to
payment, including fraud in inducement or fact or any other circumstances that
would have the effect of discharging a surety in law or in equity, upon receipt
by MBIA from the Beneficiary, the Noteholders or the Certificateholders of (x) a
certified copy of a final order of a court exercising jurisdiction in such
Insolvency Proceeding to the effect that the Beneficiary, the Noteholders or the
Certificateholders are required to return any such payment or portion thereof
prior to the Termination Date (as defined below) of this Policy because such
payment was voided under applicable law, with respect to which order the appeal
period has expired without an appeal having been filed (the "Final Order"), (y)
an assignment, in the form of Exhibit D hereto, irrevocably assigning to MBIA
all rights and claims of the Beneficiary, the Noteholders or the
Certificateholders relating to or arising under such Avoided Payment and (z) a
Notice for Payment in the form of Exhibit A hereto appropriately completed and
executed by the Beneficiary, the Noteholders or the Certificateholders. Such
payment shall be disbursed to the receiver, conservator, debtor-in-possession or
trustee in bankruptcy named in the Final Order and not to the Beneficiary, the
Noteholders or the Certificateholders directly unless such Noteholder or such
Certificateholder (as the case may be) has returned principal and interest paid
on the Notes or the Certificates (as the case may be) to such receiver,
conservator, debtor-in-possession or trustee in bankruptcy, in which case such
payment shall be disbursed to such Noteholder or such Certificateholder (as the
case may be).

         Notwithstanding the foregoing, in no event shall MBIA be obligated to
make any payment in respect of any Avoided Payment, which payment represents a
payment of interest or the principal amount of the Notes or the Certificates,
prior to the time MBIA would have been required to make a payment in respect of
such interest or principal pursuant to the first paragraph of this Policy.

         Payment of amounts hereunder shall be made in immediately available
funds (x) pursuant to the first paragraph of this Policy on the later of (a)
12:00 noon, New York City time, on the Distribution Date or (b) 12:00 noon, New
York City time, on the second Business Day following presentation to MBIA and
State Street Bank and Trust Company, N.A., as Fiscal Agent for MBIA or any
successor fiscal agent appointed by MBIA (the "Fiscal Agent") (as hereinafter
provided) of a notice for payment in the form of Exhibit A hereto ("Notice for
Payment"), appropriately completed and executed by the Beneficiary, and (y) in
respect of Avoided Payments prior to 12:00 noon New York City time, on the
second Business Day following MBIA's receipt of the documents required under
clauses (x) through (z) of the second preceding paragraph. Any such documents
received by MBIA or the Fiscal Agent after 12:00 noon New York City time on any
Business Day or on any day that is not a Business Day shall be deemed to have
been received by MBIA or the Fiscal Agent, as applicable, prior to 12:00 noon on
the next succeeding Business Day. All payments made by MBIA hereunder will be
made with MBIA's own funds. A Notice for Payment under this Policy may be
presented to the Fiscal Agent and MBIA on any Business Day following the
Determination Date in respect of which the Notice for Payment is being
presented, by (a) delivery of the original Notice for Payment to the Fiscal
Agent and MBIA at their respective addresses set forth below, or (b) facsimile
transmission of the original Notice for Payment to the Fiscal Agent and MBIA at
their respective facsimile numbers set forth below. If presentation is made by
facsimile transmission, the Beneficiary shall (i) simultaneously confirm
transmission by telephone to the Fiscal Agent and MBIA at their respective
telephone numbers set forth below, and (ii) as soon as reasonably practicable,
deliver

                                       3

<PAGE>

the original Notice for Payment to the Fiscal Agent and MBIA at their respective
addresses set forth below.

         If any Notice for Payment received by the Fiscal Agent is not in proper
form or is otherwise insufficient for the purpose of making a claim hereunder,
it shall be deemed not to have been received by the Fiscal Agent and MBIA, and
MBIA or the Fiscal Agent, shall promptly so advise the Indenture Trustee, and
the Indenture Trustee may submit an amended Notice for Payment.

         Payments due hereunder unless otherwise stated herein will be disbursed
by the Fiscal Agent or MBIA to the Indenture Trustee on behalf of the
Noteholders and the Certificateholders by wire transfer of immediately available
funds in the amount of such payment.

         The Fiscal Agent is the agent of MBIA only, and the Fiscal Agent shall
in no event be liable to the Noteholders or the Certificateholders for any acts
of the Fiscal Agent or any failure of MBIA to deposit or cause to be deposited
sufficient funds to make payments due under this Policy.

         MBIA hereby waives and agrees not to assert any and all rights to
require the Beneficiary to make demand on or to proceed against any person,
party or security prior to the Beneficiary demanding payment under this Policy.

         No defenses, set-offs and counterclaims of any kind available to MBIA
so as to deny payment of any amount due in respect of this Policy will be valid
and MBIA hereby waives and agrees not to assert any and all such defenses,
set-offs and counterclaims, including, without limitation, any such rights
acquired by subrogation, assignment or otherwise.

         MBIA shall be subrogated to the rights of the Noteholders and the
Certificateholders to receive payments under the Notes and the Certificates to
the extent of any payment by MBIA hereunder.

         Any rights of subrogation acquired by MBIA as a result of any payment
made under this Policy shall, in all respects, be subordinate and junior in
right of payment to the prior indefeasible payment in full of all amounts due
the Noteholders and the Certificateholders under the Notes and the Certificates.
MBIA's obligations under this Policy shall be discharged to the extent funds to
pay the Insured Obligation are deposited into the Collection Account, the Note
Payment Account or the Certificate Payment Account by the Servicer or the
Indenture Trustee, as applicable, in accordance with the Sale and Servicing
Agreement (except to the extent such payment is thereafter returned as an
Avoided Payment) or disbursed by MBIA as provided in this Policy, whether or not
such funds are properly applied by the Owner Trustee or the Beneficiary.

         This Policy is neither transferable nor assignable, in whole or in
part, except to a successor trustee duly appointed and qualified under the
Agreement. Such transfer and assignment shall be effective upon receipt by MBIA
of a copy of the instrument effecting such transfer and assignment signed by the
transferor and by the transferee, and a certificate, properly completed and
signed by the transferor and the transferee, in the form of Exhibit B hereto
(which shall be conclusive evidence of such transfer and assignment), and, in
such case, the transferee instead of the transferor shall, without the necessity
of further action, be entitled to all the benefits of and rights under this
Policy in the transferor's place, provided that, in such case, the Notice for
Payment presented hereunder shall be a certificate of the transferee and shall
be signed by one who states therein that he is a duly authorized officer of the
transferee.

                                       4

<PAGE>

         All notices, presentations, transmissions, deliveries and
communications made by the Beneficiary to MBIA with respect to this Policy
shall specifically refer to the number of this Policy and shall be made to MBIA
at:

                  MBIA Insurance Corporation
                  113 King Street
                  Armonk, N.Y. 10504
                  Attention: Insured Portfolio Management,
                                 Structured Finance
                  Telephone: (914) 273-4545
                  Facsimile: (914) 765-3131

or such other address, telephone number or facsimile number as MBIA may
designate to the Beneficiary in writing from time to time. Each such notice,
presentation, transmission, delivery and communication shall be effective only
upon actual receipt by MBIA.

         Any notice hereunder delivered to the Fiscal Agent may be made at the
address listed below for the Fiscal Agent or such other address as MBIA shall
specify in writing to the Indenture Trustee, the Seller and the Depositor.

         The notice address of the Fiscal Agent is 61 Broadway, 15th Floor, New
York, New York 10006, Attention: Municipal Registrar and Paying Agency,
Facsimile: (212) 612-3201, Telephone: (212) 612-3458 or such other address as
the Fiscal Agent shall specify in writing to the Indenture Trustee, the Seller
and the Depositor.

         The obligations of MBIA under this Policy are irrevocable, primary,
absolute and unconditional (except as expressly provided herein) and neither the
failure of the Indenture Trustee, the Depositor, the Seller, the Servicer, the
Trust or any other person to perform any covenant or obligation in favor of MBIA
(or otherwise), nor the failure or omission to make a demand permitted
hereunder, nor the commencement of any bankruptcy, debtor or other insolvency
proceeding by or against the Indenture Trustee, the Depositor, the Seller, the
Servicer, the Trust or any other person shall in any way affect or limit MBIA's
obligations under this Policy. If an action or proceeding to enforce this Policy
is brought by the Beneficiary, the Beneficiary shall be entitled to recover from
MBIA costs and expenses reasonably incurred, including without limitation
reasonable fees and expenses of counsel.

         There shall be no acceleration payment due under this Policy unless
such acceleration is at the sole option of MBIA.

         This Policy and the obligations of MBIA hereunder shall terminate on
the day (the "Termination Date") on which the earliest of the following occurs:
(i) MBIA receives written notice, signed by the Beneficiary, substantially in
the form of Exhibit C hereto, stating that the Agreement has been terminated
pursuant to its terms, (ii) the date which is ninety-one days following the
Distribution Date occurring on June 15, 2009 and (iii) the date which is
ninety-one days following the Distribution Date upon which the later of the
final distribution on the Notes or the Certificates is made.

         The foregoing notwithstanding, if an Insolvency Proceeding is existing
during the ninety-one day period set forth in clauses (ii) or (iii) above, then
this Policy and MBIA's obligations hereunder shall terminate on (and the
"Termination Date" shall be) the later of (i) the date of the

                                     5

<PAGE>

conclusion or dismissal of such Insolvency Proceeding without continuing
jurisdiction by the court in such Insolvency Proceeding, and (ii) the date on
which MBIA has made all payments required to be made under the terms of this
Policy in respect of Avoided Payments.

         This Policy is not covered by the property/casualty insurance fund
specified in Article Seventy-Six of the New York State insurance law.

         This Policy sets forth in full the undertaking of MBIA, and shall not
be modified, altered or affected by any other agreement or instrument, including
any modification or amendment to any other agreement or instrument, or by the
merger, consolidation or dissolution of the Trust or any other Person and may
not be canceled or revoked by MBIA prior to the time it is terminated in
accordance with the express terms hereof. The Premium on this Policy is not
refundable for any reason.

         This Policy shall be returned to MBIA upon termination.

         THIS POLICY SHALL BE CONSTRUED, AND THE OBLIGATIONS, RIGHTS AND
REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED, IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS
PRINCIPLES THEREOF WHICH MAY REQUIRE THE APPLICATION OF THE LAWS OF ANY OTHER
JURISDICTION.

                                       6

<PAGE>

         IN WITNESS WHEREOF, MBIA has caused this Policy to be duly executed on
the date first written above.

                         MBIA INSURANCE CORPORATION

                         By: /s/ Gary C. Dunton
                             ---------------------
                             Name   Gary C. Dunton
                             Title: President

                         By: /s/ Amy R. Gonch
                             ---------------------
                             Name:  Amy R. Gonch
                             Title: Asst. Secretary

                                       7

<PAGE>

                                                Exhibit A to Policy Number 39760

MBIA Insurance Corporation
113 King Street
Armonk, New York  10504
Attention: Insured Portfolio Management,
             Structured Finance

                               NOTICE FOR PAYMENT

                            UNDER POLICY NUMBER 39760

         ______________, as indenture trustee (the "Indenture Trustee"), hereby
certifies to MBIA Insurance Corporation ("MBIA") with reference to that certain
Policy, Number 39760 dated December 5, 2002 (the "Policy"), issued by MBIA in
favor of the Indenture Trustee under the Indenture, dated as of December 1, 2002
(the "Agreement") between CarMax Auto Owner Trust 2002-2 and Wells Fargo Bank
Minnesota, National Association, as indenture trustee, as follows:

         1. The Indenture Trustee is the Beneficiary under the Policy.

         2. The Indenture Trustee is entitled to make a demand under the Policy
[pursuant to Section 4.6(c) of the Sale and Servicing Agreement][as a result of
the occurrence of a Preference Event as defined in the Policy].

[For a Notice for Payment in respect of a Distribution Date use the following
paragraphs 3,4, and 5.]

         3. This notice relates to the [insert date] Distribution Date. The
Policy Amount, as specified to the Indenture Trustee by the Servicer, for such
Distribution Date is $ . The amount demanded by this notice for the benefit of
the Noteholders and the Certificateholders does not exceed such Policy Amount.

         4. The Indenture Trustee demands payment of $_______ which consists of
[Total Servicing Fee in the amount of $_______]; [Total Note Interest in the
amount of $___________]; [Total Certificate Interest in the amount of
$____________]; [Monthly Note Principal in the amount of $___________]; [and
Monthly Certificate Principal in the amount of $_____________].

         5. The amount demanded is to be paid in immediately available funds to
the Collection Account at [       ], account number [       ] [except that
$_____ of such amount is to be paid to the Certificate Payment Account at
____________, account number ____________].

[For a Notice for Payment in respect of an Avoided Payment use the following
paragraphs 3, 4, and 5.]

         3. The Indenture Trustee hereby represents and warrants, based upon
information available to it, that (i) the amount entitled to be drawn under the
Policy on the date hereof in

<PAGE>

respect of Avoided Payments is [$               ], (ii) each Noteholder and
                                 ---------------
Certificateholder with respect to which the drawing is being made under the
Policy has paid or simultaneously with such draw on the Policy will pay such
Avoided Payment, and (iii) the documents required by the Policy to be delivered
in connection with such Avoided Payment have previously been presented to MBIA
or are attached hereto.

         4. The Indenture Trustee hereby demands payment of the Avoided Payment
in the amount of [$                  ] and the Indenture Trustee hereby
                   ------------------
represents and warrants, based upon information available to it, that such
amount is not in excess of the sum of (i) the Policy Amount calculated without
regard to clause (x)(A)(i) of the definition thereof, as of the date hereof, and
(ii) interest thereon (which interest is the amount paid to the Noteholders or
the Certificateholders on the date the Trust made the payment that has been
voided).

         5. The amount demanded is to be paid in immediately available funds by
wire transfer to [                  ].
                  ------------------

         Capitalized terms used herein and not otherwise defined herein shall
have the meanings assigned to them in the Agreement.

         Any Person Who Knowingly And With Intent To Defraud Any Insurance
Company Or Other Person Files An Application For Insurance Or Statement Of Claim
Containing Any Materially False Information, Or Conceals For The Purpose Of
Misleading Information Concerning Any Fact Material Thereof, Commits A
Fraudulent Insurance Act, Which Is A Crime, And Shall Also Be Subject To A Civil
Penalty Not To Exceed Five Thousand Dollars And The Stated Value Of The Claim
For Each Such Violation.

         IN WITNESS WHEREOF, this notice has been executed this       day of
                                                                -----
                       ,    .
----------------------   ---

__________________, as Indenture Trustee

By:________________________

      Authorized Officer

                                       2

<PAGE>

                                                Exhibit B to Policy Number 39760

MBIA Insurance Corporation
113 King Street
Armonk, New York 10504
Attention:  Insured Portfolio Management,
            Structured Finance

Dear Sirs:

         Reference is made to that certain Policy, Number 39760 dated December
5, 2002 (the "Policy") which has been issued by MBIA Insurance Corporation in
favor of Wells Fargo Bank Minnesota, National Association, as Indenture Trustee.

         The undersigned [Name of Transferor] has transferred and assigned (and
hereby confirms to you said transfer and assignment) all of its rights in and
under said Policy to [Name of Transferee] and confirms that [Name of Transferor]
no longer has any rights under or interest in said Policy.

         Transferor and Transferee have indicated on the face of said Policy
that it has been transferred and assigned to Transferee.

         Transferee hereby certifies that it is a duly authorized transferee
under the terms of said Policy and is accordingly entitled, upon presentation of
the document(s) called for therein, to receive payment thereunder.

-------------------------
[Name of Transferor]

By:______________________

     [Name and Title of
     Authorized Officer of
     Transferor

-------------------------
[Name of Transferee]

By:______________________
     [Name and Title of
     Authorized Officer of
     Transferee]

<PAGE>

                                                Exhibit C to Policy Number 39760

MBIA Insurance Corporation
113 King Street
Armonk, New York  10504
Attention: Insured Portfolio Management,
           Structured Finance

Dear Sirs:

         Reference is made to that certain Policy, Number 39760 dated December
5, 2002 (the "Policy"), issued by MBIA in favor of the Indenture Trustee under
the Indenture dated as of December 1, 2002 between CarMax Auto Owner Trust
2002-2 and Wells Fargo Bank Minnesota, National Association, as indenture
trustee (the "Indenture Trustee") (the "Agreement").

         The undersigned hereby certifies and confirms that the Agreement and
the Trust have been terminated, with respect to the Noteholders and the
Certificateholders, pursuant to their terms and that the Collection Account
contains sufficient funds after taking into account all payments [ ] to pay in
full all payments due under presently outstanding Notes and Certificates
(referred to in said Policy) and to pay in full all payments due to MBIA under
the Agreement and the Insurance and Reimbursement Agreement dated as of December
5, 2002 among CarMax Auto Superstores, Inc., individually, as Seller and as
Servicer, Pooled Auto Securities Shelf LLC and MBIA. Accordingly, said Policy is
hereby terminated in accordance with its terms. The Indenture Trustee hereby
surrenders the Policy to MBIA for cancellation and hereby instructs MBIA to
cancel the same, effective on the date of its receipt of this certificate.

         Capitalized terms used herein and not otherwise defined herein shall
have the meanings assigned to them in the Agreement.

         IN WITNESS WHEREOF, this notice has been executed this      day of
                                                                ----
                       ,     .
----------------------   ----

__________________, as Indenture Trustee

By:________________________
     Authorized Officer

                                       2

<PAGE>

                                                Exhibit D to Policy Number 39760

                               Form of Assignment

         Reference is made to that certain Policy No. 39760, dated December 5,
2002 (the "Policy") issued by MBIA Insurance Corporation ("MBIA") relating to
the CarMax Auto Owner Trust 2002-2. Unless otherwise defined herein, capitalized
terms used in this Assignment shall have the meanings assigned thereto in the
Policy or as incorporated by reference therein. In connection with the Avoided
Payment of [$   ] [paid on _________] [which is being paid on the date hereof]
by the undersigned (the "Holder") and the payment by MBIA in respect of such
Avoided Payment pursuant to the Policy, the Holder hereby irrevocably and
unconditionally, without recourse, representation or warranty (except as
provided below), sells, assigns, transfers, conveys and delivers all of such
Holder's rights, title and interest in and to any rights or claims, whether
accrued, contingent or otherwise, which the Holder now has or may hereafter
acquire, against any person relating to, arising out of or in connection with
such Avoided Payment. The Holder represents and warrants that such claims and
rights are free and clear of any lien or encumbrance created or incurred by such
Holder./1/

----------------------------
Holder of Note or Certificate

--------
         /1/ In the event that the terms of this form of assignment are
reasonably determined to be insufficient solely as a result of a change of law
or applicable rules after the date of the Policy to fully vest all of the
Holder's right, title and interest in such rights and claims, the Holder and
MBIA shall agree on such other form as is reasonably necessary to effect such
assignment, which assignment shall be without recourse, representation or
warranty except as provided above.Amendment #1 to 2nd Amend. Loan and Security Agr.

  
 Exhibit 10.3 
  
 EXECUTION 
  
 AMENDMENT NO. 1 TO SECOND AMENDED AND
RESTATED 
 LOAN AND SECURITY AGREEMENT 
  
 AMENDMENT NO. 1, dated as of July 12, 2002, entered into by and among Congress Financial Corporation (Western), a California corporation (“Lender”), Central Garden & Pet Company, a Delaware corporation
(“CG&Pet”), Matthews Redwood and Nursery Supply, Inc., a California corporation (“Matthews”), Four Paws Products, Ltd., a New York corporation (“Four Paws”), Kaytee Products Incorporated, a Wisconsin corporation
(“Kaytee”), T.F.H. Publications, Inc., a Delaware corporation (“T.F.H.”), Norcal Pottery Products, Inc., a California corporation (“Norcal”) and Wellmark International, a California corporation (“Wellmark”,
and together with CG&Pet, Matthews, Four Paws, Kaytee, Norcal, T.F.H., individually, each a “Borrower” and collectively, “Borrowers”). 
  
 W I T N E S S E T H : 
  
 WHEREAS, Lender and Borrowers have
entered into financing arrangements pursuant to which Lender may make loans and advances and provide other financial accommodations to Borrowers as set forth in the Second Amended and Restated Loan and Security Agreement, dated as of December 12,
2000, by and among Lender and Borrowers (as amended hereby and as the same 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, Ezell Nursery Supply, Inc., a California corporation (“Ezell”), formerly a wholly-owned
subsidiary of CG&Pet, has merged with and into CG&Pet, with CG&Pet as the surviving corporation; and 
  
 WHEREAS, Borrowers have requested that Lender make certain amendments to the Loan Agreement; and 
  
 WHEREAS, Lender is willing to consent to such merger and make such amendments to the extent and upon the terms and conditions as set forth herein. By this Amendment, Lender and Borrowers desire and intend to evidence such consent and
amendments; 
  
 NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein and
other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lender and Borrowers agree as follows: 
  
 1.  Definitions. 
  
 (a) Additional Definitions. As used
herein, the following terms shall have the respective meanings given to them below and the Loan Agreement shall be deemed and is hereby amended to include, in addition and not in limitation, each of the following definitions: 

 
 (i) “Amendment No. 1” shall mean this Amendment No. 1 to the Second Amended and Restated Loan and Security Agreement
by and among Lender and Borrowers, as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 
  
 (ii) “Applicable Margin” shall mean, at any time, as to the Interest Rate for Eurodollar Rate Loans, the applicable percentage (on a per annum basis) set forth below from the 

 

 applicable date set forth below determined based on the EBITDA for the immediately preceding twelve (12) months prior to such date:

  
 (A)  From September 30, 2002: 
  
 
	 Tier
 
	  	 EBITDA
 
	  	 Eurodollar Rate Margin
 

	 
	 1
 	  	 INTENTIONALLY DELETED
 	  	  
	 
	 2
 	  	 INTENTIONALLY DELETED
 	  	  
	 
	 3
 	  	 Less than $14,000,000
 	  	 2.50%
 
	 
	 4
 	  	 Greater than or equal to $14,000,000 and less than $16,000,000
 	  	 2.25%
 
	 
	 5
 	  	 Greater than or equal to $16,000,000 and less than $20,000,000
 	  	 2.00%
 
	 
	 6
 	  	 Greater than or equal to $20,000,000
 	  	 1.75%
 

 
  
 (B)  From December 31, 2002: 
  
 
	 Tier
 
	  	 EBITDA
 
	  	 Eurodollar Rate Margin
 

	 
	 1
 	  	 INTENTIONALLY DELETED
 	  	  
	 
	 2
 	  	 INTENTIONALLY DELETED
 	  	  
	 
	 3
 	  	 Less than $18,000,000
 	  	 2.50%
 
	 
	 4
 	  	 Greater than or equal to $18,000,000 and less than $20,000,000
 	  	 2.25%
 
	 
	 5
 	  	 Greater than or equal to $20,000,000 and less than $24,000,000
 	  	 2.00%
 
	 
	 6
 	  	 Greater than or equal to $24,000,000
 	  	 1.75%
 

 
  
 (C)  From March 31, 2003: 
  
 
	 Tier
 
	  	 EBITDA
 
	  	 Eurodollar Rate Margin
 

	 
	 1
 	  	 INTENTIONALLY DELETED
 	  	  
	 
	 2
 	  	 INTENTIONALLY DELETED
 	  	  
	 
	 3
 	  	 Less than $24,000,000
 	  	 2.50%
 
	 
	 4
 	  	 Greater than or equal to $24,000,000 and less than $26,000,000
 	  	 2.25%
 
	 
	 5
 	  	 Greater than or equal to $26,000,000 and less than $30,000,000
 	  	 2.00%
 

 

 
 2 

  
 
	 6
 	  	     Greater than or equal to $30,000,000
 	  	 1.75%
 

 
  
 (D)  From the last day of each fiscal quarter thereafter:

  
 
	 Tier
 
	  	 EBITDA
 
	  	 Eurodollar Rate Margin
 

	 
	 1
 	  	 Less than $32,000,000
 	  	 3.00%
 
	 
	 2
 	  	 Greater than or equal to $32,000,000 and less than $33,000,000
 	  	 2.75%
 
	 
	 3
 	  	 Greater than or equal to $33,000,000 and less than $34,000,000
 	  	 2.50%
 
	 
	 4
 	  	 Greater than or equal to $34,000,000 and less than $35,000,000
 	  	 2.25%
 
	 
	 5
 	  	 Greater than or equal to $35,000,000 and less than $39,000,000
 	  	 2.00%
 
	 
	 6
 	  	 Greater than or equal to $39,000,000
 	  	 1.75%
 

 
  
 The Applicable Margin shall be determined and established (in
accordance with the above definition) on the first day of the calendar month following the delivery of the Compliance Certificate for each March, June, September and December of each fiscal year pursuant to Section 9.6(e) of the Loan Agreement,
commencing with the Compliance Certificate for the month ending September 30, 2002 (without regard to any subsequent corrections to reflect year-end audit adjustments). The Applicable Margin so determined shall apply to all Eurodollar Rate Loans for
the period from and including the date of determination to and excluding the first day of the calendar month following the delivery of the next Compliance Certificate and to all Eurodollar Rate Loans for any Interest Period commencing during the
period from and including the date of determination to and excluding the first day of the calendar month following the delivery of the next Compliance Certificate; provided, that, if Borrowers fail to deliver any Compliance Certificate in a timely
manner pursuant to Section 9.6(e) of the Loan Agreement, the greater of (i) the then existing Applicable Margin and (ii) 3.00% per annum in excess of the Adjusted Eurodollar Rate shall apply to all Eurodollar Rate Loans for the period from and
including the first date on which such Compliance Certificate was required to be delivered, to and excluding the date on which the Lender receives such Compliance Certificate. 
  
 (iii) “Capital Leases” shall mean, as applied to any Person, any lease of (or any agreement conveying the right to use) any property (whether real, personal or
mixed) by such Person as lessee which in accordance with GAAP, is required to be reflected as a liability on the balance sheet of such Person. 
  
 (iv) “Consolidated Net Income” shall mean, with respect to Borrowers for any period, the aggregate of the net income (loss) of Borrowers, on a consolidated basis, for such period (excluding
to the extent included therein any extraordinary and/or one time or unusual and non-recurring gains) after deducting all charges which should be deducted before arriving at the net income (loss) for such period and, without duplication, after
deducting the Provision for Taxes for such period, all as determined in accordance with GAAP. For the purposes of this definition, net income excludes any gain together with any related Provision for Taxes for such gain realized upon the sale or
other disposition of any assets that are not sold in the ordinary course of business (including, without limitation, dispositions pursuant to sale and leaseback transactions) or of any Capital Stock of Borrowers and any net income realized or loss
incurred as a result of changes in accounting principles or the application thereof to any Borrower. 

 
 3 

  
 (v) “EBITDA” shall mean, as to Borrowers, with respect to any period,
an amount equal to: (i) the Consolidated Net Income of Borrowers for such period determined in accordance with GAAP, plus (ii) depreciation, amortization and other non-cash charges (including, but not limited to, imputed interest and deferred
compensation) for such period (to the extent deducted in the computation of Consolidated Net Income of such Borrower), all in accordance with GAAP, plus (iii) Interest Expense for such period (to the extent deducted in the computation of
Consolidated Net Income of Borrowers), plus (iv) the Provision for Taxes (to the extent deducted in the computation of Consolidated Net Income of Borrowers). 
  
 (vi) “Ezell Merger” shall mean the merger of Ezell with and into CG&Pet, pursuant to the terms of the Ezell Merger Agreements (as in effect on July 26, 2001), with CG&Pet as the
surviving corporation. 
  
 (vii) “Ezell Merger Agreements” shall mean, collectively, the following: (A)
the Certificate of Ownership Merging Ezell Nursery Supply, Inc. Into Central Garden & Pet Company, dated July 15, 2001, by CG&Pet with respect to the Ezell Merger (the “Certificate of Merger”) and (B) all agreements, documents and
instruments related to the foregoing. 
  
 (viii) “Interest Expense” shall mean, for any period as to
Borrowers, as determined in accordance with GAAP, the total interest expense, whether paid or accrued during such period (including the interest component of Capital Leases for such period), including, without limitation, discounts in connection
with the sale of any Accounts and bank fees, commissions, discounts and other fees and charges owed with respect to letters of credit, banker’s acceptances or similar instruments. 
  
 (ix) “Provision for Taxes” shall mean, with respect to Borrowers for any period, an amount equal to all taxes imposed on or measured by net income, whether
Federal, State, county or local, and whether foreign or domestic, that are paid or payable by Borrowers in respect of such period in accordance with GAAP. 
  
 (x) “Tangible Net Worth” shall mean as to Borrowers, at any time, in accordance with GAAP (except as otherwise specifically set forth below), the amount equal to: stockholders’ equity
less goodwill, capitalized financing costs, intercompany accounts (exclusive of amounts identified on Borrowers’ financial statements as “due from affiliates”) and other assets deemed intangible under GAAP, less amounts identified on
Borrowers’ financial statements as “other assets” plus indebtedness of Borrowers which is subordinated in right of payment to the full and final payment and satisfaction of all Obligations, on terms and conditions acceptable to
Lender. 
  
 (xi) All references to the term “Financing Agreements” in the Loan Agreement and in any of the
other Financing Agreements shall be deemed to include, in addition and not in limitation, this Amendment No. 1. 
  
 (b)       Interpretation. For purposes of this Amendment No. 1, unless otherwise defined herein, all terms used herein, including, but not limited to, those terms used and/or defined in the
recitals above, shall have the respective meanings assigned to such terms in the Loan Agreement. 
  
 2.  Consent. Subject to the terms and conditions contained herein, Lender hereby consents to the Ezell Merger. 
  
 3.  Acknowledgment. 
  
 (a) CG&Pet hereby
acknowledges, confirms, and agrees that as of the date hereof (i) Lender has and shall continue to have a security interest in and lien upon the Collateral of Ezell heretofore granted to Lender pursuant to certain of the Financing Agreements to
which Ezell is a party and (ii) the consent contained herein to the Ezell Merger shall not be deemed to release, terminate or waive such 

 
 4 

 security interests and liens, or any rights or remedies of Lender pursuant thereto, all of which shall continue in all respects. 

 
 (b) Borrowers hereby acknowledge, confirm, and agree that as of and after the effectiveness of the Ezell Merger: (i)
CG&Pet, as survivor pursuant to the Ezell Merger, is and shall continue to be liable in all respects for, and has assumed as of such date, all of the Obligations of Ezell pursuant to the Financing Agreements; (ii) the security interests in and
liens upon the assets and properties of Ezell in favor of Lender continues upon all assets and properties of CG&Pet, including such assets and properties to which CG&Pet succeeded pursuant to the Ezell Merger, and such security interests and
liens and their perfection and priority continues and shall continue in all respects in full force and effect; and (iii) without limiting the generality of the foregoing, the Ezell Merger shall in no way limit, impair or adversely affect the
Obligations howsoever arising, or any security interests or liens securing the same. 
  
 4.  Adjusted
Eurodollar Rate. Section 1.2 of the Loan Agreement is hereby amended by deleting the reference to “one-sixteenth (1/16)” therein and substituting “one-thirty secondth (1/32)” therefor. 
  
 5.  Eligible Accounts. Section 1.13(e) of the Loan Agreement is hereby amended by adding the following provision at the
end thereof: 
  
 “The principal amount of Revolving Loans, if any, made by Lender, in Lender’s discretion,
with respect to Accounts in which the chief executive office of the account debtor is located outside of the United States in accordance with Section 1.13(e) above shall not, in any event, exceed $5,000,000 at any time;” 

 
 6.  Eligible Inventory. Section 1.14 of the Loan Agreement is hereby deleted in its entirety and the following
is substituted therefor: 
  
 “1.14 ‘Eligible Inventory’ shall mean, as to each Borrower, Inventory
consisting of finished goods in the categories of lawn and garden and pet products purchased and held for resale in the ordinary course of the business of such Borrower and raw materials with respect to such finished goods, in each case which are
acceptable to Lender based on the criteria set forth below. In general, Eligible Inventory shall not include (a) work-in-process or any goods (not consisting of finished goods in the categories of lawn and garden and pet products purchased and held
for resale in the ordinary course of the business of any Borrower as described above) manufactured by or for Borrowers; (b) components which are not part of finished goods; (c) spare parts for equipment; (d) packaging and shipping materials; (e)
supplies used or consumed in such Borrower’s business; (f) Inventory at premises other than those owned and controlled by such Borrower, except if Lender shall have received an agreement in writing from the person in possession of such
Inventory and/or the owner or operator of such premises in form and substance satisfactory to Lender acknowledging Lender’s first priority security interest in the Inventory, waiving security interests and claims by such person against the
Inventory and permitting Lender access to, and the right to remain on, the premises so as to exercise Lender’s rights and remedies and otherwise deal with the Collateral; (g) Inventory subject to a security interest or lien in favor of any
person other than Lender except those permitted in this Agreement; (h) bill and hold goods; (i) unserviceable, obsolete or slow moving Inventory; (j) Inventory which is not subject to the first priority, valid and perfected security interest of
Lender; (k) damaged, out of date and/or defective Inventory; and (l) Inventory purchased or sold on consignment, including, but not limited to, Inventory sold on consignment by Distributor/Agents. General criteria for Eligible Inventory may be
established and revised from time to time by Lender in good faith. Any Inventory which is not Eligible Inventory shall nevertheless be part of the Collateral.” 
  
 7.  Eurodollar Rate. Section 1.20 of the Loan Agreement is hereby amended by deleting the reference to “one-sixteenth (1/16)” therein and
substituting “one-thirty secondth (1/32)” therefor. 
  
 8.  Interest Rate. Section 1.33 of
the Loan Agreement is hereby deleted in its entirety and the following is substituted therefor: 
  
 “1.33
‘Interest Rate’ shall mean, 

 
 5 

  
 (a) subject to clauses (b) and (c) below: 
  
 (i) as to Prime Rate Loans, the Prime Rate, and 
  
 (ii) as to Eurodollar Rate Loans, a rate equal to two (2%) percent per annum in excess of the Adjusted Eurodollar Rate (based on the Eurodollar Rate applicable for the Interest Period selected by
Borrower as in effect three (3) Business Days after the date of receipt by Lender of the request of a Borrower for such Eurodollar Rate Loans in accordance with the terms hereof, whether such rate is higher or lower than any rate previously quoted
to any Borrower); 
  
 (b) subject to clause (c) of this definition below, effective from the date that the Applicable
Margin shall first become effective pursuant to the definition of the term Applicable Margin, the Interest Rate payable by Borrowers as to Eurodollar Rate Loans shall be increased or decreased, as the case may be, to the rate equal to the Applicable
Margin on a per annum basis in excess of the Adjusted Eurodollar Rate; and 
  
 (c) notwithstanding anything to the
contrary contained in clauses (a) and (b) of this definition, the Interest Rate shall mean (i) as to Prime Rate Loans, the rate of two (2%) percent per annum in excess of the Prime Rate and (ii) as to Eurodollar Rate Loans, (A) before the date the
Applicable Margin is in effect, the rate of four (4%) percent per annum in excess of the Adjusted Eurodollar Rate and (B) on and after the date the Applicable Margin is in effect, the Applicable Margin otherwise used to calculate the Interest Rate
for Eurodollar Rate Loans shall be two (2%) percent per annum in excess of the percentage then in effect as set forth in the definition of the term Applicable Margin, in each case, at Lender’s option, without notice, (a) for the period (i) from
and after the date of termination or non-renewal hereof until Lender has received full and final payment of all obligations (notwithstanding entry of a judgment against any Borrower) and (ii) from and after the date of the occurrence of an Event of
Default for so long as such Event of Default is continuing as determined by Lender, and (b) on the Revolving Loans at any time outstanding in excess of the amounts available to the applicable Borrowers under Section 2 (whether or not such
excess(es), arise or are made with or without Lender’s knowledge or consent and whether made before or after an Event of Default). Lender shall provide Borrowers with prompt notice following the exercise by Lender of its right to increase the
Interest Rate in accordance with this clause (c), provided, that, the date of the receipt by Borrowers of any such notice shall not affect the right of Lender to increase the Interest Rate effective from the earliest date provided for under this
clause (c). 
  
 9.  Inventory Loan Limit. Section 1.35 of the Loan Agreement is hereby deleted in
its entirety and the following is substituted therefor: 
  
 “1.35 ‘Inventory Loan Limit’ shall mean
(a) as to CG&Pet, the amount of $85,000,000, less the amount of Obligations determined by Lender to be outstanding at such time in respect of inventory loans of the other Borrowers, (b) as to Matthews, the amount of $10,000,000, (c) as to Four
Paws, the amount of $10,000,000, (d) as to Kaytee, the amount of $10,000,000, (e) as to T.F.H., the amount of $5,000,000, (f) as to Norcal, the amount of $7,500,000, and (g) as to Wellmark, the amount of $10,000,000.” 
  
 10.  Maximum Credit. Section 1.40 of the Loan Agreement is hereby deleted in its entirety and the following is
substituted therefor: 
  
 “1.40 ‘Maximum Credit’ shall mean the amount of $125,000,000.”

  
 11.  Raw Materials Loan Limit. Section 1.53 of the Loan Agreement is hereby deleted in its
entirety and the following is substituted therefor: 
  
 “1.53 ‘Raw Materials Loan Limit’ shall mean
the amount of $15,000,000.” 
  
 12.  Permitted Acquisition. 

 
 6 

  
 (a) Sections 1.49(a)(v) and 1.49(b)(vii) of the Loan Agreement are hereby amended
by deleting the reference to “$20,000,000” therein and substituting “$10,000,000” therefor. 
  
 (b) Section 1.49(b)(iii) of the Loan Agreement is hereby deleted in its entirety and the following is substituted therefor: 
  
 “(iii) in no event shall the total amount of all payments by CG&Pet in connection with all such acquisitions pursuant to this Section 1.49(b) exceed $25,000,000 in the aggregate at any time
from the date of this Agreement,” 
  
 13.  Revolving Loans. Section 2.1(a) of the Loan
Agreement is hereby deleted in its entirety and the following is substituted therefor: 
  
 “(a) Subject to, and
upon the terms and conditions contained herein, Lender agrees to make Revolving Loans to each Borrower from time to time in amounts requested by such Borrower (or by CG&Pet on behalf of such Borrower), up to the amount equal to the sum of:

  
 (i) eighty-five (85%) percent of the Net Amount of Eligible Accounts of such Borrower, plus 

 
 (ii) the lesser of: (A) sixty-five (65%) percent of the Value of Eligible Inventory of such Borrower consisting of finished
goods, (B) 85% of the net orderly liquidation Value of Eligible Inventory of such Borrower consisting of finished goods, as determined by Lender based on the results of written reports or appraisals as to the Inventory delivered or caused to be
delivered by Borrowers to Lender at any time or times as Lender may request, at Borrowers’ expense, in form, scope and methodology acceptable to Lender and by an appraiser acceptable to Lender, or (C) the Inventory Loan Limit applicable to such
Borrower, plus 
  
 (iii) the lesser of: (A) 65% of the Value of Eligible Inventory of such Borrower consisting of
raw materials for finished goods which are part of Eligible Inventory, (B) 85% of the net orderly liquidation Value of Eligible Inventory of such Borrower consisting of raw materials for finished goods which are part of Eligible Inventory, as
determined by Lender based on the results of written reports or appraisals as to the Inventory (including such raw materials) delivered or caused to be delivered by Borrowers to Lender at any time or times as Lender may request, at Borrowers’
expense, in form, scope and methodology acceptable to Lender and by an appraiser acceptable to Lender, or (C) the Raw Materials Loan Limit, less 
  
 (iv) any Availability Reserves.” 
  
 14.  Letter of
Credit Accommodations. 
  
 (a) Letter of Credit Fees. Section 2.2(b) of the Loan Agreement is hereby amended by
deleting the reference to “two and one-quarter (2.25%) percent per annum” therein and substituting “one and one-half (1.50%) percent per annum” therefor and by deleting the reference to “four and one-quarter (4.25%) percent
per annum” therein and substituting “three and one-half (3.50%) percent per annum” therefor. 
  
 (b)
Letter of Credit Sublimit. Section 2.2(d) of the Loan Agreement is hereby amended by deleting the reference to “$10,000,000” therein and substituting “$15,000,000” therefor. 
  

15.  Interest. 
  
 (a) Section 3.1(b)(iv) of the Loan Agreement is hereby deleted in its entirety and the following is substituted therefor: 

 
 7 

  
 “(iv) no more than ten (10) Interest Periods may be in effect at any one
time,” 
  
 (a) Section 3.1(b)(v) of the Loan Agreement is hereby deleted in its entirety and the following is
substituted therefor: 
  
 “(v) the amount of each Eurodollar Rate Loan must be in an amount not less than
$1,000,000 or an integral multiple of $500,000 in excess thereof,” 
  
 16.  Inventory
Covenants. Section 7.3(d) of the Loan Agreement is hereby deleted in its entirety and the following is substituted therefor: 
  
 “(d) upon Lender’s request, Borrowers shall, at their expense, (i) no more than semi-annually, but at any time or times as Lender may request on or after an Event of Default, deliver or cause to be delivered to Lender
written reports or appraisals as to the Inventory in form, scope and methodology acceptable to Lender and by an appraiser acceptable to Lender, addressed to Lender or upon which Lender is expressly permitted to rely and (ii) semi-annually (except
for a fiscal quarter in which Lender has received an appraisal as described in and in accordance with Section 7.13(d)(i) above), but at any time or times as Lender may request on or after an Event of Default, deliver or cause to be delivered to
Lender desktop appraisals, in form, scope and methodology acceptable to Lender and by an appraiser acceptable to Lender, addressed to Lender or upon which Lender is expressly permitted to rely;” 
  
 17.  Financial Statements and Other Information. Section 9.6 of the Loan Agreement is hereby amended by adding the
following new subsection (e) thereto: 
  
 “(e) CG&Pet (on behalf of all Borrowers) shall deliver to Lender,
simultaneously with the delivery by Borrowers to Lender of each of the annual audited financial statements required to be delivered pursuant to Section 9.6(a)(ii) of the Loan Agreement, and within forty-five (45) days after the end of each fiscal
month, a certificate (“Compliance Certificate”) of the chief financial officer of CG&Pet (on behalf of all Borrowers) in a form satisfactory to Lender (i) setting forth in reasonable detail (as determined by Lender) the calculations
required to establish that each Borrower was in compliance with the covenants set forth in Sections 9.18 and Section 9.19 of the Loan Agreement during the period covered in such financial statements and as of the end thereof, and (ii) stating that,
except as explained in reasonable detail in such certificate, (A) all of the representations and warranties of the Borrowers contained in this Agreement and the other Financing Agreements are correct and complete in all material respects as of the
date of such certificate as if made at such time, other than any such representation or warranty which relates to a specified prior date, (B) the Borrowers are, at the date of such certificate, in compliance in all material respects with all of its
respective covenants and agreements in this Agreement and the other Financing Agreements, and (C) as of the date of such certificate, no Event of Default, and no condition or event which, with the giving of notice or lapse of time, or both, would
constitute an Event of Default, exists or has occurred and is continuing or existed during the period covered by such financial statements. If such certificate discloses that a representation or warranty is not correct or complete, or that a
covenant has not been complied with, or that an Event of Default existed or exists, such certificate shall set forth what action the Borrowers have taken or propose to take with respect thereto.” 
  
 18.  Disposition of Obsolete Equipment. Section 9.7(b)(ii)(B) of the Loan Agreement is hereby amended by deleting the
reference to “$1,000,000” therein and substituting “$2,000,000” therefor. 
  
 19.  Consolidated Net Worth. Section 9.15 of the Loan Agreement is hereby deleted in its entirety and the following is substituted therefor: 
  
 “9.15 Intentionally Deleted.” 
  
 20.  Tangible Net Worth. Section 9 of the Loan Agreement is hereby amended by adding the following new Section 9.18 at the end thereto: 

 
 8 

  
 “9.18 Tangible Net Worth. Borrowers shall as of the end of each month have
Tangible Net Worth of not less than $32,000,000.” 
  
 21.  EBITDA. Section 9 of the Loan
Agreement is hereby amended by adding the following new Section 9.19 at the end thereto: 
  
 “9.19 Minimum
EBITDA. The EBITDA of Borrowers shall, as of the end of each fiscal quarter set forth below, be not less than the amount set forth below opposite each such fiscal quarter determined based on the EBITDA for the immediately preceding twelve (12)
months: 
  
  
 
	 Period
 
	  	 Minimum EBITDA
 

	 
	 Fiscal Quarter ending September 30, 2002
 	  	 $13,000,000
 
	 Fiscal Quarter ending December 31, 2002
 	  	 $17,400,000
 
	 Fiscal Quarter ending March 31, 2003
 	  	 $23,000,000
 
	 Fiscal Quarter ending June 30, 2003
 	  	 $32,000,000
 
	 Each Fiscal Quarter thereafter
 	  	 $36,000,000”
 

 
  
 22.  Events of Default. 
  
 (a) Section 10.1(d) of the Loan Agreement is hereby deleted in its entirety and the following is substituted therefor: 

 
 “(d) (i) any judgment for the payment of money is rendered against any Borrower or Obligor in excess of $1,000,000 in any
one case or i.n excess of $2,500,000 in the aggregate and shall remain undischarged or unvacated for a period in excess of thirty (30) days or execution shall at any time not be effectively stayed, or (ii) any judgment other than for the payment of
money or an order of injunction, attachment, garnishment or execution is rendered against any Borrower or any Obligor or any of their assets (including the Collateral) if such judgment or order may result in a loss to or a liability of any Borrower
or any Obligor in excess of $1,000,000 in any one case or in excess of $2,500,000 in the aggregate or any attachment, garnishment or execution is rendered against any of their assets (including the Collateral) having a value in excess of $1,000,000
in any one case or in excess of $2,500,000 in the aggregate.” 
  
 (b) Section 10.1(i) of the Loan Agreement is
hereby amended by deleting the reference to “$100,000” therein and substituting “$2,500,000” therefor. 
  
 23.  Term. Section 12.1(a) of the Loan Agreement is hereby deleted in its entirety and the following is substituted therefor: 
  
 “(a) This Agreement and the other Financing Agreements shall become effective as of the date set forth on the first page thereof and shall continue in full force and effect for a term ending on
July 12, 2004 (the “Renewal Date”), and from year to year thereafter, unless sooner terminated pursuant to the terms hereof. Lender or Borrowers may terminate this Agreement and the other Financing Agreements effective on the Renewal Date
or on the anniversary of the Renewal Date in any year by giving to the other party at least sixty (60) days prior written notice; provided, that, this Agreement and all other Financing Agreements must be terminated simultaneously. Upon the effective
date of termination or non-renewal of the Financing Agreements, Borrowers shall pay to Lender, in full, all outstanding and unpaid Obligations and shall furnish cash collateral to Lender in such amounts as Lender determines are reasonably necessary
to secure Lender from loss, cost, damage or expense, including reasonable attorneys’ fees and legal expenses, in connection with any contingent Obligations, including issued and outstanding Letter of Credit Accommodations and checks or other
payments provisionally credited to the Obligations and/or as to which Lender has not yet received final and indefeasible payment. Such payments in respect of the Obligations and cash collateral shall be remitted by wire transfer in Federal funds to
such bank account of Lender, as Lender may, in its discretion, designate in writing to Borrowers for such purpose. Interest shall 

 
 9 

 be due until and including the next business day, if the amounts so paid by Borrowers to the bank account designated by Lender are received in
such bank account later than 12:00 noon, Los Angeles, California time. 
  
 24.  Notices. Section
12.2(a) of the Loan Agreement is hereby deleted in its entirety and the following is substituted therefor: 
  
 “(a) made to Lender at its address set forth below and to any or all Borrowers c/o CG&Pet at its chief executive office set forth below to the attention of Chief Financial Officer, or to such other address as either party
may designate by written notice to the other in accordance with this provision, 
  
 25.  Waiver of Event
of Default. 
  
 (a) Subject to the terms and conditions set forth herein, Lender hereby waives the Event of
Default arising under Section 10.1(d) of the Loan Agreement as a result of the judgment in favor of The Scotts Company against Borrowers in an amount up to $10,500,000 entered in case no. C2-00-755 with the United States District Court for the
Southern District of Ohio on May 16, 2002. 
  
 (b) Lender has not waived, is not by this Amendment No. 1 waiving, and
has no intention of waiving any Event of Default which is continuing on or which may occur after the date hereof (whether the same or similar to the Event of Default referred to above or otherwise), other than the Event of Default specifically
referred to above. The foregoing waiver shall not be construed as a bar to or a waiver of any other or further Event of Default on any future occasion, whether similar in kind or otherwise and shall not constitute a waiver, express or implied, of
any of the rights and remedies of Lender arising under the terms of the Loan Agreement or any other Financing Agreements on any future occasion or otherwise. 
  
 26.  Amendment Fee. In consideration of the amendments set forth herein, Borrowers shall on the date hereof, pay to Lender or Lender, at its option, may charge the account of Borrowers
maintained by Lender, an amendment fee in the amount of $375,000 which fee is fully earned as of the date hereof and shall constitute part of the Obligations. 
  
 27.  Representations, Warranties and Covenants. Borrowers, jointly and severally, represent, warrant and covenant with and to Lender as follows, which representations, warranties and
covenants are continuing and shall survive the execution and delivery hereof, the truth and accuracy of, or compliance with each, together with the representations, warranties and covenants in the other Financing Agreements, being a continuing
condition of the making of any Revolving Loans by Lender to Borrowers: 
  
 (a) As of the date hereof, (i) the Ezell
Merger is valid and effective in accordance with the Ezell Merger Agreements and the corporation statutes of the State of Delaware and the State of California and CG&Pet is the surviving corporation pursuant to the Ezell Merger, (ii) all actions
and proceedings required by the Ezell Merger Agreements, applicable law and regulation have been taken and the transactions required thereunder have been duly and validly taken and consummated, and (iii) no court of competent jurisdiction has issued
any injunction, restraining order or other order which prohibits or has prohibited consummation of the transactions described in the Ezell Merger Agreements and no government action or proceeding has been threatened or commenced seeking any
injunction, restraining order or other order which seeks to void or otherwise modify the transactions described in the Ezell Merger Agreements. 
  
 (b) The Ezell Merger and the other arrangements contemplated herein do not violate any law or regulation or any order or decree of any court or governmental instrumentality in any respect and do not
and will not conflict with or result in the breach of, or constitute a default in any respect under, any agreement, document or instrument to which any Borrower is a party or may be bound, or result in the creation or imposition of any lien, charge
or encumbrance upon any of the property of any Borrower or violate any provision of the Certificate of Incorporation or By-Laws of any Borrower. 
  
 (c) Borrowers have delivered, or caused to be delivered, to Lender, true, correct and complete copies of the Ezell Merger Agreements. 

 
 10 

  
 (d) This Amendment No. 1 and each other agreement or instrument to be executed
and delivered by the Borrowers have been duly authorized, executed and delivered by all necessary action on the part of the Borrowers and, if necessary, their respective stockholders, and is in full force and effect as of the date hereof, as the
case may be, and the agreements and obligations of the Borrowers contained herein and therein constitute legal, valid and binding obligations of the Borrowers, respectively, enforceable against them in accordance with their terms. 

 
 (e) All of the representations and warranties set forth in the Loan Agreement and the other Financing Agreements, each as
amended hereby, are true and correct in all material respects on and as of the date hereof as if made on the date hereof, except to the extent any such representation or warranty is made as of a specified date, in which case such representation or
warranty shall have been true and correct as of such date. 
  
 (f) As of the date hereof, and after giving effect to
the provisions of this Amendment No. 1, no Event of Default, and no condition or event which, with the giving of notice or lapse of time, or both, would constitute an Event of Default, exists or has occurred and is continuing. 

 
 28.  Conditions Precedent. The consent and amendments contained herein shall only be effective upon the
satisfaction of each of the following conditions precedent in a manner satisfactory to Lender: 
  
 (a) Lender shall
have received, in form and substance satisfactory to Lender, an original of this Amendment No. 1, duly authorized, executed and delivered by Borrowers; 
  
 (b) Lender shall have received from Borrowers, Borrowers’ financial projections for fiscal year ending September 30, 2003, with sufficient time to review and analyze such projections, which
projections shall be satisfactory to Lender; and 
  
 (c) Lender shall have received from Borrowers (or Borrowers have
caused to be delivered to Lender), an updated appraisal of Borrowers’ Inventory in form, scope and methodology acceptable to Lender and by an appraiser acceptable to Lender, with sufficient time to review and analyze such appraisal, which
results of the appraisal shall be satisfactory to Lender. 
  
 29.  Effect of this Amendment. Except
for the specific amendments expressly set forth herein, no other waiver, changes or modifications to the Financing Agreements, and no waivers of any provisions thereof are intended or implied, and in all other respects the Financing Agreements are
hereby specifically ratified, restated and confirmed by all parties hereto as of the date hereof. To the extent of conflict between the terms of this Amendment No. 1 and the other Financing Agreements, the terms of this Amendment No. 1 shall
control. The Loan Agreement and this Amendment No. 1 shall be read and construed as one agreement. 
  
 30.  Further Assurances. Borrowers shall execute and deliver such additional documents and take such additional action as may be reasonably requested by Lender to effectuate the provisions and purposes of this
Amendment No. 1. 
  
 31.  Governing Law. The rights and obligations hereunder of each of the parties
hereto shall be governed by and interpreted and determined in accordance with the internal laws of the State of California (without giving effect to principles of conflicts of laws). 
  
 32.  Binding Effect. This Amendment No. 1 shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors and
assigns. 
  
 33.  Counterparts. This Amendment No. 1 may be executed in any number of counterparts,
but all of such counterparts shall together constitute but one and the same agreement. In making proof of this Amendment No. 1, it shall not be necessary to produce or account for more than one counterpart thereof signed by each of the parties
hereto. Delivery of an executed counterpart of this Amendment No. 1 by 

 
 11 

 telefacsimile shall have the same force and effect as delivery of an original executed counterpart of this Amendment No. 1. Any party delivering
an executed counterpart of this Amendment No. 1 by telefacsimile also shall deliver an original executed counterpart of this Amendment No. 1, but the failure to deliver an original executed counterpart shall not affect the validity, enforceability,
and binding effect of this Amendment No. 1 as to such party or any other party. 
  
 [REMAINDER OF THIS PAGE INTENTIONALLY
LEFT BLANK] 

 
 12 

  
 IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to be
duly executed and delivered by their authorized officers as of the day and year first above written. 
  
 
	 CENTRAL GARDEN & PET COMPANY
 
	 
	 By:
 	 	 /s/    STUART W. BOOTH        
 

	 Title:
 	 	 VP & CFO
 

 
  
 
	 MATTHEWS REDWOOD AND NURSERY SUPPLY, INC.
 
	 
	 By:
 	 	 /s/    STUART W. BOOTH        
 

	 Title:
 	 	 VP & CFO
 

 
  
 
	 FOUR PAWS PRODUCTS, LTD.
 
	 
	 By:
 	 	 /s/    STUART W. BOOTH        
 

	 Title:
 	 	 VP & CFO
 

 
  
 
	 KAYTEE PRODUCTS INCORPORATED
 
	 
	 By:
 	 	 /s/    STUART W. BOOTH        
 

	 Title:
 	 	 VP
 

 
  
 [SIGNATURES CONTINUED ON FOLLOWING PAGE] 

 
 13 

  
 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] 
  
 
	 T.F.H. PUBLICATIONS, INC. 
 
	 
	 By:
 	 	 /s/    STUART W. BOOTH        
 

	 Title:
 	 	 VP & CFO
 

 
  
 
	 NORCAL POTTERY PRODUCTS, INC.
 
	 
	 By:
 	 	 /s/    STUART W. BOOTH        
 

	 Title:
 	 	 VP & CFO
 

 
  
 
	 WELLMARK INTERNATIONAL
 
	 
	 By:
 	 	 /s/    STUART W. BOOTH        
 

	 Title:
 	 	 VP - Finance
 

 
  
 AGREED: 
  
 
	 CONGRESS FINANCIAL CORPORATION (WESTERN)
 
	 
	 By:
 	 	 /s/    GARY WHITAKER        
 

	 Title:
 	 	 VP
 

 

 
 14

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