-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QGDGFvGdQ8xu9AjMumUFp8J1xLiqCXVB0SJm3dT0K21lHQsgU2x2mzlCLFgDm3T+ l1eDqq12AU10EGrTLCduiw== 0000891554-02-000822.txt : 20020414 0000891554-02-000822.hdr.sgml : 20020414 ACCESSION NUMBER: 0000891554-02-000822 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: US HOME & GARDEN INC CENTRAL INDEX KEY: 0000879911 STANDARD INDUSTRIAL CLASSIFICATION: TEXTILE MILL PRODUCTS [2200] IRS NUMBER: 770262908 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14015 FILM NUMBER: 02548298 BUSINESS ADDRESS: STREET 1: 655 MONTGOMERY ST STE 500 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 BUSINESS PHONE: 4156168111 MAIL ADDRESS: STREET 1: 655 MONTGOMERY ST STREET 2: SUITE 500 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 FORMER COMPANY: FORMER CONFORMED NAME: NATURAL EARTH TECHNOLOGIES INC DATE OF NAME CHANGE: 19930328 10-Q 1 d27918_10q.txt QUARTERLY REPORT U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 From the transition period from _________________ to ___________________ Commission File Number 001-14015 U.S. HOME & GARDEN INC. (Exact name of registrant as specified in its charter) Delaware 77-0262908 (State or other jurisdiction IRS Employer of incorporation or organization) (Identification Number) 655 Montgomery Street San Francisco, California 94111 (Address of Principal Executive Offices) (Zip Code) (415) 616-8111 (Registrant's Telephone Number, Including Area Code) Indicate by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. As of February 4, 2002 there were 17,543,379 shares of the issuer's common stock, par value $.001 per share, outstanding. Part I. - Financial Information Item 1. - Consolidated Financial Statements Consolidated balance sheets as of December 31, 2001 (Unaudited) 3-4 and June 30, 2001 Consolidated statements of loss for the three months and six months ended December 31, 2001 and 2000 (Unaudited) 5 Consolidated statements of cash flows for the six months 6-7 ended December 31, 2001 and 2000 (Unaudited) Notes to consolidated financial statements 8-13 Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations 14-19 Item 3. - Quantitative and Qualitative Disclosures About Market Risk 19 Part II. - Other Information Item 1. - Legal Proceedings 20 Item 2. - Change in Securities and use of Proceeds 20 Item 6. - Exhibits and Reports on Form 8-K 20-21 Signatures 21 2 U.S. Home & Garden Inc. and Subsidiaries Consolidated Balance Sheets ================================================================================
December 31, 2001 June 30, 2001 ----------------- ---------------- (Unaudited) Assets Current Cash and cash equivalents $ -- $ 2,724,000 Accounts receivable, less allowance for doubtful accounts and sales returns of $1,034,000 and $1,260,000 9,510,000 19,483,000 Inventories 11,249,000 11,043,000 Prepaid expenses and other current assets 1,024,000 697,000 Refundable income taxes 653,000 653,000 Deferred tax asset 1,205,000 1,205,000 Net current assets of discontinued operations -- 371,000 - ---------------------------------------------------------------------------------------------------------------- Total Current Assets 23,641,000 36,176,000 Property and Equipment, net 5,633,000 5,994,000 Intangible Assets Excess of cost over net assets acquired, net 59,632,000 59,632,000 Deferred financing costs, net of accumulated amortization of $384,000 and $562,000 3,581,000 3,001,000 Non-compete agreements, net of accumulated amortization of $228,000 and $132,000 1,282,000 1,378,000 Package tooling costs, net of accumulated amortization of $1,648,000 and $1,390,000 1,297,000 1,371,000 Product rights, patents and trademarks, net of accumulated amortization of $105,000 and $85,000 574,000 559,000 Officer Receivables 541,000 521,000 Net Long-Term Assets of Discontinued Operations 117,000 -- Other Assets 26,000 304,000 - ---------------------------------------------------------------------------------------------------------------- Total Assets $ 96,324,000 $ 108,936,000 ================================================================================================================
See accompanying notes to consolidated financial statements. 3 U.S. Home & Garden Inc. and Subsidiaries Consolidated Balance Sheets ================================================================================
December 31, 2001 June 30, 2001 ----------------- ----------------- (Unaudited) Liabilities and Stockholders' Equity Current Lines-of-credit $ -- $ 21,650,000 Accounts payable 7,408,000 3,293,000 Accrued rebates 855,000 1,618,000 Accrued freight 813,000 434,000 Accrued commissions 649,000 1,279,000 Accrued co-op advertising 437,000 732,000 Accrued restructuring costs 93,000 999,000 Accrued expenses 722,000 1,285,000 Current portion of bank term loan 400,000 -- - ----------------------------------------------------------------------------------------------------------------- Total Current Liabilities 11,377,000 31,290,000 Revolving Credit Facility 5,840,000 Long Term Debt 7,428,000 -- Deferred Tax Liability 1,205,000 1,205,000 Net Long-Term Liabilities of Discontinued Operations -- 263,000 Other Long Term Liabilities -- 20,000 Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures 56,951,000 56,951,000 - ----------------------------------------------------------------------------------------------------------------- Total Liabilities 82,801,000 89,729,000 - ----------------------------------------------------------------------------------------------------------------- Minority Interest in Equity of Affiliate 1,239,000 1,239,000 - ----------------------------------------------------------------------------------------------------------------- Stockholders' Equity Preferred stock, 1,000,000 shares authorized and unissued -- -- Common stock, $0.001 par value - shares authorized, 75,000,000; 21,433,000 shares issued at June 30, 2001 and December 31, 2001 21,000 21,000 Additional paid-in capital 52,308,000 51,846,000 Retained deficit (27,217,000) (21,071,000) - ----------------------------------------------------------------------------------------------------------------- 25,112,000 30,796,000 Less: Treasury Stock, 3,890,000 shares at cost at June 30, 2001 and December 31, 2001 (12,828,000) (12,828,000) - ----------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 12,284,000 17,968,000 - ----------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders Equity $ 96,324,000 $ 108,936,000 =================================================================================================================
See accompanying notes to consolidated financial statements. 4 U.S. Home & Garden Inc. and Subsidiaries Consolidated Statements of Net Loss ================================================================================
Three Months Ended Six Months Ended December 31, December 31, ------------------------------------------------------------- 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Unaudited Unaudited ------------------------------------------------------------- Net sales $ 11,639,000 $ 11,359,000 $ 25,289,000 $ 24,470,000 Cost of Sales 7,168,000 7,384,000 15,322,000 16,115,000 - ------------------------------------------------------------------------------------------------------------------------------------ Gross Profit 4,471,000 3,975,000 9,967,000 8,355,000 - ------------------------------------------------------------------------------------------------------------------------------------ Operating Expenses Selling and shipping 3,422,000 3,289,000 7,452,000 6,856,000 General and administrative 2,124,000 1,747,000 4,266,000 3,460,000 Depreciation 190,000 225,000 374,000 487,000 Goodwill amortization -- 713,000 -- 1,429,000 Other amortization 66,000 100,000 260,000 277,000 Write off of deferred financing costs 254,000 -- 254,000 -- - ------------------------------------------------------------------------------------------------------------------------------------ Total Operating Expenses 6,056,000 6,074,000 12,606,000 12,509,000 - ------------------------------------------------------------------------------------------------------------------------------------ Loss from Operations (1,585,000) (2,099,000) (2,639,000) (4,154,000) Other Income (Expense) Investment income 27,000 35,000 70,000 99,000 Interest expense (1,767,000) (1,764,000) (3,577,000) (3,424,000) - ------------------------------------------------------------------------------------------------------------------------------------ Loss from Continuing Operations Before Income Taxes and Extraordinary Gain (3,325,000) (3,828,000) (6,146,000) (7,479,000) Income Tax Benefit -- 1,808,000 -- 3,587,000 - ------------------------------------------------------------------------------------------------------------------------------------ Loss from Continuing Operations Before Extraordinary Gain (3,325,000) (2,020,000) (6,146,000) (3,892,000) Discontinued Operations - Loss from discontinued operations net of tax benefit of $1,262,000 and $2,449,000, respectively, and minority interest of $209,000 and $426,000, respectively, in 2000 -- (977,000) -- (1,860,000) - ------------------------------------------------------------------------------------------------------------------------------------ Net Loss Before Extraordinary Gain (3,325,000) (2,997,000) (6,146,000) (5,752,000) Extraordinary gain on purchase of Trust Preferred Securities, net of income taxes -- -- -- 4,000 - ------------------------------------------------------------------------------------------------------------------------------------ Net Loss $ (3,325,000) $ (2,997,000) $ (6,146,000) $ (5,748,000) - ------------------------------------------------------------------------------------------------------------------------------------ Per Share Amounts: Weighted Average Common Shares Outstanding- Basic and Diluted 17,543,000 18,313,000 17,543,000 18,493,000 Loss from Continuing Operations per Common Share Before Extraordinary Gain - Basic and Diluted ($.19) ($.11) ($.35) ($.21) Discontinued operations -- (.05) -- (.10) Extraordinary gain -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Net Loss ($.19) ($.16) ($.35) ($.31) - ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 5 U.S. Home & Garden Inc. and Subsidiaries Consolidated Statements of Cash Flows ================================================================================
Six months ended December 31, 2001 2000 - -------------------------------------------------------------------------------------------------------- Unaudited ---------------------------------- Cash Flows from Operating Activities: Net loss from continuing operations before extraordinary gain $ (6,146,000) $ (3,892,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,429,000 3,084,000 Write off of deferred financing costs 254,000 -- Extraordinary gain -- (4,000) Compensation related to stock options 60,000 160,000 Changes in operating assets and liabilities, net of assets acquired and liabilities assumed: Accounts receivable 9,973,000 8,688,000 Inventories (206,000) (5,680,000) Prepaid expenses and other current assets (327,000) (242,000) Accounts payable and accrued expenses 1,317,000 (5,912,000) Other assets 278,000 56,000 - -------------------------------------------------------------------------------------------------------- Net Cash Provided By (Used In) Operating Activities 6,632,000 (3,742,000) - -------------------------------------------------------------------------------------------------------- Cash Flows for Investing Activities: Payment for purchase of business, net of cash acquired -- (27,000) Increase in officer receivables (20,000) (52,000) Purchase of property and equipment (577,000) (663,000) Purchase of intangibles (219,000) (236,000) - -------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (816,000) (978,000) ========================================================================================================
See accompanying notes to consolidated financial statements. 6 U.S. Home & Garden Inc. and Subsidiaries Consolidated Statements of Cash Flows ================================================================================
Six months ended December 31, 2001 2000 - ------------------------------------------------------------------------------------------------------------- Unaudited ------------------------------------ Cash Flows from Financing Activities: (Payments)/proceeds on lines-of-credit $ (15,810,000) $ 11,000,000 Proceeds from long term debt 8,263,000 -- Deferred finance costs (951,000) -- Principal payments on long-term debt (33,000) -- Repurchase of common stock for treasury -- (1,927,000) Purchase of mandatorily redeemable preferred securities -- (22,000) Other -- 114,000 - ------------------------------------------------------------------------------------------------------------- Net Cash Provided By (Used) In Financing Activities (8,531,000) 9,165,000 - ------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents from continuing operations (2,715,000) 4,445,000 Cash used in discontinued operations (9,000) (7,006,000) - ------------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (2,724,000) (2,561,000) Cash and Cash Equivalents, beginning of period 2,724,000 3,474,000 - ------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents, end of period $ -- $ 913,000 - ------------------------------------------------------------------------------------------------------------- Supplemental disclosure of Cash Flow Information Cash paid for interest $ 3,212,000 $ 3,190,000 Cash paid for taxes $ 219,000 $ (14,000) - ------------------------------------------------------------------------------------------------------------- Non-Cash Investing and Financing Activities Issuance of 16% subordinated notes at 90% of face amount $ 600,000 $ -- Issuance of warrants and options in conjunction with debt refinancing $ 402,000 $ -- =============================================================================================================
See accompanying notes to consolidated financial statements. 7 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ 1. The accompanying consolidated financial statements at December 31, 2001 and for the three months and six months ended December 31, 2001 and 2000 are unaudited, but, in the opinion of management, include all adjustments necessary for a fair presentation of consolidated financial position and results of operations for the periods presented. The results for the six months ended December 31, 2001 are not necessarily indicative of the results of operations for a full year. Certain amounts as previously reported have been reclassified to conform to current year classifications. 2. Refer to the audited consolidated financial statements for the year ended June 30, 2001, for details of accounting policies and detailed notes to the consolidated financial statements. 3. Inventories consist of: December 31, 2001 June 30, 2001 ------------------------------------------------------------------- Raw materials $ 5,427,000 $ 6,290,000 Finished goods 5,822,000 4,753,000 ------------------------------------------------------------------- $ 11,249,000 $ 11,043,000 =================================================================== 4. On November 15, 2001, the Company secured financing from a bank to provide up to $33,000,000 in senior secured financing due three years from the closing date. The financing provides for a $31,000,000 revolving credit facility and a $2,000,000 term loan due in monthly installments of $33,000 plus interest. The term loan balance outstanding, net of current portion of $400,000, of $1,566,000 is included in long term debt. Interest on borrowings is calculated at variable annual rates based on either the bank's prime rate plus an applicable marginal rate or the federal funds rate plus an applicable marginal rate (effectively 5.25% at December 31, 2001). Borrowings on the revolving credit facility are limited based on eligible borrowing bases. The bank has a first priority perfected security interest in substantially all of the Company's assets. The Company's obligations under the Revolving Credit Facility are guaranteed by its subsidiaries and secured by a security interest in favor of the Bank in substantially all of the assets of the Company and its subsidiaries. Upon the occurrence of an event of default as specified in the Financing Agreement, the maturity of loans outstanding under the Financing Agreement may be accelerated by the Bank, which may also foreclose its security interest on the assets of the Company and its subsidiaries. During the three months ended December 31, 2001, the Company borrowed $5,847,000, net of discounts of $1,002,000, pursuant to subordinated secured notes due six years from the closing date with an effective interest rate of 18.4%. The discounts at December 31, 2001, were $988,000. Interest is charged on the face of the notes at 16% and 14% per annum, payable monthly. The issue price of the 16% notes was 90% of the face amount of the notes resulting in a discount of $600,000. The notes are secured by a second lien on all assets of the Company and rank junior to the senior financing provided by the bank. In connection with this financing, 8 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ the company issued to the Purchasers of the notes warrants to purchase up to 3.75% of the fully diluted common stock of the Company and granted to the Purchasers an option to purchase from the Company certain Trust Preferred Securities of the Company's subsidiary, U.S. Home & Garden Trust I, that are owned by the Company, which resulted in a discount of $402,000. The Company is required to pay certain fees and is subject to certain restrictions. Under the two financing agreements, the Company and its subsidiaries are required, among other things, to comply with (a) certain limitations on incurring additional indebtedness, liens and guaranties, on dispositions of assets, payment of cash dividends and cash redemption and repurchases of securities, and (b) certain limitations on mergers, liquidations, changes in business, investments, loans and advances, affiliate transactions and certain acquisitions. In addition, the Company must comply with certain financial tests and ratios. A violation of any of these covenants constitutes an event of default under the financing agreements. At December 31, 2001, the Company was in compliance with the financial covenants. 5. In June 2001, the Company announced that it was discontinuing its e-commerce initiative, which it was conducting through its subsidiary, Egarden, Inc. (Egarden), effective June 30, 2001. During the year ended June 30, 2001, the Company recorded a net loss on disposal of discontinued operations of $4,551,000, net of minority interest of $1,118,000. The loss, prior to minority interest, included the write-off of all long-lived assets of $5,224,000 and severance expense of $445,000 related to the termination of all 39 employees. Approximately $106,000 of severance payments are unpaid at December 31, 2001. No adjustments were made to the liability recorded for severance payments during the period ended December 31, 2001. The Company had a net loss from the operations of Egarden of $977,000, and $1,860,000 net of minority interest of $209,000 and $426,000 for the three months and six months ended December 31, 2000. Revenues of the discontinued operations for the three months and six months ended December 31, 2000 were not material. The net assets and liabilities of discontinued operations reported in the consolidated balance sheets consisted of the following:
December 31, June 30, 2001 2001 -------------------------------------------------------------------------------------- Current assets $ 106,000 $ 882,000 Current liabilities (106,000) (511,000) -------------------------------------------------------------------------------------- Net current assets $ -- $ 371,000 ====================================================================================== Net long-term liabilities $ 117,000 $ (263,000) ====================================================================================== Minority interest in equity of affiliate $ (1,239,000) $ (1,239,000) ======================================================================================
9 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Pursuant to APB Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, the Company's consolidated financial statements and notes have been restated for all periods presented to reflect the discontinuation of Egarden. The net operating results, net assets and net cash flows of Egarden have been reported as "Discontinued Operations" in the accompanying consolidated financial statements. The restated notes exclude amounts related to these discontinued operations. 6. During the fiscal year ended June 30, 2001, the Company recorded a restructuring charge of $2,860,000 relating to the closing and sale of its subsidiary's Ampro Industries Inc. facility in Michigan. The Company intends to continue to sell products, through a contract manufacturing agreement, being manufactured at the former Ampro facility. As part of this agreement, the Company has a firm commitment to purchase minimum quantities of product in the fiscal year ended June 30, 2002. However, the contract includes an exit provision, whereby the maximum cost to the Company of termination of the agreement is $332,000. As of December 31, 2001, the Company has purchased approximately $405,000 of product from the subcontractor. During the period ended June 30, 2001, the Company recognized approximately $1,709,000 of expenses and losses relating to the closing and sale of property and equipment of the Ampro facility and $1,151,000 for termination benefits to be paid to all 60 former employees at the Ampro facility. Approximately $93,000 of severance payments as a result of the restructuring were unpaid as of December 31, 2001. All payments are expected to be completed by June 30, 2002. No adjustments were made to the liability recorded for severance payments during the six months ended December 31, 2001. 7. In June 2001, the Financial Accounting Standards Board (FASB) finalized Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interest method of accounting for business combinations initiated after June 30, 2001. SFAS No. 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS No. 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. SFAS No. 141 also requires, upon adoption of SFAS No. 142, that the Company reclassify the carrying amounts of goodwill and other intangible assets based on the criteria of SFAS No. 141. SFAS No. 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS No. 142 requires that the Company identify reporting units for the purpose of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidelines in SFAS No. 142. SFAS No. 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. 10 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ SFAS No. 142 requires the Company to complete a two-step transitional goodwill impairment test, with the first step to be completed within six months of the date of adoption. The first step, used to identify potential impairment, compares the fair value of a reporting unit with its carrying value. If it is determined that the carrying value of the net assets of the reporting unit (including goodwill) exceeds the fair value of that reporting unit, the second step must be performed as soon as possible, but no later than the end of the year of initial adoption, to measure the amount of the impairment loss, if any. An impairment loss resulting from the transitional goodwill impairment test is recognized as the effect of a change in accounting principle. The Company has elected to adopt SFAS No. 141 and SFAS No. 142, effective July 1, 2001. The adoption of SFAS No. 141 had no effect on the Company's financial statements for the six months ended December 31, 2001 as the Company engaged in no business acquisitions during this period and there were no reclassifications between goodwill and other intangible assets. During the three months ended September 30, 2001, the Company completed a reassessment of the useful lives of other intangible assets which total $6,734,000 (net of accumulated amortization of $2,365,000) at December 31, 2001. As a result, no adjustments were made to previously determined amortization periods. The Company has no intangible assets with indefinite useful lives at December 31, 2001. The Company completed step one of the SFAS No. 142 transitional goodwill impairment test during the quarter ended December 31, 2001. The carrying value of the net assets of the Ampro reporting unit exceeds its fair value. Goodwill associated with the purchase of Ampro was approximately $17,078,000, net of accumulated amortization, at December 31, 2001. As disclosed at June 30, 2001, the Company restructured the operations of Ampro during the year ended June 30, 2001. This restructuring included the closing and sale of the Ampro facility in Michigan. The Company currently continues to sell Ampro products, through a contract manufacturing agreement, being manufactured at the former Ampro facility. This restructuring is currently being considered by the Company in conjunction with the transitional goodwill impairment test being completed. Step two of the transitional goodwill impairment test will be completed as soon as possible to measure the impairment loss, with the loss recorded no later than June 30, 2002. The Company's previous business combinations were accounted for using the purchase method. As a result of such combinations, the Company has recognized a significant amount of goodwill, which, in the aggregate, was approximately $59,632,000, net of accumulated amortization, at December 31, 2001. Amortization expense for all intangible assets during the six months ended December 31, 2001 and 2000 was $514,000 and $2,114,000, respectively. Estimated amortization expense for each of the five succeeding fiscal years is as follows: Year Ended June 30, -------------------------------------------------- 2002 $ 1,478,000 2003 - 2004 $ 1,468,000 2005 $ 1,288,000 2006 $ 1,108,000 11 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ The following represents a reconciliation of the reported net loss to the adjusted net loss and the adjusted net loss before extraordinary gain for the three months and the six months ended December 31, 2000, which exclude goodwill amortization expense, net of tax benefit:
Three Months Ended Six Months Ended -------------------------------------- December 31, 2000 ------------------------------------------------------------------------------------------ Reported Net Loss $ (2,997,000) $ (5,748,000) Goodwill amortization, net of tax benefit of $383,000 and $774,000 401,000 793,000 ========================================================================================== Adjusted Net Loss (2,596,000) (4,955,000) Extraordinary gain 4,000 ========================================================================================== Adjusted Net Loss Before Extraordinary Gain $ (2,596,000) $ (4,959,000) ========================================================================================== Per Share Amounts: Reported Net Loss $ (.16) $ (.31) Goodwill amortization, net of tax benefit .02 .04 ========================================================================================== Adjusted Net Loss (.14) (.27) Extraordinary gain -- -- ========================================================================================== Adjusted Net Loss Before Extraordinary Gain $ (.14) $ (.27) ==========================================================================================
8. In the normal course of business, the Company is subject to proceedings, lawsuits, and other claims, including proceedings under laws and government regulations related to product safety and other matters. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. Consequently, the ultimate amount of monetary liability or financial impact with respect to these matters at December 31, 2001 cannot be ascertained. During fiscal 2001, the U.S. Consumer Product Safety Commission ("CPSC") began an investigation into a product previously distributed by the Company's Weed Wizard subsidiary. This investigation could result in an adverse outcome for the Company. While the amount of loss cannot be reasonably estimated at this time, the approximate maximum potential loss is $1.6 million. The Company has vigorously defended, and will continue to vigorously defend, its actions with respect to this subsidiary and its discontinued product. 12 U.S. Home & Garden Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ In fiscal 2001, the Company commenced an action against A.A.B.B., Inc. (formerly known as Weed Wizard, Inc.) and certain stockholders and officers relating to the purchase from the defendants of substantially all of the assets of Weed Wizard, Inc. by the Company. The Company is seeking to rescind the transaction or to recover monetary damages. A.A.B.B., Inc. has asserted a counterclaim for breach of contract against the Company for $720,000, plus interest, representing an alleged adjustment to the purchase price. During the six months ended December 31, 2001, the Company was notified by the staff of the CPSC that a cap on one of the Company's products sold prior to June 30, 2000 was found to be defective. The Company recently agreed to a voluntary corrective action providing replacement caps for earlier versions of the caps. Costs related to the voluntary corrective action are not expected to be significant. 13 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information included in this Report contains statements that are forward-looking, such as statements relating to plans for the Company's future activities. Such forward-looking information involves important known and unknown risks and uncertainties that could significantly affect actual results, performance or achievements in the future and, accordingly, such actual results, performance or achievements may materially differ from those expressed or implied in any forward-looking statements made by or on behalf of the Company. These risks and uncertainties include, but are not limited to, those relating to the Company's growth strategy, customer concentration, outstanding indebtedness, dependence on weather conditions, seasonality, expansion and other activities of competitors, ability to successfully integrate acquired companies and product lines, changes in federal or state environmental laws and the administration of such laws, protection of trademarks and other proprietary rights, litigation, and the general condition of the economy and its effect on the securities markets and other risks detailed in the Company's other filings with the Securities and Exchange Commission. The words "believe," "expect," "anticipate," "intend" and "plan" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. General U.S. Home & Garden Inc., ("the Company"), manufactures and markets a broad range of brand-name consumer lawn and garden products through its wholly owned subsidiaries, Ampro Industries, Inc. ("Ampro"), Easy Gardener, Inc. ("Easy Gardener"), and Golden West Agri-Products, Inc., and Easy Gardener's wholly owned subsidiaries, Weatherly Consumer Products Group, Inc. and Weed Wizard Acquisition Corp. Since 1992, the Company consummated eleven acquisitions of complementary lawn and garden companies and product lines for an aggregate consideration of approximately $111,000,000 in cash, notes and equity securities. As a result of such acquisitions, the Company recognized a significant amount of goodwill, which, in the aggregate, was approximately $59,632,000, net of accumulated amortization, at June 30, 2001 and December 31, 2001. Results of Operations The following table sets forth, for the periods indicated, certain selected financial data as a percentage of net sales:
Three Months Ended Six Months Ended December 31, December 31, ------------ ------------ 2001 2000 2001 2000 Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 61.6 65.0 60.6 65.9 --------------------- --------------------- Gross profit 38.4 35.0 39.4 34.1 Selling and shipping expenses 29.4 29.0 29.4 28.0 General and administrative expenses 18.2 15.4 16.9 14.1 Depreciation and amortization 4.4 9.1 3.5 9.0 --------------------- --------------------- Income (loss) from operations (13.6) (18.5) (10.4) (17.0) Interest expense, net (14.9) (15.2) (13.9) (13.6) Income tax benefit -- 15.9 -- 14.7 ================================================= Loss from continuing operations (28.5) (17.8) (24.3) (15.9) Loss from discontinued operations -- (8.6) -- (7.6) ================================================= Net loss (28.5)% (26.4)% (24.3)% (23.5)% ====================== =====================
14 Three Months Ended December 31, 2001 Compared to Three Months Ended December 31, 2000 Net sales. Net sales increased by $280,000, or 2.5%, to $11,639,000 during the three months ended December 31, 2001 from $11,359,000 during the comparable period in 2000. The increase in net sales was a result of growth in sales of core products primarily to home center customers. Gross profit. Gross profit increased by $496,000, or 12.5%, to $4,471,000 for the three months ended December 31, 2001 from $3,975,000 during the comparable period in 2000. Gross profit as a percentage of net sales increased to 38.4% during the three months ended December 31, 2001, from 35.0% during the comparable period in 2000. This increase in gross profit as a percentage of net sales is due to a decrease in cost of sales as a result of the restructuring and closing of the Bradley, Michigan facility, a reduction in certain raw material costs, and increased operating efficiencies. Selling and shipping expenses. Selling and shipping expenses increased by $133,000, or 4.0% to $3,422,000 during the three months ended December 31, 2001 from $3,289,000 during the comparable period in 2000. As a percentage of net sales, selling and shipping expenses increased to 29.4% during the three months ended December 31, 2001 from 29.0% during the comparable period in 2000. This increase in expense and increase as a percent of net sales was primarily attributable to increases in outbound freight. General and administrative expenses. General and administrative expenses increased by $377,000 or 21.6%, to $2,124,000 during the three months ended December 31, 2001 from $1,747,000 during the comparable period in 2000. This increase is primarily due to the allocation of certain costs in the prior year to the discontinued startup operations of Egarden. All general and administrative costs during the three months ended December 31, 2001 were charged to continuing operations. As a percentage of net sales, general and administrative expenses increased to 18.2% during the three months ended December 31, 2001 from 15.4% during the comparable period in 2000. Depreciation, amortization, and write off of deferred financing costs. Depreciation, amortization, and write-off of deferred financing costs expenses decreased by $528,000 or 50.9% to $510,000 during the three months ended December 31, 2001 from $1,038,000 during the comparable period in 2000. This decrease is primarily a result of the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") in July 2001. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. Goodwill amortization was also reduced by the write off of Weed Wizard goodwill at June 30, 2001. The decrease in depreciation and amortization expenses was mitigated somewhat by the write off of deferred financing costs in conjunction with the restructuring of the Company's debt during the quarter. As a percentage of net sales, depreciation, amortization, and write off of deferred financing costs decreased to 4.4% during the three months ended December 31, 2001 from 9.1% during the comparable period in 2000. Loss from operations. Loss from operations decreased by $514,000 or 24.5% to $1,585,000 during the three months ended December 31, 2001, from $2,099,000 during the comparable period in 2000. The decrease in loss from operations was primarily due to increased gross profit and other expense changes noted above. As a percentage of net sales, loss from operations decreased to 13.6% for the three months ended December 31, 2001 from 18.5% during the comparable period in 2000. Interest expense, net. Net interest expense increased $11,000, or .6% to $1,740,000 during the three months ended December 31, 2001, from $1,729,000 during the comparable period in 2000. The slight increase in interest expense results from higher interest rates prior to the refinancing of the revolving credit facility offset by reductions in the borrowing levels. 15 Income taxes. Income tax benefit decreased to $0 during the three months ended December 31, 2001 from $1,808,000 during the comparable period in 2000. The income tax benefit for each interim period is based upon the Company's estimated effective income tax rate for the year. No income tax benefit was recorded for the three months ended December 31, 2001, due to a valuation allowance established for the full amount of the deferred tax asset generated during the three months ended December 31, 2001. Discontinued Operations. Loss from discontinued operations decreased by $977,000 to $0 during the three months ended December 31, 2001, from the comparable period in 2000. The decrease in loss from discontinued operations is due to the Company's decision to discontinue the operations of Egarden, Inc. during the quarter ended June 30, 2001. Net loss. Net loss increased by $328,000 to $3,325,000 during the three months ended December 31, 2001 from a net loss of $2,997,000 during the comparable period in 2000. Net loss per common share increased to $0.19 per share for the three months ended December 31, 2001 from net loss of $0.16 per share during the comparable period in 2000. The increase in net loss and net loss per common share is due primarily to not reflecting a tax benefit in 2001, largely offset by the reduced loss from continuing operations due to the factors discussed above and not having a loss related to the discontinued operations. There were fewer weighted average common and common equivalent shares outstanding in the three months ended December 31, 2001 compared to the comparable period in the prior year due to the Company's repurchase of shares of its common stock in fiscal 2001. Six Months Ended December 31, 2001 Compared to Six Months Ended December 31, 2000 Net sales. Net sales increased by $819,000, or 3.3%, to $25,289,000 during the six months ended December 31, 2001 from $24,470,000 during the comparable period in 2000. The increase in net sales was a result of growth in sales of core products primarily to home center customers. Gross profit. Gross profit increased by $1,612,000, or 19.3%, to $9,967,000 for the six months ended December 31, 2001 from $8,355,000 during the comparable period in 2000. Gross profit as a percentage of net sales increased to 39.4% during the six months ended December 31, 2001, from 34.1% during the comparable period in 2000. This increase in gross profit as a percentage of net sales is due to a decrease in cost of sales as a result of the restructuring and closing of the Bradley, Michigan facility, a reduction in certain raw material costs and increased operating efficiencies. Selling and shipping expenses. Selling and shipping expenses increased by $596,000, or 8.7% to $7,452,000 during the six months ended December 31, 2001 from $6,856,000 during the comparable period in 2000. As a percentage of net sales, selling and shipping expenses increased to 29.4% during the six months ended December 31, 2001 from 28.0% during the comparable period in 2000. This increase in expense and increase as a percent of net sales was primarily attributable to increases in outbound freight for the six months ended December 31, 2001. General and administrative expenses. General and administrative expenses increased by $806,000 or 23.3%, to $4,266,000 during the six months ended December 31, 2001 from $3,460,000 during the comparable period in 2000. This increase is primarily due to the allocation of certain costs in the prior year to the discontinued startup operations of Egarden. All general and administrative costs during the six months ended December 31, 2001 were charged to continuing operations. As a percentage of net sales, general and administrative expenses increased to 16.9% during the six months ended December 31, 2001 from 14.1% during the comparable period in 2000. 16 Depreciation, amortization, and write off of deferred financing costs. Depreciation, amortization, and write-off of deferred financing costs expenses decreased by $1,305,000 or 59.5% to $888,000 during the six months ended December 31, 2001 from $2,193,000 during the comparable period in 2000. This decrease is primarily a result of the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") in July 2001. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. Goodwill amortization was also reduced by the write off of Weed Wizard goodwill at June 30, 2001. The decrease in depreciation, amortization, and write off of deferred financing costs was mitigated somewhat by the write off of deferred financing costs in conjunction with the restructuring of the Company's debt during the quarter. As a percentage of net sales, depreciation, amortization, and write-off of deferred financing costs decreased to 3.5% during the six months ended December 31, 2001 from 9.0% during the comparable period in 2000. Loss from operations. Loss from operations decreased by $1,515,000 or 36.5% to $2,639,000 during the six months ended December 31, 2001, from $4,154,000 during the comparable period in 2000. The decrease in loss from operations was primarily due to increased gross profit and other expense changes as noted above. As a percentage of net sales, loss from operations decreased to 10.4% for the six months ended December 31, 2001 from 17.0% during the comparable period in 2000. Interest expense, net. Net interest expense increased $182,000, or 5.5% to $3,507,000 during the six months ended December 31, 2001, from $3,325,000 during the comparable period in 2000. The increase in interest expense results from higher interest rates prior to the refinancing of the revolving credit facility offset by reductions in borrowing levels. Income taxes. Income tax benefit decreased to $0 during the six months ended December 31, 2001 from $3,587,000 during the comparable period in 2000. The income tax benefit for each interim period is based upon the Company's estimated effective income tax rate for the year. No income tax benefit was recorded for the six months ended December 31, 2001, due to a valuation allowance established for the full amount of the deferred tax asset generated during the six months ended December 31, 2001. Discontinued Operations. Loss from discontinued operations decreased by $1,860,000 to $0 during the six months ended December 31, 2001, from the comparable period in 2000. The decrease in loss from discontinued operations is due to the Company's decision to discontinue the operations of Egarden, Inc. during the quarter ended June 30, 2001. Net loss. Net loss increased by $398,000 to $6,146,000 during the six months ended December 31, 2001 from a net loss of $5,748,000 during the comparable period in 2000. Net loss per common share increased to $0.35 per share for the six months ended December 31, 2001 from net loss of $0.31 per share during the comparable period in 2000. The increase in net loss and net loss per common share is due primarily to not reflecting a tax benefit in 2001, largely offset by the reduced loss from continuing operations due to the factors discussed above and not having a loss related to the discontinued operations. There were fewer weighted average common and common equivalent shares outstanding in the six months ended December 31, 2001 compared to the comparable period in the prior year due to the Company's repurchase of shares of its common stock in fiscal 2001. 17 Seasonality The Company's sales are seasonal due to the nature of the lawn and garden business, in parallel with the annual growing season. The Company's sales and shipping are most active from late December through May when home lawn and garden customers are purchasing supplies for spring planting and retail stores are increasing their inventory of lawn and garden products. Additionally, since the Company has adjusted its operations to respond more closely to the just-in-time inventory management programs increasingly utilized by its major customers, it expects to ship an increasingly larger proportion of its total orders on an annual basis in the seasonally strong third and fourth quarter of the fiscal year. Sales of the Company's agricultural products, which were not material during the six months ended December 31, 2001, are also seasonal. Most shipments occur during the agricultural cultivation period from March through October. Liquidity and Capital Resources Since inception, the Company has financed its operations primarily through cash generated by operations, net proceeds from the Company's private placements and public sales of securities and borrowings from lending institutions. At December 31, 2001, the Company had consolidated cash and short-term investments totaling $0, and working capital of $12,264,000. Under the Company's new credit facility all cash balances are automatically used to reduce outstanding borrowings. At June 30, 2001, the Company had consolidated cash and short-term investments totaling $2,724,000, and working capital of $4,886,000. The increase in working capital is primarily attributable to the cash provided by operations utilized to reduce borrowings and by the modification in the revolving credit facility allowing balances to be included in long-term debt. During the three months ended December 31, 2001, the Company secured financing from a bank to provide up to $33,000,000 in senior secured financing due three years from the closing date. The financing commitment provides for a $31,000,000 revolving credit facility and a $2,000,000 term loan. Interest on borrowings is calculated at variable annual rates based on either the bank's prime rate plus an applicable marginal rate or the federal funds rate plus an applicable marginal rate (effectively 5.25% at December 31, 2001). Available borrowing on the revolving credit facility is limited based on eligible borrowing bases. The bank has first priority perfected security interest in substantially all of the Company's assets. The Company is subject to certain fees and restrictions in conjunction with the financing. During the three months ended December 31, 2001, the Company borrowed $5,847,000, net of discounts of $1,002,000, pursuant to subordinated secured notes due six years from the closing date with an effective interest rate of 18.4%. The discounts at December 31, 2001, were $988,000. Interest is charged on the face of the notes at 16% and 14% per annum, payable monthly. The issue price of the 16% notes was 90% of the face amount of the notes resulting in a discount of $600,000. The notes are secured by a second lien on all assets of the Company and rank junior to the senior financing provided by the bank. In connection with this financing, the company issued to the Purchasers of the notes warrants to purchase up to 3.75% of the fully diluted common stock of the Company and granted to the Purchasers an option to purchase from the Company certain Trust Preferred Securities of the Company's subsidiary, U.S. Home & Garden Trust I, that are owned by the Company, which resulted in a discount of $402,000. The Company is required to pay certain fees and is subject to certain restrictions. New Accounting Pronouncements In September 2000, the Emerging Issues Task Force (EITF) issued EITF Issue 00-25, Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendors Products, which requires certain cooperative 18 advertising charges to be classified as a reduction of revenue. This guidance is effective for fiscal periods beginning after December 15, 2001. Currently, the Company is assessing but has not yet adopted EITF 00-25. In August 2001, the Financial Accounting Standards Board finalized SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses accounting and reporting for the impairment or disposal of long-lived assets, including the disposal of a segment of business. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. We are currently reviewing the impact of SFAS No. 144 on the Company. In June 2001, the FASB finalized SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interest method of accounting for business combinations initiated after June 30, 2001. SFAS No. 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS No. 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS No. 142, that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria of SFAS No. 141. SFAS No. 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS No. 142 requires that the Company identify reporting units for the purpose of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS NO. 142. SFAS No. 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS No. 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS No. 142. The Company has elected to adopt SFAS No. 141 and SFAS No. 142, effective July 1, 2001. See Note 7 to the Consolidated Financial Statements. Inflation Inflation has historically not had a material effect on the Company's operations. Item 3. Quantitative and Qualitative Disclosures About Market Risk As a result of its variable rate revolving credit line, the Company is exposed to the risk of rising interest rates. The following table provides information on the Company's fixed maturity debt as of December 31, 2001 that are sensitive to changes in interest rates. The Revolving Credit Facility had an $5.8 million interest rate of 5.25% for the period ended December 31, 2001. 19 PART II - OTHER INFORMATION Item 1. Legal Proceedings In July 2000, our subsidiary, Weed Wizard Acquisition Corp. ("Weed Wizard") commenced an action in the U.S. District Court, Northern District of Georgia, against A.A.B.B., Inc. (formerly known as Weed Wizard, Inc.) and certain of its stockholders and officers. In this action we allege that the defendants made certain misrepresentations and omitted to disclose certain facts regarding, among other things, alleged defects in certain of the Weed Wizard products in connection with our purchase from defendants in 1998 of substantially all of the assets of Weed Wizard, Inc. We are seeking to rescind the transaction, or in the alternative, to recover rescissionary monetary damages, and to recover compensatory damages. In addition, we are seeking punitive damages. In October 2000 A.A.B.B., Inc. asserted a counterclaim for breach of contract against Weed Wizard alleging that it is owed $720,267, plus interest, representing an adjustment to the purchase price allegedly required to be made pursuant to the agreement in which Weed Wizard acquired certain A.A.B.B., Inc.'s assets. A.A.B.B., Inc. is also seeking to recover attorney's fees. We deny any liability and intend to defend this counterclaim. In fiscal 2001, we were notified by the staff of the U.S. Consumer Product Safety Commission ("CPSC") that the staff is considering recommending that the CSPC commence an action against Weed Wizard to obtain a monetary fine from Weed Wizard for the alleged failure of Weed Wizard to timely disclose to the CPSC, pursuant to the Consumer Products Safety Act, certain required information concerning Weed Wizard product previously distributed by us that was the subject of a voluntary recall during fiscal 2000. We believe that the maximum amount of any claim that may be brought by the CSPC will not exceed approximately $1.6 million. We intend to defend any claim against Weed Wizard or us that may be brought by the CSPC. Item 2. Change in Securities and Use of Proceeds In connection with certain subordinated borrowing in November 2001 the Company issued to several accredited investor purchasers (the "Purchasers") subordinated secured notes in the principal amount of approximately $6,850,000 and issued to the Purchasers warrants to purchase up to 3.75% of the fully diluted common stock of the Company and granted to the Purchasers an option to purchase from the Company certain Trust Preferred Securities of the Company's subsidiary, U.S. Home & Garden Trust I, that are owned by the Company. The securities issued to the Purchasers were issued by the Company in reliance on the exemption provided by Section 4(2) of the Securities Act of 1933. Item 6. Exhibits and Reports on Form 8-K (a) 10.1 Revolving Credit, Term Loan, Guaranty and Security Agreement dated as of November 15, 2001 among U.S. Home & Garden Inc., Easy Gardener, Inc., each of the direct or indirect subsidiaries of U.S. Home & Garden Inc. which are signatories to the Credit Agreement), the financial institutions which are a party to the Credit Agreement, and PNC Bank, National Association, as agent for the lenders. 10.2 Note and Warrant Purchase, Guaranty and Security Agreement dated as of November 15, 2001 among, U.S. Home & Garden, Inc. Easy Gardener, Inc. each of the direct or indirect subsidiaries of U.S. Home & Garden Inc. which are signatories to the Note and Warrant 20 Purchase Agreement and the purchasers listed on the signature page of the Note and Warrant Purchase Agreement. (b) No reports on Form 8-K were filed during the quarter ended December 31, 2001. SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. February 14, 2002 U.S. Home & Garden Inc. (Registrant) By: /s/ Robert Kassel ------------------------------------- President, Chief Executive Officer By: /s/ Richard Kurz ------------------------------------- Chief Financial Officer 21 EX-10.1 3 d27918_ex10-1.txt REVOLVING CREDIT AGREEMENT Exhibit 10.1 REVOLVING CREDIT, TERM LOAN, GUARANTY AND SECURITY AGREEMENT AMONG PNC BANK, NATIONAL ASSOCIATION (AS AGENT), CERTAIN FINANCIAL INSTITUTIONS PARTY HERETO (AS LENDERS), EASY GARDENER, INC. (AS BORROWER), U. S. HOME & GARDEN, INC. (AS HOLDINGS) AND CERTAIN OF THEIR SUBSIDIARIES Dated as of November 15, 2001 TABLE OF CONTENTS Page I. DEFINITIONS 1 1.1 Accounting Terms 1 1.2 General Terms 1 1.3 Uniform Commercial Code Terms 16 1.4 Certain Matters of Construction 16 II. ADVANCES, PAYMENTS 16 2.1 (a) Revolving Advances 16 (b) Discretionary Rights 17 2.2 Procedure for Revolving Advances Borrowing 17 2.3 Disbursement of Advance Proceeds 18 2.4 Term Loan 18 2.5 Maximum Revolving Advances 19 2.6 Repayment of Advances 19 2.7 Repayment of Excess Advances 19 2.8 Statement of Account 19 2.9 Letters of Credit 20 2.10 Issuance of Letters of Credit 20 2.11 Requirements For Issuance of Letters of Credit 20 2.12 Additional Payments 21 2.13 Manner of Borrowing and Payment 22 2.14 Mandatory Prepayments 23 2.15 Use of Proceeds 23 2.16 Defaulting Lender 23 III. INTEREST AND FEES 24 3.1 Interest 24 3.2 Letter of Credit Fees 24 3.3 (a) Closing Fee 25 (b) Facility Fee 25 (c) Agency Fee 25 (d) Other Fees 25 3.4 Collateral Monitoring Fee 25 3.5 Other Expenses 25 3.6 Computation of Interest and Fees 26 3.7 Maximum Charges 26 3.8 Increased Costs 26 i TABLE OF CONTENTS (continued) Page 3.9 Basis For Determining Interest Rate Inadequate or Unfair 26 3.10 Capital Adequacy 27 3.11 Gross Up for Taxes 27 3.12 Withholding Tax Exemption 28 IV. COLLATERAL: GENERAL TERMS 28 4.1 Security Interest in the Collateral 28 4.2 Perfection of Security Interest 28 4.3 Disposition of Collateral 29 4.4 Preservation of Collateral 29 4.5 Ownership of Collateral 29 4.6 Defense of Agent's and Lenders' Interests 29 4.7 Books and Records 30 4.8 Financial Disclosure 30 4.9 Compliance with Laws 30 4.10 Inspection of Premises 30 4.11 Insurance 30 4.12 Failure to Pay Insurance 31 4.13 Payment of Taxes 31 4.14 Payment of Leasehold Obligations 32 4.15 Receivables 32 (a) Nature of Receivables 32 (b) Solvency of Customers 32 (c) Location of Credit Parties 32 (d) Collection of Receivables 32 (e) Notification of Assignment of Receivables 33 (f) Power of Agent to Act on Credit Parties Behalf 33 (g) No Liability 33 (h) Establishment of a Lockbox Account, Dominion Account 34 (i) Adjustments 34 4.16 Inventory 34 4.17 Maintenance of Equipment 34 4.18 Exculpation of Liability 34 4.19 Environmental Matters 34 4.20 Financing Statements 36 V. REPRESENTATIONS AND WARRANTIES 36 ii TABLE OF CONTENTS (continued) Page 5.1 Authority 36 5.2 Formation and Qualification 36 5.3 Survival of Representations and Warranties 37 5.4 Tax Returns 37 5.5 Financial Statements 37 5.6 Corporate Name 38 5.7 O.S.H.A. and Environmental Compliance 38 5.8 Solvency; No Litigation, Violation, Indebtedness or Default 38 5.9 Patents, Trademarks, Copyrights and Licenses 39 5.10 Licenses and Permits 39 5.11 Default of Indebtedness 40 5.12 No Default 40 5.13 No Burdensome Restrictions 40 5.14 No Labor Disputes 40 5.15 Margin Regulations 40 5.16 Investment Company Act 40 5.17 Disclosure 40 5.18 Swaps 40 5.19 Conflicting Agreements 40 5.20 Application of Certain Laws and Regulations 41 5.21 Business and Property of Borrower 41 5.22 Section 20 Subsidiaries 41 VI. AFFIRMATIVE COVENANTS 41 6.1 Payment of Fees 41 6.2 Conduct of Business and Maintenance of Existence and Assets 41 6.3 Violations 41 6.4 Government Receivables 41 6.5 Net Worth 41 6.6 Fixed Charge Coverage Ratio 42 6.7 Execution of Supplemental Instruments 42 6.8 Payment of Indebtedness 42 6.9 Standards of Financial Statements 42 6.10 Appraisals 43 VII. NEGATIVE COVENANTS 43 7.1 Merger, Consolidation, Acquisition and Sale of Assets 43 iii TABLE OF CONTENTS (continued) Page 7.2 Creation of Liens 43 7.3 Guarantees 43 7.4 Investments 43 7.5 Loans, etc. 44 7.6 Capital Expenditures 44 7.7 Dividends, etc 44 7.8 Indebtedness 44 7.9 Nature of Business 44 7.10 Transactions with Affiliates 44 7.11 Leases 44 7.12 Subsidiaries 45 7.13 Fiscal Year and Accounting Changes 45 7.14 Pledge of Credit 45 7.15 Amendments 45 7.16 Compliance with ERISA 45 7.17 Prepayment of Indebtedness 45 7.18 Subordinated Obligations 45 VIII. CONDITIONS PRECEDENT 46 8.1 Conditions to Initial Advances 46 (a) Note 46 (b) Filings, Registrations and Recordings 46 (c) Corporate Proceedings of Borrower 46 (d) Incumbency Certificates of Borrower 46 (e) Corporate Proceedings of each Guarantor 47 (f) Incumbency Certificates of each Guarantor 47 (g) Certificates 47 (h) Good Standing Certificates 47 (i) Legal Opinion 47 (j) No Litigation 47 (k) Financial Condition Certificate 47 (l) Collateral Examination 47 (m) Financial Statements 47 (n) Fees 48 (o) Pro Forma Financial Statements 48 (p) EBITDA Projections 48 iv TABLE OF CONTENTS (continued) Page (q) Subordination Agreement 48 (r) Subordinated Notes 48 (s) Junior Subordinated Debentures 48 (t) Insurance 48 (u) Payment Instructions 48 (v) Blocked Accounts 48 (w) Consents 48 (x) No Adverse Material Effect 48 (y) Leasehold Agreements 48 (z) Other Documents 48 (aa) Contract Review 48 (bb) Closing Certificate 49 (cc) Formula Amount 49 (dd) Undrawn Availability 49 (ee) Other 49 8.2 Conditions to Each Advance 49 (a) Representations and Warranties 49 (b) No Default 49 (c) Maximum Advances 49 IX. INFORMATION AS TO CREDIT PARTIES 49 9.1 Disclosure of Material Matters 49 9.2 Schedules 50 9.3 Environmental Reports 50 9.4 Litigation 50 9.5 Material Occurrences 50 9.6 Government Receivables 50 9.7 Annual Financial Statements 50 9.8 Quarterly Financial Statements 51 9.9 Monthly Financial Statements 51 9.10 Other Reports 51 9.11 Additional Information 51 9.12 Projected Operating Budget 52 9.13 Variances From Operating Budget 52 9.14 Notice of Suits, Adverse Events 52 9.15 ERISA Notices and Requests 52 v TABLE OF CONTENTS (continued) Page 9.16 Additional Documents 53 X. EVENTS OF DEFAULT 53 XI. LENDERS' RIGHTS AND REMEDIES AFTER DEFAULT 55 11.1 Rights and Remedies 55 11.2 Agent's Discretion 55 11.3 Setoff 56 11.4 Rights and Remedies not Exclusive 56 11.5 Allocation of Payments After Event of Default 56 XII. WAIVERS AND JUDICIAL PROCEEDINGS 57 12.1 Waiver of Notice 57 12.2 Delay 57 12.3 Jury Waiver 57 XIII. EFFECTIVE DATE AND TERMINATION 57 13.1 Term 57 13.2 Termination 57 XIV. GUARANTY 57 14.1 Guaranty 57 14.2 Guarantors' Obligations Unconditional 58 14.3 Subordination 60 14.4 Waiver of Subrogation 61 14.5 Fraudulent Transfer Limitation 61 14.6 Contribution Among Guarantors 61 14.7 Future Guarantors 62 14.8 Joint and Several Obligation 62 14.9 No Waiver 62 14.10 Representations and Warranties 62 XV. REGARDING AGENT 62 15.1 Appointment 62 15.2 Nature of Duties 63 15.3 Lack of Reliance on Agent and Resignation 63 15.4 Certain Rights of Agent 64 15.5 Reliance 64 15.6 Notice of Default 64 15.7 Indemnification 64 15.8 Agent in its Individual Capacity 64 vi TABLE OF CONTENTS (continued) Page 15.9 Delivery of Documents 64 15.10 Credit Parties' Undertaking to Agent 64 XVI. MISCELLANEOUS 65 16.1 Governing Law 65 16.2 Entire Understanding 65 16.3 Successors and Assigns; Participations; New Lenders 67 16.4 Application of Payments 68 16.5 Indemnity 68 16.6 Notice 68 16.7 Survival 70 16.8 Severability 70 16.9 Expenses 70 16.10 Injunctive Relief 70 16.11 Consequential Damages 70 16.12 Captions 71 16.13 Counterparts; Facsimile Signatures 71 16.14 Construction 71 16.15 Confidentiality; Sharing Information 71 16.16 Publicity 71 vii REVOLVING CREDIT, TERM LOAN, GUARANTY AND SECURITY AGREEMENT THIS REVOLVING CREDIT, TERM LOAN, GUARANTY AND SECURITY AGREEMENT, dated as of November 15, 2001 (the "Agreement"), is entered into by and among EASY GARDENER, INC., a Delaware corporation ("Borrower"), U. S. HOME & GARDEN, INC., a Delaware corporation of which Borrower is a wholly-owned Subsidiary ("Holdings"), the various Subsidiaries of Borrower and Holdings whose names appear on the signature pages to this Agreement or who may hereafter become parties hereto by executing and delivering an Instrument of Joinder (such Subsidiaries and Holdings sometimes being referred to herein collectively as the "Guarantors" and individually as a "Guarantor"; and the Guarantors and Borrower sometimes being referred to herein collectively as the "Credit Parties" and individually as a "Credit Party"), the financial institutions which are now or which hereafter become a party hereto (collectively, the "Lenders" and individually a "Lender") and PNC BANK, NATIONAL ASSOCIATION ("PNC"), as agent for Lenders (PNC, in such capacity, the "Agent"). IN CONSIDERATION of the mutual covenants and undertakings herein contained, Borrower, Lenders and Agent hereby agree as follows: I. DEFINITIONS. 1.1 Accounting Terms. As used in this Agreement, the Other Documents or any certificate, report or other document made or delivered pursuant to this Agreement, accounting terms not defined in Section 1.2 or elsewhere in this Agreement and accounting terms partly defined in Section 1.2 to the extent not defined, shall have the respective meanings given to them under GAAP; provided, however, whenever such accounting terms are used for the purposes of determining compliance with financial covenants in this Agreement, such accounting terms shall be defined in accordance with GAAP as applied in preparation of the audited financial statements of Borrower for the fiscal year ended June 30, 2001, unless otherwise agreed by Agent. 1.2 General Terms. For purposes of this Agreement the following terms shall have the following meanings: "Accountants" shall have the meaning set forth in Section 9.7 hereof. "Advance Rates" shall have the meaning set forth in Section 2.1(a)(y)(iii) hereof. "Advances" shall mean and include the Revolving Advances, Letters of Credit and the Term Loan. "Affiliate" of any Person shall mean (a) any Person that, directly or indirectly, is in control of, is controlled by, or is under common control with such Person, or (b) any Person who is a director or officer (i) of such Person, (ii) of any Subsidiary of such Person or (iii) of any Person described in clause (a) above. For purposes of this definition, control of a Person shall mean the power, direct or indirect, (x) to vote five percent (5%) or more of the securities having ordinary voting power for the election of directors of such Person, or (y) to direct or cause the direction of the management and policies of such Person whether by contract or otherwise. "Agent" shall have the meaning set forth in the preamble to this Agreement and shall include its successors and assigns. "Agreement" shall have the meaning set forth in the preamble hereto. 1 "Alternate Base Rate" shall mean, for any day, a rate per annum equal to the higher of (i) the Base Rate in effect on such day and (ii) the Federal Funds Rate in effect on such day plus one-half of one percent (0.5%). "Applicable Law" shall mean all laws, rules and regulations applicable to the Person, conduct, transaction, covenant, Other Documents or contract in question, including all applicable common law and equitable principles; all provisions of all applicable state, federal and foreign constitutions, statutes, rules, regulations and orders of any Governmental Body, and all orders, judgments and decrees of all courts and arbitrators. "Authority" shall have the meaning set forth in Section 4.19(d) hereof. "Base Rate" shall mean the base commercial lending rate of PNC as publicly announced to be in effect from time to time, such rate to be adjusted automatically, without notice, on the effective date of any change in such rate. This rate of interest is determined from time to time by PNC as a means of pricing some loans to its customers and is neither tied to any external rate of interest or index nor does it necessarily reflect the lowest rate of interest actually charged by PNC to any particular class or category of customers of PNC. "Benefited Lender" shall have the meaning set forth in Section 2.13(d) hereof. "Blocked Accounts" shall have the meaning set forth in Section 4.15(h) hereof. "Borrower" shall have the meaning set forth in the preamble to this Agreement and shall extend to all permitted successors and assigns of such Person. "Borrower's Account" shall have the meaning set forth in Section 2.8 hereof. "Business Day" shall mean any day other than Saturday or Sunday or a legal holiday on which commercial banks are authorized or required by law to be closed for business in East Brunswick, New Jersey and, if the applicable Business Day relates to any Eurodollar Rate Loans, such day must also be a day on which dealings are carried on in the London interbank market. "Capital Expenditures" shall mean expenditures made or liabilities incurred for the acquisition of any fixed assets or improvements, replacements, substitutions or additions thereto which have a useful life of more than one year, including the total principal portion of Capitalized Lease Obligations, which, in accordance with GAAP, would be classified as capital expenditures. "Capitalized Lease Obligation" shall mean any Indebtedness of Borrower represented by obligations under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP. "CERCLA" shall mean the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. ss.ss.9601 et seq. "Change of Control" shall mean the failure of Richard Grandy to be President and CEO of Borrower, in substantially the same capacity as he functions in those offices on the Closing Date; provided that if such failure arises from the death or disability of Richard Grandy, a Change of Control shall not be deemed to have occurred unless Borrower shall have failed to replace Mr. Grandy in such capacities with a person or persons acceptable to Agent within 90 days. "Change of Ownership" shall mean, (a) the failure of Holdings to own and control, directly, 100% of the equity interests of Borrower and directly or indirectly, 100% of the equity interests of each of Ampro Industries, Inc., Golden West Agri-Products, Inc., Weed Wizard Acquisition Corp., Weatherly Consumer Products, Inc. and Weatherly Consumer Products Group, Inc. or (b) the acquisition 2 of ownership, directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934, as amended, and the rules of the Securities and Exchange Commission thereunder as in effect on the date hereof), other than Richard Kassel and/or Richard Grandy (and/or any entity of which Mr. Kassel and/or Mr. Grandy have voting and management control and more than 50% of the economic interests), of shares representing fifty percent (50%) or more of the aggregate ordinary voting power represented by the issued and outstanding equity interests of Holdings. "Charges" shall mean all taxes, charges, fees, imposts, levies or other assessments, including, without limitation, all net income, gross income, gross receipts, sales, use, ad valorem, value added, transfer, franchise, profits, inventory, capital stock, license, withholding, payroll, employment, social security, unemployment, excise, severance, stamp, occupation and property taxes, custom duties, fees, assessments, liens, claims and charges of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts, imposed by any taxing or other authority, domestic or foreign (including, without limitation, the Pension Benefit Guaranty Corporation or any environmental agency or superfund), upon the Collateral, Borrower or any of its Affiliates. "Closing Date" shall mean November 20, 2001 or such other date as may be agreed to by the parties hereto. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time and the regulations promulgated thereunder. "Collateral", with respect to any Person, shall mean all of such Person's personal property, including: (a) all Receivables (including, all Intercompany Obligations); (b) all Equipment; (c) all General Intangibles; (d) all Inventory; (e) all Subsidiary Stock; and (f) all of such Person's right, title and interest in and to (i) its respective goods and other property including, but not limited to, all merchandise returned or rejected by Customers, relating to or securing any of the Receivables; (ii) all of such Person's rights as a consignor, a consignee, an unpaid vendor, mechanic, artisan, or other lienor, including stoppage in transit, setoff, detinue, replevin, reclamation and repurchase; (iii) all additional amounts due to such Person from any Customer relating to the Receivables; (iv) other property, including warranty claims, relating to any goods securing this Agreement; (v) all of such Person's contract rights, rights of payment which have been earned under a contract right, instruments (including promissory notes), documents, chattel paper (including electronic chattel paper), warehouse receipts, deposit accounts, letters of credit and money; (vi) all commercial tort claims (whether now existing or hereafter arising); (vii) if and when obtained by such Person, all real and personal property of third parties in which such Person has been granted a lien or security interest as security for the payment or enforcement of Receivables; and (viii) any other goods, personal property or real property now owned or hereafter acquired in which such Person has expressly granted a security interest or may in the future grant a security interest to Agent hereunder, or in any amendment or supplement hereto or thereto, or under any other agreement between Agent and such Person; (g) all of such Person's ledger sheets, ledger cards, files, correspondence, records, books of account, business papers, computers, computer software (owned by 3 such Person or in which it has an interest), computer programs, tapes, disks and documents relating to the items referred to in any of the foregoing clauses (a), (b), (c), (d), (e) or (f); and (h) all proceeds and products of the items referred to in any of the foregoing clauses (a), (b), (c), (d), (e), (f) or (g) in whatever form, including, but not limited to: cash, deposit accounts (whether or not comprised solely of proceeds), certificates of deposit, insurance proceeds (including hazard, flood and credit insurance), negotiable instruments and other instruments for the payment of money, chattel paper, security agreements, documents, eminent domain proceeds, condemnation proceeds and tort claim proceeds. For avoidance of doubt, Collateral shall not include ownership interests in the Trust or treasury stock of Holdings. "Commitment Percentage" of any Lender shall mean the percentage set forth below such Lender's name on the signature page hereof as same may be adjusted upon any assignment by a Lender pursuant to Section 16.3 hereof. "Commitment Transfer Supplement" shall mean a document in the form of Exhibit 16.3 hereto, properly completed and otherwise in form and substance satisfactory to Agent by which the Purchasing Lender purchases and assumes a portion of the obligation of Lenders to make Advances under this Agreement. "Consents" shall mean all filings and all licenses, permits, consents, approvals, authorizations, qualifications and orders of governmental authorities and other third parties, domestic or foreign, necessary to carry on Borrower's business, including, without limitation, any Consents required under all applicable federal, state or other applicable law. "Contract Rate" shall mean, as applicable, the Revolving Interest Rate or the Term Loan Rate. "Controlled Group" shall mean, with respect to any Person, all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with such Person, are treated as a single employer under Section 414 of the Code. "Credit Parties" and "Credit Party" shall have the respective meanings set forth in the preamble to this Agreement. "Current Assets" of any Person at a particular date, shall mean all cash, cash equivalents, accounts and inventory of such Person and all other items which would, in conformity with GAAP, be included under current assets on a consolidated balance sheet of such Person as at such date; provided, however, that such amounts shall not include (a) any amounts for any Indebtedness owing by an Affiliate of such Person, unless such Indebtedness arose in connection with the sale of goods or rendition of services in the ordinary course of business and would otherwise constitute current assets in conformity with GAAP, (b) any shares of stock issued by an Affiliate of such Person, or (c) the cash surrender value of any life insurance policy. "Current Liabilities" of any Person at a particular date, shall mean all amounts which would, in conformity with GAAP, be included under current liabilities on a consolidated balance sheet of such Person, as at such date, but in any event including, without limitation, the amounts of (a) all Indebtedness of such Person payable on demand, or, at the option of the Person to whom such Indebtedness is owed, not more than twelve (12) months after such date, (b) any payments in respect of any Indebtedness of such Person (whether installment, serial maturity, sinking fund payment or otherwise) required to be made not more than twelve (12) months after such date, (c) all reserves in respect of liabilities or Indebtedness payable on demand or, at the option of the Person to whom such Indebtedness is owed, not more than twelve (12) months after such date, the validity of which is not 4 contested at such date, and (d) all accruals for federal or other taxes measured by income payable within a twelve (12) month period. "Customer" of any Person shall mean and include the account debtor with respect to any Receivable and/or the purchaser of goods, services or both with respect to any contract or contract right, and/or any party who enters into any contract or other arrangement with such Person, pursuant to which such Person is to deliver any personal property or perform any services. "Customs" shall have the meaning set forth in Section 2.11(c) hereof. "Default" shall mean an event which, with the giving of notice or passage of time or both, would constitute an Event of Default. "Default Rate" shall have the meaning set forth in Section 3.1 hereof. "Defaulting Lender" shall have the meaning set forth in Section 2.16(a) hereof. "Depository Accounts" shall have the meaning set forth in Section 4.15(h) hereof. "Designated Lender" shall have the meaning set forth in Section 16.2(b) hereof. "Documents" shall have the meaning set forth in Section 8.1(c) hereof. "Dollar" and the sign "$" shall mean lawful money of the United States of America. "Domestic Rate Loan" shall mean any Advance that bears interest based upon the Alternate Base Rate. "Early Termination Date" shall have the meaning set forth in Section 13.1 hereof. "Earnings Before Interest and Taxes" of any Person shall mean for any period the sum of (i) net income (or loss) of such Person for such period (excluding extraordinary gains and losses, plus (ii) all interest expense of such Person for such period, plus (iii) all charges against income of such Person for such period for federal, state and local taxes actually paid. "EBITDA" shall mean for any period the sum of (i) Earnings Before Interest and Taxes for such period plus (ii) depreciation expenses for such period, plus (iii) amortization expenses for such period. "Eligible Inventory" shall mean and include Inventory valued at the lower of cost or market value, determined on a first-in-first-out basis, which is not, in Agent's opinion, obsolete, slow moving or unmerchantable and which Agent, in its sole discretion, shall not deem ineligible Inventory, based on such considerations as Agent may from time to time deem appropriate including, without limitation, whether the Inventory is subject to a perfected, first priority security interest in favor of Agent and whether the Inventory conforms to all standards imposed by any governmental agency, division or department thereof which has regulatory authority over such goods or the use or sale thereof. Eligible Inventory shall include all Inventory in-transit for which title has passed to the applicable Credit Party, which is insured to the full value thereof and for which Agent shall have in its possession (a) all negotiable bills of lading properly endorsed and (b) all non-negotiable bills of lading issued in Agent's name. "Eligible Receivables" shall mean and include with respect to any Credit Party, each Receivable of Borrower arising in the ordinary course of such Credit Party's business and which Agent, in its sole credit judgment, shall deem to be an Eligible Receivable, based on such considerations as Agent may from time to time deem appropriate. A Receivable shall not be deemed eligible unless such Receivable is subject to Agent's first priority perfected security interest and no other Lien (other than 5 Permitted Encumbrances), and is evidenced by an invoice or other documentary evidence satisfactory to Agent. In addition, no Receivable shall be an Eligible Receivable if: (a) it arises out of a sale made by such Credit Party to an Affiliate of such Credit Party or to a Person controlled by an Affiliate of Borrower; (b) it is due or unpaid more than one hundred twenty (120) days after the original invoice date or more than sixty (60) days after the due date; (c) fifty percent (50%) or more of the Receivables from such Customer are not deemed Eligible Receivables hereunder; provided, that Seasonal Receivables shall only be deemed not to be Eligible Receivables for purposes of this clause (c) to the extent not paid within their originally stated terms. Such percentage may, in Agent's sole discretion, be increased or decreased from time to time; (d) any covenant, representation or warranty contained in this Agreement with respect to such Receivable has been breached; (e) the Customer shall (i) apply for, suffer, or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property or call a meeting of its creditors, (ii) admit in writing its inability, or be generally unable, to pay its debts as they become due or cease operations of its present business, (iii) make a general assignment for the benefit of creditors, (iv) commence a voluntary case under any state or federal bankruptcy laws (as now or hereafter in effect), (v) be adjudicated a bankrupt or insolvent, (vi) file a petition seeking to take advantage of any other law providing for the relief of debtors, (vii) acquiesce to, or fail to have dismissed, any petition which is filed against it in any involuntary case under such bankruptcy laws, or (viii) take any action for the purpose of effecting any of the foregoing; (f) the sale is to a Customer outside the continental United States of America, unless the sale is on letter of credit, guaranty or acceptance terms or supported by credit insurance, in each case acceptable to Agent in its sole discretion; (g) the sale to the Customer is on a bill-and-hold, guaranteed sale, sale-and-return, sale on approval, consignment or any other repurchase or return basis or is evidenced by chattel paper; (h) Agent believes, in its sole judgment, that collection of such Receivable is insecure or that such Receivable may not be paid by reason of the Customer's financial inability to pay; (i) the Customer is the United States of America, any state or any department, agency or instrumentality of any of them, unless Borrower assigns its right to payment of such Receivable to Agent pursuant to the Assignment of Claims Act of 1940, as amended (31 U.S.C. Sub-Section 3727 et seq. and 41 U.S.C. Sub-Section 15 et seq.) or has otherwise complied with other applicable statutes or ordinances; (j) the goods giving rise to such Receivable have not been shipped to the Customer or the services giving rise to such Receivable have not been performed by Borrower or the Receivable otherwise does not represent a final sale; (k) the Receivables of the Customer exceed a credit limit determined by Agent, in its sole discretion, to the extent such Receivable exceeds such limit (provided that with respect to Receivables in existence and considered Eligible Receivables at the time that Agent imposes any such Credit Limit, the effect of which would be to render such Receivables no longer Eligible Receivables, such credit limit shall take effect on the tenth (10th) Business Day following its imposition 6 with respect to outstanding Advances but shall have immediate effect for purposes of any additional Advances); (l) the Receivable is subject to any offset, deduction, defense, dispute, or counterclaim (to the extent of the portion of such Receivable that is subject to offset, deduction, defense, dispute, or counterclaim), the Customer is also a creditor or supplier of such Credit Party or the Receivable is contingent in any respect or for any reason; (m) such Credit Party has made any agreement with any Customer for any deduction therefrom, except for discounts or allowances made in the ordinary course of business for prompt payment, all of which discounts or allowances are reflected in the calculation of the face value of each respective invoice related thereto; (n) any return, rejection or repossession of the merchandise has occurred or the rendition of services has been disputed; (o) such Receivable is not payable to such Credit Party; or (p) such Receivable is not otherwise satisfactory to Agent as determined in good faith by Agent in the exercise of its discretion in a reasonable manner. "Environmental Complaint" shall have the meaning set forth in Section 4.19(d) hereof. "Environmental Laws" shall mean all federal, state and local environmental, land use, zoning, health, chemical use, safety and sanitation laws, statutes, ordinances and codes relating to the protection of the environment and/or governing the use, storage, treatment, generation, transportation, processing, handling, production or disposal of Hazardous Substances and the rules, regulations, policies, guidelines, interpretations, decisions, orders and directives of federal, state and local governmental agencies and authorities with respect thereto. "Equipment" of any Person shall mean and include all of such Person's goods (other than Inventory) whether now owned or hereafter acquired and wherever located including, without limitation, all equipment, machinery, apparatus, motor vehicles, fittings, furniture, furnishings, fixtures, parts, accessories and all replacements and substitutions therefor or accessions thereto. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time and the rules and regulations promulgated thereunder. "Eurodollar Rate" shall mean for any Eurodollar Rate Loan for the then current Interest Period relating thereto the interest rate per annum determined by PNC by dividing (the resulting quotient rounded upwards, if necessary, to the nearest 1/100th of 1% per annum) (i) the rate of interest determined by PNC in accordance with its usual procedures (which determination shall be conclusive absent manifest error) to be the average of the London interbank offered rates for U.S. Dollars quoted by the British Bankers' Association as set forth on Bridge Information Services (formerly known as Dow Jones Markets Service) (or appropriate successor or, if British Banker's Association or its successor ceases to provide such quotes, a comparable replacement determined by PNC) display page 3750 (or such other display page on the Bridge Information Services system as may replace display page 3750) two (2) Business Days prior to the first day of such Interest Period for an amount comparable to such Eurodollar Rate Loan and having a borrowing date and a maturity comparable to such Interest Period by (ii) a number equal to 1.00 minus the Reserve Percentage. The Eurodollar Rate may also be expressed by the following formula: Average of London interbank offered rates quoted by BBA as shown on Eurodollar Rate =Bridge Information Services display page 3750 or appropriate successor (including the Reuters Service LIBOR Page) ------------------------------------------------------------------- 1.00 - Reserve Percentage. 7 "Eurodollar Rate Loan" shall mean an Advance at any time that bears interest based on the Eurodollar Rate. "Event of Default" shall have the meaning set forth in Article X hereof. "Federal Funds Rate" shall mean, for any day, the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or if such rate is not so published for any day which is a Business Day, the average of quotations for such day on such transactions received by PNC from three Federal funds brokers of recognized standing selected by PNC. "Fee Letter" shall mean the fee letter dated as of November 15, 2001 between Borrower and PNC. "Fixed Charge Coverage Ratio" shall mean and include, with respect to any period of determination, the ratio of (a) EBITDA minus (i) capitalized expenditures made during such period minus (ii) cash taxes paid during such period, to (b) the sum (without duplication) of all Senior Debt Payments (excluding payments to reduce the principal of the Revolving Advances) and all Subordinated Debt Payments during such period. "Formula Amount" shall have the meaning set forth in Section 2.1(a) hereof. "GAAP" shall mean generally accepted accounting principles in the United States of America in effect from time to time. "General Intangibles" of any Person shall mean and include all of such Person's general intangibles, whether now owned or hereafter acquired including, without limitation, all payment intangibles, all choses in action, causes of action, corporate or other business records, inventions, designs, patents, patent applications, equipment formulations, manufacturing procedures, quality control procedures, trademarks, trademark applications, service marks, trade secrets, goodwill, copyrights, design rights, software, computer information, source codes, codes, records and dates, registrations, licenses, franchises, customer lists, tax refunds, tax refund claims, computer programs, all claims under guaranties, security interests or other security held by or granted to such Person to secure payment of any of the Receivables by a Customer (other than to the extent covered by Receivables) all rights of indemnification and all other intangible property of every kind and nature (other than Receivables). "Governmental Body" shall mean any nation or government, any state or other political subdivision thereof or any entity exercising the legislative, judicial, regulatory or administrative functions of or pertaining to a government. "Guarantor" is defined in the preamble. "Guaranty" shall mean any guaranty of the obligations of Borrower executed by a Guarantor in favor of Agent for its benefit and for the ratable benefit of Lenders, whether pursuant to Article XIV hereof or otherwise. "Hazardous Discharge" shall have the meaning set forth in Section 4.19(d) hereof. "Hazardous Substance" shall mean, without limitation, any flammable explosives, radon, radioactive materials, asbestos, urea formaldehyde foam insulation, polychlorinated biphenyls, petroleum and petroleum products, methane, hazardous materials, Hazardous Wastes, hazardous or Toxic Substances or related materials as defined in CERCLA, the Hazardous Materials Transportation Act, as 8 amended (49 U.S.C. Sections 1801, et seq.), RCRA, Articles 15 and 27 of the New York State Environmental Conservation Law or any other applicable Environmental Law and in the regulations adopted pursuant thereto. "Hazardous Wastes" shall mean all waste materials subject to regulation under CERCLA, RCRA or applicable state law, and any other applicable Federal and state laws now in force or hereafter enacted relating to hazardous waste disposal. "Holdings" shall mean U.S. Home & Garden Inc., a corporation organized under the laws of the State of Delaware. "Indebtedness" of a Person at a particular date shall mean all obligations of such Person which in accordance with GAAP would be classified upon a balance sheet as liabilities (except capital stock and surplus earned or otherwise) and in any event, without limitation by reason of enumeration, shall include all indebtedness, debt and other similar monetary obligations of such Person whether direct or guaranteed, and all premiums, if any, due at the required prepayment dates of such indebtedness, and all indebtedness secured by a Lien on assets owned by such Person, whether or not such indebtedness actually shall have been created, assumed or incurred by such Person. Any indebtedness of such Person resulting from the acquisition by such Person of any assets subject to any Lien shall be deemed, for the purposes hereof, to be the equivalent of the creation, assumption and incurring of the indebtedness secured thereby, whether or not actually so created, assumed or incurred. "Indenture" shall have the meaning set forth in Section 7.18 hereof. "Ineligible Security" shall mean any security which may not be underwritten or dealt in by member banks of the Federal Reserve System under Section 16 of the Banking Act of 1933 (12 U.S.C. Section 24, Seventh), as amended. "Instrument of Joinder" shall mean an Instrument of Joinder substantially in the form of Exhibit 14.7 hereto, pursuant to which a Person becomes a party to this Agreement as a Guarantor. "Intercompany Note" shall mean a promissory note substantially in the form of Exhibit 7.8 hereto, evidencing Intercompany Obligations owed to Borrower by one of its Subsidiaries. "Intercompany Obligations" shall have the meaning set forth in Section 14.3 hereof. "Interest Period" shall mean the period provided for any Eurodollar Rate Loan pursuant to Section 2.2(b). "Inventory" of any Person shall mean and include all of such Person's now owned or hereafter acquired goods, merchandise and other personal property, wherever located, to be furnished under any consignment arrangement, contract of service or held for sale or lease, all raw materials, work in process, finished goods and materials and supplies of any kind, nature or description which are or might be used or consumed in such Person's business or used in selling or furnishing such goods, merchandise and other personal property, and all documents of title or other documents representing them. "Inventory Advance Rate" shall have the meaning set forth in Section 2.1(a)(y)(iii) hereof. "Investment Property" of any Person shall mean and include all of such Person's now owned or hereafter acquired securities (whether certificated or uncertificated), securities entitlements, securities accounts, commodities contracts and commodities accounts. "Issuer" shall mean any Person who issues a Letter of Credit and/or accepts a draft pursuant to the terms hereof. 9 "Junior Subordinated Debentures" shall refer to those certain Junior Subordinated Deferrable Interest Debentures issued by Holdings in connection with the Trust Preferred Securities. "Leasehold Interests" of any Person shall mean all of such Person's right, title and interest in and to any leasehold estate in real property. "Lender" and "Lenders" shall have the meaning ascribed to such term in the preamble to this Agreement and shall include each Person which becomes a transferee, successor or assign of any Lender. "Lender Default" shall have the meaning set forth in Section 2.16(a) hereof. "Letter of Credit Application" shall have the meaning set forth in Section 2.10(a) hereof. "Letter of Credit Fees" shall have the meaning set forth in Section 3.2 hereof. "Letters of Credit" shall have the meaning set forth in Section 2.9 hereof. "Liabilities" shall have the meaning set forth in Section 14.1 hereof. "Lien" shall mean any mortgage, deed of trust, pledge, hypothecation, assignment, security interest, lien (whether statutory or otherwise), Charge, claim or encumbrance, or preference, priority or other security agreement or preferential arrangement held or asserted in respect of any asset of any kind or nature whatsoever including, without limitation, any conditional sale or other title retention agreement, any lease having substantially the same economic effect as any of the foregoing, and the filing of, or agreement to give, any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction. "Material Adverse Effect" shall mean a material adverse effect on (a) the condition, operations, assets, business or prospects of the Credit Parties taken as a whole or of Borrower, (b) Borrower's ability to pay the Obligations in accordance with the terms thereof, (c) the value of the Collateral taken as a whole, or Agent's Liens on the Collateral or the priority of any such Lien or (d) the practical realization of the benefits of Agent's and each Lender's rights and remedies under this Agreement and the Other Documents. "Maximum Revolving Advance Amount" shall mean $31,000,000. "Maximum Term Loan" shall mean $2,000,000. "Multiemployer Plan" shall mean a "multiemployer plan" as defined in Sections 3(37) and 4001(a)(3) of ERISA. "Net Orderly Liquidation Value" shall mean, with respect to Eligible Inventory, the value of such Eligible Inventory as determined by reference to the most recent inventory appraisal satisfactory to Agent. "Net Worth" of any Person at a particular date, shall mean all amounts which would be included under shareholders' equity on a consolidated balance sheet of such Person determined in accordance with GAAP as at such date. "Non-Defaulting Lenders" shall have the meaning set forth in Section 2.16(b) hereof. "Note" shall mean both the Term Note and the Revolving Credit Note. "Notice" shall have the meaning set forth in Section 16.6 hereof. 10 "Obligations" shall mean and include any and all loans, advances, debts, liabilities, obligations, covenants and duties owing by the Borrower or any Guarantor to Lenders or Agent or to any other direct or indirect subsidiary or affiliate of Agent or any Lender of any kind or nature, present or future (including, without limitation, any interest accruing thereon after maturity, or after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding relating to the Borrower or any Guarantor, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding), whether or not evidenced by any note, guaranty or other instrument, whether arising under any agreement, instrument or document, (including, without limitation, this Agreement and the Other Documents) whether or not for the payment of money, whether arising by reason of an extension of credit, opening of a letter of credit, loan, equipment lease or guarantee, under any interest or currency swap, future, option or other similar agreement, or in any other manner, whether arising out of overdrafts or deposit or other accounts or electronic funds transfers (whether through automated clearing houses or otherwise) or out of the Agent's or any Lenders non-receipt of or inability to collect funds or otherwise not being made whole in connection with depository transfer check or other similar arrangements, whether direct or indirect (including those acquired by assignment or participation), absolute or contingent, joint or several, due or to become due, now existing or hereafter arising, contractual or tortious, liquidated or unliquidated, regardless of how such indebtedness or liabilities arise or by what agreement or instrument they may be evidenced or whether evidenced by any agreement or instrument, including, but not limited to, any and all of Borrower's Indebtedness and/or liabilities under this Agreement, the Other Documents or under any other agreement between Agent or Lenders (on the one hand) and Borrower or nay Guarantor (on the other hand) and any amendments, extensions, renewals or increases and all costs and expenses of Agent and any Lender incurred in the documentation, negotiation, modification, enforcement, collection or otherwise in connection with any of the foregoing, including but not limited to reasonable attorneys' fees and expenses and all obligations of Borrower and the Guarantors to Agent or Lenders to perform acts or refrain from taking any action. "Other Documents" shall mean the Note, the Fee Letter, the Subordination Agreement, the Intercompany Notes and all other agreements, instruments and documents, including, without limitation, guaranties, pledges, powers of attorney, consents, interest or currency swap agreements or other similar agreements and all other writings heretofore, now or hereafter executed by Borrower or any Guarantor and/or delivered to Agent or any Lender in respect of the transactions contemplated by this Agreement. "Out-of-Formula Loans" shall have the meaning set forth in Section 16.2(b). "Overadvance Threshold Amount" shall have the meaning set forth in Section 16.2(b) hereof. "Participant" shall mean each Person who shall be granted the right by any Lender to participate in any of the Advances and who shall have entered into a participation agreement in form and substance satisfactory to such Lender. "Payment Office" shall mean initially Two Tower Center Boulevard, East Brunswick, New Jersey 08816; thereafter, such other office of Agent, if any, which it may designate by notice to Borrower and to each Lender to be the Payment Office. "PBGC" shall mean the Pension Benefit Guaranty Corporation. "Permitted Encumbrances" shall mean (a) Liens in favor of Agent for the benefit of Agent and Lenders; (b) Liens for taxes, assessments or other governmental charges not delinquent or being contested in good faith and by appropriate proceedings and with respect to which proper reserves have been taken by Borrower; provided, that, the Lien shall have no effect on the priority of the Liens in favor of Agent or the value of the assets in which Agent has such a Lien and a stay of enforcement of any such Lien shall be in effect; (c) Liens disclosed in the financial statements referred to in Section 5.5; (d) deposits or pledges to secure obligations under worker's compensation, social security or similar laws, or under unemployment insurance; (e) deposits or pledges to secure bids, tenders, contracts (other than 11 contracts for the payment of money), leases, statutory obligations, surety and appeal bonds and other obligations of like nature arising in the ordinary course of Borrower's business; (f) judgment Liens that have been stayed or bonded and mechanics', workers', materialmen's or other like Liens arising in the ordinary course of Borrower's business with respect to obligations which are not due or which are being contested in good faith by Borrower; (g) Liens placed upon fixed assets hereafter acquired to secure a portion of the purchase price thereof, provided that (x) any such lien shall not encumber any other property of Borrower and (y) the aggregate amount of Indebtedness secured by such Liens incurred as a result of such purchases during any fiscal year shall not exceed the amount provided for in Section 7.6; (h) other Liens incidental to the conduct of Borrower's business or the ownership of its property and assets which were not incurred in connection with the borrowing of money or the obtaining of advances or credit, and which do not in the aggregate materially detract from Agent's or Lenders' rights in and to the Collateral or the value of Borrower's property or assets or which do not materially impair the use thereof in the operation of Borrower's business; and (i) Liens disclosed on Schedule 1.2. "Person" shall mean any individual, sole proprietorship, partnership, corporation, business trust, joint stock company, trust, unincorporated organization, association, limited liability company, institution, public benefit corporation, joint venture, entity or government (whether federal, state, county, city, municipal or otherwise, including any instrumentality, division, agency, body or department thereof). "Plan" shall mean any employee benefit plan within the meaning of Section 3(3) of ERISA, maintained for employees of Borrower or any member of the Controlled Group or any such Plan to which Borrower or any member of the Controlled Group is required to contribute on behalf of any of its employees. "Pro Forma Balance Sheet" shall have the meaning set forth in Section 5.5(a) hereof. "Pro Forma Financial Statements" shall have the meaning set forth in Section 5.5(b) hereof. "Projections" shall have the meaning set forth in Section 5.5(b) hereof. "Purchasing Lender" shall have the meaning set forth in Section 16.3(c) hereof. "RCRA" shall mean the Resource Conservation and Recovery Act, 42 U.S.C.ss.ss. 6901 et seq., as same may be amended from time to time. "Real Property" shall mean all right, title and interest in and to the owned and leased premises identified on Schedule 4.19 hereto and shall include the Leasehold Interests. "Receivables" of any Person shall mean and include all of such Person's accounts, contract rights, instruments (including those evidencing indebtedness owed to such Person by its Affiliates), documents, chattel paper (including electronic chattel paper), general intangibles relating to accounts, drafts and acceptances, credit card receivables and all other forms of obligations owing to such Person arising out of or in connection with the sale or lease of Inventory or the rendition of services, all supporting obligations, guarantees and other security therefor, whether secured or unsecured, now existing or hereafter created, and whether or not specifically sold or assigned to Agent hereunder. "Receivables Advance Rate" shall have the meaning set forth in Section 2.1(a)(y)(i) hereof. "Register" shall have the meaning set forth in Section 16.3(d) hereof. "Release" and "Releases" shall have the meaning set forth in Section 5.7(c)(i) hereof. 12 "Reportable Event" shall mean a reportable event described in Section 4043(b) of ERISA or the regulations promulgated thereunder. "Required EBITDA" shall mean, for purposes of Section 7.18 hereof, the amount set forth below opposite the month in which such determination is made, in each case for the applicable Determination Period, for which purpose "Determination Period" shall mean the period of 12 consecutive months ended on the last day of the second month ended prior to the date of determination (by way of illustration, for a determination made during the month of March 2002, the Determination Period will be the 12-month period ended on January 31, 2002): Month of Determination Required EBITDA ---------------------- --------------- December 2001 $5,396,000 January 2002 $5,944,000 February 2002 $6,438,000 March 2002 $6,402,000 April 2002 $7,265,000 May 2002 $8,884,000 June 2002 $9,383,000 July 2002 $9,537,000 August 2002 $10,507,000 September 2002 $10,540,000 October 2002 $10,511,000 November 2002 $10,477,000 December 2002 $10,440,000 January 2003 $10,398,000 February 2003 $10,442,000 March 2003 $10,470,000 April 2003 $10,683,000 May 2003 $10,937,000 June 2003 $11,188,000 July 2003 $11,380,000 August 2003 $11,511,000 September 2003 $11,547,000 October 2003 $11,515,000 November 2003 $11,479,000 December 2003 $11,438,000 January 2004 $11,392,000 February 2004 $11,440,000 March 2004 $11,471,000 April 2004 $11,703,000 May 2004 $11,978,000 June 2004 $12,252,000 July 2004 $12,460,000 August 2004 $12,603,000 September 2004 $12,642,000 October 2004 $12,608,000 November 2004 $12,568,000 "Required Lenders" shall mean Lenders holding at least sixty-six and two-thirds percent (66 2/3%) of the Advances and, if no Advances are outstanding, shall mean Lenders holding at least sixty-six and two-thirds percent (66 2/3%) of the Commitment Percentages; provided that the foregoing percentages shall be increased to one hundred percent (100%) at any and all times when there are fewer than three (3) Lenders. 13 "Reserve Percentage" shall mean the maximum effective percentage in effect on any day as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the reserve requirements (including, without limitation, supplemental, marginal and emergency reserve requirements) with respect to eurocurrency funding. "Revolving Advances" shall mean Advances made other than Letters of Credit, and the Term Loan. "Revolving Credit Note" shall mean the promissory notes referred to in Section 2.1(a) hereof. "Revolving Interest Rate" shall mean an interest rate per annum equal to (a) the sum of the Alternate Base Rate plus one-half of one percent (0.5%) with respect to Domestic Rate Loans and (b) the sum of the Eurodollar Rate plus two and three-fourths percent (2.75%)with respect to Eurodollar Rate Loans. "Seasonal Receivables" shall mean Receivables that fail to be Eligible Receivables solely by virtue of clause (b) of the definition of Eligible Receivables and that are evidenced by invoices having specific, stated payment due dates or stated payment terms in excess of 120 days. "Seasonal Receivables Advance Rate" shall have the meaning set forth in Section 2.1(a)(y)(ii) hereof. "SEC Report" shall mean the most recent annual report of Holdings as filed on Form 10-K with the Securities and Exchange Commission. "Section 20 Subsidiary" shall mean the Subsidiary of the bank holding company controlling PNC, which Subsidiary has been granted authority by the Federal Reserve Board to underwrite and deal in certain Ineligible Securities. "Senior Debt Payments" shall mean and include all cash actually expended by Holdings and its Subsidiaries on a consolidated basis to make (a) interest payments on any Advances hereunder, plus (b) scheduled principal payments on the Term Loan, plus (c) payments for all fees, commissions and charges set forth herein and with respect to any Advances, plus (d) capitalized lease payments, plus (e) all payments with respect to any other Indebtedness for borrowed money (including, without limitation, the Subordinated Notes and the Junior Subordinated Debentures). "Settlement Date" shall mean the Closing Date and thereafter Wednesday or Thursday of each week or more frequently if Agent deems appropriate unless such day is not a Business Day in which case it shall be the next succeeding Business Day. "Subordinated Debt Payments" shall mean and include all cash actually expended to make payments of principal and interest on the Subordinated Notes. "Subordinated Loan" shall mean the loan evidenced by the Subordinated Notes. "Subordinated Note Holders" shall mean, collectively, LEG Partners III SBIC, L.P., LEG Co-Investors, LLC, LEG Partners Debenture SBIC, L.P., LEG Partners III, L.P., LEG Co-Investors II, LLC, 555 Madison Investors, LLC and their respective successors and assigns. "Subordinated Notes" shall mean the subordinated promissory notes issued by Borrower in favor of the Subordinated Note Holders Incorporated dated as of November 15, 2001 in the aggregate principal amount of $6,849,315. 14 "Subordination Agreement" shall mean the Subordination Agreement dated as of November 15, 2001 among Agent, Borrower, the Guarantors and the Subordinated Note Holders. "Subsidiary" or in the collective, "Subsidiaries" shall mean a corporation or other entity of whose shares of stock or other ownership interests having ordinary voting power (other than stock or other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the directors of such corporation, or other Persons performing similar functions for such entity, are owned, directly or indirectly, by such Person. "Subsidiary Stock" shall mean, with respect to any Person, all of the issued and outstanding shares of capital stock of such Person's Subsidiaries excluding the ownership interests of the Trust and of Egarden, Inc. "Term" shall have the meaning set forth in Section 13.1 hereof. "Term Loan" shall mean the Advances made pursuant to Section 2.4 hereof. "Term Loan Rate" shall mean an interest rate per annum equal to (a) the sum of the Alternate Base Rate plus one percent (1%) with respect to Domestic Rate Loans and (b) the sum of the Eurodollar Rate plus three and one-fourth percent (3.25%) with respect to Eurodollar Rate Loans. "Term Note" shall have the meaning set forth in Section 2.4 hereof. "Termination Event" shall mean (i) a Reportable Event with respect to any Plan or Multiemployer Plan; (ii) the withdrawal of Borrower or any member of the Controlled Group from a Plan or Multiemployer Plan during a plan year in which such entity was a "substantial employer" as defined in Section 4001(a)(2) of ERISA; (iii) the providing of notice of intent to terminate a Plan in a distress termination described in Section 4041(c) of ERISA; (iv) the institution by the PBGC of proceedings to terminate a Plan or Multiemployer Plan; (v) any event or condition (a) which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan or Multiemployer Plan, or (b) that may result in termination of a Multiemployer Plan pursuant to Section 4041A of ERISA; or (vi) the partial or complete withdrawal within the meaning of Sections 4203 and 4205 of ERISA, of Borrower or any member of the Controlled Group from a Multiemployer Plan. "Toxic Substance" shall mean and include any material present on the Real Property or the Leasehold Interests which has been shown to have significant adverse effect on human health or which is subject to regulation under the Toxic Substances Control Act (TSCA), 15 U.S.C. ss.ss. 2601 et seq., applicable state law, or any other applicable Federal or state laws now in force or hereafter enacted relating to toxic substances. "Toxic Substance" includes but is not limited to asbestos, polychlorinated biphenyls (PCBs) and lead-based paints. "Transactions" shall have the meaning set forth in Section 5.5(a) hereof. "Transferee" shall have the meaning set forth in Section 16.3(b) hereof. "Trust" shall mean U.S. Home & Garden Trust I, a Delaware business trust and wholly owned Subsidiary of Holdings. "Trust Preferred Securities" shall mean trust securities issued by the Trust. "Undrawn Availability" at a particular date shall mean an amount equal to (a) the lesser of (i) the Formula Amount or (ii) the Maximum Revolving Advance Amount, minus (b) the sum of (i) the outstanding amount of Advances (other than the Term Loan) plus (ii) all amounts due and owing to Borrower's trade creditors which are outstanding beyond 60 days, plus (iii) fees and expenses for which Borrower is liable but which have not been paid or charged to Borrower's Account. 15 "Website Posting" shall have the meaning set forth in Section 16.6 hereof. "Week" shall mean the time period commencing with the opening of business on a Wednesday and ending on the end of business the following Tuesday. "Working Capital" at a particular date, shall mean the excess, if any, of Current Assets over Current Liabilities at such date. 1.3 Uniform Commercial Code Terms. All terms used herein and defined in the Uniform Commercial Code as adopted in the State of New York from time to time shall have the meaning given therein unless otherwise defined herein. To the extent the definition of any category or type of collateral is expanded by any amendment, modification or revision to the Uniform Commercial Code, such expanded definition will apply automatically as of the date of such amendment, modification or revision. 1.4 Certain Matters of Construction. The terms "herein", "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular section, paragraph or subdivision. Any pronoun used shall be deemed to cover all genders. Wherever appropriate in the context, terms used herein in the singular also include the plural and vice versa. All references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations. Unless otherwise provided, all references to any instruments or agreements to which Agent is a party, including, without limitation, references to any of the Other Documents, shall include any and all modifications or amendments thereto and any and all extensions or renewals thereof. II. ADVANCES, PAYMENTS. 2.1 (a) Revolving Advances. Subject to the terms and conditions set forth in this Agreement including, without limitation, Section 2.1(b), each Lender, severally and not jointly, agrees make Revolving Advances to Borrower in aggregate amounts outstanding at any time up to such Lender's Commitment Percentage of the lesser of (x) the Maximum Revolving Advance Amount less the aggregate amount of outstanding Letters of Credit and (y) an amount equal to the sum of: (i) up to eighty-five percent (85%), subject to the provisions of Section 2.1(b) hereof (the "Receivables Advance Rate"), of Eligible Receivables, plus (ii) up to eighty-five percent (85%), subject to the provisions of Section 2.1(b) hereof (the "Seasonal Receivables Advance Rate"), of Seasonal Receivables due and unpaid one hundred eighty (180) days or less from invoice date and sixty (60) days or less from due date, provided that in no event shall the amount determined pursuant to this clause (ii) be permitted to exceed $1,500,000, plus (iii) up to eighty-five percent (85%), subject to the provisions of Section 2.1(b) hereof ("Inventory Advance Rate") of the Net Orderly Liquidation Value of Eligible Inventory, subject to the provisions of Section 2.1(b) hereof (the Inventory Advance Rate, Receivables Advance Rate and the Seasonal Receivables Advance Rate, being referred to collectively as the "Advance Rates") provided that in no event shall the amount determined pursuant to this clause (iii) be permitted to exceed $10,000,000, minus (iv) the aggregate amount of outstanding Letters of Credit, minus (v) such reserves as Agent may reasonably deem proper and necessary from time to time. The amount derived from the sum of Sections 2.1(a)(y)(i), (ii) and (iii) minus Sections 2.1 (a)(y)(iv) and (v) at any time and from time to time shall be referred to as the "Formula Amount"; provided that at no time may more than $500,000 of the Formula Amount be attributable to Receivables owed by Tru Serve 16 and its Affiliates, unless otherwise agreed by Agent. The Revolving Advances shall be evidenced by one or more secured promissory notes (collectively, the "Revolving Credit Note") substantially in the form attached hereto as Exhibit 2.1(a). (b) Discretionary Rights. Subject to Section 16.2, the Advance Rates may be increased or decreased by Agent at any time and from time to time in the exercise of its reasonable discretion. Borrower consents to any such increases or decreases and acknowledges that decreasing the Advance Rates or increasing or imposing the reserves may limit or restrict Advances requested by Borrower. Agent shall give Borrower five (5) days' prior written notice of its intention to decrease the Advance Rates. 2.2 Procedure for Revolving Advances Borrowing. (a) Borrower may notify Agent prior to 11:00 a.m., Pacific Time, on a Business Day of Borrower's request to incur, on that day, a Revolving Advance hereunder. Should any amount required to be paid as interest hereunder, or as fees or other charges under this Agreement or any other agreement with Agent or Lenders, or with respect to any other Obligation, become due, same shall be deemed a request for a Revolving Advance as of the date such payment is due, in the amount required to pay in full such interest, fee, charge or Obligation under this Agreement or any other agreement with Agent or Lenders, and such request shall be irrevocable. (b) Notwithstanding the provisions of subsection (a) above, in the event Borrower desires to obtain a Eurodollar Rate Loan, Borrower shall give Agent at least three (3) Business Days' prior written notice, specifying (i) the date of the proposed borrowing (which shall be a Business Day), (ii) the type of borrowing and the amount on the date of such Advance to be borrowed, which amount shall be an integral multiple of $500,000, and (iii) the duration of the first Interest Period therefor. Interest Periods for Eurodollar Rate Loans shall be for one, two or three months (except that during the period of 90 days commencing on the Closing Date, all Interest Periods shall be for one month); provided, if an Interest Period would end on a day that is not a Business Day, it shall end on the next succeeding Business Day unless such day falls in the next succeeding calendar month in which case the Interest Period shall end on the next preceding Business Day. No Eurodollar Rate Loan shall be made available to Borrower during the continuance of a Default or an Event of Default. (c) Each Interest Period of a Eurodollar Rate Loan shall commence on the date such Eurodollar Rate Loan is made and shall end on such date as Borrower may elect as set forth in subsection (b)(iii) above provided that the exact length of each Interest Period shall be determined in accordance with the practice of the interbank market for offshore Dollar deposits and no Interest Period shall end after the last day of the Term. Borrower shall elect the initial Interest Period applicable to a Eurodollar Rate Loan by its notice of borrowing given to Agent pursuant to Section 2.2(b) or by its notice of conversion given to Agent pursuant to Section 2.2(d), as the case may be. Borrower shall elect the duration of each succeeding Interest Period by giving irrevocable written notice to Agent of such duration not less than three (3) Business Days prior to the last day of the then current Interest Period applicable to such Eurodollar Rate Loan. If Agent does not receive timely notice of the Interest Period elected by Borrower, Borrower shall be deemed to have elected to convert to a Domestic Rate Loan subject to Section 2.2(d) hereinbelow. (d) Provided that no Event of Default shall have occurred and be continuing, Borrower may, on the last Business Day of the then current Interest Period applicable to any outstanding Eurodollar Rate Loan, or on any Business Day with respect to Domestic Rate Loans, convert any such loan into a loan of another type in the same aggregate principal amount provided that any conversion of a Eurodollar Rate Loan shall be made only on the last Business Day of the then current Interest Period applicable to such Eurodollar Rate Loan. If Borrower desires to so convert a loan, Borrower shall give Agent not less than three (3) Business Days' prior written notice to convert from a Domestic Rate Loan to a Eurodollar Rate Loan or one (1) Business Day's prior written notice to convert from a Eurodollar Rate Loan to a Domestic Rate Loan, specifying the date of such conversion, the loans to be converted and if 17 the conversion is from a Domestic Rate Loan to any other type of loan, the duration of the first Interest Period therefor. After giving effect to each such conversion, there shall not be outstanding more than ten (10) Eurodollar Rate Loans, in the aggregate. (e) At its option and upon three (3) Business Days' prior written notice, Borrower may prepay the Eurodollar Rate Loans in whole at any time or in part from time to time with accrued interest on the principal being prepaid to the date of such repayment. Borrower shall specify the date of prepayment of Advances which are Eurodollar Rate Loans and the amount of such prepayment. In the event that any prepayment of a Eurodollar Rate Loan is required or permitted on a date other than the last Business Day of the then current Interest Period with respect thereto, Borrower shall indemnify Agent and Lenders therefor in accordance with Section 2.2(f) hereof. (f) Borrower shall indemnify Agent and Lenders and hold Agent and Lenders harmless from and against any and all losses or expenses that Agent and Lenders may sustain or incur as a consequence of any prepayment, conversion of or any default by Borrower in the payment of the principal of or interest on any Eurodollar Rate Loan or failure by Borrower to complete a borrowing of, a prepayment of or conversion of or to a Eurodollar Rate Loan after notice thereof has been given, including, but not limited to, any interest payable by Agent or Lenders to lenders of funds obtained by it in order to make or maintain its Eurodollar Rate Loans hereunder. A certificate as to any additional amounts payable pursuant to the foregoing sentence submitted by Agent or any Lender to Borrower shall be conclusive absent manifest error. (g) Notwithstanding any other provision hereof, if any applicable law, treaty, regulation or directive, or any change therein or in the interpretation or application thereof, shall make it unlawful for any Lender (for purposes of this subsection (g), the term "Lender" shall include any Lender and the office or branch where any Lender or any corporation or bank controlling such Lender makes or maintains any Eurodollar Rate Loans) to make or maintain its Eurodollar Rate Loans, the obligation of Lenders to make Eurodollar Rate Loans hereunder shall forthwith be cancelled and Borrower shall, if any affected Eurodollar Rate Loans are then outstanding, promptly upon request from Agent, either pay all such affected Eurodollar Rate Loans or convert such affected Eurodollar Rate Loans into loans of another type. If any such payment or conversion of any Eurodollar Rate Loan is made on a day that is not the last day of the Interest Period applicable to such Eurodollar Rate Loan, Borrower shall pay Agent, upon Agent's request, such amount or amounts as may be necessary to compensate Lenders for any loss or expense sustained or incurred by Lenders in respect of such Eurodollar Rate Loan as a result of such payment or conversion, including (but not limited to) any interest or other amounts payable by Lenders to lenders of funds obtained by Lenders in order to make or maintain such Eurodollar Rate Loan. A certificate as to any additional amounts payable pursuant to the foregoing sentence submitted by Lenders to Borrower shall be conclusive absent manifest error. 2.3 Disbursement of Advance Proceeds. All Advances shall be disbursed from whichever office or other place Agent may designate from time to time and, together with any and all other Obligations of Borrower to Agent or Lenders, shall be charged to Borrower's Account on Agent's books. During the Term, Borrower may use the Revolving Advances by borrowing, prepaying and reborrowing, all in accordance with the terms and conditions hereof. The proceeds of each Revolving Advance requested by Borrower or deemed to have been requested by Borrower under Section 2.2(a) hereof shall, with respect to requested Revolving Advances to the extent Lenders make such Revolving Advances, be made available to Borrower on the day so requested by way of credit to Borrower's operating account at PNC, or such other bank as Borrower may designate following notification to Agent, in immediately available federal funds or other immediately available funds or, with respect to Revolving Advances deemed to have been requested by Borrower, be disbursed to Agent to be applied to the outstanding Obligations giving rise to such deemed request. 2.4 Term Loan. Subject to the terms and conditions of this Agreement, each Lender, severally and not jointly, will make a Term Loan to Borrower in the sum equal to such Lender's Commitment Percentage of $2,000,000. The Term Loan shall be advanced on the Closing Date and shall be, with respect to principal, payable as follows, subject to acceleration upon the occurrence of an 18 Event of Default under this Agreement or termination of this Agreement: The Term Loan shall be, with respect to principal, payable in equal monthly installments of $33,333.33, commencing on January 1, 2002 and on the first day of each month thereafter with the balance payable upon the expiration of the Term, subject to acceleration upon the occurrence of an Event of Default under this Agreement or termination of this Agreement. The Term Loan shall be evidenced by one or more secured promissory notes (collectively, the "Term Note") in substantially the form attached hereto as Exhibit 2.4. 2.5 Maximum Revolving Advances. The aggregate balance of Revolving Advances outstanding at any time shall not exceed the lesser of (a) the Maximum Revolving Advance Amount less the aggregate amount of outstanding Letters of Credit or (b) the Formula Amount. 2.6 Repayment of Advances. (a) The Revolving Advances shall be due and payable in full on the last day of the Term subject to earlier prepayment as herein provided. The Term Loan shall be due and payable as provided in Section 2.4 hereof and in the Term Note, subject to mandatory prepayments as herein provided. (b) Borrower recognizes that the amounts evidenced by checks, notes, drafts or any other items of payment relating to and/or proceeds of Collateral may not be collectible by Agent on the date received. In consideration of Agent's agreement to conditionally credit Borrower's Account as of the Business Day on which Agent receives those items of payment, Borrower agrees that, in computing the charges under this Agreement, all items of payment shall be deemed applied by Agent on account of the Obligations one (1) Business Day after (i) the Business Day Agent receives such payments via wire transfer or electronic depository check or (ii) in the case of payments received by Agent in any other form, the Business Day such payment constitutes good funds in Agent's account. Agent is not, however, required to credit Borrower's Account for the amount of any item of payment which is unsatisfactory to Agent and Agent may charge Borrower's Account for the amount of any item of payment which is returned to Agent unpaid. (c) All payments of principal, interest and other amounts payable hereunder, or under any of the Other Documents shall be made to Agent at the Payment Office not later than 12:00 p.m. Pacific Time, on the due date therefor in lawful money of the United States of America in federal funds or other funds immediately available to Agent. Agent shall have the right to effectuate payment on any and all Obligations due and owing hereunder by charging Borrower's Account or by making Advances as provided in Section 2.2 hereof. (d) Borrower shall pay principal, interest, and all other amounts payable hereunder, or under any related agreement, without any deduction whatsoever, including, but not limited to, any deduction for any setoff or counterclaim. 2.7 Repayment of Excess Advances. The aggregate balance of Advances outstanding at any time in excess of the maximum amount of Advances permitted pursuant to Section 2.5 hereof shall be immediately due and payable without the necessity of any demand, at the Payment Office, whether or not a Default or Event of Default has occurred. 2.8 Statement of Account. Agent shall maintain, in accordance with its customary procedures, a loan account ("Borrower's Account") in the name of Borrower in which shall be recorded the date and amount of each Advance made by Agent and the date and amount of each payment in respect thereof; provided, however, the failure by Agent to record the date and amount of any Advance shall not adversely affect Agent or any Lender. Each month, Agent shall send to Borrower a statement showing the accounting for the Advances made, payments made or credited in respect thereof, and other transactions between Agent and Borrower, during such month. The monthly statements shall be deemed correct and binding upon Borrower in the absence of manifest error and shall constitute an account stated between Lenders and Borrower unless Agent receives a written statement of Borrower's specific exceptions thereto within thirty (30) days after such statement is received by Borrower. The records of 19 Agent with respect to the loan account shall be conclusive evidence absent manifest error of the amounts of Advances and other charges thereto and of payments applicable thereto. 2.9 Letters of Credit. Subject to the terms and conditions hereof, Agent shall issue or cause the issuance of Letters of Credit ("Letters of Credit") on behalf of Borrower; provided, however, that Agent will not be required to issue or cause to be issued any Letters of Credit to the extent that the face amount of such Letters of Credit would then cause the sum of (i) the outstanding Revolving Advances plus (ii) outstanding Letters of Credit to exceed the lesser of (x) the Maximum Revolving Advance Amount or (y) the Formula Amount. The maximum amount of outstanding Letters of Credit shall not exceed $2,000,000 in the aggregate at any time. All disbursements or payments related to Letters of Credit shall be deemed to be Domestic Rate Loans consisting of Revolving Advances and shall bear interest at the applicable Contract Rate; Letters of Credit that have not been drawn upon shall not bear interest. 2.10 Issuance of Letters of Credit. (a) Borrower may request Agent to issue or cause the issuance of a Letter of Credit by delivering to Agent at the Payment Office, Agent's form of Letter of Credit Application (the "Letter of Credit Application") completed to the satisfaction of Agent; and, such other certificates, documents and other papers and information as Agent may reasonably request. Borrower also has the right to give instructions and make agreements with respect to any application, any applicable letter of credit and security agreement, any applicable letter of credit reimbursement agreement and/or any other applicable agreement, any letter of credit and the disposition of documents, disposition of any unutilized funds, and to agree with Agent upon any amendment, extension or renewal of any Letter of Credit. (b) Each Letter of Credit shall, among other things, (i) provide for the payment of sight drafts or acceptances of usance drafts when presented for honor thereunder in accordance with the terms thereof and when accompanied by the documents described therein and (ii) have an expiry date not later than one (1) year after such Letter of Credit's date of issuance and in no event later than the last day of the Term. Each Letter of Credit shall be subject to the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500, and any amendments or revision thereof adhered to by the Issuer and, to the extent not inconsistent therewith, the laws of the State of New York. (c) Agent shall use its reasonable efforts to notify Lenders of the request by Borrower for a Letter of Credit hereunder. (d) Agent shall have absolute discretion whether to accept any draft. Without in any way limiting Agent's absolute discretion whether to accept any draft, Borrower will not present for acceptance any draft, and Agent will generally not accept any drafts (i) that arise out of transactions involving the sale of goods by Borrower not in the ordinary course of its business, (ii) that involve a sale to an Affiliate of Borrower, (iii) that involve any purchase for which Agent has not received all related documents, instruments and forms requested by Agent, (iv) for which Agent is unable to locate a purchaser in the ordinary course of business on standard terms, or (v) that is not eligible for discounting with Federal Reserve Banks pursuant to paragraph 7 of Section 13 of the Federal Reserve Act, as amended. 2.11 Requirements For Issuance of Letters of Credit. (a) In connection with the issuance of any Letter of Credit, Borrower shall indemnify, save and hold Agent, each Lender and each Issuer harmless from any loss, cost, expense or liability, including, without limitation, payments made by Agent, any Lender or any Issuer and expenses and reasonable attorneys' fees incurred by Agent, any Lender or Issuer arising out of, or in connection with, any Letter of Credit to be issued or created for Borrower. Borrower shall be bound by Agent's or any Issuer's regulations and good faith interpretations of any Letter of Credit issued or created for Borrower's Account, although this interpretation may be different from its own; and, neither Agent, nor any Lender, nor any Issuer nor any of their correspondents shall be liable for any error, negligence, or mistakes, 20 whether of omission or commission, in following Borrower's instructions or those contained in any Letter of Credit or of any modifications, amendments or supplements thereto or in issuing or paying any Letter of Credit, except for Agent's, any Lender's, any Issuer's or such correspondents' gross negligence or willful misconduct. (b) Borrower shall authorize and direct any Issuer to name Borrower as the "Applicant" or "Account Party" of each Letter of Credit. If Agent is not the Issuer of any Letter of Credit, Borrower shall authorize and direct the Issuer to deliver to Agent all instruments, documents, and other writings and property received by the Issuer pursuant to the Letter of Credit and to accept and rely upon Agent's instructions and agreements with respect to all matters arising in connection with the Letter of Credit or any Letter of Credit Application therefor. (c) In connection with all Letters of Credit issued or caused to be issued by Agent under this Agreement, Borrower hereby appoints Agent, or its designee, as its attorney, with full power and authority if an Event of Default or Default shall have occurred and be continuing, (i) to sign and/or endorse Borrower's name upon any warehouse or other receipts, letter of credit applications and acceptances; (ii) to sign Borrower's name on bills of lading; (iii) to clear Inventory through the United States of America Customs Department ("Customs") in the name of Borrower or Agent or Agent's designee, and to sign and deliver to Customs officials powers of attorney in the name of Borrower for such purpose; and (iv) to complete in Borrower's name or Agent's, or in the name of Agent's designee, any order, sale or transaction, obtain the necessary documents in connection therewith, and collect the proceeds thereof. Neither Agent nor its attorneys will be liable for any acts or omissions nor for any error of judgment or mistakes of fact or law, except for Agent's or its attorney's gross negligence or willful misconduct. This power, being coupled with an interest, is irrevocable as long as any Letters of Credit remain outstanding. (d) Each Lender shall to the extent of the percentage amount equal to the product of such Lender's Commitment Percentage times the aggregate amount of all unreimbursed reimbursement obligations arising from disbursements made or obligations incurred with respect to the Letters of Credit be deemed to have irrevocably purchased an undivided participation in each such unreimbursed reimbursement obligation. In the event that at the time a disbursement is made the unpaid balance of Revolving Advances exceeds or would exceed, with the making of such disbursement, the lesser of the Maximum Revolving Advance Amount or the Formula Amount, and such disbursement is not reimbursed by Borrower within two (2) Business Days, Agent shall promptly notify each Lender and upon Agent's demand each Lender shall pay to Agent such Lender's proportionate share of such unreimbursed disbursement together with such Lender's proportionate share of Agent's unreimbursed costs and expenses relating to such unreimbursed disbursement. Upon receipt by Agent of a repayment from Borrower of any amount disbursed by Agent for which Agent had already been reimbursed by Lenders, Agent shall deliver to each Lender that Lender's pro rata share of such repayment. Each Lender's participation commitment shall continue until the last to occur of any of the following events: (A) Agent ceases to be obligated to issue or cause to be issued Letters of Credit hereunder; (B) no Letter of Credit issued hereunder remains outstanding and uncancelled or (C) all Persons (other than Borrower) have been fully reimbursed for all payments made under or relating to Letters of Credit. 2.12 Additional Payments. Any compensation demanded by Agent or any Lender pursuant to this Agreement or any Other Documents (including, without limitation, pursuant to Sections 3.2, 3.3, 3.4, 3.5, 3.8, 3.10 and 3.11 hereof) and any sums expended by Agent or any Lender due to Borrower's failure to perform or comply with its obligations under this Agreement or any Other Documents including, without limitation, Borrower's obligations under Sections 4.2, 4.4, 4.12, 4.13, 4.14 and 6.1 hereof, may be charged to Borrower's Account as a Revolving Advance and added to the Obligations. Without in any way limiting Agent's right to any such payment or to charge Borrower's Account in payment thereof, Agent agrees to furnish to Borrower notice of each payment so charged to Borrower's Account. 21 2.13 Manner of Borrowing and Payment. (a) Each borrowing of Revolving Advances shall be advanced according to the applicable Commitment Percentages of Lenders. The Term Loan shall be advanced according to the Commitment Percentages of Lenders. (b) Each payment (including each prepayment) by Borrower on account of the principal of and interest on the Revolving Advances, shall be applied to the Revolving Advances pro rata according to the applicable Commitment Percentages of Lenders. Each payment (including each prepayment) by Borrower on account of the principal of and interest on the Term Note, shall be made from or to, or applied to that portion of the Term Loan evidenced by the Term Note pro rata according to the Commitment Percentages of Lenders. Except as expressly provided herein, all payments (including prepayments) to be made by Borrower on account of principal, interest and fees shall be made without set off or counterclaim and shall be made to Agent on behalf of the Lenders to the Payment Office, in each case on or prior to 1:00 p.m. Pacific Time, in Dollars and in immediately available funds. (c) (i) Notwithstanding anything to the contrary contained in Sections 2.13(a) and (b) hereof, commencing with the first Business Day following the Closing Date, each borrowing of Revolving Advances shall be advanced by Agent and each payment by Borrower on account of Revolving Advances shall be applied first to those Revolving Advances advanced by Agent. On or before 1:00 p.m. Pacific Time, on each Settlement Date commencing with the first Settlement Date following the Closing Date, Agent and Lenders shall make certain payments as follows: (I) if the aggregate amount of new Revolving Advances made by Agent during the preceding Week (if any) exceeds the aggregate amount of repayments applied to outstanding Revolving Advances during such preceding Week, then each Lender shall provide Agent with funds in an amount equal to its applicable Commitment Percentage of the difference between (w) such Revolving Advances and (x) such repayments and (II) if the aggregate amount of repayments applied to outstanding Revolving Advances during such Week exceeds the aggregate amount of new Revolving Advances made during such Week, then Agent shall provide each Lender with funds in an amount equal to its applicable Commitment Percentage of the difference between (y) such repayments and (z) such Revolving Advances. (ii) Each Lender shall be entitled to earn interest at the applicable Contract Rate on outstanding Advances which it has funded. (iii) Promptly following each Settlement Date, Agent shall submit to each Lender a certificate with respect to payments received and Advances made during the Week immediately preceding such Settlement Date. Such certificate of Agent shall be conclusive in the absence of manifest error. (d) If any Lender or Participant (a "Benefited Lender") shall at any time receive any payment of all or part of its Advances, or interest thereon, or receive any Collateral in respect thereof (whether voluntarily or involuntarily or by set-off) in a greater proportion than any such payment to and Collateral received by any other Lender, if any, in respect of such other Lender's Advances, or interest thereon, and such greater proportionate payment or receipt of Collateral is not expressly permitted hereunder, such Benefited Lender shall purchase for cash from the other Lenders a participation in such portion of each such other Lender's Advances, or shall provide such other Lender with the benefits of any such Collateral, or the proceeds thereof, as shall be necessary to cause such Benefited Lender to share the excess payment or benefits of such Collateral or proceeds ratably with each of the other Lenders; provided, however, that if all or any portion of such excess payment or benefits is thereafter recovered from such Benefited Lender, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. Each Lender so purchasing a portion of another Lender's Advances may exercise all rights of payment (including, without limitation, rights of set-off) with respect to such portion as fully as if such Lender were the direct holder of such portion. (e) Unless Agent shall have been notified by telephone, confirmed in writing, by any Lender that such Lender will not make the amount which would constitute its applicable Commitment 22 Percentage of the Advances available to Agent, Agent may (but shall not be obligated to) assume that such Lender shall make such amount available to Agent on the next Settlement Date and, in reliance upon such assumption, make available to Borrower a corresponding amount. Agent will promptly notify Borrower of its receipt of any such notice from a Lender. If such amount is made available to Agent on a date after such next Settlement Date, such Lender shall pay to Agent on demand an amount equal to the product of (i) the daily average Federal Funds Rate (computed on the basis of a year of three hundred sixty (360) days) during such period as quoted by Agent, times (ii) such amount, times (iii) the number of days from and including such Settlement Date to the date on which such amount becomes immediately available to Agent. A certificate of Agent submitted to any Lender with respect to any amounts owing under this subsection (e) shall be conclusive, in the absence of manifest error. If such amount is not in fact made available to Agent by such Lender within three (3) Business Days after such Settlement Date, Agent shall be entitled to recover such an amount, with interest thereon at the rate per annum then applicable to such Revolving Advances hereunder, on demand from Borrower; provided, however, that Agent's right to such recovery shall not prejudice or otherwise adversely affect Borrower's rights (if any) against such Lender. 2.14 Mandatory Prepayments. (a) Subject to Section 4.3 hereof, when any Credit Party sells or otherwise disposes of any Collateral other than Inventory in the ordinary course of business, Borrower shall repay the Advances in an amount equal to the net proceeds of such sale (i.e., gross proceeds less the reasonable costs of such sales or other dispositions and net of amounts payable in respect of any Permitted Encumbrance allocable to such Collateral), such repayments to be made promptly but in no event more than one (1) Business Day following receipt of such net proceeds, and until the date of payment, such proceeds shall be held in trust for Agent (and each other Credit Party covenants to take such actions as may be necessary to permit Borrower to comply with this sentence). The foregoing shall not be deemed to be implied consent to any such sale otherwise prohibited by the terms and conditions hereof. Such repayments shall be applied to the Advances in such order as Agent may determine, subject to Borrower's ability to reborrow Advances in accordance with the terms hereof. 2.15 Use of Proceeds. Borrower shall apply the proceeds of Advances to (i) repay existing indebtedness owed to Bank of America, (ii) pay fees and expenses relating to this transaction, and (iii) to provide for its working capital and general corporate needs and those of its Subsidiaries (subject to Section 7.5). 2.16 Defaulting Lender. (a) Notwithstanding anything to the contrary contained herein, in the event any Lender (x) has refused (which refusal constitutes a breach by such Lender of its obligations under this Agreement) to make available its portion of any Advance or (y) notifies either Agent or Borrower that it does not intend to make available its portion of any Advance (if the actual refusal would constitute a breach by such Lender of its obligations under this Agreement) (each, a "Lender Default"), all rights and obligations hereunder of such Lender (a "Defaulting Lender") as to which a Lender Default is in effect and of the other parties hereto shall be modified to the extent of the express provisions of this Section 2.16 while such Lender Default remains in effect. (b) Advances shall be incurred pro rata from Lenders (the "Non-Defaulting Lenders") which are not Defaulting Lenders based on their respective Commitment Percentages, and no Commitment Percentage of any Lender or any pro rata share of any Advances required to be advanced by any Lender shall be increased as a result of such Lender Default. Amounts received in respect of principal of any type of Advances shall be applied to reduce the applicable Advances of each Lender pro rata based on the aggregate of the outstanding Advances of that type of all Lenders at the time of such application; provided, that, such amount shall not be applied to any Advances of a Defaulting Lender at any time when, and to the extent that, the aggregate amount of Advances of any Non-Defaulting Lender exceeds such Non-Defaulting Lender's Commitment Percentage of all Advances then outstanding. 23 (c) A Defaulting Lender shall not be entitled to give instructions to Agent or to approve, disapprove, consent to or vote on any matters relating to this Agreement and the Other Documents. All amendments, waivers and other modifications of this Agreement and the Other Documents may be made without regard to a Defaulting Lender and, for purposes of the definition of "Required Lenders", a Defaulting Lender shall be deemed not to be a Lender and not to have Advances outstanding. (d) Other than as expressly set forth in this Section 2.16, the rights and obligations of a Defaulting Lender (including the obligation to indemnify Agent) and the other parties hereto shall remain unchanged. Nothing in this Section 2.16 shall be deemed to release any Defaulting Lender from its obligations under this Agreement and the Other Documents, shall alter such obligations, shall operate as a waiver of any default by such Defaulting Lender hereunder, or shall prejudice any rights which Borrower, Agent or any Lender may have against any Defaulting Lender as a result of any default by such Defaulting Lender hereunder. (e) In the event a Defaulting Lender retroactively cures to the satisfaction of Agent the breach which caused a Lender to become a Defaulting Lender, such Defaulting Lender shall no longer be a Defaulting Lender and shall be treated as a Lender under this Agreement. III. INTEREST AND FEES. 3.1 Interest. Interest on Advances shall be payable in arrears on the first day of each month with respect to Domestic Rate Loans and, with respect to Eurodollar Rate Loans, at the end of each Interest Period or, for Eurodollar Rate Loans with an Interest Period in excess of three months, at the earlier of (a) each three months on the anniversary date of the commencement of such Eurodollar Rate Loan or (b) the end of the Interest Period. Interest charges shall be computed on the actual principal amount of Advances outstanding during the month at a rate per annum equal to (i) with respect to Revolving Advances the applicable Revolving Interest Rate and (ii) with respect to the Term Loan, the applicable Term Loan Rate (as applicable, the "Contract Rate"). Whenever, subsequent to the date of this Agreement, the Alternate Base Rate is increased or decreased, the applicable Contract Rate shall be similarly changed without notice or demand of any kind by an amount equal to the amount of such change in the Alternate Base Rate during the time such change or changes remain in effect. The Eurodollar Rate shall be adjusted with respect to Eurodollar Rate Loans without notice or demand of any kind on the effective date of any change in the Reserve Percentage as of such effective date. Upon and after the occurrence of an Event of Default, and during the continuation thereof, at the option of Agent or at the direction of Required Lenders, the Obligations shall bear interest at the applicable Contract Rate plus two percent (2%) per annum (the "Default Rate"). 3.2 Letter of Credit Fees. (a) Borrower shall pay (x) to Agent, for the benefit of Lenders, fees for each Letter of Credit for the period from and excluding the date of issuance of same to and including the date of expiration or termination, equal to the average daily face amount of each outstanding Letter of Credit multiplied by two and one-half percent (2.50%) per annum, such fees to be calculated on the basis of a three hundred sixty (360) -day year for the actual number of days elapsed and to be payable monthly in arrears on the first day of each month and on the last day of the Term and (y) to the Issuer, (A) an issuance fee for each Letter of Credit for the period from and excluding the date of issuance of same to and including the date of expiration or termination, equal to the average daily face amount of each outstanding Letter of Credit multiplied by one-quarter of one percent (0.25%) per annum, such fees to be calculated on the basis of a three hundred sixty (360) -day year for the actual number of days elapsed and to be payable monthly in arrears on the first day of each month and on the last day of the Term and (B) any and all fees and expenses as agreed upon by the Issuer and the Borrower in connection with any Letter of Credit, including, without limitation, in connection with the opening, amendment or renewal of any such Letter of Credit and any acceptances created thereunder and shall reimburse Agent for any and all fees and expenses, if any, paid by Agent to the Issuer (all of the foregoing fees, the "Letter of Credit Fees"). All such charges shall be deemed earned in full on the date when the same are due and payable 24 hereunder and shall not be subject to rebate or proration upon the termination of this Agreement for any reason. Any such charge in effect at the time of a particular transaction shall be the charge for that transaction, notwithstanding any subsequent change in the Issuer's prevailing charges for that type of transaction. All Letter of Credit Fees payable hereunder shall be deemed earned in full on the date when the same are due and payable hereunder and shall not be subject to rebate or proration upon the termination of this Agreement for any reason. (b) If so requested by Agent when a Default or Event of Default is continuing, Borrower will cause cash to be deposited and maintained in an account with Agent, as cash collateral, in an amount equal to one hundred and five percent (105%) of the outstanding Letters of Credit, and Borrower hereby irrevocably authorizes Agent, in its discretion, on Borrower's behalf and in Borrower's name, to open such an account and to make and maintain deposits therein, or in an account opened by Borrower, in the amounts required to be made by Borrower, out of the proceeds of Receivables or other Collateral or out of any other funds of Borrower coming into any Lender's possession at any time. Agent will invest such cash collateral (less applicable reserves) in such short-term money-market items as to which Agent and Borrower mutually agree and the net return on such investments shall be credited to such account and constitute additional cash collateral, which amounts may not be withdrawn except that the portion thereof allocable to a particular Letter of Credit may be withdrawn (x) upon the expiration of such Letter of Credit or (y) if such Letter of Credit is drawn, upon the payment in full of all reimbursement obligations in respect of such Letter of Credit. 3.3 (a) Closing Fee. Upon the execution of this Agreement, Borrower shall pay to Agent the closing fee set forth in the Fee Letter. (b) Facility Fee. If, for any month during the Term, the average daily unpaid balance of the Revolving Advances for each day of such month does not equal the Maximum Revolving Advance Amount, then Borrower shall pay to Agent, for the ratable benefit of the Lenders, a fee at a rate equal to one-half of one percent (0.5%) per annum on the amount by which the Maximum Revolving Advance Amount exceeds such average daily unpaid balance. Such fee shall be payable to Agent in arrears on the first day of each month with respect to the previous month. (c) Agency Fee. For as long as the Obligations remain outstanding (other than contingent obligations which survive the termination of this Agreement), Borrower shall pay to Agent the agency fee set forth in the Fee Letter, in the amounts and at the times provided in the Fee Letter. (d) Other Fees. Borrower shall pay to Agent such other fees as may be provided for in the Fee Letter at the times, in the amounts and upon the terms and conditions set forth therein. 3.4 Collateral Monitoring Fee. Borrower shall pay to Agent a collateral monitoring fee in the amount and at the times set forth in the Fee Letter, in connection with any field examination, collateral analysis or other business analysis performed by Agent, the need for which is to be determined by Agent (such determination to be made in Agent's reasonable discretion unless a Default or Event of Default shall have occurred and be continuing) and which monitoring is undertaken by Agent for Agent's benefit. The collateral monitoring fee shall be deemed earned in full on the date when same is due and payable hereunder and shall not be subject to rebate or pro-ration upon termination of this Agreement for any reason. In addition, Borrower shall pay to Agent the sums provided in the Fee Letter for persons (other than Agent's management personnel) employed to conduct audits of Borrower. Agent and the Lenders agree that not more than four (4) audits per year shall be conducted in the absence of an Event of Default. 3.5 Other Expenses Borrower shall pay all costs required to be paid in any Fee Letter, and all expenses incurred by Agent relating to reasonable legal, accounting and audit fees, searches and the filings and recordings in accordance with the Uniform Commercial Code, and any other expenses incurred by Agent in connection with the structuring, documenting, closing, monitoring or enforcing of this Agreement and the transactions contemplated herein. 25 3.6 Computation of Interest and Fees. Interest and fees hereunder shall be computed on the basis of a year of three hundred sixty (360) days and for the actual number of days elapsed. If any payment to be made hereunder becomes due and payable on a day other than a Business Day, the due date thereof shall be extended to the next succeeding Business Day and interest thereon shall be payable at the applicable Contract Rate for Domestic Rate Loans during such extension. 3.7 Maximum Charges. In no event whatsoever shall interest and other charges charged hereunder exceed the highest rate permissible under law. In the event interest and other charges as computed hereunder would otherwise exceed the highest rate permitted under law, such excess amount shall be first applied to any unpaid principal balance owed by Borrower, and if the then remaining excess amount is greater than the previously unpaid principal balance, Lenders shall promptly refund such excess amount to Borrower and the provisions hereof shall be deemed amended to provide for such permissible rate. 3.8 Increased Costs. In the event that any applicable law, treaty or governmental regulation, or any change therein or in the interpretation or application thereof, or compliance by any Lender (for purposes of this Section 3.8, the term "Lender" shall include Agent or any Lender and any corporation or bank controlling Agent or any Lender) and the office or branch where Agent or any Lender (as so defined) makes or maintains any Eurodollar Rate Loans with any request or directive (whether or not having the force of law) from any central bank or other financial, monetary or other authority, shall: (a) subject Agent or any Lender to any tax of any kind whatsoever with respect to this Agreement or any Other Documents or change the basis of taxation of payments to Agent or any Lender of principal, fees, interest or any other amount payable hereunder or under any Other Documents (except for changes in the rate of tax on the overall net income of Agent or any Lender by the jurisdiction in which it maintains its principal office); (b) impose, modify or hold applicable any reserve, special deposit, assessment or similar requirement against assets held by, or deposits in or for the account of, advances or loans by, or other credit extended by, any office of Agent or any Lender, including (without limitation) pursuant to Regulation D of the Board of Governors of the Federal Reserve System; or (c) impose on Agent or any Lender or the London interbank Eurodollar market any other condition with respect to this Agreement or any Other Documents; and the result of any of the foregoing is to increase the cost to Agent or any Lender of making, renewing or maintaining its Advances hereunder by an amount that Agent or such Lender deems to be material or to reduce the amount of any payment (whether of principal, interest or otherwise) in respect of any of the Advances by an amount that Agent or such Lender deems to be material, then, in any case Borrower shall promptly pay Agent or such Lender, upon its demand, such additional amount as will compensate Agent or such Lender for such additional cost or such reduction, as the case may be, provided that the foregoing shall not apply to increased costs which are reflected in the Eurodollar Rate, as the case may be. Agent or such Lender shall certify the amount of such additional cost or reduced amount to Borrower, and such certification shall be conclusive absent manifest error. Notwithstanding the foregoing, any demand for compensation pursuant to this Section 3.8 shall be made within 180 days after Agent or the applicable Lender receives actual notice or obtains actual knowledge of the matter giving rise to such demand and, in the event that such demand is not made within such 180 day period, Borrower shall not be obligated to pay any portion of the demanded compensation accruing prior to the 180th day preceding such demand. 3.9 Basis For Determining Interest Rate Inadequate or Unfair. In the event that Agent or any Lender shall have determined that: (a) reasonable means do not exist for ascertaining the Eurodollar Rate applicable pursuant to Section 2.2 hereof for any Interest Period; or 26 (b) Dollar deposits in the relevant amount and for the relevant maturity are not available in the London interbank Eurodollar market, with respect to an outstanding Eurodollar Rate Loan, a proposed Eurodollar Rate Loan, or a proposed conversion of a Domestic Rate Loan into a Eurodollar Rate Loan, then Agent shall give Borrower prompt written, telephonic or telegraphic notice of such determination. If such notice is given, (i) any such requested Eurodollar Rate Loan shall be made as a Domestic Rate Loan, unless Borrower shall notify Agent no later than 10:00 a.m. EST, two (2) Business Days prior to the date of such proposed borrowing, that its request for such borrowing shall be cancelled or made as an unaffected type of Eurodollar Rate Loan, (ii) any Domestic Rate Loan or Eurodollar Rate Loan which was to have been converted to an affected type of Eurodollar Rate Loan shall be continued as or converted into a Domestic Rate Loan, or, if Borrower shall notify Agent, no later than 10:00 a.m. EST, two (2) Business Days prior to the proposed conversion, shall be maintained as an unaffected type of Eurodollar Rate Loan, and (iii) any outstanding affected Eurodollar Rate Loans shall be converted into a Domestic Rate Loan, or, if Borrower shall notify Agent, no later than 10:00 a.m. EST, two (2) Business Days prior to the last Business Day of the then current Interest Period applicable to such affected Eurodollar Rate Loan, shall be converted into an unaffected type of Eurodollar Rate Loan, on the last Business Day of the then current Interest Period for such affected Eurodollar Rate Loans. Until such notice has been withdrawn, Lenders shall have no obligation to make an affected type of Eurodollar Rate Loan or maintain outstanding affected Eurodollar Rate Loans and Borrower shall not have the right to convert a Domestic Rate Loan or an unaffected type of Eurodollar Rate Loan into an affected type of Eurodollar Rate Loan. 3.10 Capital Adequacy. (a) In the event that Agent or any Lender shall have determined that any applicable law, rule, regulation or guideline regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by Agent or any Lender (for purposes of this Section 3.10, the term "Lender" shall include Agent or any Lender and any corporation or bank controlling Agent or any Lender) and the office or branch where Agent or any Lender (as so defined) makes or maintains any Eurodollar Rate Loans with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on Agent or any Lender's capital as a consequence of its obligations hereunder to a level below that which Agent or such Lender could have achieved but for such adoption, change or compliance (taking into consideration Agent's and each Lender's policies with respect to capital adequacy) by an amount deemed by Agent or any Lender to be material, then, from time to time, Borrower shall pay upon demand to Agent or such Lender such additional amount or amounts as will compensate Agent or such Lender for such reduction. In determining such amount or amounts, Agent or such Lender may use any reasonable averaging or attribution methods. The protection of this Section 3.10 shall be available to Agent and each Lender regardless of any possible contention of invalidity or inapplicability with respect to the applicable law, regulation or condition. Notwithstanding the foregoing, any demand for compensation pursuant to this Section 3.10 shall be made within 180 days after Agent or the applicable Lender receives actual notice or obtains actual knowledge of the matter giving rise to such demand and, in the event that such demand is not made within such 180 day period, Borrower shall not be obligated to pay any portion of the demanded compensation accruing prior to the 180th day preceding such demand. (b) A certificate of Agent or such Lender setting forth such amount or amounts as shall be necessary to compensate Agent or such Lender with respect to Section 3.10(a) hereof when delivered to Borrower shall be conclusive absent manifest error. 3.11 Gross Up for Taxes. If Borrower shall be required by Applicable Law to withhold or deduct any taxes from or in respect of any sum payable under this Agreement or any of the Other Documents, (a) the sum payable to Agent or such Lender shall be increased as may be necessary so that, after making all required withholding or deductions, Agent or such Lender (as the case may be) receives an amount equal to the sum it would have received had no such withholding or deductions been 27 made, (b) Borrower shall make such withholding or deductions, and (c) Borrower shall pay the full amount withheld or deducted to the relevant taxation authority or other authority in accordance with Applicable Law. 3.12 Withholding Tax Exemption. At least five (5) Business Days prior to the first date on which interest or fees are payable hereunder for the account of any Lender, each Lender that is not incorporated under the laws of the United States or any state thereof agrees that it will deliver to Borrower and Agent two (2) duly completed copies of United States Internal Revenue Service Form 1001 or 4224, certifying in either case that such Lender is entitled to receive payment under this Agreement and its Notes without deduction or withholding of any United States federal income taxes. Each Lender which so delivers a Form 1001 or 4224 further undertakes to deliver to Borrower and Agent two (2) additional copies of such form (or a successor form) on or before the date that such form expires (currently, three (3) successive calendar years for Form 1001 and one calendar year for Form 4224) or becomes obsolete or after the occurrence of any event requiring a change in the most recent form so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by Borrower or Agent, in each case, certifying that such Lender is entitled to receive payments under this Agreement and its Note without deduction or withholding of any United States federal income taxes, unless an event (including any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required that renders all such forms inapplicable or that would prevent such Lender from duly completing and delivering any such form with respect to it and such Lender advises Borrower and Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income taxes. IV. COLLATERAL: GENERAL TERMS 4.1 Security Interest in the Collateral. To secure the prompt payment and performance to Agent and each Lender of the Obligations, each Credit Party hereby assigns, pledges and grants to Agent for its benefit and for the ratable benefit of each Lender a continuing security interest in and to all of its Collateral, whether now owned or existing or hereafter acquired or arising and wheresoever located. Each Credit Party shall mark its books and records as may be necessary or appropriate to evidence, protect and perfect Agent's security interest and shall cause its financial statements to reflect such security interest. Each Credit Party shall promptly provide Agent with written notice of all commercial tort claims, such notice to contain the case title together with the applicable court and a brief description of the claim(s). Upon delivery of each such notice, such Credit Party shall be deemed to hereby grant to Agent a security interest and lien in and to such commercial tort claims and all proceeds thereof. 4.2 Perfection of Security Interest. Each Credit Party shall take all action that may be necessary or desirable, or that Agent may request, so as at all times to maintain the validity, perfection, enforceability and priority of Agent's security interest in the Collateral or to enable Agent to protect, exercise or enforce its rights hereunder and in the Collateral, including, but not limited to, (i) immediately discharging all Liens other than Permitted Encumbrances, (ii) obtaining landlords' or mortgagees' lien waivers, (iii) delivering to Agent, endorsed or accompanied by such instruments of assignment as Agent may specify, and stamping or marking, in such manner as Agent may specify, any and all chattel paper, instruments, letters of credits and advices thereof and documents evidencing or forming a part of the Collateral, (iv) entering into warehousing, lockbox and other custodial arrangements satisfactory to Agent (provided that any such arrangements other than lockboxes shall be reasonable), and (v) executing and delivering financing statements, control agreements, instruments of pledge, mortgages, notices and assignments, in each case in form and substance satisfactory to Agent, relating to the creation, validity, perfection, maintenance or continuation of Agent's security interest under the Uniform Commercial Code or other applicable law. Agent is hereby authorized to file financing statements signed by Agent instead of the Credit Parties in accordance with the Uniform Commercial Code as adopted in the State of New York from time to time. By its signature hereto, each Credit Party hereby authorizes Agent to file against such Credit Party one or more financing continuation or amendment statements pursuant to the Uniform Commercial Code in form and substance satisfactory to Agent (which statements may have a description of collateral which is broader than that set forth herein). All charges, expenses and fees Agent may incur in doing any of the foregoing, and any local taxes relating thereto, shall be charged to Borrower's Account 28 as a Revolving Advance of a Domestic Rate Loan and added to the Obligations, or, at Agent's option, shall be paid to Agent for its benefit and for the ratable benefit of Lenders immediately upon demand. 4.3 Disposition of Collateral. The Credit Parties will safeguard and protect all Collateral for Agent's general account and make no disposition thereof whether by sale, lease or otherwise except (a) the sale of Inventory in the ordinary course of business and (b) the disposition or transfer of obsolete and worn-out Equipment in the ordinary course of business during any fiscal year having an aggregate fair market value of not more than $100,000 (for all Credit Parties taken together) and only to the extent that (i) the net cash proceeds of any such disposition are used to acquire replacement Equipment which is subject to Agent's first priority security interest or (ii) the net cash proceeds of which are remitted to Agent to be applied pursuant to Section 2.14. 4.4 Preservation of Collateral. At any time when a Default or Event of Default has occurred and is continuing, in addition to the rights and remedies set forth in Section 11.1 hereof, Agent: (a) may at any time take such steps as Agent deems necessary to protect Agent's interest in and to preserve the Collateral, including the hiring of such security guards or the placing of other security protection measures as Agent may deem appropriate; (b) may employ and maintain at any of the Credit Parties' premises a custodian who shall have full authority to do all acts necessary to protect Agent's interests in the Collateral; (c) may lease warehouse facilities to which Agent may move all or part of the Collateral; (d) may use the Credit Parties' owned or leased lifts, hoists, trucks and other facilities or equipment for handling or removing the Collateral; and (e) shall have, and is hereby granted, a right of ingress and egress to the places where the Collateral is located, and may proceed over and through any of the Credit Parties' owned or leased property, except as otherwise disclosed on Schedule 4.4. The Credit Parties shall cooperate fully with all of Agent's efforts to preserve the Collateral and will take such actions to preserve the Collateral as Agent may direct. All of Agent's expenses of preserving the Collateral, including any expenses relating to the bonding of a custodian, shall be charged to Borrower's Account as a Revolving Advance and added to the Obligations. 4.5 Ownership of Collateral. With respect to the Collateral, at the time the Collateral becomes subject to Agent's security interest: (a) the applicable Credit Party shall be the sole owner of and fully authorized and able to sell, transfer, pledge and/or grant a first priority security interest (subject only to Permitted Encumbrances that are purchase money security interests) in each and every item of its respective Collateral to Agent; and, except for Permitted Encumbrances the Collateral shall be free and clear of all Liens and encumbrances whatsoever; (b) each document and agreement executed by the Credit Parties (or any of them) or delivered to Agent or any Lender in connection with this Agreement shall be true and correct in all material respects; (c) all signatures and endorsements of any Credit Party that appear on such documents and agreements shall be genuine and such Credit Party shall have full capacity to execute same; and (d) each Credit Party's Equipment and Inventory shall be located as set forth on Schedule 4.5 and shall not be removed from such location(s) without the prior written consent of Agent except with respect to the sale of Inventory in the ordinary course of business and Equipment to the extent permitted in Section 4.3 hereof. 4.6 Defense of Agent's and Lenders' Interests. Until (a) payment and performance in full of all of the Obligations and (b) termination of this Agreement, Agent's interests in the Collateral shall continue in full force and effect. During such period no Credit Party shall, without Agent's prior written consent, pledge, sell (except Inventory in the ordinary course of business and Equipment to the extent permitted in Section 4.3 hereof), assign, transfer, create or suffer to exist a Lien upon or encumber or allow or suffer to be encumbered in any way except for Permitted Encumbrances, any part of the Collateral. The Credit Parties shall defend Agent's interests in the Collateral against any and all Persons whatsoever (other than with respect to Permitted Encumbrances). At any time following demand by Agent for payment of all Obligations, Agent shall have the right to take possession of the indicia of the Collateral and the Collateral in whatever physical form contained, including without limitation: labels, stationery, documents, instruments and advertising materials. If Agent exercises this right to take possession of the Collateral, the Credit Parties shall, upon demand, assemble it in the best manner possible and make it available to Agent at a place reasonably convenient to Agent. In addition, with respect to all Collateral, Agent and Lenders shall be entitled to all of the rights and remedies set forth 29 herein and further provided by the Uniform Commercial Code or other applicable law. At any time the Credit Parties shall, if reasonably requested by Agent, and if an Event of Default shall have occurred and be continuing, Agent may, at its option, instruct all suppliers, carriers, forwarders, warehousers or others receiving or holding cash, checks, Inventory, documents or instruments in which Agent holds a security interest to deliver same to Agent and/or subject to Agent's order and if they shall come into any Credit Party's possession, they, and each of them, shall be held by such Credit Party in trust as Agent's trustee, and such Credit Party will immediately deliver them to Agent in their original form together with any necessary endorsement. 4.7 Books and Records. Each Credit Party shall (a) keep proper books of record and account in which full, true and correct entries will be made of all dealings or transactions of or in relation to its business and affairs; (b) set up on its books accruals with respect to all taxes, assessments, charges, levies and claims; and (c) on a reasonably current basis set up on its books, from its earnings, allowances against doubtful Receivables, advances and investments and all other proper accruals (including without limitation by reason of enumeration, accruals for premiums, if any, due on required payments and accruals for depreciation, obsolescence, or amortization of properties), which should be set aside from such earnings in connection with its business. All determinations pursuant to this subsection shall be made in accordance with, or as required by, GAAP consistently applied in the opinion of such independent public accountant as shall then be regularly engaged by the Credit Parties. 4.8 Financial Disclosure. Each Credit Party hereby irrevocably authorizes and directs all accountants and auditors employed by such Credit Party at any time during the Term to exhibit and deliver to Agent and each Lender copies of any of such Credit Party's financial statements, trial balances or other accounting records of any sort in the accountant's or auditor's possession, and to disclose to Agent and each Lender any information such accountants may have concerning such Credit Party's financial status and business operations. Each Credit Party hereby authorizes all federal, state and municipal authorities to furnish to Agent and each Lender copies of reports or examinations relating to such Credit Party, whether made by such Credit Party or otherwise; however, Agent and each Lender will attempt to obtain such information or materials directly from the Credit Parties prior to obtaining such information or materials from such accountants or such authorities. 4.9 Compliance with Laws. Each Credit Party shall comply with all acts, rules, regulations and orders of any legislative, administrative or judicial body or official applicable to the Collateral or any part thereof or to the operation of such Credit Party's business the non-compliance with which could reasonably be expected to have a Material Adverse Effect. Each Credit Party may, however, contest or dispute any acts, rules, regulations, orders and directions of those bodies or officials in any reasonable manner, provided that any related Lien is inchoate or stayed and sufficient reserves are established to the reasonable satisfaction of Agent to protect Agent's Lien on or security interest in the Collateral. The Collateral at all times shall be maintained in accordance with the requirements of all insurance carriers which provide insurance with respect to the Collateral so that such insurance shall remain in full force and effect. 4.10 Inspection of Premises. At all reasonable times Agent and each Lender shall have full access to and the right to audit, check, inspect and make abstracts and copies from the Credit Parties` books, records, audits, correspondence and all other papers relating to the Collateral and the operation of Borrower's business. Agent, any Lender and their agents may enter upon any of the Credit Parties' premises at any time during business hours and at any other reasonable time, and from time to time, for the purpose of inspecting the Collateral and any and all records pertaining thereto and the operation of the Credit Parties' business, provided, that if no Default or Event of Default is continuing, the applicable Credit Party shall receive reasonable advance notice of any such entry that is proposed to be made other than during business hours. 4.11 Insurance. The Credit Parties shall bear the full risk of any loss of any nature whatsoever with respect to the Collateral. At its own cost and expense in amounts and with carriers acceptable to Agent, each Credit Party shall (a) keep all its insurable properties and properties in which it has an interest insured against the hazards of fire, flood, sprinkler leakage, those hazards covered by extended 30 coverage insurance and such other hazards, and for such amounts, as is customary in the case of companies engaged in businesses similar to that of such Credit Party including, without limitation, business interruption insurance; (b) maintain a bond in such amounts as is customary in the case of companies engaged in businesses similar to such Credit Party insuring against larceny, embezzlement or other criminal misappropriation of insured's officers and employees who may either singly or jointly with others at any time have access to the assets or funds of such Credit Party either directly or through authority to draw upon such funds or to direct generally the disposition of such assets; (c) maintain public and product liability insurance against claims for personal injury, death or property damage suffered by others; (d) maintain all such worker's compensation or similar insurance as may be required under the laws of any state or jurisdiction in which such Credit Party is engaged in business; (e) upon Agent's request, obtain and maintain a life insurance policy covering the life of Richard Grandy in the face amount of at least $2,000,000, provided that he is reasonably insurable; (f) furnish Agent with (i) copies of all policies and evidence of the maintenance of such policies by the renewal thereof at least thirty (30) days before any expiration date, and (ii) appropriate loss payable endorsements in form and substance satisfactory to Agent, naming Agent as a co-insured and loss payee as its interests may appear with respect to all insurance coverage referred to in clauses (a), (c) and (e) above, and providing (A) that all proceeds thereunder shall be payable to Agent, (B) no such insurance shall be affected by any act or neglect of the insured or owner of the property described in such policy, and (C) that such policy and loss payable clauses may not be cancelled, amended or terminated unless at least thirty (30) days' prior written notice is given to Agent. In the event of any loss thereunder, the carriers named therein hereby are directed by Agent and such Credit Party to make payment for such loss to Agent and not to such Credit Party and Agent jointly. If any insurance losses are paid by check, draft or other instrument payable to any Credit Party and Agent jointly, Agent may endorse such Credit Party's name thereon and do such other things as Agent may deem advisable to reduce the same to cash. Agent is hereby authorized to adjust and compromise claims under insurance coverage referred to in clauses (a), (b) and (e) above. All loss recoveries received by Agent upon any such insurance may be applied to the Obligations, in such order as Agent in its sole discretion shall determine. Any surplus shall be paid by Agent to the applicable Credit Party or applied as may be otherwise required by law. Anything hereinabove to the contrary notwithstanding, and subject to the fulfillment of the conditions set forth below, Agent shall remit to Borrower (for the benefit of the Credit Parties) insurance proceeds received by Agent during any calendar year under insurance policies procured and maintained by the Credit Parties which insure their insurable properties to the extent such insurance proceeds do not exceed $150,000 in the aggregate during such calendar year or $75,000 per occurrence. In the event the amount of insurance proceeds received by Agent for any occurrence exceeds $75,000, then Agent shall not be obligated to remit the insurance proceeds to Borrower unless Borrower shall provide Agent with evidence reasonably satisfactory to Agent that the insurance proceeds will be used by the Credit Parties to repair, replace or restore the insured property which was the subject of the insurable loss. In the event Borrower have previously received (or, after giving effect to any proposed remittance by Agent to Borrower would receive) insurance proceeds which equal or exceed $150,000 in the aggregate during any calendar year, then Agent may, in its sole discretion, either remit the insurance proceeds to Borrower upon Borrower's providing Agent with evidence reasonably satisfactory to Agent that the insurance proceeds will be used by the Credit Parties to repair, replace or restore the insured property which was the subject of the insurable loss, or apply the proceeds to the Obligations, as aforesaid. The agreement of Agent to remit insurance proceeds in the manner above provided shall be subject in each instance to satisfaction of each of the following conditions: (x) No Event of Default or Default shall then have occurred and be continuing, and (y) the Credit Parties shall use such insurance proceeds to repair, replace or restore the insurable property which was the subject of the insurable loss and for no other purpose. 4.12 Failure to Pay Insurance. If any Credit Party fails to obtain insurance as hereinabove provided, or to keep the same in force, Agent, if Agent so elects, may obtain such insurance and pay the premium therefor on behalf of such Credit Party, and charge Borrower's Account therefor as a Revolving Advance of a Domestic Rate Loan and such expenses so paid shall be part of the Obligations. 4.13 Payment of Taxes. Each Credit Party will pay, when due, all taxes, assessments and other Charges lawfully levied or assessed upon it or any of the Collateral including, without limitation, real and personal property taxes, assessments and charges and all franchise, income, employment, social 31 security benefits, withholding, and sales taxes; provided, however, that the applicable Credit Party shall have the right to contest in good faith, by an appropriate proceeding timely initiated and diligently conducted, the validity, amount or imposition of any such tax, assessment or charge, and upon such good faith contest to delay or refuse payment thereof, if any related tax lien is stayed and sufficient reserves are established to the reasonable satisfaction of Agent to protect Agent's security interest in or Lien on the Collateral. If any tax by any governmental authority is or may be imposed on or as a result of any transaction between any of the Credit Parties and Agent or any Lender which Agent or any Lender may be required to withhold or pay or if any taxes, assessments, or other Charges remain unpaid after the date fixed for their payment, or if any claim shall be made which, in Agent's or any Lender's opinion, may possibly create a valid Lien on the Collateral, Agent may without notice to any Credit Party pay the taxes, assessments or other Charges and the Credit Parties hereby jointly and severally indemnify and hold Agent and each Lender harmless in respect thereof. Agent will not pay any taxes, assessments or Charges to the extent that the same are being contested or disputed by any Credit Party in accordance with the proviso to the first sentence of this Section 4.13. The amount of any payment by Agent under this Section 4.13 shall be charged to Borrower's Account as a Revolving Advance and added to the Obligations. 4.14 Payment of Leasehold Obligations. Each Credit Party shall at all times pay, when and as due (subject to any applicable grace or cure periods), its rental obligations under all leases under which it is a tenant, and shall otherwise comply, in all material respects, with all other terms of such leases and keep them in full force and effect and, at Agent's request will provide evidence of having done so; provided, that no Credit Party shall be in default of its obligations under this Section 4.14 if such Credit Party reserves amounts necessary to satisfy its obligations under any such lease in connection with any good faith dispute with the landlord of the premises subject to such lease and during the pendency of such dispute the Collateral, Agent's Lien therein and such Credit Party occupancy of the leased premises remain unimpaired. 4.15 Receivables. (a) Nature of Receivables. Each of the Receivables shall be a bona fide and valid account representing a bona fide indebtedness incurred by the Customer therein named, for a fixed sum as set forth in the invoice relating thereto (provided immaterial or unintentional invoice errors shall not be deemed to be a breach hereof) with respect to an absolute sale or lease and delivery of goods upon stated terms of the applicable Credit Party, or work, labor or services theretofore rendered by such Credit Party as of the date each Receivable is created. Same shall be due and owing in accordance with such Credit Party's standard terms of sale without dispute, setoff or counterclaim except as may be stated on the accounts receivable schedules delivered by Borrower to Agent. (b) Solvency of Customers. Each Customer, to the best of the Credit Parties' knowledge, as of the date each Receivable is created, is and will be solvent and able to pay all Receivables on which the Customer is obligated in full when due or with respect to such Customers of the Credit Parties who are not solvent, the applicable Credit Party has set up on its books and in its financial records bad debt reserves adequate to cover such Receivables. (c) Location of Credit Parties. Borrower's chief executive office is located at 3022 Franklin Avenue, Waco, Texas 76702-1025. Borrower maintains its records pertaining to the Receivables primarily at its chief executive office and all other records pertaining to the Receivables are maintained at one or more of the locations described on Schedule 4.15(c). Until written notice is given to Agent by any Credit Party of any other office at which any Credit Party keeps its records pertaining to Receivables, all such records shall be kept at such executive office and the locations described on Schedule 4.15(c). (d) Collection of Receivables. Until the Credit Parties' authority to do so is terminated by Agent (which notice Agent may give at any time following the occurrence and during the continuation of a Default or Event of Default), each Credit Party will, at its sole cost and expense, but on Agent's behalf and for Agent's account, collect as Agent's property and in trust for Agent all amounts received on Receivables, and shall not commingle such collections with such Credit Party's funds or use 32 the same except to pay Obligations. Each Credit Party shall deposit in the Blocked Account or, upon request by Agent, deliver to Agent, in original form and on the date of receipt thereof, all checks, drafts, notes, money orders, acceptances, cash and other evidences of Indebtedness. (e) Notification of Assignment of Receivables. At any time following the occurrence of an Event of Default or a Default, Agent shall have the right to send notice of the assignment of, and Agent's security interest in, the Receivables to any and all Customers or any third party holding or otherwise concerned with any of the Collateral. Thereafter, Agent shall have the sole right to collect the Receivables, take possession of the Collateral, or both. Agent's actual collection expenses, including, but not limited to, stationery and postage, telephone and telegraph, secretarial and clerical expenses and the salaries of any collection personnel used for collection, may be charged to Borrower's Account and added to the Obligations. (f) Power of Agent to Act on Credit Parties Behalf. Agent shall have the right to receive, endorse, assign and/or deliver in the name of Agent or any Credit Party any and all checks, drafts and other instruments for the payment of money relating to the Receivables, and each Credit Party waives notice of presentment, protest and non-payment of any instrument so endorsed. Each Credit Party hereby constitutes Agent or Agent's designee as such Credit Party's attorney with power (i) to endorse such Credit Party's name upon any notes, acceptances, checks, drafts, money orders or other evidences of payment or Collateral; (ii) to sign such Credit Party's name on any invoice or bill of lading relating to any of the Receivables, drafts against Customers, assignments and verifications of Receivables; (iii) to send verifications of Receivables to any Customer; (iv) to sign such Credit Party's name on all financing statements or any other documents or instruments deemed necessary or appropriate by Agent to preserve, protect, or perfect Agent's interest in the Collateral and to file same; (v) to demand payment of the Receivables; (vi) to enforce payment of the Receivables by legal proceedings or otherwise; (vii) to exercise all of such Credit Party's rights and remedies with respect to the collection of the Receivables and any other Collateral; (viii) to settle, adjust, compromise, extend or renew the Receivables; (ix) to settle, adjust or compromise any legal proceedings brought to collect Receivables; (x) to prepare, file and sign such Credit Party's name on a proof of claim in bankruptcy or similar document against any Customer; (xi) to prepare, file and sign such Credit Party's name on any notice of Lien, assignment or satisfaction of Lien or similar document in connection with the Receivables; and (xii) to do all other acts and things necessary to carry out this Agreement; provided that (A) Agent shall only take the actions referred to in clauses (ii), (v), (vi), (vii), (viii), (ix) and (xii) following the occurrence and during the continuance of an Event of Default, and (B) unless an Event of Default is continuing, Agent shall only take the actions referred to in clauses (x) and (xi) if the applicable Credit Party has not done so promptly following Agent's request. All acts of said attorney or designee are hereby ratified and approved, and said attorney or designee shall not be liable for any acts of omission or commission nor for any error of judgment or mistake of fact or of law, unless done maliciously or with gross (not mere) negligence; this power being coupled with an interest is irrevocable while any of the Obligations remain unpaid. Agent shall have the right at any time following the occurrence of an Event of Default, to change the address for delivery of mail addressed to any Credit Party to such address as Agent may designate and to receive, open and dispose of all mail addressed to such Credit Party. (g) No Liability. Neither Agent nor any Lender shall, under any circumstances or in any event whatsoever, have any liability for any error or omission or delay of any kind occurring in the settlement, collection or payment of any of the Receivables or any instrument received in payment thereof, or for any damage resulting therefrom. Following the occurrence of and during the continuance of an Event of Default or Default Agent may, without notice or consent from any Credit Party, sue upon or otherwise collect, extend the time of payment of, compromise or settle for cash, credit or upon any terms any of the Receivables or any other securities, instruments or insurance applicable thereto and/or release any obligor thereof. Agent is authorized and empowered to accept, following the occurrence and during the continuance of an Event of Default, the return of the goods represented by any of the Receivables, without notice to or consent by any Credit Party, all without discharging or in any way affecting any Credit Party's liability hereunder. 33 (h) Establishment of a Lockbox Account, Dominion Account. All proceeds of Collateral shall be deposited by each Credit Party into a lockbox account, dominion account or such other "blocked account" ("Blocked Accounts") as Agent may require pursuant to an arrangement with such bank as may be selected by such Credit Party and be acceptable to Agent. Each Credit Party shall issue to any such bank, an irrevocable letter of instruction directing said bank to transfer such funds so deposited to Agent, either to any account maintained by Agent at said bank or by wire transfer to appropriate account(s) of Agent. All funds deposited in such Blocked Accounts shall immediately become the property of Agent and each Credit Party shall obtain the agreement by such bank to waive any offset rights against the funds so deposited (other than offset rights in respect of ordinary fees and charges of maintaining such account). Neither Agent nor any Lender assumes any responsibility for such blocked account arrangement, including without limitation, any claim of accord and satisfaction or release with respect to deposits accepted by any bank thereunder. Alternatively, Agent may establish depository accounts ("Depository Accounts") in the name of Agent at a bank or banks for the deposit of such funds and the Credit Parties shall deposit all proceeds of Collateral or cause same to be deposited, in kind, in such Depository Accounts of Agent in lieu of depositing same to the Blocked Accounts. Notwithstanding the foregoing, so long as the Credit Parties have established their respective accounts with Agent at the Closing Date as contemplated by Section 8.1(v), the Credit Parties shall have a period of thirty (30) days following the Closing Date within which to enter into a lockbox agreement acceptable to Agent with respect to funds that may continue to be deposited into the Credit Parties' former accounts. (i) Adjustments. No Credit Party will, without Agent's consent, compromise or adjust any material amount of the Receivables (or extend the time for payment thereof) or accept any material returns of merchandise or grant any additional discounts, allowances or credits thereon except for those compromises, extensions, adjustments, returns, discounts, credits and allowances as have been heretofore customary in the business of such Credit Party. 4.16 Inventory. To the extent Inventory held for sale or lease has been produced by a Credit Party, it has been and will be produced by such Credit Party in accordance with the Federal Fair Labor Standards Act of 1938, as amended, and all rules, regulations and orders thereunder. 4.17 Maintenance of Equipment. The Equipment shall be maintained in good operating condition and repair (reasonable wear and tear excepted) and all necessary replacements of and repairs thereto shall be made so that the value and operating efficiency of the Equipment shall be maintained and preserved. No Credit Party shall use or operate the Equipment in violation of any law, statute, ordinance, code, rule or regulation. The Credit Parties shall have the right to sell Equipment to the extent set forth in Section 4.3 hereof. 4.18 Exculpation of Liability. Nothing herein contained shall be construed to constitute Agent or any Lender as any Credit Party's agent for any purpose whatsoever, nor shall Agent or any Lender be responsible or liable for any shortage, discrepancy, damage, loss or destruction of any part of the Collateral wherever the same may be located and regardless of the cause thereof. Neither Agent nor any Lender, whether by anything herein or in any assignment or otherwise, assume any of the Credit Parties' obligations under any contract or agreement assigned to Agent or such Lender, and neither Agent nor any Lender shall be responsible in any way for the performance by such Credit Party of any of the terms and conditions thereof. 4.19 Environmental Matters. (a) Each Credit Party shall ensure that the Real Property remains in compliance with all Environmental Laws and they shall not place or permit to be placed any Hazardous Substances on any Real Property except as permitted by applicable law or appropriate governmental authorities. (b) Each Credit Party shall establish and maintain a system to assure and monitor continued compliance in all material respects with all applicable Environmental Laws which system shall include periodic reviews of such compliance. 34 (c) Each Credit Party shall (i) employ in connection with the use of the Real Property appropriate technology necessary to maintain compliance in all material respects with any applicable Environmental Laws and (ii) dispose of any and all Hazardous Waste generated at the Real Property only at facilities and with carriers that maintain valid permits under RCRA and any other applicable Environmental Laws. Each Credit Party shall use its best efforts to obtain certificates of disposal, such as hazardous waste manifest receipts, from all treatment, transport, storage or disposal facilities or operators employed by such Credit Party in connection with the transport or disposal of any Hazardous Waste generated at the Real Property. (d) In the event that any Credit Party obtains, gives or receives notice of any Release or threat of Release of a reportable quantity of any Hazardous Substances at the Real Property (any such event being hereinafter referred to as a "Hazardous Discharge") or receives any notice of violation, request for information or notification that it is potentially responsible for investigation or cleanup of environmental conditions at the Real Property, demand letter or complaint, order, citation, or other written notice with regard to any Hazardous Discharge or violation of Environmental Laws affecting the Real Property or such Credit Party's interest therein (any of the foregoing is referred to herein as an "Environmental Complaint") from any Person, including any state agency responsible in whole or in part for environmental matters in the state in which the Real Property is located or the United States Environmental Protection Agency (any such person or entity hereinafter the "Authority"), then such Credit Party shall, within five (5) Business Days, give written notice of same to Agent detailing facts and circumstances of which such Credit Party is aware giving rise to the Hazardous Discharge or Environmental Complaint. Such information is to be provided to allow Agent to protect its security interest in the Collateral and is not intended to create nor shall it create any obligation upon Agent or any Lender with respect thereto. (e) Each Credit Party shall promptly forward to Agent copies of any request for information, notification of potential liability, demand letter relating to potential responsibility with respect to the investigation or cleanup of Hazardous Substances at any other site owned, operated or used by such Credit Party to dispose of Hazardous Substances and shall continue to forward copies of correspondence between such Credit Party and the Authority regarding such claims to Agent until the claim is settled. Each Credit Party shall promptly forward to Agent copies of all documents and reports concerning a Hazardous Discharge at the Real Property that such Credit Party is required to file under any Environmental Laws. Such information is to be provided solely to allow Agent to protect Agent's security interest in the Collateral. (f) Each Credit Party shall respond promptly to any Hazardous Discharge or Environmental Complaint and take all necessary action in order to safeguard the health of any Person and to avoid subjecting the Collateral or Real Property to any Lien. If a Credit Party shall fail to respond promptly to any Hazardous Discharge or Environmental Complaint or shall fail to comply with any of the requirements of any Environmental Laws, Agent on behalf of Lenders may, but without the obligation to do so, for the sole purpose of protecting Agent's interest in the Collateral: (A) give such notices or (B) enter onto the Real Property (or authorize third parties to enter onto the Real Property) and take such actions as Agent (or such third parties as directed by Agent) deem reasonably necessary or advisable, to clean up, remove, mitigate or otherwise deal with any such Hazardous Discharge or Environmental Complaint. All reasonable costs and expenses incurred by Agent and Lenders (or such third parties) in the exercise of any such rights, including any sums paid in connection with any judicial or administrative investigation or proceedings, fines and penalties, together with interest thereon from the date expended at the Default Rate for Domestic Rate Loans constituting Revolving Advances shall be paid upon demand by Borrower, and until paid shall be added to and become a part of the Obligations secured by the Liens created by the terms of this Agreement or any other agreement between Agent, any Lender and Borrower or any other Credit Party. (g) Promptly upon the written request of Agent from time to time, the Credit Parties shall provide Agent, at the Credit Parties' expense, with an environmental site assessment or environmental audit report prepared by an environmental engineering firm acceptable in the reasonable opinion of Agent, to assess with a reasonable degree of certainty the existence of a Hazardous Discharge 35 and the potential costs in connection with abatement, cleanup and removal of any Hazardous Substances found on, under, at or within the Real Property. Any report or investigation of such Hazardous Discharge proposed and acceptable to an appropriate Authority that is charged to oversee the clean-up of such Hazardous Discharge shall be acceptable to Agent. If such estimates, individually or in the aggregate, exceed $100,000, Agent shall have the right to require the applicable Credit Party to post a bond, letter of credit or other security reasonably satisfactory to Agent to secure payment of these costs and expenses. (h) The Credit Parties shall, jointly and severally, defend and indemnify Agent and Lenders and hold Agent, Lenders and their respective employees, agents, directors and officers harmless from and against all loss, liability, damage and expense, claims, costs, fines and penalties, including attorney's fees, suffered or incurred by Agent or Lenders under or on account of any Environmental Laws, including, without limitation, the assertion of any Lien thereunder, with respect to any Hazardous Discharge, the presence of any Hazardous Substances affecting the Real Property, whether or not the same originates or emerges from the Real Property or any contiguous real estate, including any loss of value of the Collateral as a result of the foregoing except to the extent such loss, liability, damage and expense is attributable to any Hazardous Discharge resulting from actions on the part of Agent or any Lender. The Credit Parties' obligations under this Section 4.19 shall arise upon the discovery of the presence of any Hazardous Substances at the Real Property, whether or not any federal, state, or local environmental agency has taken or threatened any action in connection with the presence of any Hazardous Substances. The Credit Parties' obligation and the indemnifications hereunder shall survive the termination of this Agreement. (i) For purposes of Section 4.19 and 5.7, all references to Real Property shall be deemed to include all of any Credit Party's right, title and interest in and to its owned and leased premises described on Schedule 4.19. 4.20 Financing Statements. As of the Closing Date, except as respects the financing statements filed by Agent and the financing statements described on Schedule 1.2, no financing statement covering any of the Collateral or any proceeds thereof is on file in any public office. Following the Closing Date, except as respects the financing statements filed by Agent, the financing statements described on Schedule 1.2 and Permitted Encumbrances, no financing statement covering any of the Collateral or any proceeds thereof is on file in any public office. V. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants as follows: 5.1 Authority. Each Credit Party has full corporate power, authority and legal right to enter into this Agreement and the Other Documents and to perform all its respective Obligations hereunder and thereunder. This Agreement and the Other Documents to which any Credit Party is a party constitute the legal, valid and binding obligation of such Credit Party, enforceable in accordance with their terms, except as such enforceability may be limited by any applicable bankruptcy, insolvency, moratorium, fraudulent conveyance, fraudulent transfer or similar laws affecting creditors' rights generally and by general principles of equity, whether considered in a proceeding at law or in equity. The execution, delivery and performance of this Agreement and of the Other Documents (a) are within each Credit Party's corporate powers, have been duly authorized, are not in contravention of law or the terms of each Credit Party's by-laws, certificate of incorporation or other applicable documents relating to such Credit Party's formation or to the conduct of such Credit Party's business or of any material agreement or undertaking to which such Credit Party is a party or by which such Credit Party is bound, and (b) will not conflict with nor result in any breach in any of the provisions of or constitute a default under or result in the creation of any Lien except Permitted Encumbrances upon any asset of any Credit Party under the provisions of any agreement, charter document, instrument, by-law, or other instrument to which any Credit Party is a party or by which it or its property may be bound. 5.2 Formation and Qualification. (a) Each Credit Party is duly incorporated and in good standing under the laws of the applicable state listed on Schedule 5.2(a) and is qualified to do business 36 and is in good standing in the states listed on Schedule 5.2(a) which constitute all states in which qualification and good standing are necessary for such Credit Party to conduct its business and own its property and where the failure to so qualify could reasonably be expected to have a Material Adverse Effect. Each Credit Party has delivered to Agent true and complete copies of its certificate of incorporation and by-laws and will promptly notify Agent of any amendment or changes thereto. (b) A true and complete list of all Subsidiaries of each Credit Party is set forth on Schedule 5.2(b). 5.3 Survival of Representations and Warranties. All representations and warranties of the Credit Parties contained in this Agreement and the Other Documents shall be true at the time of their execution of this Agreement and the Other Documents, and shall survive the execution, delivery and acceptance thereof by the parties thereto and the closing of the transactions described therein or related thereto. 5.4 Tax Returns. Each Credit Party's federal tax identification number is set forth on Schedule 5.4. Each Credit Party has filed all federal, state and local tax returns and other reports each is required by law to file and has paid all taxes, assessments, fees and other governmental charges that are due and payable. Federal, state and local income tax returns of each Credit Party have been examined and reported upon by the appropriate taxing authority or closed by applicable statute and satisfied for all fiscal years prior to and including the fiscal year ending June 30, 2001. The provision for taxes on the books of the Credit Parties is adequate for all years not closed by applicable statutes, and for its current fiscal year, and the Credit Party's have no knowledge of any deficiency or additional assessment in connection therewith not provided for on its books. 5.5 Financial Statements. (a) The pro forma consolidated and consolidating balance sheet of Holdings (the "Pro Forma Balance Sheet") furnished to Agent on the Closing Date reflects the consummation of the transactions contemplated under this Agreement (the "Transactions") and is a true and complete copy of such balance sheet, which presents fairly the consolidated financial condition of Holdings as of the Closing Date after giving effect to the Transactions, and has been prepared in accordance with GAAP, consistently applied. Such copy of the Pro Forma Balance Sheet has been certified as a true and complete copy by the President or Chief Financial Officer of Holdings. All financial statements referred to in this subsection (a), including the related schedules and notes thereto, have been prepared, in accordance with GAAP, except as may be disclosed in such financial statements. (b) The twelve-month cash flow projections of Holdings and each entity's projected balance sheets as of the Closing Date, copies of which are annexed hereto as Exhibit 5.5(b) (the "Projections") were prepared by the Chief Financial Officer of Holdings, as applicable, are based on underlying assumptions which provide a reasonable basis for the projections contained therein and reflect both Holdings' judgment based on present circumstances of the anticipated course of business of Holdings and its consolidated Subsidiaries for the projected period. The cash flow Projections together with the Pro Forma Balance Sheet, are referred to as the "Pro Forma Financial Statements". (c) The monthly internal and annual audited consolidated and consolidating balance sheets of Holdings and it Subsidiaries (which shall include Borrower and its Subsidiaries) and such other Persons described therein (including the accounts of all Subsidiaries for the respective periods during which a subsidiary relationship existed) as of June 30, 2001, and the related statements of income, changes in stockholder's equity, and changes in cash flow for the period ended on such date, monthly accounts receivable and accounts payable agings, and monthly inventory designations, all accompanied by reports thereon containing opinions without qualification by independent certified public accountants, copies of which have been delivered to Agent, have been prepared in accordance with GAAP, consistently applied (except for changes in application in which such accountants concur and present fairly the financial position of Holdings and its Subsidiaries (which shall include Borrower and its Subsidiaries) at such date and the results of their operations for such period. Since June 30, 2001 there 37 has been no change in the condition, financial or otherwise, of Holdings and its Subsidiaries (which shall include Borrower and its Subsidiaries), taken as a whole, as shown on the consolidated balance sheet as of such date and no change in the aggregate value of machinery, equipment and Real Property owned by Holdings or its Subsidiaries (which shall include Borrower and its Subsidiaries), except changes in the ordinary course of business, none of which individually or in the aggregate has been materially adverse. 5.6 Corporate Name. None of the Credit Parties has been known by any other corporate name in the past five years and does not sell Inventory under any other name except as set forth on Schedule 5.6, nor has any Credit Party been the surviving corporation of a merger or consolidation or acquired all or substantially all of the assets of any Person during the preceding five (5) years, except as set forth on Schedule 5.6. 5.7 O.S.H.A. and Environmental Compliance. Except as disclosed in Schedule 5.7: (a) Each Credit Party has duly complied in all material respects with, and its facilities, business, assets, property, leaseholds and Equipment are in compliance in all material respects with, the provisions of the Federal Occupational Safety and Health Act, RCRA and all other Environmental Laws; there have been no outstanding citations, notices or orders of non-compliance issued to any Credit Party or relating to its business, assets, property, leaseholds or Equipment under any such laws, rules or regulations. (b) Each Credit Party has been issued all material federal, state and local licenses, certificates or permits relating to all applicable Environmental Laws. (c) (i) There are no visible signs of releases, spills, discharges, leaks or disposal (each, a "Release", and collectively referred to as "Releases") of Hazardous Substances at, upon, under or within any Real Property or any premises leased by any Credit Party; (ii) to the best knowledge of the Credit Parties after due inquiry, there are no underground storage tanks or polychlorinated biphenyls on the Real Property or any premises leased by any Credit Party; (iii) to the best knowledge of the Credit Parties after due inquiry, neither the Real Property nor any premises leased by any Credit Party has ever been used as a treatment, storage or disposal facility of Hazardous Waste; and (iv) no Hazardous Substances are present on the Real Property or any premises leased by any Credit Party, excepting such quantities as are handled in accordance with all applicable manufacturer's instructions and governmental regulations and in proper storage containers and as are necessary for the operation of the commercial business of such Credit Party or of its tenants. 5.8 Solvency; No Litigation, Violation, Indebtedness or Default. (a) On the Closing Date after giving effect to the Transactions, (i) each Credit Party is solvent (net of its intercompany payables and treating as assets its rights under Section 14.6 hereof), able to pay its debts as they mature, has capital sufficient to carry on its business and all businesses in which it is about to engage, (ii) the fair present saleable value of its assets, calculated on a going concern basis, is in excess of the amount of its liabilities (net of its intercompany payables and treating as assets its rights under Section 14.6 hereof) and (iii) the fair saleable value of its assets (calculated on a going concern basis) will be in excess of the amount of its liabilities (net of its intercompany payables and treating as assets its rights under Section 14.6 hereof). (b) Except as disclosed in Schedule 5.8(b) or in the SEC Report, no Credit Party has (i) pending or threatened litigation, arbitration, actions or proceedings which involve the possibility of having a Material Adverse Effect, or (ii) liabilities or indebtedness for borrowed money other than the Obligations. (c) None of the Credit Parties is in violation of any applicable statute, regulation or ordinance in any respect which could reasonably be expected to have a Material Adverse Effect, nor is any of them in violation of any order of any court, governmental authority or arbitration board or tribunal. 38 (d) Neither Borrower nor any member of the Controlled Group maintains or contributes to any Plan other than those listed on Schedule 5.8(d) hereto. Except as set forth in Schedule 5.8(d), (i) no Plan has incurred any "accumulated funding deficiency," as defined in Section 302(a)(2) of ERISA and Section 412(a) of the Code, whether or not waived, and Borrower and each member of the Controlled Group has met all applicable minimum funding requirements under Section 302 of ERISA in respect of each Plan, (ii) each Plan which is intended to be a qualified plan under Section 401(a) of the Code as currently in effect has been determined by the Internal Revenue Service to be qualified under Section 401(a) of the Code and the trust related thereto is exempt from federal income tax under Section 501(a) of the Code, (iii) neither Borrower nor any member of the Controlled Group has incurred any liability to the PBGC other than for the payment of premiums, and there are no premium payments which have become due which are unpaid, (iv) no Plan has been terminated by the plan administrator thereof nor by the PBGC which could give rise to any material liability, and there is no occurrence which would cause the PBGC to institute proceedings under Title IV of ERISA to terminate any Plan, (v) at this time, the current value of the assets of each Plan exceeds the present value of the accrued benefits and other liabilities of such Plan and neither Borrower nor any member of the Controlled Group knows of any facts or circumstances which would materially change the value of such assets and accrued benefits and other liabilities, (vi) neither Borrower nor any member of the Controlled Group has breached any of the responsibilities, obligations or duties imposed on it by ERISA with respect to any Plan, which breach could give rise to any material liability, (vii) neither Borrower nor any member of a Controlled Group has incurred any material liability for any excise tax arising under Section 4972 or 4980B of the Code, and no fact exists which could give rise to any such liability, (viii) neither Borrower nor any member of the Controlled Group nor, to the best of any Credit Party's knowledge, any fiduciary of, nor any trustee to, any Plan, has engaged in a "prohibited transaction" described in Section 406 of the ERISA or Section 4975 of the Code nor taken any action which would constitute or result in a Termination Event with respect to any such Plan which is subject to ERISA which could give rise to any material liability, (ix) Borrower and each member of the Controlled Group has made all contributions due and payable with respect to each Plan, except to the extent that the failure to make any such contribution would not give rise to any material liability, (x) there exists no event described in Section 4043(b) of ERISA, for which the thirty (30) day notice period contained in 29 CFR ss.2615.3 has not been waived, (xi) neither Borrower nor any member of the Controlled Group has any fiduciary responsibility for investments with respect to any plan existing for the benefit of persons other than employees or former employees of Borrower and any member of the Controlled Group, and (xii) neither Borrower nor any member of the Controlled Group has withdrawn, completely or partially, from any Multiemployer Plan so as to incur liability under the Multiemployer Pension Plan Amendments Act of 1980. 5.9 Patents, Trademarks, Copyrights and Licenses. All patents, patent applications, trademarks, trademark applications, service marks, service mark applications, copyrights, copyright applications, design rights, tradenames, assumed names, trade secrets and licenses owned or utilized by any Credit Party are set forth on Schedule 5.9, are valid and have been duly registered or filed with all appropriate governmental authorities and constitute all of the intellectual property rights which are necessary for the operation of its business; there is no objection to or pending challenge to the validity of any such patent, trademark, copyright, design right, tradename, trade secret or license and no Credit Party is aware of any grounds for any challenge, except as set forth in Schedule 5.9 hereto. Each patent, patent application, patent license, trademark, trademark application, trademark license, service mark, service mark application, service mark license, design right, copyright, copyright application and copyright license owned or held by any Credit Party and all trade secrets used by any Credit Party consist of original material or property developed by a Credit Party or was lawfully acquired by the applicable Credit Party from the proper and lawful owner thereof. Each of such items has been maintained so as to preserve the value thereof from the date of creation or acquisition thereof. With respect to all software used by any Credit Party, such Credit Party is in possession of all source and object codes related to each piece of software or is the beneficiary of a source code escrow agreement, each such source code escrow agreement being listed on Schedule 5.9 hereto. 5.10 Licenses and Permits. Except as set forth in Schedule 5.10, each Credit Party (a) is in compliance with and (b) has procured and is now in possession of, all material licenses or permits required by any applicable federal, state, provincial or local law or regulation for the operation of its 39 business in each jurisdiction wherein it is now conducting or proposes to conduct business and where the failure to procure such licenses or permits could have a Material Adverse Effect. 5.11 Default of Indebtedness. None of the Credit Parties is in default in the payment of the principal of or interest on any Indebtedness or under any instrument or agreement under or subject to which any Indebtedness has been issued and no event has occurred under the provisions of any such instrument or agreement which with or without the lapse of time or the giving of notice, or both, constitutes or would constitute an event of default thereunder, other than trade payables which are outstanding beyond their terms in the ordinary course of the Credit Parties' businesses. 5.12 No Default. None of the Credit Parties is in default in the payment or performance of any of its contractual obligations, except defaults which could not reasonably be expected to result, individually or in the aggregate, in a Material Adverse Effect and no Default has occurred and shall, at the request of Agent, deliver a certificate of non-default. 5.13 No Burdensome Restrictions. None of the Credit Parties is party to any contract or agreement the performance of which could have a Material Adverse Effect. None of the Credit Parties has agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its property, whether now owned or hereafter acquired, to be subject to a Lien which is not a Permitted Encumbrance. 5.14 No Labor Disputes. None of the Credit Parties is involved in any labor dispute; there are no strikes or walkouts or union organization of any of their respective employees threatened or in existence and no labor contract is scheduled to expire during the Term other than as set forth on Schedule 5.14 hereto. 5.15 Margin Regulations. None of the Credit Parties is engaged, nor will it engage, principally or as one of its important activities, in the business of extending credit for the purpose of "purchasing" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulation U of the Board of Governors of the Federal Reserve System as now and from time to time hereafter in effect. No part of the proceeds of any Advance will be used for "purchasing" or "carrying" "margin stock" as defined in Regulation U of such Board of Governors. 5.16 Investment Company Act. None of the Credit Parties is an "investment company" registered or required to be registered under the Investment Company Act of 1940, as amended, nor is it controlled by such a company. 5.17 Disclosure. No representation or warranty made by any of the Credit Parties in this Agreement or in any financial statement, report, certificate or any other document furnished in connection herewith contains any untrue statement of a material fact or omits to state any material fact necessary to make the statements herein or therein not misleading in light of the circumstances in which such statements were made, it being understood that, except as set forth in Section 5.5 hereof, no representation or warranty is made with respect to the Projections or other prospective financial information. There is no fact known to any of the Credit Parties (other than information concerning general economic conditions known to the public generally) or which reasonably should be known to any of them which has not been disclosed to Agent in writing with respect to the transactions contemplated by this Agreement which could reasonably be expected to have a Material Adverse Effect. 5.18 Swaps. None of the Credit Parties is a party to, nor will it be a party to, any swap agreement whereby it has agreed or will agree to swap interest rates or currencies unless same provides that damages upon termination following an event of default thereunder are payable on an unlimited "two-way basis" without regard to fault on the part of either party. 5.19 Conflicting Agreements. No provision of any mortgage, indenture, contract, agreement, judgment, decree or order binding on any Credit Party or affecting the Collateral conflicts with, or requires 40 any Consent which has not already been obtained to, or would in any way prevent the execution, delivery or performance of, the terms of this Agreement or the Other Documents. 5.20 Application of Certain Laws and Regulations. Neither any Credit Party nor any Affiliate of any of them is subject to any statute, rule or regulation which regulates the incurrence of any Indebtedness, including without limitation, statutes or regulations relative to common or interstate carriers or to the sale of electricity, gas, steam, water, telephone, telegraph or other public utility services. 5.21 Business and Property of Borrower. Upon and after the Closing Date, none of the Credit Parties proposes to engage in any business other than the manufacturing and marketing of a broad range of brand-name consumer lawn and garden products, activities necessary to conduct the foregoing, and businesses substantially similar or substantially related to the foregoing. On the Closing Date, each Credit Party will own all the property and possess all of the rights and Consents necessary for the conduct of its business. 5.22 Section 20 Subsidiaries. None of the Credit Parties intends to use and shall not use any portion of the proceeds of the Advances, directly or indirectly, to purchase during the underwriting period, or for 30 days thereafter, Ineligible Securities being underwritten by a Section 20 Subsidiary. VI. AFFIRMATIVE COVENANTS. Until payment in full of the Obligations and termination of this Agreement: 6.1 Payment of Fees. Borrower shall pay to Agent on demand all usual and customary fees and expenses which Agent incurs in connection with (a) the forwarding of Advance proceeds and (b) the establishment and maintenance of any Blocked Accounts or Depository Accounts as provided for in Section 4.15(h). Agent may, without making demand, charge Borrower's Account for all such fees and expenses. 6.2 Conduct of Business and Maintenance of Existence and Assets. Each Credit Party shall (a) Conduct continuously and operate actively its business according to good business practices and maintain all of its properties useful or necessary in its business in good working order and condition (reasonable wear and tear excepted and except as may be disposed of in accordance with the terms of this Agreement), including, without limitation, all material licenses, patents, copyrights, design rights, tradenames, trade secrets and trademarks and take all actions necessary to enforce and protect the validity of any intellectual property right or other right included in the Collateral; (b) keep in full force and effect its existence and comply in all material respects with the laws and regulations governing the conduct of its business where the failure to do so could reasonably be expected to have a Material Adverse Effect; and (c) make all such reports and pay all such franchise and other taxes and license fees and do all such other acts and things as may be lawfully required to maintain its rights, licenses, leases, powers and franchises under the laws of the United States or any political subdivision thereof where the failure to do so could reasonably be expected to have a Material Adverse Effect. 6.3 Violations. Each Credit Party shall promptly notify Agent in writing of any violation of any law, statute, regulation or ordinance of any Governmental Body, or of any agency thereof, applicable to such Credit Party which could reasonably be expected to have a Material Adverse Effect. 6.4 Government Receivables. Take all steps necessary to protect Agent's interest in the Collateral under the Federal Assignment of Claims Act or other applicable state or local statutes or ordinances and deliver to Agent appropriately endorsed, any instrument or chattel paper connected with any Receivable arising out of contracts between any Credit Party and the United States, any state or any department, agency or instrumentality of any of them. 6.5 Net Worth. Borrower shall maintain a minimum Net Worth at the end of each fiscal quarter set forth below in an amount not less than the amount set forth opposite such fiscal quarter and 41 shall maintain such Net Worth at all times thereafter until the succeeding minimum Net Worth becomes applicable: Fiscal Quarter Ended Minimum Net Worth -------------------- ----------------- December 2001 $9,750,000 March 2002 $13,000,000 June 2002 $13,750,000 September 2002 $11,000,000 December 2002 $10,750,000 March 2003 $14,250,000 June 2003 $15,000,000 September 2003 $12,250,000 December 2003 $12,000,000 March 2004 $15,500,000 June 2004 $16,250,000 September 2004 $13,500,000 6.6 Fixed Charge Coverage Ratio. Borrower shall maintain a Fixed Charge Coverage Ratio at the end of each fiscal quarter set forth below (determined for the period of four (4) consecutive fiscal quarters then ended) of not less than the ratio set forth below opposite such fiscal quarter: Fiscal Quarter Ended Minimum Fixed Charge Coverage Ratio -------------------- ----------------------------------- March 2002 0.90 June 2002 1.0 September 2002 1.10 December 2002 1.10 March 2003 1.20 June 2003 1.20 September 2003 and each fiscal quarter thereafter 1.25; provided, that in determining the Fixed Charge Coverage Ratio, the following adjustments shall be made with respect to those portions of the applicable period of determination that precede the Closing Date: (a) principal amortization of indebtedness shall be deemed to be $33,333.33 per month; (b) taxes shall be deemed to be zero ($-0-) per month; and (c) Capital Expenditures shall be deemed to be $100,000 per month. 6.7 Execution of Supplemental Instruments. Each Credit Party shall promptly upon demand therefor, execute and deliver to Agent from time to time, such supplemental agreements, statements, assignments and transfers, or instructions or documents relating to the Collateral, and such other instruments as Agent may reasonably request, in order that the full intent of this Agreement may be carried into effect. 6.8 Payment of Indebtedness. Each Credit Party shall pay, discharge or otherwise satisfy at or before maturity (subject, where applicable, to specified grace periods and, in the case of the trade payables, to normal payment practices) all of its obligations and liabilities of whatever nature, except when the failure to do so could not reasonably be expected to have a Material Adverse Effect or when the amount or validity thereof is currently being contested in good faith by appropriate proceedings and Borrower shall have provided for such reserves as Agent may reasonably deem proper and necessary, subject at all times to any applicable subordination arrangement in favor of Lenders. 6.9 Standards of Financial Statements. Each Credit Party shall cause all financial statements referred to in Article IX as to which GAAP is applicable to be complete and correct in all material respects (subject, in the case of interim financial statements, to normal year-end audit 42 adjustments) and to be prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein (except as concurred in by such reporting accountants or officer, as the case may be, and disclosed therein). 6.10 Appraisals. Each Credit Party hereby authorizes Agent to conduct, at the Credit Parties' expense, a re-appraisal of the Inventory on or before March 31, 2002, and on an annual basis thereafter. VII. NEGATIVE COVENANTS. Until satisfaction in full of the Obligations and termination of this Agreement: 7.1 Merger, Consolidation, Acquisition and Sale of Assets. (a) No Credit Party shall enter into any merger, consolidation or other reorganization with or into any other Person or acquire all or a substantial portion of the assets or stock of any Person or permit any other Person to consolidate with or merge with it, provided that any Guarantor may merge with any other Guarantor or into Borrower. (b) No Credit Party shall sell, lease, transfer or otherwise dispose of any of its properties or assets, except in the ordinary course of its business and except as provided in Section 4.3; provided that the assets of Egarden, Inc. may be disposed of so long as Holdings and Borrower exercise commercially reasonable efforts to obtain the release of the Credit Parties from any further liability or contingent liability in respect of the obligations of Egarden, Inc. (including without limitation in respect of the equipment leases listed in Item 1 of Schedule 7.3), provided that (in the event USHG and the Company are unable to obtain such release in spite of such commercially reasonable efforts) the Credit Parties shall be permitted to pay up to $90,000 per annum in order to prevent a default under any Egarden Inc. obligations for which the Credit Parties remain contingently liable 7.2 Creation of Liens. No Credit Party shall create or suffer to exist any Lien or transfer upon or against any of its property or assets now owned or hereafter acquired, except Permitted Encumbrances. 7.3 Guarantees. No Credit Party shall become liable upon the obligations of any Person by assumption, endorsement or guaranty thereof or otherwise (other than to Lenders) except (a) as disclosed on Schedule 7.3 and any guaranty issued in connection with the extension, replacement, renewal or refinancing of the Indebtedness so guaranteed, to the extent not otherwise prohibited hereunder and to the extent that the amount of such Indebtedness is not increased or (b) the endorsement of checks in the ordinary course of business. 7.4 Investments. No Credit Party shall purchase or acquire obligations or stock of, or any other interest in, any Person, except (a) obligations issued or guaranteed by the United States of America or any agency thereof, (b) commercial paper with maturities of not more than one hundred eighty (180) days and a published rating of not less than A-1 or P-1 (or the equivalent rating), (c) certificates of time deposit and bankers' acceptances having maturities of not more than one hundred eighty (180) days and repurchase agreements backed by United States government securities of a commercial bank if (i) such bank has a combined capital and surplus of at least $500,000,000, or (ii) its debt obligations, or those of a holding company of which it is a Subsidiary, are rated not less than A (or the equivalent rating) by a nationally recognized investment rating agency, and (d) U.S. money market funds that invest solely in obligations issued or guaranteed by the United States of America or an agency thereof; provided that this Section shall not prohibit any Credit Party from owning the capital stock of its Subsidiaries that it owns as of the date hereof or from owning any additional capital stock of such existing Subsidiaries, to the extent that the investment made to acquire such additional capital stock is otherwise permitted by this Agreement. 43 7.5 Loans, etc. No Credit Party shall make advances, loans or extensions of credit to any Person, including without limitation, any other Credit Party, other than (a) extensions of credit made by any Credit Party to another Credit Party that is a Subsidiary of Borrower in the form of Intercompany Obligations evidenced by Intercompany Notes, (b) the loan to Richard Kassel having an outstanding balance of $560,000 at the Closing Date, provided that the amount thereof shall not be increased and no portions thereof that are repaid may be reborrowed (although the maturity thereof may be extended) and (c) other loans to officers, directors, employees and Affiliates in the ordinary course of business not to exceed the aggregate amount of $100,000 at any time outstanding. Without limiting the foregoing, no Credit Party shall be permitted to make any payments of any kind to Holdings except pursuant to Section 7.7. 7.6 Capital Expenditures. No Credit Party shall contract for, purchase or make any expenditure or commitments for Capital Expenditures in any fiscal year in an aggregate amount for all Credit Parties in excess of $1,500,000. 7.7 Dividends, etc. No Credit Party shall declare, pay or make any dividend or distribution on any shares of its capital stock (other than dividends or distributions payable in its stock, or split-ups or reclassifications of its stock) or apply any of its funds, property or assets to the purchase, redemption or other retirement of any common or preferred stock, or of any options to purchase or acquire any such shares of common or preferred stock of such Credit Party, except that so long as no notice of termination with regard to this Agreement is outstanding (except for a notice of termination given by Borrower provided that Borrower has given Agent at least 5 Business Days' prior written notice of the proposed payment), Borrower shall be permitted to make payments to the extent permitted by Section 7.18 with respect to Holdings' payments of interest on the Junior Subordinated Debentures. Notwithstanding the foregoing, any wholly-owned Subsidiary of Borrower shall be permitted to pay dividends and make distributions to Borrower. This Section 7.7 shall not prohibit payments to Holdings for the payment by Holdings of professional fees, taxes and other ordinary course of business operating expenses (including salaries and other employee compensation) incurred by Holdings solely in its capacity as parent corporation of Borrower, provided that the aggregate amounts of such payments to Holdings in any fiscal year shall not exceed the aggregate amount of the applicable expenses for such fiscal year (as set forth in Holdings' budget for such fiscal year as approved by Agent) by more than ten percent (10%). 7.8 Indebtedness. No Credit Party shall create, incur, assume or suffer to exist any Indebtedness (exclusive of trade debt) except in respect of (i) Indebtedness to Lenders; (ii) Indebtedness incurred for Capital Expenditures permitted under Section 7.6 hereof; provided, however, that the maximum aggregate amount outstanding at any time of such Indebtedness shall not exceed $1,000,000; (iii) Indebtedness consisting of Intercompany Obligations to the extent permitted under Section 7.5; and (iv) Indebtedness listed on Schedule 7.8 hereto and any renewal, extension, refinancing or replacement of such Indebtedness listed on Schedule 7.8, so long as the amount of such Indebtedness is not increased. 7.9 Nature of Business. No Credit Party shall change the nature of the business in which it is presently engaged to the extent that, after giving effect thereto, the representation set forth in Section 5.21 would no longer be true, nor except as specifically permitted hereby purchase or invest, directly or indirectly, in any assets or property other than in the ordinary course of business for assets or property which are useful in, necessary for and are to be used in its business as presently conducted. 7.10 Transactions with Affiliates. No Credit Party shall directly or indirectly, purchase, acquire or lease any property from, or sell, transfer or lease any property to, or otherwise deal with, any Affiliate, except (a) transactions in the ordinary course of business, on an arm's-length basis on terms no less favorable than terms which would have been obtainable from a Person other than an Affiliate and (b) transactions permitted by Sections 7.5 and 7.7 hereof. 7.11 Leases. No Credit Party shall enter as lessee into any lease arrangement for real or personal property (unless capitalized and permitted under Section 7.6 hereof) if after giving effect thereto, aggregate annual rental payments for all leased property of all Credit Parties would exceed the aggregate 44 annual rental payments of all Credit Parties for the fiscal year ended June 30, 2001 by more than $150,000. 7.12 Subsidiaries. (a) No Credit Party shall form any Subsidiary unless (i) such Subsidiary expressly joins in this Agreement as a Guarantor and becomes jointly and severally liable for the Obligations and (ii) Agent shall have received all documents, including legal opinions, it may reasonably require to establish compliance with each of the foregoing conditions. (b) No Credit Party shall enter into any partnership, joint venture or similar arrangement. 7.13 Fiscal Year and Accounting Changes. No Credit Party shall change its fiscal year from June 30, 2001 or make any significant change (i) in accounting treatment and reporting practices except as required by GAAP or (ii) in tax reporting treatment except as required by law. 7.14 Pledge of Credit. No Credit Party shall now or hereafter pledge Agent's or any Lender's credit on any purchases or for any purpose whatsoever or use any portion of any Advance in or for any business other than businesses that would not cause the representation set forth in Section 5.21 to be untrue. 7.15 Amendments. No Credit Party shall (a) amend, modify or waive any material term or material provision of its Articles of Incorporation or By-Laws unless required by law, (b) amend, modify or waive any term or provision of the Junior Subordinated Debentures or any document governing or related to them (including the Indenture identified in Section 7.18) or (c) amend, modify or waive any term or provision applicable to the Subordinated Notes except to the extent not otherwise prohibited by this Agreement or the Subordination Agreement. 7.16 Compliance with ERISA. No Credit Party shall (i) (x) maintain, or permit any member of the Controlled Group to maintain, or (y) become obligated to contribute, or permit any member of the Controlled Group to become obligated to contribute, to any Plan, other than those Plans disclosed on Schedule 5.8(d), (ii) engage, or permit any member of the Controlled Group to engage, in any non-exempt "prohibited transaction", as that term is defined in Section 406 of ERISA and Section 4975 of the Code, (iii) incur, or permit any member of the Controlled Group to incur, any "accumulated funding deficiency", as that term is defined in Section 302 of ERISA or Section 412 of the Code, (iv) terminate, or permit any member of the Controlled Group to terminate, any Plan where such event could result in any liability of such Credit Party or any member of its Controlled Group or the imposition of a lien on the property of such Credit Party or any member of its Controlled Group pursuant to Section 4068 of ERISA, (v) assume, or permit any member of its Controlled Group to assume, any obligation to contribute to any Multiemployer Plan not disclosed on Schedule 5.8(d), (vi) incur, or permit any member of its Controlled Group to incur, any withdrawal liability to any Multiemployer Plan; (vii) fail promptly to notify Agent of the occurrence of any Termination Event, (viii) fail to comply, or permit a member of its Controlled Group to fail to comply, with the requirements of ERISA or the Code or other applicable laws in respect of any Plan, (ix) fail to meet, or permit any member of its Controlled Group to fail to meet, all minimum funding requirements under ERISA or the Code or postpone or delay or allow any member of its Controlled Group to postpone or delay any funding requirement with respect of any Plan. 7.17 Prepayment of Indebtedness. No Credit Party shall, except as permitted pursuant to Section 7.18 hereof, at any time, directly or indirectly, prepay any Indebtedness (other than to Lenders and trade payables in the ordinary course of business), or repurchase, redeem, retire or otherwise acquire any of its Indebtedness. 7.18 Subordinated Obligations. No Credit Party shall at any time, directly or indirectly, pay, prepay, repurchase, redeem, retire or otherwise acquire, or make any payment on account of any 45 principal of, interest on or premium payable in connection with the repayment or redemption of the Subordinated Note, except as expressly permitted in the Subordination Agreement by the terms of the Subordinated Note as in effect on the Closing Date. Borrower shall be permitted to make distributions to Holdings in order to permit Holdings to make scheduled payments of interest on the Junior Subordinated Debentures provided that (a) at the time of any such payment, Holdings shall have achieved the Required EBITDA, (b) Borrower shall have Undrawn Availability on the date of, and immediately after giving effect to such distributions by Borrower and payments of interest by Holdings of $500,000 for any payments made during March and April, and $1,000,000 for any payments made during the remaining months of any given calendar year, and (c) there shall not be in effect any notice from Agent to Borrower stating that Borrower is prohibited from making such payment, which notice Agent shall be entitled to give if any Default or Event of Default shall have occurred and be continuing, provided that, solely in the case of a Default or Event of Default arising from a violation of a provision of Article IX hereof, such violation shall be continuing for a period thirty (30) days or more. To the extent that Borrower is permitted to make a distribution to Holdings pursuant to the preceding sentence, Holdings shall be permitted to make the corresponding interest payment. In furtherance of the foregoing restrictions on payments in respect of the Junior Subordinated Debentures, Holdings hereby appoints Agent as its attorney, with full power to execute and deliver, in the name and stead of Holdings, notices invoking deferral of payments in respect of the Junior Subordinated Debentures as contemplated by Section 3.11 of the indenture governing the Junior Subordinated Debentures (the "Indenture"), for such periods as Agent may determine (including any extensions thereof in accordance with the Indenture), provided that Agent shall not exercise such power until the first to occur of (a) an Event of Default involving non-payment of the Obligations, (b) an acceleration of the maturity of the Obligations, and (c) the sixth (6th) Business Day prior to the date on which an Event of Default would exist under the Indenture if such deferral were not invoked. Without limiting Agent's right pursuant to the preceding sentence, Agent agrees to provide Holdings with a copy of any notice sent by Agent invoking a deferral pursuant to the Indenture. Holdings further covenants to deliver to Agent, immediately upon Holdings' receipt thereof, a copy of any notice received by Holdings pursuant to Section 13.4 of the Indenture instituting a payment block with respect to the Junior Subordinated Debentures. VIII. CONDITIONS PRECEDENT. 8.1 Conditions to Initial Advances. The agreement of Lenders to make the initial Advances requested to be made on the Closing Date is subject to the satisfaction, or waiver by Agent, immediately prior to or concurrently with the making of such Advances, of the following conditions precedent: (a) Note. Agent shall have received the Note duly executed and delivered by an authorized officer of Borrower; (b) Filings, Registrations and Recordings. Each document (including, without limitation, any Uniform Commercial Code financing statement) required by this Agreement, any related agreement or under law or reasonably requested by the Agent to be filed, registered or recorded in order to create, in favor of Agent, a perfected security interest in or lien upon the Collateral shall have been properly filed, registered or recorded in each jurisdiction in which the filing, registration or recordation thereof is so required or requested; (c) Corporate Proceedings of Borrower. Agent shall have received a copy of the resolutions in form and substance reasonably satisfactory to Agent, of the Board of Directors of Borrower authorizing (i) the execution, delivery and performance of this Agreement, the Note and any related agreements (collectively the "Documents") and (ii) the granting by Borrower of the security interests in and liens upon the Collateral in each case certified by the Secretary or an Assistant Secretary of Borrower as of the Closing Date; and, such certificate shall state that the resolutions thereby certified have not been amended, modified, revoked or rescinded as of the date of such certificate; (d) Incumbency Certificates of Borrower. Agent shall have received a certificate of the Secretary or an Assistant Secretary of Borrower, dated the Closing Date, as to the incumbency and signature of the officers of Borrower executing this Agreement, the Other Documents, any certificate or 46 other documents to be delivered by it pursuant hereto, together with evidence of the incumbency of such Secretary or Assistant Secretary; (e) Corporate Proceedings of each Guarantor. Agent shall have received a copy of the resolutions in form and substance reasonably satisfactory to Agent, of the Board of Directors of Guarantor authorizing the execution, delivery and performance of this Agreement and the Other Documents to which it is a party, certified by the Secretary or an Assistant Secretary of each Guarantor as of the Closing Date; and, such certificate shall state that the resolutions thereby certified have not been amended, modified, revoked or rescinded as of the date of such certificate; (f) Incumbency Certificates of each Guarantor. Agent shall have received a certificate of the Secretary or an Assistant Secretary of each Guarantor, dated the Closing Date, as to the incumbency and signature of the officers of each Guarantor executing this Agreement, any certificate or other documents to be delivered by it pursuant hereto, together with evidence of the incumbency of such Secretary or Assistant Secretary; (g) Certificates. Agent shall have received a copy of the Articles or Certificate of Incorporation of Borrower and each Guarantor, and all amendments thereto, certified by the Secretary of State or other appropriate official of its jurisdiction of incorporation together with copies of the By-Laws of Borrower and each Guarantor, certified as accurate and complete by the Secretary of Borrower and such Guarantor; (h) Good Standing Certificates. Agent shall have received good standing certificates for Borrower and each Guarantor dated as of a recent date, issued by the Secretary of State or other appropriate official of Borrower's and each Guarantor's jurisdiction of incorporation and each jurisdiction where the conduct of Borrower's and each Guarantor's business activities or the ownership of its properties necessitates qualification; (i) Legal Opinion. Agent shall have received the executed legal opinion of Blank Rome Comisky & McCauley LLP, counsel to the Credit Parties, in form and substance satisfactory to Agent which shall cover such matters incident to the transactions contemplated by this Agreement, the Note, the Other Documents and related agreements as Agent may reasonably require and each Credit Party hereby authorizes and directs such counsel to deliver such opinions to Agent and Lenders; (j) No Litigation. (i) No litigation, investigation or proceeding before or by any arbitrator or Governmental Body shall be continuing or threatened against any of the Credit Parties or any of their respective officers or directors (A) in connection with this Agreement, the Other Documents or any of the transactions contemplated thereby and which, in the reasonable opinion of Agent, is deemed material or (B) which could, in the reasonable opinion of Agent, have a Material Adverse Effect; and (ii) no injunction, writ, restraining order or other order of any nature materially adverse to any Credit Party or the conduct of its business or inconsistent with the due consummation of the Transactions shall have been issued by any Governmental Body; (k) Financial Condition Certificate. Agent shall have received an executed Financial Condition Certificate in the form of Exhibit 8.1(k); (l) Collateral Examination. Agent shall have completed Collateral examinations including, but not limited to, field examinations, and received appraisals, the results of which shall be satisfactory in form and substance to Lenders, of the Receivables, Inventory, General Intangibles, Leasehold Interests and Equipment of the Credit Parties and all books and records in connection therewith; (m) Financial Statements. Agent shall have received a copy of Holdings' audited consolidated and consolidating financial statements for the fiscal year ended June 30, 2001, and a copy of Holdings' most recent interim consolidated financial statements; 47 (n) Fees. Agent shall have received all fees payable to Agent and Lenders on or prior to the Closing Date hereunder, including, without limitation, pursuant to Article III hereof; (o) Pro Forma Financial Statements. Agent shall have received a copy of the Pro Forma Financial Statements which shall be satisfactory in all respects to Lenders; (p) EBITDA Projections. Agent shall have received, for purposes of Section 7.18, projections of Holdings' EBITDA on a rolling 12-month basis as at the end of each calendar month commencing December 2001 through December 2004; (q) Subordination Agreement. The Subordination Agreement shall have been executed and delivered by all parties thereto and shall be satisfactory in form and substance to Agent in its sole discretion; (r) Subordinated Notes. Agent shall have received final executed copies of the Subordinated Note Documentation which shall contain such terms and provisions including, without limitation, subordination terms, satisfactory to Agent, and Borrower shall have received proceeds from the issuance and sale of the Subordinated Notes of not less than $6,000,000, net of expenses; (s) Junior Subordinated Debentures. Agent shall be satisfied that the terms of the Junior Subordinated Debentures provide that payments of interest on the Junior Subordinated Debentures may be deferred for up to sixty (60) months, without giving rise to a default thereunder; (t) Insurance. Agent shall have received evidence to its satisfaction that the Credit Parties have in force insurance complying with the requirements of Section 4.11, reflecting Agent's status as loss payee or additional insured, as applicable; (u) Payment Instructions. Agent shall have received written instructions from Borrower directing the application of proceeds of the initial Advances made pursuant to this Agreement; (v) Blocked Accounts. Agent shall have received duly executed agreements establishing the Blocked Accounts or Depository Accounts with financial institutions acceptable to Agent for the collection or servicing of the Receivables and proceeds of the Collateral, subject to Section 4.15(h); (w) Consents. Agent shall have received any and all Consents necessary to permit the effectuation of the transactions contemplated by this Agreement and the Other Documents; and, Agent shall have received such Consents and waivers of such third parties as might assert claims with respect to the Collateral, as Agent and its counsel shall deem necessary; (x) No Adverse Material Effect. (i) since June 30, 2001, there shall not have occurred any event, condition or state of facts which could reasonably be expected to have a Material Adverse Effect and (ii) no representations made or information supplied to Agent or Lenders shall have been proven to be inaccurate or misleading in any material respect; (y) Leasehold Agreements. Agent shall have received landlord or warehouseman agreements satisfactory to Agent with respect to all premises leased by any Credit Party at which Inventory and books and records are located; (z) Other Documents. Agent shall have received the executed Other Documents, all in form and substance satisfactory to Agent; (aa) Contract Review. Agent shall have reviewed all material contracts of Borrower including, without limitation, the Trust Preferred Securities, leases, union contracts, labor contracts, 48 vendor supply contracts, license agreements and distributorship agreements and such contracts and agreements shall be satisfactory in all respects to Agent; (bb) Closing Certificate. Agent shall have received a closing certificate signed by the Chief Financial Officer of each Credit Party dated as of the date hereof, stating that (i) all representations and warranties set forth in this Agreement and the Other Documents are true and correct on and as of such date, (ii) each Credit Party is on such date in compliance with all the terms and provisions set forth in this Agreement and the Other Documents and (iii) no Default or Event of Default shall then have occurred and be continuing; (cc) Formula Amount. Agent shall have received evidence from Borrower that the aggregate amount of Eligible Receivables, Seasonal Receivables and Eligible Inventory is sufficient in value and amount to support Advances in the amount requested by Borrower on the Closing Date; (dd) Undrawn Availability. After giving effect to the initial Advances hereunder, Borrower shall have Undrawn Availability of at least $2,999,983; and (ee) Other. All corporate and other proceedings, and all documents, instruments and other legal matters in connection with the Transactions shall be satisfactory in form and substance to Agent and its counsel. 8.2 Conditions to Each Advance. The agreement of Lenders to make any Advance requested to be made on any date (including, without limitation, the initial Advance), is subject to the satisfaction of the following conditions precedent as of the date such Advance is made: (a) Representations and Warranties. Each of the representations and warranties made by the Credit Parties in or pursuant to this Agreement and any related agreements to which it is a party, and each of the representations and warranties contained in any certificate, document or financial or other statement furnished at any time under or in connection with this Agreement or any related agreement shall be true and correct in all material respects on and as of such date as if made on and as of such date, except to the extent that such representations and warranties related solely to an earlier date, in which case such representations and warranties shall have been true and correct in all material respects as of such earlier date; (b) No Default. No Event of Default or Default shall have occurred and be continuing on such date, or would exist after giving effect to the Advances requested to be made, on such date; provided, however that Agent, in its sole discretion, may continue to make Advances notwithstanding the existence of an Event of Default or Default and that any Advances so made shall not be deemed a waiver of any such Event of Default or Default; and (c) Maximum Advances. In the case of any Advances requested to be made, after giving effect thereto, the aggregate Advances shall not exceed the maximum amount of Advances permitted under Section 2.5 hereof. Each request for an Advance by Borrower hereunder shall constitute a representation and warranty by Borrower as of the date of such Advance that the conditions contained in this subsection shall have been satisfied. IX. INFORMATION AS TO CREDIT PARTIES. Until satisfaction in full of the Obligations and the termination of this Agreement: 9.1 Disclosure of Material Matters. Each Credit Party shall, promptly upon learning thereof, report to Agent all matters materially affecting the value, enforceability or collectibility of any portion of the Collateral including, without limitation, such Credit Party's reclamation or repossession of, or the return to 49 such Credit Party of, a material amount of goods or claims or disputes asserted by any Customer or other obligor. 9.2 Schedules. Borrower shall deliver to Agent on or before the fifteenth (15th) day of each month as and for the prior month (a) accounts receivable agings inclusive of reconciliations to the general ledger, (b) accounts payable schedules inclusive of reconciliations to the general ledger, (c) Inventory reports and (d) a borrowing base certificate in form and substance reasonably satisfactory to Agent (which shall be calculated as of the last day of the prior month and which shall not be binding upon Agent or restrictive of Agent's rights under this Agreement). In addition, Borrower will deliver to Agent at such intervals as Agent may reasonably require: (i) confirmatory assignment schedules, (ii) copies of Customer's invoices, (iii) evidence of shipment or delivery, and (iv) such further schedules, documents and/or information regarding the Collateral as Agent may reasonably require including, without limitation, trial balances and test verifications. Agent shall have the right to confirm and verify all Receivables by any manner and through any medium it considers advisable and do whatever it may deem reasonably necessary to protect its interests hereunder. The items to be provided under this Section are to be in form satisfactory to Agent and executed by Borrower and delivered to Agent from time to time solely for Agent's convenience in maintaining records of the Collateral, and Borrower's failure to deliver any of such items to Agent shall not affect, terminate, modify or otherwise limit Agent's Lien with respect to the Collateral. 9.3 Environmental Reports. Borrower shall furnish Agent, concurrently with the delivery of the financial statements referred to in Sections 9.7 and 9.8, with a certificate signed by the President of Borrower stating, to the best of his knowledge, that each Credit Party is in compliance in all material respects with all Environmental Laws and all federal, state and local laws relating to occupational safety and health. To the extent that any Credit Party is not in compliance with the foregoing laws, the certificate shall set forth with specificity all areas of non-compliance and the proposed action such Credit Party will implement in order to achieve full compliance. 9.4 Litigation. Each Credit Party shall promptly notify Agent in writing of any litigation, suit or administrative proceeding affecting such Credit Party, whether or not the claim is covered by insurance, and of any suit or administrative proceeding, which in any such case could reasonably be expected to have a Material Adverse Effect. 9.5 Material Occurrences. Each Credit Party shall, promptly notify Agent in writing upon the occurrence of (a) any Event of Default or Default; (b) any event, development or circumstance whereby any financial statements or other reports furnished to Agent fail in any material respect to present fairly, in accordance with GAAP consistently applied, the financial condition or operating results of such Credit Party as of the date of such statements; (c) any accumulated retirement plan funding deficiency which, if such deficiency continued for two plan years and was not corrected as provided in Section 4971 of the Code, could subject such Credit Party to a tax imposed by Section 4971 of the Code; (d) each and every default by such Credit Party which might result in the acceleration of the maturity of any Indebtedness in excess of $100,000, including the names and addresses of the holders of such Indebtedness with respect to which there is a default existing or with respect to which the maturity has been or could be accelerated, and the amount of such Indebtedness; and (e) any other development in the business or affairs of such Credit Party which could reasonably be expected to have a Material Adverse Effect; in each case describing the nature thereof and the action such Credit Party proposes to take with respect thereto. 9.6 Government Receivables. Each Credit Party shall notify Agent immediately if any of its Receivables arise out of contracts between such Credit Party and the United States, any state, or any department, agency or instrumentality of any of them. 9.7 Annual Financial Statements. Holdings shall furnish Agent as soon as filed with the Securities and Exchange Commission and in any event within one hundred five (105) days after the end of each fiscal year of Holdings, financial statements of Holdings including, but not limited to, statements of income and stockholders' equity and cash flow from the beginning of the current fiscal year to the end of such fiscal year and the balance sheet as at the end of such fiscal year, all prepared in accordance with 50 GAAP applied on a basis consistent with prior practices, and in reasonable detail and reported upon without qualification by an independent certified public accounting firm selected by Holdings and reasonably satisfactory to Agent (the "Accountants"). The report of the Accountants shall be accompanied by a statement of the Accountants certifying that (i) they have caused this Agreement to be reviewed, (ii) in making the examination upon which such report was based either no information came to their attention which to their knowledge constituted an Event of Default or a Default under this Agreement or any related agreement or, if such information came to their attention, specifying any such Default or Event of Default, its nature, when it occurred and whether it is continuing, and such report shall contain or have appended thereto calculations which set forth the Credit Parties' compliance with the requirements or restrictions imposed by Sections 6.5, 6.6, 7.6 and 7.11 hereof. In addition, the reports shall be accompanied by a certificate of Borrower's Chief Financial Officer which shall state that, based on an examination sufficient to permit him to make an informed statement, no Default or Event of Default exists, or, if such is not the case, specifying such Default or Event of Default, its nature, when it occurred, whether it is continuing and the steps being taken by Borrower or the applicable Credit Party with respect to such event, and such certificate shall have appended thereto calculations which set forth the Credit Parties' compliance with the requirements or restrictions imposed by Sections 6.5, 6.6, 7.6 and 7.11 hereof. 9.8 Quarterly Financial Statements. Holdings shall furnish Agent as soon as filed with the Securities and Exchange Commission and in any event within fifty (50) days after the end of each fiscal quarter, an unaudited consolidated balance sheet of Holdings and unaudited statements of income and stockholders' equity and cash flow of Holdings reflecting results of operations from the beginning of the fiscal year to the end of such quarter and for such quarter, prepared on a basis consistent with prior practices and complete and correct in all material respects, subject to normal and recurring year end adjustments that individually and in the aggregate are not material to the Credit Parties' business. The reports shall be accompanied by a certificate signed by the Chief Financial Officer of Holdings, which shall state that, based on an examination sufficient to permit him to make an informed statement, no Default or Event of Default exists, or, if such is not the case, specifying such Default or Event of Default, its nature, when it occurred, whether it is continuing and the steps being taken by Borrower or the applicable Credit Party with respect to such default and, such certificate shall have appended thereto calculations which set forth the Credit Parties' compliance with the requirements or restrictions imposed by Sections 6.5, 6.6, 7.6 and 7.11 hereof. 9.9 Monthly Financial Statements. Holdings shall furnish Agent within thirty (30) days after the end of each month, an unaudited consolidated balance sheet of Holdings and unaudited statements of income and stockholders' equity and cash flow of Holdings reflecting results of operations from the beginning of the fiscal year to the end of such month and for such month, prepared on a basis consistent with prior practices and complete and correct in all material respects, subject to normal and recurring year end adjustments that individually and in the aggregate are not material to the Credit Parties' business. The reports shall be accompanied by a certificate of Holdings' Chief Financial Officer, which shall state that, based on an examination sufficient to permit him to make an informed statement, no Default or Event of Default exists, or, if such is not the case, specifying such Default or Event of Default, its nature, when it occurred, whether it is continuing and the steps being taken by Borrower or the applicable Credit Party with respect to such event and, such certificate shall have appended thereto calculations which set forth the Credit Parties' compliance with the requirements or restrictions imposed by Sections 6.5, 6.6, 7.6 and 7.11 hereof. 9.10 Other Reports. Each Credit Party shall furnish Agent as soon as available, but in any event within ten (10) days after the issuance thereof, with copies of such financial statements, reports and returns as such Credit Party shall send to its stockholders. 9.11 Additional Information. Each Credit Party shall furnish Agent with such additional information as Agent shall reasonably request in order to enable Agent to determine whether the terms, covenants, provisions and conditions of this Agreement and the Note have been complied with by the Credit Parties including, without limitation and without the necessity of any request by Agent, (a) copies of all environmental audits and reviews, (b) at least thirty (30) days prior thereto, notice of the any Credit 51 Party's opening of any new office or place of business or closing of any existing office or place of business, and (c) promptly upon such Credit Party's learning thereof, notice of any labor dispute to which a Credit Party may become a party, any strikes or walkouts relating to any of its plants or other facilities, and the expiration of any labor contract to which a Credit Party is a party or by which a Credit Party is bound. 9.12 Projected Operating Budget. Borrower shall furnish Agent, no later than thirty (30) days prior to the beginning of Borrower's fiscal years commencing with fiscal year 2001, a month by month projected operating budget and cash flow of Borrower for such fiscal year (including an income statement for each month and a balance sheet as at the end of the last month in each fiscal quarter), such projections to be accompanied by a certificate signed by the President or Chief Financial Officer of Borrower to the effect that such projections have been prepared on the basis of sound financial planning practice consistent with past budgets and financial statements and that such officer has no reason to question the reasonableness of any material assumptions on which such projections were prepared. 9.13 Variances From Operating Budget. Borrower shall furnish Agent, concurrently with the delivery of the financial statements referred to in Section 9.7 and each monthly report, a written report summarizing all material variances from budgets submitted by Borrower pursuant to Section 9.12 and a discussion and analysis by management with respect to such variances. 9.14 Notice of Suits, Adverse Events. Each Credit Party shall furnish Agent with prompt notice of (i) any lapse or other termination of any Consent issued by any Governmental Body or any other Person that is material to the operation of such Credit Party's business, (ii) any refusal by any Governmental Body or any other Person to renew or extend any such Consent; and (iii) copies of any periodic or special reports filed by such Credit Party with any Governmental Body or Person, if such reports indicate any material change in the business, operations, affairs or condition of such Credit Party, or if copies thereof are requested by Lender, and (iv) copies of any material notices and other communications from any Governmental Body or Person which specifically relate to such Credit Party. 9.15 ERISA Notices and Requests. Each Credit Party shall furnish Agent with immediate written notice in the event that (i) such Credit Party or any member of its Controlled Group knows or has reason to know that a Termination Event has occurred, together with a written statement describing such Termination Event and the action, if any, which such Credit Party or any member of its Controlled Group has taken, is taking, or proposes to take with respect thereto and, when known, any action taken or threatened by the Internal Revenue Service, Department of Labor or PBGC with respect thereto, (ii) such Credit Party or any member of its Controlled Group knows or has reason to know that a prohibited transaction (as defined in Sections 406 of ERISA and 4975 of the Code) has occurred together with a written statement describing such transaction and the action which such Credit Party or any member of its Controlled Group has taken, is taking or proposes to take with respect thereto, (iii) a funding waiver request has been filed with respect to any Plan together with all communications received by such Credit Party or any member of its Controlled Group with respect to such request, (iv) any increase in the benefits of any existing Plan or the establishment of any new Plan or the commencement of contributions to any Plan to which such Credit Party or any member of its the Controlled Group was not previously contributing shall occur, (v) such Credit Party or any member of its Controlled Group shall receive from the PBGC a notice of intention to terminate a Plan or to have a trustee appointed to administer a Plan, together with copies of each such notice, (vi) Borrower or any member of the Controlled Group shall receive any favorable or unfavorable determination letter from the Internal Revenue Service regarding the qualification of a Plan under Section 401(a) of the Code, together with copies of each such letter; (vii) such Credit Party or any member of its Controlled Group shall receive a notice regarding the imposition of withdrawal liability, together with copies of each such notice; (viii) such Credit Party or any member of its Controlled Group shall fail to make a required installment or any other required payment under Section 412 of the Code on or before the due date for such installment or payment; (ix) Borrower or any member of the Controlled Group knows that (a) a Multiemployer Plan has been terminated, (b) the administrator or plan sponsor of a Multiemployer Plan intends to terminate a Multiemployer Plan, or (c) the PBGC has instituted or will institute proceedings under Section 4042 of ERISA to terminate a Multiemployer Plan. 52 9.16 Additional Documents. Each Credit Party shall execute and deliver to Agent, upon request, such documents and agreements as Agent may, from time to time, reasonably request to carry out the purposes, terms or conditions of this Agreement. X. EVENTS OF DEFAULT. The occurrence of any one or more of the following events shall constitute an "Event of Default": 10.1 failure by Borrower (a) to pay any principal on the Obligations when due, whether at maturity or by reason of acceleration pursuant to the terms of this Agreement or any Other Document or by notice of intention to prepay, or by required prepayment or failure to pay any other liabilities (except liabilities referred to in clause (b) below), including, but not limited to, any failure to comply with the limitations on outstanding Advances hereunder, when due, or (b) to make any payment of interest on the Obligations or any other payment, fee or charge provided for herein, which failure, in the case of this clause (b), continues unremedied for more than three (3) calendar days; 10.2 any representation or warranty made or deemed made by any Credit Party in this Agreement or any related agreement or in any certificate, document or financial or other statement furnished at any time in connection herewith or therewith shall prove to have been misleading in any material respect on the date when made or deemed to have been made; 10.3 failure by any Credit Party to (i) furnish financial information when due or when requested, or (ii) permit the inspection of its books or records in accordance with Section 4.10; 10.4 issuance of a notice of Lien, levy, assessment, injunction or attachment against a material portion of any Credit Party's property; 10.5 except as otherwise provided for in this Article X, failure or neglect of any Credit Party to perform, keep or observe any term, provision, condition, covenant contained in (a) Article VII or any of Sections 4.3, 4.11, 4.15(h), 6.5 and 6.6 hereof or any undertaking set forth on any Schedule hereto or (b) any other provision of this Agreement or any other agreement or arrangement, now or hereafter entered into between any Credit Party and Agent or any Lender, provided, solely in the case of this clause (b), that if such failure or neglect is by its nature susceptible of cure, the Credit Parties shall have a period of thirty (30) days from the occurrence of such failure or neglect within which to cure same before such failure or neglect becomes an Event of Default; 10.6 any judgment or judgments are rendered or judgment liens filed against any Credit Party for an aggregate amount in excess of $250,000 which within thirty (30) days of such rendering or filing is not either satisfied, stayed, bonded or discharged of record; 10.7 any Credit Party shall (i) apply for, consent to or suffer the appointment of, or the taking of possession by, a receiver, custodian, trustee, liquidator or similar fiduciary of itself or of all or a substantial part of its property, (ii) make a general assignment for the benefit of creditors, (iii) commence a voluntary case under any state or federal bankruptcy laws (as now or hereafter in effect), (iv) be adjudicated a bankrupt or insolvent, (v) file a petition seeking to take advantage of any other law providing for the relief of debtors, (vi) acquiesce to, or fail to have dismissed, within sixty (60) days, any petition filed against it in any involuntary case under such bankruptcy laws, or (vii) take any action for the purpose of effecting any of the foregoing; 10.8 any Credit Party shall admit in writing its inability, or be generally unable, to pay its debts as they become due or cease operations of its present business; 10.9 there shall exist or occur any event or events or condition or conditions not otherwise referred to in this Article X (which may include, without limitation, a default of the obligations of any Credit Party under any other agreement to which it is a party) which have, individually or in the aggregate, a 53 material adverse effect on (a) the condition, operations, assets or business of the Credit Parties taken as a whole or of Borrower, (b) Borrower's ability to pay the Obligations in accordance with the terms thereof, (c) the value of the Collateral taken as a whole, or Agent's Liens on the Collateral or the priority of any such Lien or (d) the practical realization of the benefits of Agent's and each Lender's rights and remedies under this Agreement and the Other Documents; 10.10 any Lien created hereunder or provided for hereby or under any related agreement for any reason ceases to be or is not a valid and perfected Lien having a first priority interest; 10.11 an event of default has occurred under the Subordination Agreement or pursuant to the terms of the Subordinated Notes which default shall not have been cured or waived within any applicable grace or cure period; 10.12 an event of default shall occur with respect to any other Indebtedness of a Credit Party (including, without limitation, the Subordinated Notes and the Junior Subordinated Debentures but excluding trade debt unless evidenced by a note or similar instrument) and such event of default shall not have been cured or waived within any applicable grace or cure period. 10.13 termination or breach of the obligations of any Guarantor hereunder or under any other agreement executed and delivered to Agent in connection with the Obligations of Borrower, or if any Guarantor attempts to terminate, challenges the validity of, or its liability under, this Agreement or any such other agreement; 10.14 any Change of Ownership or Change of Control shall occur; 10.15 any material provision of this Agreement shall, for any reason, cease to be valid and binding on any Credit Party, or any Credit Party shall so claim in writing to Agent; 10.16 (i) any Governmental Body shall (A) revoke, terminate, suspend or adversely modify any license, permit, patent trademark or tradename of any Credit Party, the continuation of which is material to the continuation of such Credit Party's business, or (B) commence proceedings to suspend, revoke, terminate or adversely modify any such license, permit, trademark, tradename or patent and such proceedings shall not be dismissed or discharged within sixty (60) days, or (c) schedule or conduct a hearing on the renewal of any license, permit, trademark, tradename or patent necessary for the continuation of any Credit Party's business and the staff of such Governmental Body issues a report recommending the termination, revocation, suspension or material, adverse modification of such license, permit, trademark, tradename or patent; (ii) any agreement which is necessary or material to the operation of any Credit Party's business shall be revoked or terminated and not replaced by a substitute acceptable to Agent within thirty (30) days after the date of such revocation or termination, and such revocation or termination and non-replacement would reasonably be expected to have a Material Adverse Effect; 10.17 any portion of the Collateral shall be seized or taken by a Governmental Body, or any Credit Party or the title and rights of any Credit Party which is the owner of any material portion of the Collateral shall have become the subject matter of litigation which might, in the opinion of Agent, upon final determination, result in impairment or loss of the security provided by this Agreement or the Other Documents; 10.18 the operations of any Credit Party's material manufacturing facility are interrupted at any time for more than 72 hours during any period of 14 consecutive days, unless such Credit Party shall (i) be entitled to receive for such period of interruption, proceeds of business interruption insurance sufficient to assure that its per diem cash needs during such period is at least equal to its average per diem cash needs for the consecutive three month period immediately preceding the initial date of interruption and (ii) receive such proceeds in the amount described in clause (i) preceding not later than thirty (30) days following the initial date of any such interruption; provided, however, that notwithstanding the provisions of 54 clauses (i) and (ii) of this section, an Event of Default shall be deemed to have occurred if such Credit Party shall be receiving the proceeds of business interruption insurance for a period of thirty (30) consecutive days; 10.19 certificates representing the Subsidiary Stock, together with stock powers therefor duly executed in blank, shall not have been delivered to Agent by 5 p.m. Pacific time on November 27, 2001; or 10.20 an event or condition specified in Sections 7.16 or 9.15 hereof shall occur or exist with respect to any Plan and, as a result of such event or condition, together with all other such events or conditions, any Credit Party or any member of its Controlled Group shall incur, or in the opinion of Agent be reasonably likely to incur, a liability to a Plan or the PBGC (or both) which, in the reasonable judgment of Agent, would have a Material Adverse Effect. XI. LENDERS' RIGHTS AND REMEDIES AFTER DEFAULT. 11.1 Rights and Remedies. Upon the occurrence of (i) an Event of Default pursuant to Section 10.7 all Obligations shall be immediately due and payable and this Agreement and the obligation of Lenders to make Advances shall be deemed terminated; and, (ii) any of the other Events of Default and at any time thereafter (such default not having previously been cured), at the option of Required Lenders all Obligations shall be immediately due and payable and Lenders shall have the right to terminate this Agreement and to terminate the obligation of Lenders to make Advances and (iii) a filing of a petition against any of the Credit Parties in any involuntary case under any state or federal bankruptcy laws, the obligation of Lenders to make Advances hereunder shall be terminated other than as may be required by an appropriate order of the bankruptcy court having jurisdiction over such Credit Party. Upon the occurrence of any Event of Default, Agent shall have the right to exercise any and all other rights and remedies provided for herein, under the Uniform Commercial Code and at law or equity generally, including, without limitation, the right to foreclose the security interests granted herein and to realize upon any Collateral by any available judicial procedure and/or to take possession of and sell any or all of the Collateral with or without judicial process. Agent may enter any of the Credit Parties' premises or other premises without legal process and without incurring liability to any Credit Party therefor, and Agent may thereupon, or at any time thereafter, in its discretion without notice or demand, take the Collateral and remove the same to such place as Agent may deem advisable and Agent may require the Credit Parties to make the Collateral available to Agent at a convenient place. With or without having the Collateral at the time or place of sale, Agent may sell the Collateral, or any part thereof, at public or private sale, at any time or place, in one or more sales, at such price or prices, and upon such terms, either for cash, credit or future delivery, as Agent may elect. Except as to that part of the Collateral which is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, Agent shall give Borrower reasonable notification of such sale or sales, it being agreed that in all events written notice mailed to Borrower at least ten (10) days prior to such sale or sales is reasonable notification. At any public sale Agent or any Lender may bid for and become the purchaser, and Agent, any Lender or any other purchaser at any such sale thereafter shall hold the Collateral sold absolutely free from any claim or right of whatsoever kind, including any equity of redemption and such right and equity are hereby expressly waived and released by the Credit Parties. In connection with the exercise of the foregoing remedies, Agent is granted permission to use all of the Credit Parties' (a) trademarks, trade styles, trade names, patents, patent applications, licenses, franchises and other proprietary rights which are used in connection with Inventory for the purpose of disposing of such Inventory and (b) Equipment for the purpose of completing the manufacture of unfinished goods. The proceeds realized from the sale of any Collateral shall be applied in the order set forth in Section 11.5 hereof. If any deficiency shall arise, the Credit Parties shall remain liable to Agent and Lenders therefor. 11.2 Agent's Discretion. Agent shall have the right in its sole discretion to determine which rights, Liens, security interests or remedies Agent may at any time pursue, relinquish, subordinate, or modify or to take any other action with respect thereto and such determination will not in any way modify or affect any of Agent's or Lenders' rights hereunder. 55 11.3 Setoff. In addition to any other rights which Agent or any Lender may have under applicable law, upon the occurrence and during the continuance of an Event of Default hereunder, Agent and such Lender shall have a right to apply any Credit Party's property held by Agent and such Lender to reduce the Obligations. 11.4 Rights and Remedies not Exclusive. The enumeration of the foregoing rights and remedies is not intended to be exhaustive and the exercise of any rights or remedy shall not preclude the exercise of any other right or remedies provided for herein or otherwise provided by law, all of which shall be cumulative and not alternative. 11.5 Allocation of Payments After Event of Default. Notwithstanding any other provisions of this Agreement to the contrary, after the occurrence and during the continuance of an Event of Default, all amounts collected or received by the Agent on account of the Obligations or any other amounts outstanding under any of the Other Documents or in respect of the Collateral may, at Agent's discretion, be paid over or delivered as follows: FIRST, to the payment of all reasonable out-of-pocket costs and expenses (including without limitation, reasonable attorneys' fees) of the Agent in connection with enforcing its rights and the rights of the Lenders under this Agreement and the Other Documents and any protective advances made by the Agent with respect to the Collateral under or pursuant to the terms of this Document; SECOND, to payment of any fees owed to the Agent; THIRD, to the payment of all reasonable out-of-pocket costs and expenses (including without limitation, reasonable attorneys' fees) of each of the Lenders in connection with enforcing its rights under this Agreement and the Other Documents or otherwise with respect to the Obligations owing to such Lender; FOURTH, to the payment of all of the Obligations consisting of accrued fees and interest; FIFTH, to the payment of the outstanding principal amount of the Obligations (including the payment or cash collateralization of any outstanding Letters of Credit); SIXTH, to all other Obligations and other obligations which shall have become due and payable under the Other Documents or otherwise and not repaid pursuant to clauses "FIRST" through "FIFTH" above; SEVENTH, to the payment of the surplus, if any, to whomever may be lawfully entitled to receive such surplus. In carrying out the foregoing, (i) amounts received shall be applied in the numerical order provided until exhausted prior to application to the next succeeding category; (ii) each of the Lenders shall receive (so long as it is not a Defaulting Lender) an amount equal to its pro rata share (based on the proportion that the then outstanding Advances held by such Lender bears to the aggregate then outstanding Advances) of amounts available to be applied pursuant to clauses "FOURTH", "FIFTH" and "SIXTH" above; and (iii) to the extent that any amounts available for distribution pursuant to clause "FIFTH" above are attributable to the issued but undrawn amount of outstanding Letters of Credit, such amounts shall be held by the Agent in a cash collateral account and applied (A) first, to reimburse the Issuer from time to time for any drawings under such Letters of Credit and (B) then, following the expiration of all Letters of Credit, to all other obligations of the types described in clauses "FIFTH" and "SIXTH" above in the manner provided in this Section 11.5. 56 XII. WAIVERS AND JUDICIAL PROCEEDINGS. 12.1 Waiver of Notice. Each Credit Party hereby waives notice of non-payment of any of the Receivables, demand, presentment, protest and notice thereof with respect to any and all instruments, notice of acceptance hereof, notice of loans or advances made, credit extended, Collateral received or delivered, or any other action taken in reliance hereon, and all other demands and notices of any description, except such as are expressly provided for herein. 12.2 Delay. No delay or omission on Agent's or any Lender's part in exercising any right, remedy or option shall operate as a waiver of such or any other right, remedy or option or of any default. 12.3 Jury Waiver. EACH PARTY TO THIS AGREEMENT HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING UNDER THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR (B) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM WITH RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR THE TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE AND EACH PARTY HEREBY CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENTS OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. XIII. EFFECTIVE DATE AND TERMINATION. 13.1 Term. This Agreement, which shall inure to the benefit of and shall be binding upon the respective successors and permitted assigns of Borrower and the other Credit Parties, Agent and each Lender, shall become effective on the date hereof and shall continue in full force and effect until November 19, 2004 (the "Term") unless sooner terminated as herein provided. Borrower may terminate this Agreement at any time upon thirty (30) days' prior written notice upon payment in full of the Obligations. 13.2 Termination. The termination of the Agreement shall not affect Borrower's, Guarantors', Agent's or any Lender's rights, or any of the Obligations having their inception prior to the effective date of such termination, and the provisions hereof shall continue to be fully operative until all transactions entered into, rights or interests created or Obligations have been fully disposed of, concluded or liquidated. The security interests, Liens and rights granted to Agent and Lenders hereunder and the financing statements filed hereunder shall continue in full force and effect, notwithstanding the termination of this Agreement or the fact that Borrower's Account may from time to time be temporarily in a zero or credit position, until all of the Obligations have been paid or performed in full after the termination of this Agreement or the Credit Parties have furnished Agent and Lenders with an indemnification reasonably satisfactory to Agent and Lenders with respect thereto. Accordingly, each of the Credit Parties waives any rights which it may have under the Uniform Commercial Code to demand the filing of termination statements with respect to the Collateral, and Agent shall not be required to send such termination statements to the Credit Parties, or to file them with any filing office, unless and until this Agreement shall have been terminated in accordance with its terms and all Obligations paid in full in immediately available funds. All representations, warranties, covenants, waivers and agreements contained herein shall survive termination hereof until all Obligations are paid or performed in full. XIV. GUARANTY. 14.1 Guaranty. Each Guarantor hereby unconditionally guaranties the full and prompt payment and performance when due, whether by acceleration or otherwise, and at all times thereafter, of 57 any and all present and future Obligations of any type or nature of Borrower or any other Person (including, without limitation, any other Guarantor) to Agent and the Lenders arising under or related to this Agreement or any Other Document and/or any one or more of them, whether due or to become due, matured or unmatured, liquidated or unliquidated, or contingent or noncontingent, including obligations of performance as well as obligations of payment, including interest on any of the foregoing whether accruing before or after any bankruptcy or insolvency case or proceeding involving any Guarantor, Borrower or any other Person and, if interest on any portion of such obligations ceases to accrue by operation of law by reason of the commencement of such case or proceeding, including such interest as would have accrued on any such portion of such obligations if such case or proceeding had not commenced, and further agrees to pay all expenses (including reasonable attorneys' fees and legal expenses) paid or incurred by Agent or any Lender in endeavoring to collect any of the foregoing, or any part thereof, and in enforcing the obligations of such Guarantor (collectively, the "Liabilities"). Each Guarantor agrees that, in the event of the dissolution, bankruptcy or insolvency of Borrower, or the inability or failure of Borrower to pay debts as they become due, or an assignment by Borrower for the benefit of creditors, or the commencement of any case or proceeding in respect of Borrower under any bankruptcy, insolvency or similar laws, and if such event shall occur at a time when any of the Liabilities may not then be due and payable, Guarantor will pay to Agent, for the benefit of Agent and the Lenders, forthwith the full amount which would be payable hereunder by Guarantor if all Liabilities were then due and payable. This Guaranty shall in all respects be a continuing, absolute and unconditional guaranty of payment and performance (and not of collection), and shall remain in full force and effect (notwithstanding, without limitation, the dissolution of any Guarantor). 14.2 Guarantors' Obligations Unconditional. The covenants and agreements of each Guarantor set forth in this Guaranty shall be primary obligations of such Guarantor, and such obligations shall be continuing, absolute and unconditional, shall not be subject to any counterclaim, setoff, deduction, diminution, abatement, recoupment, suspension, deferment, reduction or defense (other than full and strict compliance by Guarantor with its obligations hereunder), whether based upon any claim that Borrower or any other Person may have against Agent, any Lender or any other Person or otherwise, and shall remain in full force and effect without regard to, and shall not be released, discharged or in any way affected by, any circumstance or condition whatsoever (whether or not any Guarantor or Borrower shall have any knowledge or notice thereof) including, without limitation: A. any amendment, modification, addition, deletion, supplement or renewal to or of or other change in the Liabilities or this Agreement or the Other Documents or any related instrument or agreement, or any other instrument or agreement applicable thereto or any of the parties to such agreements, or to any collateral, or any furnishing or acceptance of additional security for, guaranty of or right of offset with respect to, any of the Liabilities; or the failure of any security or the failure of Agent or any Lender to perfect or insure any interest in any Collateral; B. any failure, omission or delay on the part of any Credit Party, Agent or any Lender to conform or comply with any term of any instrument or agreement referred to in clause (A) above; C. any waiver, consent, extension, indulgence, compromise, release or other action or inaction under or in respect of any instrument, agreement, guaranty, right of offset or security referred to in clause (A) above or any obligation or liability of any Credit Party, Agent or any Lender, or any exercise or non-exercise by Agent or any Lender of any right, remedy, power or privilege under or in respect of any such instrument, agreement, guaranty, right of offset or security or any such obligation or liability; D. any bankruptcy, insolvency, reorganization, arrangement, readjustment, composition, liquidation or similar proceeding with respect to any Credit Party, Agent, any Lender or 58 any other Person or any of their respective properties or creditors, or any action taken by any trustee or receiver or by any court in any such proceeding; E. any limitation on the liability or obligations of any Person under the Loan Documents or any other related instrument or agreement, the Liabilities, any collateral security for the Liabilities or any other guaranty of the Liabilities or any discharge, termination, cancellation, frustration, irregularity, invalidity or unenforceability, in whole or in part, of any of the foregoing, or any other agreement, instrument, guaranty or security referred to in clause (A) above or any term of any thereof; F. any merger or consolidation of Borrower or any Guarantor into or with any other Person or any sale, lease or transfer of any of the assets of Borrower or any Guarantor to any other Person; G. any change in the ownership of any of the equity interests of Borrower or any Guarantor or any corporate change in Borrower or any Guarantor; or H. any other occurrence or circumstance whatsoever, whether similar or dissimilar to the foregoing and any other circumstance that might otherwise constitute a legal or equitable defense or discharge of the liabilities of a guarantor or surety or that might otherwise limit recourse against a Guarantor. The obligations of each Guarantor set forth herein constitute the full recourse obligations of such Guarantor, enforceable against it to the full extent of all its assets and properties. Each Guarantor waives any and all notice of the creation, renewal, extension or accrual of any of the Liabilities and notice of or proof of reliance by Agent and the Lenders upon this Guaranty or acceptance of this Guaranty, and the Liabilities, and any of them, shall conclusively be deemed to have been created, contracted or incurred in reliance upon this Guaranty. Each Guarantor unconditionally waives, to the extent permitted by law: (a) acceptance of this Guaranty and proof of reliance by Agent and the Lenders hereon; (b) notice of any of the matters referred to in the foregoing clauses A through H hereof, or any right to consent or assent to any thereof; (c) all notices that may be required by statute, rule of law or otherwise, now or hereafter in effect, to preserve intact any rights against Guarantor, including without limitation, any demand, presentment, protest, proof or notice of nonpayment under this Agreement or any Other Document or any related instrument or agreement, and notice of default or any failure on the part of any Credit Party to perform and comply with any covenant, agreement, term or condition of this Agreement, any Other Document or any related instrument or agreement; (d) any right to the enforcement, assertion or exercise against any Credit Party of any right, power, privilege or remedy conferred in this Agreement, any Other Document or any related instrument or agreement or otherwise; (e) any requirement of diligence on the part of any Person; (f) any requirement of Agent or any Lender to take any action whatsoever, to exhaust any remedies or to mitigate the damages resulting from a default under this Agreement, any Other Document or any related instrument or agreement; (g) any notice of any sale, transfer or other disposition by any Person of any right under, title to or interest in this Agreement, any Other Document or any related instrument or agreement relating thereto or any collateral for the Liabilities; and (h) any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge, release or defense of a guarantor or surety, or that might otherwise limit recourse against a Guarantor (including, without limitation, any and all benefits under California Civil Code Sections 2809, 2810, 2819, 2822, 2825, 2845, 2846, 2847, 2848, 2849, 2850, 2899 and 3433). Without limiting the foregoing, each Guarantor hereby absolutely, unconditionally and irrevocably waives and agrees not to assert or take advantage of any defense based upon an election of remedies by Agent or any Lender, including an election to proceed by non-judicial rather than judicial foreclosure, which destroys or impairs any right of subrogation of such Guarantor or the right of such Guarantor to proceed against any Person for reimbursement or both. 59 Each Guarantor agrees that this Guaranty shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of Borrower or any other Guarantor is rescinded or must be otherwise restored by Agent or any Lender, whether as a result of any proceedings in bankruptcy or reorganization or otherwise. Each Guarantor further agrees that, without limiting the generality of this Guaranty, if an Event of Default shall have occurred and be continuing and Agent or any Lender is prevented by applicable law from exercising its remedies under the Loan Documents, Agent and the Lenders shall be entitled to receive hereunder from each Guarantor, upon demand therefor, the sums which would have otherwise been due from Borrower had such remedies been exercised. 14.3 Subordination. A. Subordination to Senior Obligations. (a) Each Guarantor hereby covenants and agrees that, as provided herein, all indebtedness, intercompany charges and other sums owing and claims of any nature whatsoever owed to such Guarantor by any other Credit Party ("Intercompany Obligations"), the payment of the principal of and interest thereon and any lien or security interest therefor are hereby expressly made subordinate and subject in right of payment to the prior payment in full of: (i) all obligations now or hereafter incurred by any of the Credit Parties under any of the Loan Documents, (ii) interest thereon (including, without limitation, any such interest accruing subsequent to the filing by or against any of the Credit Parties of any proceeding brought under Chapter 11 of 11 U.S.C. ss.101 et seq., as from time to time hereafter amended and any successor or similar statute ("Bankruptcy Code"), whether or not such interest is allowed as a claim pursuant to the provisions of such Chapter), and (iii) all fees, expenses, indemnities and other amounts now or hereafter payable pursuant to or in connection with the Loan Agreement and all other Loan Documents (collectively the "Senior Obligations"), and any lien on any property or asset securing the Senior Obligations. (b) No payment or prepayment of any Intercompany Obligations (whether of principal, interest or otherwise) shall be made by any Credit Party at any time prior to the indefeasible payment in full, in cash, of the Senior Obligations, provided that the Credit Parties may make payments (not prepayments) of Intercompany Obligations in the ordinary course of business to the extent that at the time of, and immediately after giving effect to, any such payment, no Default or Event of Default exists. B. Payment Over of Proceeds Upon Bankruptcy. In the event of (i) any insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding in connection therewith, relative to any Credit Party or to its creditors as such, or to its properties or assets, or (ii) any liquidation, dissolution or other winding-up of any Credit Party, whether voluntary or involuntary and whether or not involving insolvency or bankruptcy, or (iii) any assignment for the benefit of creditors or any other marshaling of assets or liabilities of any Credit Party, then and in any such event the holders of Senior Obligations shall be entitled to receive payment in full of all amounts due on or in respect of Senior Obligations, in cash or in any other manner acceptable to the holders of Senior Obligations, before any Credit Party is entitled to receive any payment or distribution of any kind or character on account of principal of or interest on any Intercompany Obligations of such Credit Party, and to that end the holders of Senior Obligations shall be entitled to receive, for application to the payment thereof, any payment or distribution of assets of such Credit Party of any kind or character including, without limitation, securities that are subordinated in right of payment to all Senior Obligations to substantially the same extent as, or to a greater extent than, as provided in this Guaranty, that may be payable or deliverable in respect of this Guaranty in any such case, proceeding, dissolution, liquidation or other winding-up or event referred to in clauses (i) through (iii) above. C. Payments to be Held in Trust. In the event that a Guarantor shall receive any payment or distribution of assets of any Credit Party of any kind or character in respect of the Intercompany Obligations in contravention of the foregoing Subsection B, then and in such event such payment or distribution shall be received and held by such Credit Party in trust for Bank, and shall be paid over or delivered forthwith to Bank, the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other Person making payment or distribution of assets of the Credit Party in trust for 60 the holders of the Senior Obligations, and for application to the payment of, all Senior Obligations remaining unpaid, to the extent necessary to pay all Senior Obligations in full, in cash or in any other manner acceptable to Agent, after giving effect to any concurrent payment or distribution to or for the Senior Obligations. D. Waiver. Each Guarantor hereby waives presentment, demand for payment, notice of protest and all other demands and notices in connection with the delivery, acceptance, performance or enforcement hereof. E. Legend. Each Guarantor hereby covenants to cause any instrument from time to time evidencing any Intercompany Obligations to have fixed upon it a legend which reads substantially as follows: "This instrument is subject to Section 14.3 of that certain Revolving Credit, Term Loan, Guaranty and Security Agreement dated as of November 15, 2001, among Easy Gardener, Inc., U.S. Home & Garden, Inc., certain of their respective Subsidiaries, PNC Bank, National Association, as Agent, and various financial institutions, as Lenders, which, among other things, contains provisions subordinating the maker's obligations to the holders of Senior Obligations (as defined in said Agreement), to which provisions the holder of this instrument, by acceptance hereof, agrees." F. No Disposition. No Guarantor will sell, assign, pledge, encumber or otherwise dispose of any of the Intercompany Obligations owed to it, provided that such Guarantor may forgive Intercompany Obligations or contribute Intercompany Obligations to a Credit Party. 14.4 Waiver of Subrogation. Each Guarantor hereby irrevocably waives, solely for the benefit of Agent and the Lenders, until the indefeasible repayment in full of the Obligations, any claim or other rights which it may now or hereafter acquire that arise from the existence, payment, performance or enforcement of such Guarantor's obligations under this Guaranty, including any right of subrogation, reimbursement, exoneration, or indemnification, any right to participate in any claim or remedy of Agent and the Lenders against any of the Credit Parties or any of their assets which Agent or any Lender now have or hereafter acquires, whether or not such claim, remedy or right arises in equity, or under contract, statute or common law, including the right to take or receive from any Credit Party, directly or indirectly, in cash or other property or by set-off or in any manner, payment or security on account of such claim or other rights. If any amount shall be paid to Guarantor in violation of the preceding sentence and the Liabilities shall not have been indefeasibly paid in cash, such amount shall be deemed to have been paid to Guarantor for the benefit of, and held in trust for, Agent and the Lenders, and shall forthwith be paid to Agent to be credited and applied pursuant to the terms of this Agreement. Guarantor acknowledges that it will receive substantial direct and indirect benefits from the financing arrangements contemplated by this Agreement and that the waiver set forth in this paragraph is knowingly made in contemplation of such benefits. 14.5 Fraudulent Transfer Limitation. If, in any action to enforce this Guaranty or any proceeding to allow or adjudicate a claim under this Guaranty, a court of competent jurisdiction determines that enforcement of this Guaranty against any Guarantor for the full amount of the Guaranteed Obligations is not lawful under, or would be subject to avoidance under, Section 548 of the United States Bankruptcy Code or any applicable provision of comparable state law, the liability of such Guarantor under this Guaranty shall be limited to the maximum amount lawful and not subject to avoidance under such law. 14.6 Contribution Among Guarantors. The Guarantors desire to allocate among themselves, in a fair and equitable manner, their rights of contribution from each other when any payment is made by one of the Guarantors under this Guaranty. Accordingly, if any payment is made by a Guarantor under this Guaranty (a "Funding Guarantor") that exceeds its Fair Share, the Funding Guarantor shall be entitled to a contribution from each other Guarantor in the amount of such other Guarantor's Fair Share 61 Shortfall, so that all such contributions shall cause each Guarantor's Aggregate Payments to equal its Fair Share. For these purposes: (a) "Fair Share" means, with respect to a Guarantor as of any date of determination, an amount equal to (i) the ratio of (x) the Adjusted Maximum Amount of such Guarantor to (y) the aggregate Adjusted Maximum Amounts of all Guarantors, multiplied by (ii) the aggregate amount paid on or before such date by all Funding Guarantors under this Guaranty. (b) "Fair Share Shortfall" means, with respect to a Guarantor as of any date of determination, the excess, if any, of the Fair Share of such Guarantor over the Aggregate Payments of such Guarantor. (c) "Adjusted Maximum Amount" means, with respect to a Guarantor as of any date of determination, the maximum aggregate amount of the liability of such Guarantor under this Guaranty, limited to the extent required under Section 14.5 (except that, for purposes solely of this calculation, any assets or liabilities arising by virtue of any rights to or obligations of contribution under this Section 14.6 shall not be counted as assets or liabilities of such Guarantor). (d) "Aggregate Payments" means, with respect to a Guarantor as of any date of determination, the aggregate net amount of all payments made on or before such date by such Guarantor under this Guaranty (including, without limitation, under this Section 14.6). The amounts payable as contributions hereunder shall be determined by the Funding Guarantor as of the date on which the related payment or distribution is made by the Funding Guarantor, and such determination shall be binding on the other Guarantors absent manifest error. The allocation and right of contribution among the Guarantors set forth in this Section 14.6 shall not be construed to limit in any way the liability of any Guarantor under this Guaranty. 14.7 Future Guarantors. Any other Person who may hereafter become a Subsidiary of any Credit Party may and shall become a Guarantor under this Agreement and become bound by the terms and conditions hereof by executing and delivering an Instrument of Joinder. 14.8 Joint and Several Obligation. This Guaranty and all liabilities of each Guarantor hereunder shall be the joint and several obligation of each Guarantor and may be freely enforced against each Guarantor, for the full amount of the Liabilities (subject to Section 14.5), without regard to whether enforcement is sought or available against any other Guarantor. 14.9 No Waiver. No delay in the exercise of any right or remedy shall operate as a waiver thereof, and no single or partial exercise of any right or remedy shall preclude other or further exercise thereof or the exercise of any other right or remedy; nor shall any modification or waiver of any of the provisions of this Guaranty be binding upon Agent and the Lenders except as expressly set forth in a writing duly signed and delivered on their behalf. 14.10 Representations and Warranties. Each Guarantor hereby expressly reaffirms each representation and warranty made in this Agreement with respect to such Guarantor and its property. XV. REGARDING AGENT. 15.1 Appointment. Each Lender hereby designates PNC to act as Agent for such Lender under this Agreement and the Other Documents. Each Lender hereby irrevocably authorizes Agent to take such action on its behalf under the provisions of this Agreement and the Other Documents and to exercise such powers and to perform such duties hereunder and thereunder as are specifically delegated to or required of Agent by the terms hereof and thereof and such other powers as are reasonably incidental thereto and Agent shall hold all Collateral, payments of principal and interest, fees (except the fees set forth in Sections 3.3 and 3.4 and the Fee Letter), charges and collections (without giving effect to 62 any collection days) received pursuant to this Agreement, for the ratable benefit of Lenders. Agent may perform any of its duties hereunder by or through its agents or employees. As to any matters not expressly provided for by this Agreement (including without limitation, collection of the Note) Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Required Lenders, and such instructions shall be binding; provided, however, that Agent shall not be required to take any action which exposes Agent to liability or which is contrary to this Agreement or the Other Documents or applicable law unless Agent is furnished with an indemnification reasonably satisfactory to Agent with respect thereto. 15.2 Nature of Duties. Agent shall have no duties or responsibilities except those expressly set forth in this Agreement and the Other Documents. Neither Agent nor any of its officers, directors, employees or agents shall be (i) liable for any action taken or omitted by them as such hereunder or in connection herewith, unless caused by their gross (not mere) negligence or willful misconduct, or (ii) responsible in any manner for any recitals, statements, representations or warranties made by the Credit Parties or any officer thereof contained in this Agreement, or in any of the Other Documents or in any certificate, report, statement or other document referred to or provided for in, or received by Agent under or in connection with, this Agreement or any of the Other Documents or for the value, validity, effectiveness, genuineness, due execution, enforceability or sufficiency of this Agreement, or any of the Other Documents or for any failure of any Credit Party to perform its obligations hereunder. Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any of the Other Documents, or to inspect the properties, books or records of any Credit Party. The duties of Agent as respects the Advances to Borrower shall be mechanical and administrative in nature; Agent shall not have by reason of this Agreement a fiduciary relationship in respect of any Lender; and nothing in this Agreement, expressed or implied, is intended to or shall be so construed as to impose upon Agent any obligations in respect of this Agreement except as expressly set forth herein. 15.3 Lack of Reliance on Agent and Resignation. Independently and without reliance upon Agent or any other Lender, each Lender has made and shall continue to make (i) its own independent investigation of the financial condition and affairs of the Credit Parties in connection with the making and the continuance of the Advances hereunder and the taking or not taking of any action in connection herewith, and (ii) its own appraisal of the creditworthiness of the Credit Parties. Agent shall have no duty or responsibility, either initially or on a continuing basis, to provide any Lender with any credit or other information with respect thereto, whether coming into its possession before making of the Advances or at any time or times thereafter except as shall be provided by the Credit Parties pursuant to the terms hereof. Agent shall not be responsible to any Lender for any recitals, statements, information, representations or warranties herein or in any agreement, document, certificate or a statement delivered in connection with or for the execution, effectiveness, genuineness, validity, enforceability, collectibility or sufficiency of this Agreement or any Other Documents, or of the financial condition of the Credit Parties, or be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of this Agreement, the Note, the Other Documents or the financial condition of the Credit Parties, or the existence of any Event of Default or any Default. Agent may resign on sixty (60) days' written notice to each of Lenders and Borrower and upon such resignation, the Required Lenders will promptly designate a successor Agent reasonably satisfactory to Borrower, provided that Borrower's satisfaction need not be sought if at the time such successor Agent is designated there exists an Event of Default. Any such successor Agent shall succeed to the rights, powers and duties of Agent, and the term "Agent" shall mean such successor agent effective upon its appointment, and the former Agent's rights, powers and duties as Agent shall be terminated, without any other or further act or deed on the part of such former Agent. After any Agent's resignation as Agent, the provisions of this Article XV shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. 63 15.4 Certain Rights of Agent. If Agent shall request instructions from Lenders with respect to any act or action (including failure to act) in connection with this Agreement or any Other Documents, Agent shall be entitled to refrain from such act or taking such action unless and until Agent shall have received instructions from the Required Lenders; and Agent shall not incur liability to any Person by reason of so refraining. Without limiting the foregoing, Lenders shall not have any right of action whatsoever against Agent as a result of its acting or refraining from acting hereunder in accordance with the instructions of the Required Lenders. 15.5 Reliance. Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, statement, certificate, telex, teletype or telecopier message, cablegram, order or other document or telephone message believed by it to be genuine and correct and to have been signed, sent or made by the proper person or entity, and, with respect to all legal matters pertaining to this Agreement and the Other Documents and its duties hereunder, upon advice of counsel selected by it. Agent may employ agents and attorneys-in-fact and shall not be liable for the default or misconduct of any such agents or attorneys-in-fact selected by Agent with reasonable care. 15.6 Notice of Default. Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder or under the Other Documents, unless Agent has received notice from a Lender or a Credit Party referring to this Agreement or the Other Documents, describing such Default or Event of Default and stating that such notice is a "notice of default". In the event that Agent receives such a notice, Agent shall give notice thereof to Lenders. Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Lenders; provided, that, unless and until Agent shall have received such directions, Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of Lenders. 15.7 Indemnification. To the extent Agent is not reimbursed and indemnified by the Credit Parties, each Lender will reimburse and indemnify Agent in proportion to its respective portion of the Advances (or, if no Advances are outstanding, according to its Commitment Percentage), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against Agent in performing its duties hereunder, or in any way relating to or arising out of this Agreement or any Other Documents; provided that, Lenders shall not be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from Agent's gross (not mere) negligence or willful misconduct. 15.8 Agent in its Individual Capacity. With respect to the obligation of Agent to lend under this Agreement, the Advances made by it shall have the same rights and powers hereunder as any other Lender and as if it were not performing the duties as Agent specified herein; and the term "Lender" or any similar term shall, unless the context clearly otherwise indicates, include Agent in its individual capacity as a Lender. Agent may engage in business with the Credit Parties (and any of them) as if it were not performing the duties specified herein, and may accept fees and other consideration from the Credit Parties for services in connection with this Agreement or otherwise without having to account for the same to Lenders. 15.9 Delivery of Documents. To the extent Agent receives financial statements required under Sections 9.7, 9.8, 9.9, 9.12 and 9.13 and borrowing base calculations from the Credit Parties pursuant to the terms of this Agreement, Agent will promptly furnish such documents and information to Lenders. 15.10 Credit Parties' Undertaking to Agent. Without prejudice to its obligations to Lenders under the other provisions of this Agreement, each Credit Party hereby undertakes with Agent to pay to Agent from time to time on demand all amounts from time to time due and payable by it for the account of Agent or Lenders or any of them pursuant to this Agreement to the extent not already paid. Any payment made pursuant to any such demand shall pro tanto satisfy the relevant Credit Party's obligations to make payments for the account of Lenders or the relevant one or more of them pursuant to this Agreement. 64 XVI. MISCELLANEOUS. 16.1 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applied to contracts to be performed wholly within the State of New York. Any judicial proceeding brought by or against any Credit Party with respect to any of the Obligations, this Agreement, the Other Documents or any related agreement may be brought in any court of competent jurisdiction in the State of New York, United States of America, and, by execution and delivery of this Agreement, each Credit Party accepts for itself and in connection with its properties, generally and unconditionally, the non-exclusive jurisdiction of the aforesaid courts, and irrevocably agrees to be bound by any judgment rendered thereby in connection with this Agreement. Each Credit Party hereby waives personal service of any and all process upon it and consents that all such service of process may be made by registered mail (return receipt requested) directed to such Credit Party at its address set forth in Section 16.6 and service so made shall be deemed completed five (5) days after the same shall have been so deposited in the mails of the United States of America. Nothing herein shall affect the right to serve process in any manner permitted by law or shall limit the right of Agent or any Lender to bring proceedings against any Credit Party in the courts of any other jurisdiction. Each Credit Party waives any objection to jurisdiction and venue of any action instituted hereunder and shall not assert any defense based on lack of jurisdiction or venue or based upon forum non conveniens. Each Credit Party waives the right to remove any judicial proceeding brought against it in any state court to any federal court. Any judicial proceeding by a Credit Party against Agent or any Lender involving, directly or indirectly, any matter or claim in any way arising out of, related to or connected with this Agreement or any related agreement, shall be brought only in a federal or state court located in the County of New York, State of New York. 16.2 Entire Understanding. (a) This Agreement and the documents executed concurrently herewith contain the entire understanding between the Credit Parties, Agent and each Lender and supersedes all prior agreements and understandings, if any, relating to the subject matter hereof. Any promises, representations, warranties or guarantees not herein contained and hereinafter made shall have no force and effect unless in writing, signed by the Credit Parties', Agent's and each Lender's respective officers. Neither this Agreement nor any portion or provisions hereof may be changed, modified, amended, waived, supplemented, discharged, cancelled or terminated orally or by any course of dealing, or in any manner other than by an agreement in writing, signed by the party to be charged. Each Credit Party acknowledges that it has been advised by counsel in connection with the execution of this Agreement and Other Documents and is not relying upon oral representations or statements inconsistent with the terms and provisions of this Agreement. (b) The Required Lenders, Agent with the consent in writing of the Required Lenders, and the Credit Parties may, subject to the provisions of this Section 16.2(b), from time to time enter into written supplemental agreements to this Agreement or the Other Documents executed by the applicable Credit Party or Credit Parties, for the purpose of adding or deleting any provisions or otherwise changing, varying or waiving in any manner the rights of Lenders, Agent or the Credit Parties thereunder or the conditions, provisions or terms thereof of waiving any Event of Default thereunder, but only to the extent specified in such written agreements; provided, however, that no such supplemental agreement shall, without the consent of all Lenders: (i) increase the Commitment Percentage, the maximum dollar commitment of any Lender or the Maximum Revolving Advance Amount. (ii) extend the maturity of any Note or the due date for any amount payable hereunder, or decrease the rate of interest or reduce any fee payable by Borrower to Lenders pursuant to this Agreement. (iii) alter the definition of the term Required Lenders or alter, amend or modify this Section 16.2(b). 65 (iv) release any Collateral during any calendar year (other than in accordance with the provisions of this Agreement) having an aggregate value in excess of $1,000,000. (v) change the rights and duties of Agent. (vi) permit any Revolving Advance to be made if after giving effect thereto the total of Revolving Advances outstanding hereunder would exceed the Formula Amount for more than sixty (60) consecutive Business Days or exceed one hundred and ten percent (110%) of the Formula Amount. (vii) increase the Advance Rates above the Advance Rates in effect on the Closing Date. (viii) release any Guarantor. Any such supplemental agreement shall apply equally to each Lender and shall be binding upon the Credit Parties, Lenders and Agent and all future holders of the Obligations. In the case of any waiver, the Credit Parties, Agent and Lenders shall be restored to their former positions and rights, and any Event of Default waived shall be deemed to be cured and not continuing, but no waiver of a specific Event of Default shall extend to any subsequent Event of Default (whether or not the subsequent Event of Default is the same as the Event of Default which was waived), or impair any right consequent thereon. In the event that Agent requests the consent of a Lender pursuant to this Section 16.2 and such Lender shall not respond or reply to Agent in writing within five (5) days of delivery of such request, such Lender shall be deemed to have consented to the matter that was the subject of the request. In the event that Agent requests the consent of a Lender pursuant to this Section 16.2 and such consent is denied, then PNC may, at its option, require such Lender to assign its interest in the Advances to PNC or to another Lender or to any other Person designated by the Agent (the "Designated Lender"), for a price equal to the then outstanding principal amount thereof plus accrued and unpaid interest and fees due such Lender, which interest and fees shall be paid when collected from Borrower and/or the other Credit Parties. In the event PNC elects to require any Lender to assign its interest to PNC or to the Designated Lender, PNC will so notify such Lender in writing within forty-five (45) days following such Lender's denial, and such Lender will assign its interest to PNC or the Designated Lender no later than five (5) days following receipt of such notice pursuant to a Commitment Transfer Supplement executed by such Lender, PNC or the Designated Lender, as appropriate, and Agent. Notwithstanding (a) the existence of a Default or an Event of Default, (b) that any of the other applicable conditions precedent set forth in Section 8.2 hereof have not been satisfied or (c) any other provision of this Agreement, Agent may at its discretion and without the consent of the Required Lenders, voluntarily permit the outstanding Revolving Advances at any time to exceed an amount equal to the sum of (i) the Formula Amount minus (ii) the amount of minimum Undrawn Availability required by Section 8.1(ff) hereof at such time (such sum, the "Overadvance Threshold Amount") by up to ten percent (10%) of the Overadvance Threshold Amount for up to thirty (30) consecutive Business Days (the "Out-of-Formula Loans"). If Agent is willing in its sole and absolute discretion to make such Out-of-Formula Loans, such Out-of-Formula Loans shall be payable on demand and shall bear interest at the Default Rate; provided that, if Lenders do make Out-of-Formula Loans, neither Agent nor Lenders shall be deemed thereby to have changed the limits of Section 2.1(a). For purposes of this Section 16.2, the discretion granted to Agent hereunder shall not preclude involuntary overadvances that may result from time to time due to the fact that the Overadvance Threshold Amount was unintentionally exceeded for any reason, including, but not limited to, Collateral previously deemed to be "Eligible Receivables," "Seasonal Receivables" or "Eligible Inventory," as applicable, becomes ineligible, collections of Receivables applied to reduce outstanding Revolving Advances are thereafter returned for insufficient funds or overadvances are made to protect or preserve the Collateral. In the event Agent involuntarily permits the outstanding Revolving Advances to exceed the or Overadvance Threshold Amount by more than ten percent (10%), Agent shall use its efforts to have Borrower decrease such excess in as expeditious a manner as is practicable under the circumstances and not inconsistent with the reason for such excess. Revolving 66 Advances made after Agent has determined the existence of involuntary overadvances shall be deemed to be involuntary overadvances and shall be decreased in accordance with the preceding sentence. In addition to (and not in substitution of) the discretionary Revolving Advances permitted above in this Section 16.2, the Agent is hereby authorized by Borrower, the Guarantors and the Lenders, from time to time in the Agent's sole discretion, (A) after the occurrence and during the continuation of a Default or an Event of Default, or (B) at any time that any of the other applicable conditions precedent set forth in Section 8.2 hereof have not been satisfied, to make Revolving Advances to Borrower on behalf of the Lenders which the Agent, in its reasonable business judgment, deems necessary or desirable (a) to preserve or protect the Collateral, or any portion thereof, (b) to enhance the likelihood of, or maximize the amount of, repayment of the Advances and other Obligations, or (c) to pay any other amount chargeable to Borrower pursuant to the terms of this Agreement; provided, that at any time after giving effect to any such Revolving Advances the outstanding Revolving Advances do not exceed one hundred and ten percent (110%) of the Formula Amount. 16.3 Successors and Assigns; Participations; New Lenders. (a) This Agreement shall be binding upon and inure to the benefit of each Credit Party, Agent, each Lender, all future holders of the Obligations and their respective successors and assigns, except that no Credit Party may assign or transfer any of its rights or obligations under this Agreement without the prior written consent of Agent and each Lender. (b) The Credit Parties acknowledge that in the regular course of commercial banking business one or more Lenders may at any time and from time to time sell participating interests in the Advances to other financial institutions (each such transferee or purchaser of a participating interest, a "Transferee"), provided, that any such transfer shall be in a minimum amount of $5,000,000. Each Transferee may exercise all rights of payment (including without limitation rights of set-off) with respect to the portion of such Advances held by it or other Obligations payable hereunder as fully as if such Transferee were the direct holder thereof provided that Borrower shall not be required to pay to any Transferee more than the amount which it would have been required to pay to Lender which granted an interest in its Advances or other Obligations payable hereunder to such Transferee had such Lender retained such interest in the Advances hereunder or other Obligations payable hereunder and in no event shall Borrower be required to pay any such amount arising from the same circumstances and with respect to the same Advances or other Obligations payable hereunder to both such Lender and such Transferee. Each Credit Party hereby grants to any Transferee a continuing security interest in any deposits, moneys or other property actually or constructively held by such Transferee as security for the Transferee's interest in the Advances. (c) Any Lender may with the consent of Agent which shall not be unreasonably withheld or delayed sell, assign or transfer all or any part of its rights under this Agreement and the Other Documents to one or more additional banks or financial institutions and one or more additional banks or financial institutions may commit to make Advances hereunder (each a "Purchasing Lender"), in minimum amounts of not less than $5,000,000, pursuant to a Commitment Transfer Supplement, executed by a Purchasing Lender, the transferor Lender, and Agent and delivered to Agent for recording. Upon such execution, delivery, acceptance and recording, from and after the transfer effective date determined pursuant to such Commitment Transfer Supplement, (i) Purchasing Lender thereunder shall be a party hereto and, to the extent provided in such Commitment Transfer Supplement, have the rights and obligations of a Lender thereunder with a Commitment Percentage as set forth therein, and (ii) the transferor Lender thereunder shall, to the extent provided in such Commitment Transfer Supplement, be released from its obligations under this Agreement, the Commitment Transfer Supplement creating a novation for that purpose. Such Commitment Transfer Supplement shall be deemed to amend this Agreement to the extent, and only to the extent, necessary to reflect the addition of such Purchasing Lender and the resulting adjustment of the Commitment Percentages arising from the purchase by such Purchasing Lender of all or a portion of the rights and obligations of such transferor Lender under this Agreement and the Other Documents. Each Credit Party hereby consents to the addition of such Purchasing Lender and the resulting adjustment of the Commitment Percentages arising from the 67 purchase by such Purchasing Lender of all or a portion of the rights and obligations of such transferor Lender under this Agreement and the Other Documents. Each Credit Party shall execute and deliver such further documents and do such further acts and things in order to effectuate the foregoing. (d) Agent shall maintain at its address a copy of each Commitment Transfer Supplement delivered to it and a register (the "Register") for the recordation of the names and addresses of each Lender and the outstanding principal, accrued and unpaid interest and other fees due hereunder. The entries in the Register shall be conclusive, in the absence of manifest error, and each Credit Party, Agent and Lenders may treat each Person whose name is recorded in the Register as the owner of the Advance recorded therein for the purposes of this Agreement. The Register shall be available for inspection by Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. Agent shall receive a fee in the amount of $3,500 payable by the applicable Purchasing Lender upon the effective date of each transfer or assignment to such Purchasing Lender. (e) Each Credit Party authorizes each Lender to disclose to any Transferee or Purchasing Lender and any prospective Transferee or Purchasing Lender any and all financial information in such Lender's possession concerning the Credit Parties which has been delivered to such Lender by or on behalf of any Credit Party pursuant to this Agreement or in connection with such Lender's credit evaluation of the Credit Parties. 16.4 Application of Payments. Agent shall have the continuing and exclusive right to apply or reverse and re-apply any payment and any and all proceeds of Collateral to any portion of the Obligations. To the extent that any Credit Party makes a payment or Agent or any Lender receives any payment or proceeds of the Collateral for the Credit Parties' benefit, which are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, debtor in possession, receiver, custodian or any other party under any bankruptcy law, common law or equitable cause, then, to such extent, the Obligations or part thereof intended to be satisfied shall be revived and continue as if such payment or proceeds had not been received by Agent or such Lender. 16.5 Indemnity. The Credit Parties, jointly and severally, shall indemnify Agent, each Lender and each of their respective officers, directors, Affiliates, attorneys, employees and agents from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses and disbursements of any kind or nature whatsoever (including, without limitation, fees and disbursements of counsel) which may be imposed on, incurred by, or asserted against Agent or any Lender in any litigation, proceeding or investigation instituted or conducted by any governmental agency or instrumentality or any other Person with respect to any aspect of, or any transaction contemplated by, or referred to in, or any matter related to, this Agreement or the Other Documents, whether or not Agent or any Lender is a party thereto, except to the extent that any of the foregoing arises out of the gross negligence or willful misconduct of the party being indemnified. 16.6 Notice. Any notice or request hereunder may be given to any Credit Party or to Agent or any Lender at their respective addresses set forth below or at such other address as may hereafter be specified in a notice designated as a notice of change of address under this Section. Any notice, request, demand, direction or other communication (for purposes of this Section 16.6 only, a "Notice") to be given to or made upon any party hereto under any provision of this Loan Agreement shall be given or made by telephone or in writing (which includes by means of electronic transmission, including, but not limited to, an email, or facsimile transmission or by setting forth such Notice on a site on the World Wide Web (a "Website Posting") if Notice of such Website Posting (including the information necessary to access such site) has previously been delivered to the applicable parties hereto by another means set forth in this Section 16.6) in accordance with this Section 16.6. Any such Notice must be delivered to the applicable parties hereto at the addresses and numbers set forth under their respective names on Section 16.6 hereof or in accordance with any subsequent unrevoked Notice from any such party that is given in accordance with this Section 16.6. Any Notice shall be effective: (a) In the case of hand-delivery, when delivered; 68 (b) If given by mail, four (4) days after such Notice is deposited with the United States Postal Service, with first-class postage prepaid, return receipt requested; (c) In the case of a telephonic Notice, when a party is contacted by telephone, if delivery of such telephonic Notice is confirmed no later than the next Business Day by hand delivery, a facsimile or electronic transmission, a Website Posting or an overnight courier delivery of a confirmatory Notice (received at or before noon on such next Business Day); (d) In the case of a facsimile transmission, when sent to the applicable party's facsimile machine's telephone number, if the party sending such Notice receives confirmation of the delivery thereof from its own facsimile machine; (e) In the case of electronic transmission, when actually received; (f) In the case of a Website Posting, upon delivery of a Notice of such posting (including the information necessary to access such site) by another means set forth in this Section 16.6; and (g) If given by any other means (including by overnight courier), when actually received. Any Lender giving a Notice to a Credit Party shall concurrently send a copy thereof to the Agent, and the Agent shall promptly notify the other Lenders of its receipt of such Notice. (i) If to Agent or PNC at: PNC Bank, National Association 2 North Lake Avenue, Suite 440 Pasadena, CA 91101 Attention: Albert Perez Facsimile: (626) 432-4589 And PNC Bank Agency Services Department 249 Fifth Avenue Pittsburgh, Pennsylvania 15222-2707 Attention: Lisa Pierce Facsimile: (412) 762-8672 with a copy to: Manatt, Phelps & Phillips, LLP 11355 Olympic Boulevard Los Angeles, California 90064 Attention: Harold P. Reichwald, Esq. Facsimile: (310) 312-4224 (ii) If to a Lender other than Agent, as specified on the signature pages hereof (iii) If to any Credit Party: Easy Gardener, Inc. 3022 Franklin Avenue Waco, Texas 76702-1025 Attention: Richard Kurz, CFO Facsimile: (254) 753-5372 69 and: U.S. Home & Garden 655 Montgomery Street San Francisco, California 94111 Attention: Robert Kassel, Chairman CEO and President Facsimile: (415) 616-8110 with a copy to: Blank Rome Comisky & McCauley LLP One Logan Square Philadelphia, Pennsylvania 19103-6998 Attention: Harvey Forman, Esq. Facsimile: (215) 569-5222 And Blank Rome Tenzer Greenblatt LLP The Chrysler Building 405 Lexington Avenue New York, NY 10174 Attention: Ethan Seer, Esquire Facsimile: (212) 885-5001 16.7 Survival. The obligations of the Credit Parties under Sections 2.2(f), 3.7, 3.8, 3.9, 3.10, 4.19(h), 15.7 and 16.5 shall survive termination of this Agreement and the Other Documents and payment in full of the Obligations. 16.8 Severability. If any part of this Agreement is contrary to, prohibited by, or deemed invalid under applicable laws or regulations, such provision shall be inapplicable and deemed omitted to the extent so contrary, prohibited or invalid, but the remainder hereof shall not be invalidated thereby and shall be given effect so far as possible. 16.9 Expenses. All costs and expenses including, without limitation, reasonable attorneys' fees (including the allocated costs of in house counsel) and disbursements incurred by Agent on its behalf or on behalf of Lenders and Lenders (a) in all efforts made to enforce payment of any Obligation or effect collection of any Collateral, or (b) in connection with the entering into, modification, amendment, administration and enforcement of this Agreement or any consents or waivers hereunder and all related agreements, documents and instruments, or (c) in instituting, maintaining, preserving, enforcing and foreclosing on Agent's security interest in or Lien on any of the Collateral, whether through judicial proceedings or otherwise, or (d) in defending or prosecuting any actions or proceedings arising out of or relating to Agent's or any Lender's transactions with any Credit Party, or (e) in connection with any advice given to Agent or any Lender with respect to its rights and obligations under this Agreement and all related agreements, may be charged to Borrower's Account and shall be part of the Obligations, provided that the fees of attorneys to individual Lenders may not be so charged with respect to matters not involving a restructuring of the Obligations or enforcement matters following an Event of Default. Without in any way limiting Agent's right to any such payment or to charge Borrower's Account in payment thereof, Agent agrees to furnish to Borrower notice of each payment so charged to Borrower's Account. 16.10 Injunctive Relief. Each Credit Party that, in the event that any of the Credit Parties fails to perform, observe or discharge any of its obligations or liabilities under this Agreement, any remedy at law may prove to be inadequate relief to Lenders; therefore, Agent, if Agent so requests, shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving that actual damages are not an adequate remedy. 16.11 Consequential Damages. Neither Agent nor any Lender, nor any agent or attorney for any of them, shall be liable to any Credit Party for consequential damages arising from any breach of contract, tort or other wrong relating to the establishment, administration or collection of the Obligations. 70 16.12 Captions. The captions at various places in this Agreement are intended for convenience only and do not constitute and shall not be interpreted as part of this Agreement. 16.13 Counterparts; Facsimile Signatures. This Agreement may be executed in any number of and by different parties hereto on separate counterparts, all of which, when so executed, shall be deemed an original, but all such counterparts shall constitute one and the same agreement. Any signature delivered by a party by facsimile transmission shall be deemed to be an original signature hereto. 16.14 Construction. The parties acknowledge that each party and its counsel have reviewed this Agreement and that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or any amendments, schedules or exhibits thereto. 16.15 Confidentiality; Sharing Information. (a) Agent, each Lender and each Transferee shall hold all non-public information obtained by Agent, such Lender or such Transferee pursuant to the requirements of this Agreement in accordance with Agent's, such Lender's and such Transferee's customary procedures for handling confidential information of this nature; provided, however, Agent, each Lender and each Transferee may disclose such confidential information (a) to its examiners, affiliates, outside auditors, counsel and other professional advisors who shall also agree to maintain the confidentiality thereof, (b) to Agent, any Lender or to any prospective Transferees and Purchasing Lenders, and (c) as required or requested by any Governmental Body or representative thereof or pursuant to legal process; provided, further that (i) unless specifically prohibited by applicable law or court order, Agent, each Lender and each Transferee shall use its best efforts prior to disclosure thereof, to notify Borrower of the applicable request for disclosure of such non-public information (A) by a Governmental Body or representative thereof (other than any such request in connection with an examination of the financial condition of a Lender or a Transferee by such Governmental Body) or (B) pursuant to legal process and (ii) in no event shall Agent, any Lender or any Transferee be obligated to return any materials furnished by any Credit Party other than those documents and instruments in possession of Agent or any Lender in order to perfect its Lien on the Collateral once the Obligations have been paid in full and this Agreement has been terminated. (b) Each Credit Party acknowledges that from time to time financial advisory, investment banking and other services may be offered or provided to such Credit Party or one or more of its Affiliates (in connection with this Agreement or otherwise) by any Lender or by one or more Subsidiaries or Affiliates of such Lender and each Credit Party hereby authorizes each Lender to share any information delivered to such Lender by such Credit Party and its Subsidiaries pursuant to this Agreement, or in connection with the decision of such Lender to enter into this Agreement, to any such Subsidiary or Affiliate of such Lender, it being understood that any such Subsidiary or Affiliate of any Lender receiving such information shall be bound by the provisions of this Section 16.15 as if it were a Lender hereunder. Such authorization shall survive the repayment of the other Obligations and the termination of the Loan Agreement. 16.16 Publicity. Each Credit Party and each Lender hereby authorizes Agent to make appropriate announcements of the financial arrangement entered into among the Credit Parties, Agent and Lenders, including, without limitation, announcements which are commonly known as tombstones, in such publications and to such selected parties as Agent shall in its sole and absolute discretion deem appropriate. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGES FOLLOW] 71 Each of the parties has signed this Agreement as of the day and year first above written. Borrower: EASY GARDENER, INC. - --------- ATTEST: By:____________________________ __________________________ Name:__________________________ Title:_________________________ PNC BANK, NATIONAL ASSOCIATION, as Lender and as Agent By:____________________________ Name:__________________________ Title:_________________________ PNC Bank, National Association 2 North Lake Avenue, Suite 440 Pasadena, CA 91101 Attention: Albert Perez Facsimile: (626) 432-4589 Commitment Percentage: ____% U.S. HOME & GARDEN INC., as Guarantor By:____________________________ Name:__________________________ Title:_________________________ _______________________________ Address WEATHERLY CONSUMER PRODUCTS GROUP, INC., as Guarantor By:____________________________ Name:__________________________ Title:_________________________ _______________________________ Address 72 WEATHERLY CONSUMER PRODUCTS, INC., as Guarantor By:____________________________ Name:__________________________ Title:_________________________ _______________________________ Address GOLDEN WEST AGRI-PRODUCTS, INC., as Guarantor By:____________________________ Name:__________________________ Title:_________________________ _______________________________ Address WEED WIZARD ACQUISITION CORP., as Guarantor By:____________________________ Name:__________________________ Title:_________________________ _______________________________ Address AMPRO INDUSTRIES, INC., as Guarantor By:____________________________ Name:__________________________ Title:_________________________ _______________________________ Address 73 STATE OF NEW YORK ) ) ss. COUNTY OF NEW YORK ) On this _____ day of ______________, 200_, before me personally came ____________________________, to me known, who, being by me duly sworn, did depose and say that he is the __________________ of _______________________, the corporation described in and which executed the foregoing instrument; and that he signed his name thereto by order of the board of directors of said corporation. __________________________ Notary Public STATE OF NEW YORK ) ) ss. COUNTY OF NEW YORK ) On this _____ day of ______________, 200_, before me personally came ______________________________, to me known, who, being by me duly sworn, did depose and say that he is the __________________ of PNC BANK, NATIONAL ASSOCIATION, and that he was authorized to sign his name thereto. __________________________ Notary Public STATE OF NEW YORK ) ) ss. COUNTY OF NEW YORK ) On this _____ day of ______________, 200_, before me personally came ______________________________, to me known, who, being by me duly sworn, did depose and say that he is the __________________ of _______________________, the corporation described in and which executed the foregoing instrument and that he signed his name thereto by order of the board of directors of said corporation. __________________________ Notary Public 74 List of Exhibits and Schedules Exhibits Exhibit 2.1(a) Revolving Credit Note Exhibit 2.4 Term Note Exhibit 5.5(b) Financial Projections Exhibit 7.8 Intercompany Note Exhibit 8.1(k) Financial Condition Certificate Exhibit 14.7 Instrument of Joinder Exhibit 16.3 Commitment Transfer Supplement Schedules Schedule 1.2 Permitted Encumbrances Schedule 4.4 Preservation of Collateral Schedule 4.5 Equipment and Inventory Locations Schedule 4.15(c) Location of Credit Parties Schedule 4.19 Real Property Schedule 5.2(a) States of Qualification and Good Standing Schedule 5.2(b) Subsidiaries of Borrower Schedule 5.4 Federal Tax Identification Number Schedule 5.6 Prior Names Schedule 5.7 Environmental Schedule 5.8(b) Litigation Schedule 5.8(d) Plans Schedule 5.9 Intellectual Property, Source Code, Escrow Agreements Schedule 5.10 Licenses and Permits Schedule 5.14 Labor Disputes Schedule 7.3 Guarantees Schedule 7.8 Indebtedness 75 EX-10.2 4 d27918_ex10-2.txt NOTE AND AGREEMENTS Exhibit 10.2 NOTE AND WARRANT PURCHASE, GUARANTY AND SECURITY AGREEMENT ------------------------------------ EASY GARDENER, INC. $5,993,151 Principal Amount 16% Series A Senior Subordinated Notes Due November 19, 2007 $856,164 Principal Amount 14% Series B Senior Subordinated Notes Due November 19, 2007 ------------------------------------ U.S. HOME & GARDEN INC. Warrants for Common Stock $.001 par value Options for 9.4% Cumulative Trust Preferred Securities issued by U.S. Home & Garden Trust I and owned by U.S. Home & Garden Inc. ------------------------------------ as of November 15, 2001 To the Purchasers (the "Purchasers") named in Exhibit A hereto Dear Sirs: The undersigned, Easy Gardener, Inc., a Delaware corporation (the "Company"), proposes to issue and sell to the Purchasers for cash (i) $5,993,151 principal amount of its 16% Series A Senior Subordinated Notes due November 19, 2007 (the "Series A Notes"), and (ii) $856,164 principal amount of its 14% Series B Senior Subordinated Notes due November 19, 2007 (the "Series B Notes"; and, together with the Series A Notes, the "Notes"). The undersigned, U.S. Home & Garden, Inc., a Delaware corporation which owns all of the outstanding capital stock of the Company ("USHG"), proposes to issue and sell to the Purchasers for cash (i) warrants (as amended from time to time, the "Common Warrants") to purchase shares of Common Stock representing in the aggregate not less than three and three quarters percent (3.75%) of USHG's Fully-Diluted Common Stock (as defined in the Common Warrant Agreement referred to below), and (ii) options (as amended from time to time, the "Preferred Warrants") to purchase from USHG such number of 9.4% Cumulative Trust Preferred Securities ("Preferred Securities") issued by USHG's subsidiary U.S. Home & Garden Trust I (the "Trust") as represents in the aggregate not less than three and three quarters percent (3.75%) of the Trust's Fully-Diluted Preferred Securities (as defined in the Preferred Warrant Agreement referred to below). The Purchasers understand that the Preferred Securities are issued by the Trust, but that the Preferred Warrants herein granted by USHG represent the right to purchase from USHG (and not from the Trust) Preferred Securities issued by the Trust which are owned by USHG because USHG purchased such Preferred Securities from certain holders thereof. The Common Warrants and the Preferred Warrants are herein collectively referred to as the "Warrants". The Notes will be issued pursuant to and subject to the terms and conditions of this Agreement; and the Warrants will be issued pursuant to and subject to the terms and conditions of this Agreement and the applicable Warrant Agreement (as defined below). Upon and after issuance, the Notes and the Warrants, and the respective holders thereof, shall each be entitled to the continuing agreements and rights set forth herein, but the Notes and Warrants shall otherwise in all respects be separable and may be transferred, sold, modified or otherwise held or dealt in as independent instruments in accordance with the terms thereof. PREAMBLE WHEREAS, the Corporations (as defined below) have requested that the Purchasers purchase the Notes and Warrants in order to provide funds to refinance the BOA Indebtedness (as defined below) and to pay certain expenses associated with the Transactions (as defined below); and WHEREAS, the Purchasers are willing to purchase the Notes and Warrants on the terms and subject to the conditions set forth herein. NOW, THEREFORE, in connection with the issuance of the Notes and Warrants, each of the Company and USHG agrees with each Purchaser, and each Purchaser severally agrees with the Company and USHG as follows: SECTION 1. DEFINITIONS. (a) As used in this Agreement, the following terms shall have the following meanings. Any term not defined in this Section 1 shall have the meaning assigned to it elsewhere herein, or which is specifically incorporated herein by reference. "Affiliate" of any Person shall mean any other Person (a) that directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common 2 control with such first Person, it being understood that this shall include any officer or director of a Person which is a corporation, any manager or director of a limited liability company, and any general partner of a partnership, and any officer, director or owner of ten percent (10%) or more of any entity which so serves as such manager or general partner, (b) that directly or beneficially owns ten percent (10%) or more of any class of the voting stock of such first Person, or (c) ten percent (10%) or more of whose voting stock (or in the case of a Person which is not a corporation, ten percent (10%) or more of whose equity interest) is owned directly or beneficially by such first Person. "Agent" shall have the meaning given thereto in Exhibit C hereto. "Agreement" shall mean this Note and Warrant Purchase, Guaranty and Security Agreement, together with all Exhibits and Schedules hereto, as from time to time amended, modified or supplemented. "BOA" shall mean Bank of America. "BOA Indebtedness" shall mean USHG's Indebtedness to BOA outstanding prior to the Closing, which is to be paid in full with the proceeds of the issuance and sale of the Notes and Warrants pursuant hereto, as well as the proceeds of the Senior Debt to be incurred on the Closing Date pursuant to the Senior Debt Documents referred to herein. "Business Day" shall mean a day other than a Saturday, Sunday or other day on which commercial banks in New York, New York, are required by law to close. "Capital Expenditures" shall mean expenditures made (including, without limitation, any capitalized consulting and payroll expenditures) or liabilities incurred for the acquisition of any fixed assets or improvements, replacements, substitutions or additions thereto which have a useful life of more than one year, including the total principal portion of Capitalized Lease Obligations. "Capital Lease" shall mean any lease of any Property (whether real, personal or mixed) of any Person as lessee which, in conformity with GAAP, is, or is required to be, accounted for as a capital lease on the balance sheet of such Person. "Capital Stock" shall mean any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership or equity interests in a Person other than a corporation (including partnership interests and limited liability company interests), and any and all warrants, options, conversion rights or other rights to obtain any of the foregoing. "Capitalized Lease Obligation" shall mean any Indebtedness represented by obligations under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP. "Change of Control" shall mean any event or series of events which results in (i) the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or 3 group (within the meaning of the Securities Exchange Act of 1934, as amended, and the rules of the Securities and Exchange Commission thereunder as in effect on the date hereof) of shares representing fifty percent (50%) or more of the aggregate ordinary voting power represented by the issued and outstanding equity interests of USHG (other than those owned by Robert Kassel or Richard Grandy, or by their immediate family members, or by entities 50% or more owned by Robert Kassel or Richard Grandy), (ii) USHG ceasing to own all of the outstanding Capital Stock of the Company, (iii) USHG ceasing to own directly or indirectly all of the issued and outstanding Capital Stock of Weatherly Consumer Products Group, Inc. and Weatherly Consumer Products, Inc., or (iv) any event constituting a "change of control" or similar event which, together with other events or circumstances, gives Robert Kassel the right to a severance or similar payment under the terms of any employment or other arrangement from time to time in effect between Robert Kassel and any of the Corporations. "Closing" shall mean the closing of the issuance and sale of the Notes and Warrants to the Purchasers pursuant hereto. "Closing Date" shall mean November 20, 2001, the date of the Closing of the issuance and sale of the Notes and Warrants to the Purchasers pursuant hereto. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Common Stock" shall mean USHG's Common Stock, $.001 par value. "Common Warrant Agreement" shall mean the Common Warrant Agreement dated as of the date hereof among USHG and the Purchasers, as the same may be amended, modified or supplemented from time to time, relating to the terms of the Common Warrants. "Common Warrant Shares" shall mean the shares of Common Stock issuable or issued upon exercise of the Common Warrants, and shall also include any securities issued in replacement thereof, as a dividend or distribution thereon, or any stock, equity interest, securities or assets issued in the case of any reorganization, reclassification, consolidation, merger or sale of assets of the character referred to in Section 9(b) of the Common Warrant Agreement. "Common Warrants" shall mean each warrant issued pursuant to the Common Warrant Agreement. "consolidated" or "consolidating" shall, when used with reference to any financial information pertaining to (or when used as a part of any defined term or statement pertaining to the financial condition of) USHG and its subsidiaries, mean the accounts of USHG and its subsidiaries determined on a consolidated or consolidating basis, as the case may be, all determined as to principles of consolidation and, except as otherwise specifically required by the definition of such term or by such statements, as to such accounts, in accordance with GAAP and consistent with the financial statements for the fiscal year ended June 30, 2001. "Consolidated Excess Cash" shall mean, for any period, the sum of (a) the 4 Corporations' cash balances available for immediate use by the Company, plus (b) unused but available credit under the revolving line of credit described in the Senior Loan Agreement, minus (i) any accrued or incurred but unpaid costs related to the Transactions, minus (ii) any trade payables or other liabilities 60 days or more past due, and minus (iii) any other cash or cash equivalents the use of which by such Corporations is restricted by contract, lien, agreement, escrow arrangements or similar restrictions and minus (iv) all issued and outstanding checks. "Corporation" shall mean each of USHG and its Subsidiaries (including the Company); and "Corporations" shall be a collective reference to USHG and its Subsidiaries (including the Company). "Costs and Expenses" shall having the meaning set forth in Section 15.5. "Default" shall mean any one of the events specified in Section 9 which is or would become, with the lapse of time specified therein or the giving of any required notice, or both, an Event of Default. "Distribution", in respect of any Corporation, shall mean and include: (i) the payment of any dividends or other distributions on Capital Stock of the Corporation (except distributions made in additional shares of such stock) and (ii) the redemption or acquisition of securities of the Corporation (or any warrant or option for the purchase of any such securities). "Dollars" and "$" shall mean dollars in lawful currency of the United States of America. "EBITDA" shall mean for any period of determination, Net Income for such period, plus, to the extent deducted in determining Net Income, depreciation, amortization, interest expense and income taxes for such period, all as determined in accordance with GAAP. "Environmental Law" shall mean any federal, state or local statute, law, rule, regulation, ordinance, code, policy or rule of common law now or hereafter in effect and in each case as amended, and any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, relating to the environment, health, safety or Hazardous Materials, including without limitation, the Rivers and Harbors Act of 1899, 33 U.S.C.ss.401, et seq., the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendment and Reauthorization Act of 1986, as amended ("CERCLA") 42 U.S.C.ss.9601 et seq.; the Hazardous Materials Transportation Act, as amended, 49 U.S.C. ss.1801 et seq.; the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act, as amended, 42 U.S.C.ss.6901 et seq.; the Federal Water Pollution Control Act, as amended, 33 U.S.C.ss.1251 et seq.; the Toxic Substances Control Act, 15 U.S.C.ss.2601 et seq.; the Clean Air Act, 42 U.S.C.ss.7401 et seq.; the Clean Water Act, 33 U.S.C.ss.1251, et seq., the Safe Drinking Water Act, 42 U.S.C.ss.3808 et seq.; and their counterparts under state and any local law. "Environmental Notice" shall mean any summons, citation, directive, information request, notice of potential responsibility, notice of violation or deficiency, order, 5 claim, complaint, investigation, proceeding, judgment, letters or other communication, written or oral, actual or threatened, from the United States Environmental Protection Agency or other Governmental Authority, concerning any intentional or unintentional act or omission which involves Management of Hazardous Substances on or off the Property of any Corporation, or concerning any alleged violation of or responsibility under Environmental Laws, in each case which reasonably could be expected to result in a material liability to any of the Corporations or the imposition of a Lien on any Property of any of the Corporations. "ERISA Affiliate" shall mean each trade or business (whether or not incorporated) which together with any Corporation would be treated as a single employer under the provisions of Title I or Title IV of ERISA. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "Event of Default" shall mean any one or more of the events specified in Section 9, provided that any requirement set forth in such Section 9 for the giving of notice or the lapse of time, or both, has been satisfied. "Financial Statements" shall have the meaning set forth in Section 4.7(a). "Fully-Diluted Common Stock" shall have the meaning given thereto in the Common Warrant Agreement. "Fully-Diluted Preferred Securities" shall have the meaning given thereto in the Preferred Warrant Agreement. "Funded Debt" shall mean as of any date of determination, the sum, without duplication, of (a) all Indebtedness of USHG or any Subsidiary for borrowed money or for the deferred purchase price of property or services as of such date (other than trade liabilities incurred in the ordinary course of business and not yet payable in accordance with their terms) or which is evidenced by a note, bond, debenture or similar instrument, (b) all obligations of USHG or any Subsidiary under Capital Leases as of such date, (c) all obligations of USHG or any Subsidiary in respect of letters of credit, acceptances or similar obligations issued or created for the account of USHG or any Subsidiary as of such date, (d) all liabilities secured by any lien on any property owned by USHG or any Subsidiary as of such date even though USHG or the applicable Subsidiary has not assumed or otherwise become liable for the payment thereof, and (e) all contingent obligations (including, without limitation, obligations as a guarantor or surety) of USHG or any Subsidiary, in each case determined in accordance with GAAP. "GAAP" shall mean generally accepted accounting principles, in all cases consistently applied in conformity with the accounting methods and practices used in connection with the preparation of USHG's audited Financial Statements for the twelve months ended June 30, 2001. "Golub Consulting Agreement" shall have the meaning given thereto in Section 5.17. 6 "Governmental Authority" shall mean any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guaranty" shall mean any guaranty of the obligations of the Company executed by a Guarantor in favor of the Agent for the ratable benefit of the Purchasers, whether pursuant to Section 3.4 and Exhibit D hereof or otherwise. "Guarantors" shall be a collective reference to USHG and its Subsidiaries (other than the Company), each of which shall agree to and be bound by the terms and provisions of Section 3.4 and Exhibit D hereof. "Hazardous Materials" means (a) any petroleum or petroleum products, radioactive materials, asbestos in any form that is or could become friable, urea formaldehyde foam insulation, transformers or other equipment that contain dielectric fluid containing levels of polychlorinated biphenyls, and radon gas; (b) any chemicals, materials or substances defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "extremely hazardous wastes," "restricted hazardous wastes," "toxic substances," "toxic pollutants," "contaminants" or "pollutants," or words of similar import, under any applicable Environmental Law; and (c) any other chemical, material or substance exposure to which is prohibited, limited or regulated by any Governmental Authority. "Indebtedness" shall mean, as of any applicable date of determination, all items of indebtedness, obligation or liability of USHG and its consolidated Subsidiaries, whether matured or unmatured, liquidated or unliquidated, direct or indirect, absolute or contingent (including, without limitation, obligations and liabilities as a guarantor or surety and obligations with respect to letters of credit), joint or several, that should be classified as liabilities in accordance with GAAP. "Investors" shall have the meaning given thereto in section 12.2. "Junior Subordinated Debentures" shall mean the 9.40% Junior Subordinated Deferrable Interest Debentures issued by USHG pursuant to the Junior Subordinated Indenture. "Junior Subordinated Indenture" shall mean the Junior Subordinated Indenture dated as of April 17, 1998 between USHG and Wilmington Trust Company, as trustee, pursuant to which the Junior Subordinated Debentures were issued. "Lien" shall mean any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on common law, statute or contract. The term "Lien" shall also include reservations, exceptions, encroachments, agreements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting Property. For the purpose of this Agreement, a Person shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes. 7 "Manage" or "Management" shall mean to generate, handle, manufacture, process, treat, store, use, re-use, refine, recycle, reclaim, blend or burn for energy recovery, incinerate, accumulate speculatively, transport, transfer, dispose of, release, threaten to release or abandon Hazardous Materials. "Material Adverse Effect" shall mean the effect of any event or condition which, alone or when taken together with other events or conditions previously occurring, or existing concurrently therewith (a) has or is reasonably expected to have a material adverse effect upon the business, operations, performance, Property, assets, prospects or condition (financial or otherwise) of the Corporations taken as a whole, whether immediately or over the term of the Notes, (b) has or may be reasonably expected to have a material adverse effect upon the validity or enforceability of any of the Purchaser Documents, (c) impairs in any material manner the ability of the Corporations taken as a whole to perform their respective obligations under the Transaction Documents to which each is a party, or (d) impairs in any material manner the ability of the Purchasers to enforce a covenant or agreement or collect the obligations of any of the Corporations under any of the Purchaser Documents. "Material Corporations" shall mean, collectively, USHG, the Company and Weatherly Consumer Products, Inc. "Multiemployer Plan" shall mean a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA. "Net Income" shall mean the net income (or loss) of USHG and its Subsidiaries for any period (in each case after excluding extraordinary income for such period) determined in accordance with GAAP on a consolidated basis. "Obligations" shall have the meaning given thereto in Exhibit C hereto. "Notes" shall have the meaning given thereto in the first paragraph of this Agreement. The Series A Notes shall be in the form of Exhibit B-1 hereto; and the Series B Notes shall be in the form of Exhibit B-2 hereto. "PBGC" shall mean the Pension Benefit Guaranty Corporation. "Pension Plan" shall mean any Plan which is subject to the provisions of Title IV of ERISA. "Permitted Lien" shall mean a Lien permitted by Section 7.1. "Person" shall mean any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, limited liability company, association, corporation, institution, entity, party, or government (whether national, federal, state, county, city, municipal or otherwise, including without limitation any instrumentality, division, agency, body or department thereof). 8 "Plan" shall mean any employee benefit plan within the meaning of Section 3(3) of ERISA and which is maintained (in whole or in part) for employees of any Corporation or any ERISA Affiliate. "Preferred Securities" shall have the meaning given thereto in the second paragraph of this Agreement. "Preferred Warrant Agreement" shall mean the Option Agreement dated as of the date hereof among USHG and the Purchasers, as the same may be amended, modified or supplemented from time to time, relating to the terms of the Preferred Warrants. "Preferred Warrant Securities" shall mean Preferred Securities of the Trust purchasable or purchased from USHG upon exercise of the Preferred Warrants, and shall also include any securities issued in replacement thereof, as a dividend or distribution thereon. "Projections" shall have the meaning given thereto in Section 4.7(b). "Property" shall mean any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Purchase Money Indebtedness" shall mean and include (i) Indebtedness (other than the Senior Debt) for the payment of all or any part of the purchase price of any fixed assets, (ii) any Indebtedness (other than the Senior Debt) incurred at the time of or within ten (10) days prior to or after the acquisition of any fixed assets for the purpose of financing all or any part of the purchase price thereof, and (iii) any renewals, extensions or refinancings thereof, but not any increases in the principal amounts thereof outstanding at the time; provided, however, that in each such case the principal amount of such Indebtedness is not in excess of the purchase price of the fixed assets acquired (plus soft costs related to the acquisition of such fixed assets), and is secured solely, if at all, by a Purchase Money Lien. "Purchase Money Lien" shall mean a Lien upon fixed assets which secures Purchase Money Indebtedness, but only if such Lien shall at all times be confined solely to the fixed assets the purchase price of which was financed through the incurrence of the Purchase Money Indebtedness secured by such Lien. "Purchaser Documents" shall mean, collectively, this Agreement, the Notes, the Warrant Agreements, the Warrants, the Security Documents, the Guaranties, the Stockholders Agreement, the Golub Consulting Agreement, the noncompetition and nonsolicitation agreements referred to in Section 5.16 and any other agreement, document or certificate relating to any thereof, including amendments thereto, and any other document entered into between the Purchasers and any of the Corporations. "Purchaser Transactions" shall mean all transactions contemplated by the Purchaser Documents. "Purchaser" shall mean any holder from time to time of any of the Notes, Warrants or Warrant Securities. 9 "Refinancing Documents" shall mean any and all documents relating to the pay-off of the BOA Indebtedness and the release of all liens securing such Indebtedness. "Release" shall mean any actual or threatened spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping or disposing of Hazardous Materials into the environment, as "environment" is defined in CERCLA. "Reportable Event" shall mean a Reportable Event as defined in Section 4043(b) of ERISA as to which the PBGC has not by regulation waived the requirement that it be notified within 30 days of the occurrence of such an event. "Required EBITDA" shall mean, for purposes of Sections 7.18(b) and 7.18(c) hereof, the amount set forth below opposite the month in which such determination is made, in each case for the applicable Determination Period, for which purpose "Determination Period" shall mean the period of 12 consecutive months ended on the last day of the second month ended prior to the date of determination (by way of illustration, for a determination made during the month of March 2002, the Determination Period will be the 12-month period ended on January 31, 2002): Month of Determination Required EBITDA ---------------------- --------------- December 2001 $5,396,000 January 2002 $5,944,000 February 2002 $6,438,000 March 2002 $6,402,000 April 2002 $7,265,000 May 2002 $8,884,000 June 2002 $9,383,000 July 2002 $9,537,000 August 2002 $10,507,000 September 2002 $10,540,000 October 2002 $10,511,000 November 2002 $10,477,000 December 2002 $10,440,000 January 2003 $10,398,000 February 2003 $10,442,000 March 2003 $10,470,000 April 2003 $10,683,000 May 2003 $10,937,000 June 2003 $11,188,000 July 2003 $11,380,000 August 2003 $11,511,000 September 2003 $11,547,000 October 2003 $11,515,000 November 2003 $11,479,000 December 2003 $11,438,000 January 2004 $11,392,000 February 2004 $11,440,000 March 2004 $11,471,000 April 2004 $11,703,000 May 2004 $11,978,000 June 2004 $12,252,000 July 2004 $12,460,000 August 2004 $12,603,000 September 2004 $12,642,000 October 2004 $12,608,000 November 2004 $12,568,000 10 "Respond" or "Response" shall mean any action taken pursuant to Environmental Laws to correct, remove, remediate, clean up, prevent, mitigate, monitor, evaluate, investigate or assess the Release of a Hazardous Material. "Rights" shall mean all warrants, options, conversion rights or other rights exercisable or exchangeable for or convertible into Capital Stock. "SEC" shall mean the U.S. Securities and Exchange Commission. "Securities Act" shall mean the Securities Act of 1933, as amended. "Security Agreement" shall mean any security interest granted from time to time by a Corporation in favor of the Agent for the ratable benefit of the Purchasers to secure the payment and performance of the Obligations, whether pursuant to Section 3.3 and Exhibit C hereof or otherwise. "Security Documents" shall mean the Security Agreement and all stock pledge and other documents securing the Obligations. "Senior Debt" shall mean the "Senior Obligations" as defined in the Senior Subordination Agreement. "Senior Debt Documents" shall mean (i) the Senior Loan Agreement, the promissory notes delivered thereunder and the other documents delivered pursuant thereto or in connection therewith, or (ii) any replacement senior debt documents relating to any refinancing permitted pursuant to Section 7.15. "Senior Lender" shall mean each of (i) PNC Bank, National Association and any other "Lenders" as defined in the Senior Loan Agreement, and/or (ii) any replacement senior lender(s) in any refinancing permitted pursuant to Section 7.15. "Senior Loan Agreement" shall mean the Revolving Credit, Term Loan, Guaranty and Security Agreement dated as of the date hereof among the Company, as borrower, the other Corporations, as Guarantors, and the Senior Lender, as the same may be amended from time to time in accordance with the provisions hereof, or any replacement senior loan agreement in any refinancing permitted pursuant to Section 7.15. 11 "Senior Subordination Agreement" shall mean the Subordination Agreement dated as of the date hereof among the Purchasers, the Company, and the Senior Lender, or any such agreement with a Senior Lender in any refinancing permitted pursuant to Section 7.15. "Stockholders Agreement" shall mean the Stockholders Agreement dated as of the date hereof, among USHG, Robert Kassel, Richard Raleigh, Richard Grandy and the Purchasers, as the same may be amended, modified or supplemented from time to time. "Subsidiary" shall mean, with respect to any Person: either (i)(a) any corporation of which more than fifty percent (50%) of the outstanding Capital Stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned by such Person or (b) any corporation the Capital Stock of which having more than fifty percent (50%) of the aggregate fair market value of all of such corporation's outstanding Capital Stock is at the time directly or indirectly owned by such Person; or (ii) any partnership, limited liability company or joint venture or other entity of which more than fifty percent (50%) of the outstanding equity interests are at the time directly or indirectly owned by such Person. For purposes of this Agreement, references to "Subsidiary" or "Subsidiaries" of USHG shall specifically include (i) each of the Company, Ampro Industries, Inc., Golden West Agri-Products, Inc., Weed Wizard, Inc., Weatherly Consumer Products Group, Inc. and Weatherly Consumer Products, Inc., and (ii) any other direct or indirect Subsidiary of USHG created after the Closing Date in accordance with Section 7.5 hereof. Unless specifically herein provided to the contrary, references herein to Subsidiaries of USHG shall be deemed not to include the Trust or Egarden Inc. "Transaction Documents" shall mean, collectively, the Purchaser Documents, the Senior Debt Documents, the Refinancing Documents and all other agreements, instruments and documents executed and/or delivered in connection therewith, as each of the same has been or may hereafter be amended, modified or supplemented from time to time with the consent of the Purchasers. "Transactions" shall mean all transactions contemplated by the Transaction Documents. "Warrant Agreements" shall be a collective reference to the Common Warrant Agreement and the Preferred Warrant Agreement. "Warrant Securities" shall be a collective reference to the Common Warrant Shares and/or the Preferred Warrant Securities. (b) As used herein, in the other Purchaser Documents, and in any certificate, report or other document made or delivered pursuant hereto or thereto, unless otherwise defined herein accounting terms shall have the respective meanings given to them under GAAP. (c) The words "hereof," "herein," "hereunder" and "hereto" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement; and Section, Schedule and Exhibit references contained 12 in this Agreement are references to sections, Schedules and Exhibits in or to this Agreement, unless otherwise specified. (d) The meanings given to the terms defined herein shall be equally applicable to both the singular and plural forms of such terms. (e) References herein to the Purchasers' "approval," "discretion" or "judgment" shall mean the Purchasers' sole and absolute discretion or judgment, exercisable without reference to any external standard, or approval by the Purchasers in such sole and absolute discretion or judgment. SECTION 2. PURCHASE AND SALE OF NOTES AND WARRANTS. 2.1 Notes. The Company agrees to sell to each Purchaser, and each Purchaser severally agrees to purchase from the Company, on the Closing Date, Notes of the Series and in the principal amount set forth opposite such Purchaser's name on Exhibit A hereto. Each Note shall (i) be dated the Closing Date, (ii) be substantially in the form of Exhibit B-1 hereto (in the case of the Series A Notes) or Exhibit B-2 hereto (in the case of the Series B Notes), with the blanks appropriately filled in conformity herewith, (iii) bear interest as provided in Sections 3.1(c) and (d), and (iv) mature on November 19, 2007. The Series A Notes shall be issued at a price equal to 90% of the principal amount thereof, and the Series B Notes shall be issued at par. 2.2 Common Warrants. USHG agrees to sell to each Purchaser, on the Closing Date, Common Warrants to purchase the percentage of USHG's Fully-Diluted Common Stock set forth opposite such Purchaser's name on Exhibit A hereto. The Common Warrants issued pursuant hereto shall be exercisable for an aggregate of not less than three and three quarters percent (3.75%) of USHG's Fully-Diluted Common Stock. The Common Warrants shall be issued pursuant to this Agreement and the Common Warrant Agreement. Each Common Warrant shall be substantially in the form of Exhibit A to the Common Warrant Agreement, with the blanks appropriately filled in conformity herewith, and shall be dated the Closing Date. 2.3 Preferred Warrants. USHG agrees to sell to each Purchaser, on the Closing Date, Preferred Warrants to purchase the percentage of the Trust's Fully-Diluted Preferred Securities set forth opposite such Purchaser's name on Exhibit A hereto. The Preferred Warrants issued pursuant hereto shall be exercisable for an aggregate of not less than three and three quarters percent (3.75%) of the Trust's Fully-Diluted Preferred Securities. The Preferred Warrants shall be issued pursuant to this Agreement and the Preferred Warrant Agreement. Each Preferred Warrant shall be substantially in the form of Exhibit A to the Preferred Warrant Agreement, with the blanks appropriately filled in conformity herewith, and shall be dated the Closing Date. 2.4 Payment of Purchase Price. The purchase price for the Notes and Warrants shall be payable on the Closing Date in cash by wire transfer of immediately available funds pursuant to the Company's written instructions. 13 2.5 Tax Reporting. The Company and USHG, on the one hand, and the Purchasers, on the other hand, having adverse interests and as a result of arms-length bargaining, agree that (i) the Warrants are not being issued as compensation; and (ii) for the purposes and within the meaning of Section 1273(c)(2) of the Code the issue price of the Notes is $6,250,000 and the issue price of the Warrants is $75. The Company, USHG and the Purchasers acknowledge that this allocation is based on the relative fair market values of the Notes and Warrants. The Company, USHG and the Purchasers recognize that this Agreement determines the original issue discount on the Notes to be taken into account by the Company and the Purchasers for federal income tax purposes, and they agree to adhere to this Agreement for such purposes. For federal, state and local tax purposes, the Company, USHG and the Purchasers agree to take reporting and other positions with respect to the Notes and Warrants which are consistent with the purchase price of the Notes and Warrants set forth herein. 2.6 Fees and Expenses. On the Closing Date, the Company agrees to pay (i) $93,152 to Golub Associates, LLC or its designee, representing the balance due in respect of a fee of $136,968 payable to the Purchasers or their designee pursuant to the Commitment Letter referred to in Section 15.5 hereof, (ii) Costs and Expenses of the Purchasers, as set forth in Section 15.5, (iii) the finder's fee payable to Larkspur Capital Corporation, as set forth in the Commitment Letter referred to in Section 15.5 hereof, and (iv) any stand-by fee payable pursuant to Section 3 of the "Other Provisions" Section of the Summary Term Sheet attached to the Commitment Letter referred to in Section 15.5 hereof. 2.7 Manner of Payment. All payments and prepayments of principal of, premium, if any, and interest on the Notes, and any other fees or payments due hereunder, shall be made without setoff or counterclaim to the applicable Purchasers by wire transfer or other transfer or delivery of funds, in accordance with each Purchaser's instructions from time to time, so that such funds are received by and available to the Purchasers on or before the due date of each such payment. Any principal, premium, interest or other amount payable hereunder that becomes due on a day that is not a Business Day shall be payable on the next succeeding Business Day (together with interest accrued thereon during such additional days). SECTION 3. TERMS OF THE NOTES; USE OF PROCEEDS; REGISTRATION RIGHTS. 3.1 Terms of the Notes. (a) Optional Prepayments. (i) Series A Notes. The Company shall have the right at any time and from time to time, upon at least five (5) Business Days' prior written notice to the holders of the Series A Notes, to prepay the Series A Notes in whole or in part, in an amount specified in such notice, by payment of the principal amount of the Series A Notes (or portion thereof) to be prepaid, together with accrued interest thereon to the date of such prepayment, plus (i) any amounts payable pursuant to Section 3.1(h), and (ii) a premium equal to the applicable percentage of the principal amount to be prepaid, determined as follows: 14 If Prepaid During 12 Month Period Ending On: Applicable Percentage -------------------------------------------- --------------------- the first anniversary of the Closing Date 4.5% the second anniversary of the Closing Date 3.6% the third anniversary of the Closing Date 2.7% the fourth anniversary of the Closing Date 1.8% the fifth anniversary of the Closing Date 0.9% Thereafter 0% (ii) Series B Notes. The Company shall have the right at any time and from time to time, upon at least five (5) Business Days' prior written notice to the holders of the Series B Notes, to prepay the Series B Notes in whole or in part, in an amount specified in such notice, by payment of the principal amount of the Series B Notes (or portion thereof) to be prepaid, together with accrued interest thereon to the date of such prepayment, plus (i) any amounts payable pursuant to Section 3.1(h), and (ii) a premium equal to the applicable percentage of the principal amount to be prepaid, determined as follows: If Prepaid During 12 Month Period Ending On: Applicable Percentage -------------------------------------------- --------------------- the first anniversary of the Closing Date 5% the second anniversary of the Closing Date 4% the third anniversary of the Closing Date 3% the fourth anniversary of the Closing Date 2% the fifth anniversary of the Closing Date 1% Thereafter 0% (iii) Series A and Series B Notes. Any optional partial prepayment of the Notes shall be in the aggregate principal amount of not less than $500,000, or any greater amount which is a multiple of $100,000. (b) Mandatory Prepayments. (i) If there shall occur a Change of Control (other than one to which subsection (ii) applies), then, upon request of a majority in interest of the Purchasers, the Company shall prepay the Notes in full upon the occurrence of such Change of Control, together with accrued interest thereon to the date of such prepayment and the applicable premium set forth above in Section 3.1(a). (ii) If there shall occur a merger, consolidation of a Material Corporation, or a sale of 25% or more of the assets of a Material Corporation, or other transaction which effectively accomplishes such a sale, then, upon request of a majority in interest of the Purchasers, the Company shall prepay the Notes in full on the closing date of such transaction, together with accrued interest thereon to the date of such prepayment and the applicable premium set forth above in Section 3.1(a). 15 (c) Interest. (i) Subject to Section 3.1(d) below, interest on the Series A Notes shall accrue monthly at the rate of 16% per annum, and interest on the Series B Notes shall accrue monthly at the rate of 14% per annum. The Company shall pay accrued interest monthly on the first day of each month or, if any such date shall not be a Business Day, on the next succeeding Business Day to occur after such date (each date upon which interest shall be so payable, an "Interest Payment Date"), beginning on December 1, 2001. Interest on the Notes shall accrue monthly from the date of issuance thereof until repayment of the principal thereof and payment of all accrued interest thereon in full. Interest shall be computed on the basis of a 360-day year of twelve 30-day months. (d) Default Rate of Interest. If any principal of or interest on the Notes is not paid when due or there exists any other Default or Event of Default, the Notes shall bear interest thereafter at the rate of, at a rate of 4% per annum in excess of the rate otherwise applicable, accruing monthly, until the date on which such overdue principal or interest is paid in full or the date on which such other Default or Event of Default is cured, as applicable. (e) Maximum Legal Rate of Interest. Nothing in this Agreement or in the Notes shall require the Company to pay interest at a rate in excess of the maximum rate permitted by applicable law and the interest rate otherwise applicable to the Notes (including any default rate of interest) shall be reduced, if necessary, to conform to such maximum rate. (f) Application of Payments. All cash payments received in respect of the Notes, regardless of how designated, shall be applied (to the extent thereof) as follows: (i) first, to all costs and expenses of the Purchasers that are payable by any of the Corporations under the Purchaser Documents, (ii) second, to accrued and unpaid interest on the Series B Notes, (iii) third, to accrued and unpaid interest on the Series A Notes, (iv) fourth, to the prepayment or payment of the Series B Notes, with amounts being applied, first, to any premium payable in connection with any such prepayment, and, next, to the principal of such Notes, and (v) fifth, to the prepayment or payment of the Series A Notes, with amounts being applied, first, to any premium payable in connection with any such prepayment, and, next, to the principal of such Notes. Unless otherwise agreed among the holders of the Notes, and evidenced in writing to the Company prior to the payment date, all payments applied pursuant to this Section 3.1(f) in respect of a Series of Notes shall be applied among the Notes of such Series pro rata based on the principal amount of the Notes of such Series outstanding and held by each holder thereof. (g) Agreements Between Note Holders and Subordination Agreements. The Company agrees to acknowledge and abide by the terms and conditions of any allocation, participation, sharing or subordination agreements now or hereafter entered into between and among the holders of the Notes, or between the holders of the Notes and any other creditor of the Company, and shall join in any such agreements at the request of the holders of the Notes, provided that such agreements do not impair in any material respect any of the rights of the Company under the Transaction Documents then in effect. (h) Indemnity for Interrupted Funding. If the Company shall voluntarily prepay the Notes pursuant to Section 3.1(a), the Company shall reimburse each Purchaser for out-of-pocket expenses incurred by each Purchaser as a result of such prepayment (including, without 16 limitation, reasonable legal and accounting expenses, if any). Such expenses (which the Purchasers shall endeavor to minimize) shall be specified in a written notice or certificate delivered to the Company by the Purchasers and shall in any event not exceed $10,000 in the aggregate for all the Purchasers on account of each event of prepayment. 3.2 Use of Proceeds. The Company and USHG will use the proceeds of the sale of the Notes and Warrants solely in accordance with the statement of sources and uses provided to the Purchasers pursuant to Section 5.12 hereof. 3.3 Grant of Security Interest. To secure the prompt payment and performance to the Agent and each Purchaser of the Obligations, each Corporation assigns, pledges and grants to the Agent for the ratable benefit of each Purchaser a continuing security interest in and to all of its Collateral (as defined in Exhibit C), whether now owned or existing or hereafter acquired or arising and wheresoever located, all in accordance with the terms and provisions of Exhibit C hereto, the terms of which are hereby incorporated by reference as if set forth in full in this Section 3.3. 3.4 Guaranty. Each Guarantor guaranties the payment and performance of the Liabilities, all in accordance with the terms and provisions of Exhibit D hereto, the terms of which are hereby incorporated by reference as if set forth in full in this Section 3.4. 3.5 Registration Rights. The Purchasers and USHG shall have the rights and obligations set forth in Exhibit E-1 and Exhibit E-2 hereto with respect to registrations of USHG's and the Trust's securities under the Securities Act. SECTION 4. REPRESENTATIONS AND WARRANTIES. In order to induce the Purchasers to enter into this Agreement and to purchase the Notes and Warrants, each of the Company and USHG hereby represents and warrants to the Purchasers that the representations and warranties set forth below are true and correct as of the date hereof and shall be true and correct on the Closing Date after giving effect to the Transactions, including the issuance and sale of the Notes and Warrants, and that, to the best knowledge of the Company and USHG, there is no event which is scheduled to occur, or reasonably foreseeable and likely to occur, which will render any representation or warranty below to be untrue at any time after the Closing Date. 17 4.1 Corporate Existence; Capitalization. (a) Each of the Corporations (i) is duly incorporated and in good standing under the laws of its jurisdiction of incorporation, and (ii) is duly qualified and in good standing as a foreign corporation under the laws of all states where the nature and extent of the business to be transacted by it or assets to be owned by it makes such qualification necessary, except those states in which the failure to qualify or be in good standing is not reasonably likely to have a Material Adverse Effect. The state of incorporation of each Corporation, and all states in which each Corporation is qualified to do business as a foreign corporation, are listed on Schedule 4.1(a). (b) The number of authorized shares of Capital Stock of USHG consists of 75,000,000 shares of Common Stock and 1,000,000 shares of Preferred Stock, $.001 par value. On the Closing Date, immediately after giving effect to the Transactions, 17,543,379 shares of Common Stock will be issued and outstanding and another 6,595,242 shares of Common Stock will be issuable upon exercise of all Rights outstanding on the Closing Date (excluding the Common Warrants). In addition, there are 208,388 shares of Common Stock whose issuance to Robert Kassel has been deferred pursuant to the USHG Non-Qualified Deferred Compensation Plan for Select Employees. No shares of Preferred Stock are now outstanding or will be outstanding on the Closing Date. All shares of Common Stock issued and outstanding on the Closing Date after giving effect to the Transactions will have been duly authorized and validly issued by USHG and will be fully paid, non-assessable and free of preemptive rights. Except as set forth on Schedule 4.1(b), on the Closing Date after giving effect to the Transactions, there will be no outstanding Rights exercisable or exchangeable for or convertible into Capital Stock of USHG, or agreements or other rights binding upon USHG to issue or sell Capital Stock of USHG, whether on exercise, exchange or conversion of Rights or otherwise. To the best of the Company's and USHG's knowledge after due inquiry, Schedule 4.1(b) correctly sets forth the names of all record and beneficial owners of 5% or more of the outstanding shares of Common Stock and the number of shares owned by each. Schedule 4.1(b) also sets forth (i) the number of shares of Common Stock issuable upon exercise, exchange or conversion of Rights exercisable or exchangeable for or convertible into Capital Stock of USHG, (iii) the exercise or conversion price of each such owner's Rights, and (iii) the expiration date, if any, of each such Rights. Schedule 4.1(b) hereto also describes any obligations of USHG to purchase or redeem any of its Capital Stock (including Rights). The names of all record and beneficial owners of Rights exercisable or exchangeable for or convertible into Capital Stock of USHG are set forth in a letter delivered by the Company and USHG to the Purchasers on the Closing Date. (c) All of the outstanding Capital Stock of each of USHG's Subsidiaries is owned of record and beneficially by USHG or by another Subsidiary of USHG. (d) USHG has authorized and reserved and kept available, free from pre-emptive rights and free of all Liens, restrictions, rights and claims of others, for the purpose of enabling it to satisfy any obligation to issue shares of Common Stock upon any exercise of the Common Warrants, the number of shares of Common Stock issuable upon exercise of all outstanding Common Warrants. Upon any issuance of Common Warrant Shares to a holder of Common Warrants upon exercise thereof, such Common Warrant Shares shall be free of all pre-emptive 18 rights, Liens, restrictions, rights and claims of others (except for Liens, if any, created by the holders thereof). (e) USHG has kept available, free of all Liens, restrictions, rights and claims of others, for the purpose of enabling it to satisfy its obligation to sell Preferred Securities upon any exercise of the Preferred Warrants, the number of Preferred Securities purchasable upon exercise of all outstanding Preferred Warrants. Upon any sale of Preferred Securities to a holder of Preferred Warrants upon exercise thereof, such Preferred Securities shall be free of all Liens, restrictions, rights and claims of others (except for Liens, if any, created by the holders thereof). (f) There are no agreements or other instruments of any kind to which USHG (or, to the best of the Company's and USHG's knowledge after due inquiry, any other Person) is, or immediately after the Closing will be, a party which relate to the voting of the Common Stock or the control of USHG. 4.2 Authority. The Company has all corporate power and authority necessary to issue and sell the Notes, USHG has all corporate power and authority necessary to issue and sell the Warrants, and each of the Corporations has all corporate power and authority necessary to execute, deliver and perform the Transaction Documents to which it is a party. Each of the Company and USHG has taken all corporate action required to authorize the issuance and sale of the Notes or the Warrants, as applicable, and each of the Corporations has taken all corporate action required to authorize the execution, delivery and performance of the Transaction Documents to which it is a party. 4.3 Due Execution and Delivery; Binding Effect. Each of the Corporations has duly executed and delivered each of the Transaction Documents to which it is a party. Each of the Transaction Documents is a legal, valid and binding obligation of each Corporation party thereto, enforceable against such Corporation in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, fraudulent transfer or similar laws affecting creditors' rights generally and subject to general principles of equity, regardless of whether considered in a proceeding at law or in equity. 4.4 Consents; Governmental Approvals. No consent or approval of any Person, and no consent, license, approval or authorization of, or registration, filing or declaration with, any Governmental Authority is required to be obtained or made by or on behalf of any Corporation in connection with the issuance or sale of the Notes or the Warrants or the execution, delivery or performance of the Transaction Documents or the completion of the transactions contemplated thereby, except for the consents, approvals, licenses, authorizations, registrations, filings or declarations listed on Schedule 4.4 hereto, each of which shall have been obtained or made prior to the Closing. 4.5 Absence of Conflicts. The issuance and sale of the Notes by the Company and the Warrants by USHG, and the execution and delivery by each Corporation of the Transaction Documents to which it is a party and performance of its obligations thereunder do 19 not and will not (a) conflict with or violate any provision of its certificate or articles of incorporation, as amended, or by-laws, as amended, (b) conflict with or result in a violation, breach or default by it under (i) any provision of any existing statute, law, rule or regulation binding on it or any order, judgment, award, decree, license or authorization of any court or Governmental Authority binding on it, or (ii) any mortgage, indenture, lease or other contract, agreement, instrument or undertaking to which it is a party or will be a party immediately after the Closing, or by which or to which it or any of its Property or assets is now or immediately after the Closing will be bound or subject, except in the case of the foregoing clauses (i) and (ii), conflicts which would not result in a Material Adverse Effect, or (c) result in the creation or imposition of any Lien, except for Permitted Liens. 4.6 No Default. No Default or Event of Default has occurred and is continuing or will have occurred and be continuing at the time of or immediately after the Closing 4.7 Financial Data. (a) USHG and the Company have furnished to the Purchasers (i) audited consolidated and consolidating financial statements of USHG and its consolidated Subsidiaries for the fiscal years ended June 30, 1999 through June 30, 2001, certified by USHG's independent certified public accountants, and (ii) unaudited interim financial statements of USHG and its consolidated Subsidiaries for the period beginning July 1, 2001 and ending on October 31, 2001 (collectively referred to as the "Financial Statements"). All of the Financial Statements have been prepared in accordance with GAAP, and fairly present the financial condition of USHG and its consolidated Subsidiaries at the dates thereof and the results of operations for the periods indicated. Since June 30, 2001, there has been no event or condition which would constitute a Material Adverse Effect. (b) The Company and USHG have furnished to the Purchasers the following, copies of which are attached hereto as Schedule 4.7(b) (collectively, the "Projections"): (i) consolidated and consolidating projected financial statements for USHG and its consolidated Subsidiaries for the fiscal year ending on June 30, 2002, presented on a monthly basis, (ii) consolidated projected financial statements for USHG and its consolidated Subsidiaries for the following four fiscal years, presented on an annual basis, including projected balance sheets, projected funds flow statements and projected profit and loss statements, and (iii) a calculation of Consolidated Excess Cash for each month during the first twelve months after Closing, including a description of the elements thereof. The Projections have been prepared to reasonably reflect the application of GAAP to such periods, as determined in good faith by USHG and the Company and their financial personnel in light of the past business of USHG and its consolidated Subsidiaries, and represent the good faith belief of each of the Company and USHG as to the anticipated course of the business of USHG and its consolidated Subsidiaries; and neither the Company nor USHG is aware of any adverse development which has occurred since the date of the preparation of the Projections that would materially affect the Projections. Neither the Company nor USHG has any knowledge or reason to believe that the future financial results of USHG and its consolidated Subsidiaries will not be at least as favorable as reflected in the Projections; however, the Projections are not a guaranty of future performance. (c) The Company and USHG have furnished to the Purchasers a consolidated 20 and consolidating pro forma balance sheet (the "Pro Forma Balance Sheet") reflecting the financial condition of USHG and its consolidated Subsidiaries as at the Closing Date or a recent date prior to the Closing Date, on the assumption that the closing of the Transactions (including the issuance and sale of the Notes and Warrants) occurred on such date. Such balance sheet, a copy of which is attached hereto as Schedule 4.7(c), was prepared in good faith and in accordance with GAAP, and fairly presents, on a pro forma basis, the financial position of USHG and its consolidated Subsidiaries as at the date thereof, assuming that the Transactions (including the issuance and sale of the Notes and Warrants) had then been completed. Except as disclosed on Schedule 4.7(c), immediately after the Closing and after giving effect to the Transactions, none of the Corporations will have any Indebtedness or other material liabilities, contingent or otherwise, which are not reflected in the Pro Forma Balance Sheet or the Financial Statements. In addition: (i) As of the Closing Date, all notes payable to each Corporation and accounts receivable of each Corporation are properly reflected on its books and records and are valid receivables subject to no setoffs or counterclaims other than in the ordinary course of business consistent with prior fiscal years, and such notes due and accounts receivable are not due from any related party or Affiliate of any kind (other than Robert Kassel's promissory note (the "Kassel Note") in favor of the Company described in Schedule 4.25(d) hereto); (ii) the accounts receivable reflected on the balance sheets included in the Financial Statements and on the Pro Forma Balance Sheet, or thereafter acquired by any Corporation through the Closing Date, have been collected, or are collectible, at the aggregate gross recorded amounts thereof less the allowances for doubtful accounts reflected therein (it being acknowledged, that discounts, rebates and other adjustments offered to customers in the ordinary course of business and consistent with past practice ("Sales Allowances") may on occasion be offset against accounts receivable by customers, however all such Sales Allowances are properly accrued for in the Financial Statements and the Pro Forma Balance Sheet) and such accounts receivable are not due from any related party or Affiliate of any kind (other than the Kassel Note); none of the Corporations has employed any invoice dating procedures or other special credit or delivery terms with any customer; and each of the Corporations has administered its accounts receivable in the ordinary course in accordance with past practice; (iii) the inventories reflected on the balance sheets included in the Financial Statements and on the Pro Forma Balance Sheet, or thereafter acquired by any Corporation through the Closing Date, are in all material respects of a quality and quantity usable or saleable in the normal course of the business of such Corporation at values at least equal to the values at which such items are carried on such Corporation's books subject to any reserves disclosed in such balance sheet, and have not been acquired from any related party or Affiliate of any kind. The values at which such inventories are carried on the Financial Statements reflect the normal inventory valuation policy of such Corporation, stating inventories at the lower of cost (on a first-in-first-out basis) or market; and, to the best knowledge of the Company and USHG, such inventories are saleable at gross margins consistent with historical results; 21 (iv) none of the Corporations has delayed or postponed the payment of accounts payable and other liabilities except as set forth on Schedule 4.7(c)(iv) hereto, and in any event any such delay or postponement does not now create, and is not reasonably likely to create, any penalty, cost, reversal of pricing discounts, loss of beneficial supply or similar rights, or any default with any other party which is not already reflected or contemplated in the Financial Statements, the Pro Forma Balance Sheet and the Projections, other than reasonable and customary late payment charges or which are otherwise set forth on Schedule 4.7 (c)(iv) hereto; and (v) each Corporation's working capital is at a level consistent with such Corporation's customary practices except as set forth on Schedule 4.7(c)(iv) hereto, and there are no material past due liabilities or obligations of such Corporation, other than those referred to in clause (iv) above. (d) The Company and USHG have furnished to the Purchasers a correct and complete calculation of Consolidated Excess Cash as of the Closing Date, including a description of the elements thereof, a copy of which is attached hereto as Schedule 4.7(d). 4.8 Title to Property and Assets; Condition. Except as set forth on Schedule 4.8, each Corporation has, and on the Closing Date will have, good title to all Property owned by it, including all Property reflected in the Pro Forma Balance Sheet, except as disposed of after the date thereof in the ordinary course of business, and no such Property is subject to any Lien other than Permitted Liens described on Schedule 4.8 hereto. Except for Permitted Liens, there are not now and there will not be after the Closing any encumbrances on the use, ownership or sale of such Property, and all such Property is, and after the Closing will be, sufficient and maintained in appropriate condition to conduct business and operations in a manner consistent with such Corporation's past practice and with achieving the Projections. 4.9 Solvency. Immediately after giving effect to the Transactions, the Corporations, taken as a whole, will be "solvent," that is, the Corporations, taken as a whole, will be able to pay their debts as they become due and will have capital sufficient to carry on their businesses, and will own Property having a value both at fair valuation and at present fair saleable value greater than the amount required to pay their Indebtedness as it becomes due. None of the Corporations has incurred obligations or made any transfer with actual intent to hinder, delay or defraud present or future creditors (or as a result of the Transactions will incur any such obligation or make any such transfer). 4.10 Taxes. Except as set forth on Schedule 4.10, each of USHG and (to the extent required) its Subsidiaries has timely filed or caused to be timely filed with the appropriate taxing authority all federal and state income tax returns and all other material tax returns, domestic and foreign (the "Returns") required to be filed by it or with respect to the income, properties or operations of USHG and/or any of its Subsidiaries. Except as set forth on Schedule 4.10, the Returns accurately reflect in all material respects all liability for taxes of USHG and its Subsidiaries taken as a whole for the periods covered thereby. Except as set forth on Schedule 4.10, each of USHG and its Subsidiaries has paid all taxes and assessments 22 payable by it which have become due (including, without limitation, all estimated tax payments and all employment taxes). As of the Closing Date and except as set forth on Schedule 4.10, there is no action, suit, proceeding, investigation, audit or claim now pending or threatened by any authority regarding any taxes relating to USHG or any of its Subsidiaries, which, either individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect or to result in a material liability to USHG or any of its Subsidiaries. As of the Closing Date and except as set forth on Schedule 4.10, neither USHG nor any of its Subsidiaries has entered into an agreement or waiver or been requested to enter into an agreement or waiver extending any statute of limitations relating to the payment or collection of taxes of USHG or any of its Subsidiaries, nor will any of them incur any tax liability in connection with the Transactions (it being understood that the representation contained in this sentence does not cover any future tax liabilities of USHG or any of its Subsidiaries arising as a result of the operation of their businesses in the ordinary course of business). Each of the Company and USHG believes that the amount of the net operating loss carryovers to be reflected in the consolidated federal income tax return of USHG and its consolidated Subsidiaries for the tax year ended December 31, 2001 will be at least $6,000,000, all which will be fully utilizable against any consolidated net taxable income of the Corporations. 4.11 Margin Securities. None of the Corporations owns any margin securities (other than treasury stock and Preferred Securities), and no portion of the proceeds of the sale of the Notes and Warrants will be used for the purpose of purchasing or carrying any margin securities or for the purpose of reducing or retiring any Indebtedness which was originally incurred to purchase any margin securities or for any other purpose not permitted by Regulation U of the Board of Governors of the Federal Reserve System. 4.12 Subsidiaries; Joint Ventures. On the Closing Date after giving effect to the Transactions, none of the Corporations will (a) have any Subsidiaries other than as set forth on Schedule 4.12, or (b) be engaged in any joint venture or partnership with, or have any equity investment in, any other Person (other than USHG's, the Company's and Weatherly Consumer Products Group, Inc.'s equity investments in their respective direct Subsidiaries, as set forth on Schedule 4.12). 4.13 Litigation and Proceedings. Except as disclosed on Schedule 4.13, no judgments involving amounts in excess of $50,000 in the aggregate or injunctions are outstanding against any of the Corporations, nor is there now pending or threatened, any litigation, contested claim, or proceeding by or against any of the Corporations (a) requesting injunctive relief by or against such Corporation, (b) involving an amount in controversy in excess of $50,000 which is not covered by insurance, or (c) questioning the validity or the enforceability of, or otherwise seeking to restrain the performance of, any of the Transaction Documents or any actions taken or to be taken thereunder. 4.14 Defaults; Adverse Changes. None of the Corporations is, or immediately after the Closing will be, in default under or in violation of (a) its Certificate or Articles of Incorporation, as amended, or by-laws, as amended, (b) any agreement or instrument to which such Corporation is a party or will be a party immediately after the Closing, (c) any statute, rule, writ, injunction, judgment, decree, order or regulation of any Governmental Authority 23 having jurisdiction over it, (d) any license, permit, certification or approval requirement of any customer, supplier or other Person (other than a Governmental Authority), or (e) any license, permit, certification or approval requirement of any Governmental Authority, except in the case of the foregoing clauses (b) through (e), defaults or violations which could not reasonably be expected to result in a Material Adverse Effect. To the best of the Company's and USHG's knowledge, no Material Adverse Effect could reasonably be expected to occur as a result of any pending legislative or regulatory change or any revocation of any license or right to do business or any casualty, labor trouble, condemnation, requisition, embargo or otherwise. 4.15 Insurance. Attached hereto as Schedule 4.15 is a list and description of all insurance policies (including expiration dates) owned or maintained by each Corporation. Each Corporation maintains insurance in amounts and on terms reasonably adequate in relation to the nature of such Corporation's business and assets (and covering such risks as are customarily insured against by Persons of established reputation engaged in the same or a similar business and similarly situated), under policies believed by each of the Company and USHG to be valid and enforceable and issued by the insurers set forth on Schedule 4.15. None of the Corporations is in default of any obligation under any such policy. To the extent any insurance policy has a cash surrender, rebate or similar value, there is no restriction, Lien or other encumbrance affecting the Corporation's receipt or claim of such value (other than Liens in favor of the Senior Lender), and no obligation or agreement to pay, directly or indirectly, such value to any other party. Each insurance company issuing a policy listed on Schedule 4.15 has an A.M. Best rating of not less than A. 4.16 Patents, Trademarks, Licenses, etc. Attached hereto as Schedule 4.16 is a list of all patents, patent applications, registered and unregistered trademarks, service marks, trade names, brands and material copyrights (collectively, "Intellectual Property") owned or licensed by each Corporation. Except as disclosed on Schedule 4.16 and except for Permitted Liens, the applicable Corporation owns the entire unencumbered right, title and interest in and to all such properties, no rights or licenses to or from others have been granted with respect to such properties, and each Corporation owns or possesses the right to use all the patents, patent applications, trademarks, service marks, trade names, brands, copyrights and licenses, both domestic and foreign, and rights with respect to the foregoing, necessary for the conduct of its business as now conducted, without any known conflict with the rights of others which, if determined adversely to such Corporation, would result in a Material Adverse Effect. Except as disclosed on Schedule 4.16, no stockholder, officer, director or any other Affiliate of any of the Corporations (other than another Corporation) owns or possesses any rights in any patents, patent applications, registered or unregistered trademarks, service marks, trade names, brands, copyrights, or domestic or foreign licenses which are used by such Corporation in its business. 4.17 Environmental Matters. Except as disclosed on Schedule 4.17: (a) none of the Corporations has Managed Hazardous Materials on or off its property other than in compliance in all material respects with Environmental Laws; 24 (b) each of the Corporations has complied in all respects with all applicable Environmental Laws (other than any noncompliance which, individually or in the aggregate, would not result in a Material Adverse Effect); (c) none of the Corporations has any material contingent liability with respect to the Management of any Hazardous Material; and (d) none of the Corporations has received any Environmental Notice, and neither the Company nor USHG is aware of any occurrence or state of facts which would reasonably be expected to result in any such Environmental Notice. 4.18 Investment Bankers' or Finders' Fees. None of the Corporations is in any way obligated to any Person in respect of any finder's or broker's fee or similar commission in connection with the closing of the issuance and sale of the Notes and Warrants or any other part of the Transactions, except for the Corporations' obligation to pay or reimburse the Purchasers for a finder's fee payable to Larkspur Capital Corporation, as set forth in the Commitment Letter referred to in Section 15.5 hereof. Each of the Company and USHG agrees to indemnify the Purchasers and hold the Purchasers harmless from any claims for any such fees or commissions from any Persons. 4.19 Investment Company Act. None of the Corporations is an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. None of the Corporations is subject to regulation under any federal or state statute or regulation which limits its ability to incur Indebtedness. 4.20 Disclosure. Except as corrected in writing prior to the Closing Date, neither this Agreement nor any of the other Purchaser Documents nor any other written statement provided by or on behalf of any of the Corporations to the Purchasers in connection with the issuance and sale of the Notes and Warrants, nor contained in USHG's publicly available filings with the SEC, contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances under which such statements were made, it being understood that, except as set forth in Section 4.7(b) hereof and this Section 4.20, no representation or warranty is made with respect to the Projections or other prospective financial information. To the best of the Company's and USHG's knowledge after due inquiry, there is no fact or circumstance which could reasonably be expected to result in a Material Adverse Effect which has not been disclosed to the Purchasers in the written agreements and other documents described in this Section 4.20. 4.21 Pension Plans. Except as disclosed on Schedule 4.21, none of the Corporations has any Plan on the date hereof or will have any as of the Closing Date. Each of the Corporations is in compliance in all material respects with requirements of ERISA and the regulations promulgated thereunder with respect to each Plan. No fact or situation that could reasonably be expected to result in a Material Adverse Effect exists in connection with any 25 Plan. None of the Corporations has any withdrawal liability in connection with a Multiemployer Plan. 4.22 Compensation and Benefits. The Company and USHG have delivered to the Purchasers copies of all employment, management, consulting, retirement benefit and compensation contracts and commitments now in effect with any employee, officer, director or shareholder (or any Affiliate thereof) of any of the Corporations, or with any other Person, and each of such agreements or plans is set forth on Schedule 4.22. 4.23 Labor Relations. None of the Corporations is engaged in any unfair labor practice that could reasonably be expected, either individually or in the aggregate, to have a Material Adverse Effect. There is (a) no unfair labor practice complaint pending against any of the Corporations or threatened against any of them, before the National Labor Relations Board, and no grievance or arbitration proceeding arising out of or under any collective bargaining agreement is so pending against any of the Corporations or threatened against any of them, (b) no strike, labor dispute, slowdown or stoppage pending against any of the Corporations, (c) no union representation question exists with respect to the employees of any of the Corporations, except (with respect to any matter specified in clause (a), (b) or (c) above, either individually or in the aggregate) such as could not reasonably be expected to have a Material Adverse Effect, and (d) no notice, claim, formal or informal investigation or proceeding or other matter existing or threatened under the Occupational Health and Safety Act, or similar state statutes or regulations, regarding any matter of safety, working conditions, worker eligibility or similar matter, and Schedule 4.23 describes any of such matters which have occurred or been threatened since July 1, 1998, whether or not such matter was thereafter resolved or settled. To the best of the Company's and USHG's knowledge after due inquiry, no senior executive of any of the Corporations has any intention of terminating his or her employment. No such senior executive has any claim for severance, change of control payments or similar compensation as a result of the consummation of the Transactions, except as may be set forth in Schedule 4.23 hereof. 4.24 Trade and Consumer Relations and Practices. There exists no actual or threatened, termination, cancellation or limitation of, or any adverse modification or change in, the business relationships of any of the Corporations or their respective businesses with any customer or any group of customers whose purchases are individually or in the aggregate material to the business of the Corporations taken as a whole, or with any material supplier, and there exists no present condition or state of facts or circumstances regarding the foregoing that would have a Material Adverse Effect or prevent any of the Corporations from conducting its business after the consummation of the Transactions, in substantially the same manner in which such business has heretofore been conducted or in a manner sufficient to achieve the Projections. There is no notice, claim, formal or informal investigation or similar proceeding or other matter existing or threatened by the Federal Trade Commission, or any other federal or state agency or authority regarding any of the Corporations' sales practices, advertisements or conduct of any kind regarding consumers or customers, or which regards competition or relationship with competitors or any other matter, and no such matters which have occurred or been threatened since July 1, 1998. 26 4.25 Other Agreements. Except for the Transaction Documents or as set forth on Schedule 4.25 attached hereto, none of Corporations is a party to or otherwise bound or affected by any written or (to the best of the Company's and USHG's knowledge) oral: (a) employment, severance or similar agreement or other material agreement (other than Rights disclosed on Schedule 4.1(b) hereto) with (i) any present or former director, officer or other Affiliate, (ii) any present shareholder, or (iii) any former shareholder who held 5% or more of any Corporation's Capital Stock; (b) agreement, contract or commitment for the purchase of, or payment for, supplies or products, or for the performance of services by a third party, involving in any one case $100,000 or more, other than purchase orders issued to vendors in the ordinary course of business involving $500,000 or less; (c) agreement, contract or commitment to sell or supply products or to perform services, involving in any one case $100,000 or more, other than purchase orders received from customers in the ordinary course of business involving $1,000,000 or less, and other than ordinary course customer rebate agreements of the nature described in Section 4.7(c)(ii) hereof; (d) note, debenture, bond, conditional sale agreement, equipment trust agreement, letter of credit agreement, loan agreement or other agreement or contract, commitment or arrangement for the borrowing or lending of money in an amount in excess of $250,000 (including without limitation loans to or from officers, directors, any stockholder or any member of any of their immediate families, but excluding the extension of trade credit in the ordinary course of business consistent with past practices and travel allowances made in the ordinary course of business), agreement, contract, commitment or arrangement for a line of credit or guarantee, pledge or undertaking in any manner whatsoever of the indebtedness of any other Person; (e) agreement, contract or commitment for any capital expenditure in excess of $100,000; or (f) agreement, contract or commitment limiting or restraining it from engaging or competing in any lines of business with any Person, nor is any director, officer or employee of any of the Corporations subject to any such agreement except where such limitation runs to the benefit of one of the Corporations. Each of the Corporations and, to the best knowledge of the Company and USHG (after due inquiry), each other party thereto have in all material respects performed all the obligations required to be performed by them to date under, have received no notice of default under and are not in default under any lease, agreement or contract now in effect to which any of Corporations is a party or by which any of Corporations or its respective property may be 27 bound, except where the same would not have a Material Adverse Effect. None of Corporations has any present expectation or intention of not fully performing all its obligations under each such lease, contract or other agreement, and neither the Company nor USHG has any knowledge of any breach or anticipated breach by any other party to any contract or commitment to which any of the Corporations is a party, except where the same would not have a Material Adverse Effect. SECTION 5. CONDITIONS PRECEDENT. The obligation of each Purchaser to purchase Notes and Warrants shall be subject to the satisfaction, and continuing existence, of each of the following conditions precedent on or prior to the Closing Date: 5.1 Consolidated Excess Cash. The Company and its Subsidiaries shall have, on a consolidated basis, no less than $1,000,000 of Consolidated Excess Cash on the Closing Date after giving effect to the Transactions, as set forth in the calculation thereof provided pursuant to Section 4.7(d); and the Projections delivered pursuant to Section 4.7(b) (i) shall project no less than $1,000,000 of Consolidated Excess Cash for each month during the first twelve months after Closing (other than for the months of March and April 2002), and (ii) shall project no less than $500,000 of Consolidated Excess Cash for the months of March and April 2002. 5.2 Purchaser Documents. The Company shall have issued the Notes, and USHG shall have issued the Warrants; and each Purchaser shall have received the original of its Note and of the certificates evidencing its Common Warrants and Preferred Warrants, as well as an original counterpart of this Agreement and of each of the other Purchaser Documents, duly executed by each party thereto. 5.3 Legal Opinions. The Purchasers shall have received the executed legal opinion of Blank Rome Tenzer Greenblatt LLP, counsel to the Corporations, dated the Closing Date, in form and substance reasonably satisfactory to the Purchasers and their counsel and covering such matters incident to the Transactions as the Purchasers may reasonably require, including without limitation the matters referred to in Sections 4.1-4.5, 4.11, 4.13, 4.14 and 4.19 hereof. 5.4 Other Documents. The Purchasers shall have received all closing certificates, corporate documents, evidence of authorization, forms and information required by the U.S. Small Business Administration, and other agreements, instruments and documents in respect of any aspect or consequence of the Transactions as the Purchasers may reasonably request, including without limitation all documents listed on the List of Closing Documents provided by the Purchasers to the Company and USHG on or prior to the Closing Date, all of which shall be in form and substance reasonably satisfactory to the Purchasers. 5.5 Representations and Warranties; No Default or Event of Default. The representations and warranties made by each of the Corporations in the Purchaser Documents to which it is a party shall be true and correct as of the Closing Date, with the same force and 28 effect as though made again on such date at the time of, and giving effect to, the Transactions. On the Closing Date, after giving effect to the Transactions, no Default or Event of Default shall have occurred and be continuing. 5.6 Purchaser Transactions; Other Transactions. (a) All consents necessary to the consummation of the Purchaser Transactions shall have been obtained, and all conditions precedent to the consummation of the Purchaser Transactions shall have been or shall be satisfied or waived prior to or concurrently with the issuance and sale of the Notes and Warrants. All Purchaser Transactions shall have been or shall be consummated pursuant to the terms of the applicable Purchaser Documents prior to or concurrently with the issuance and sale of the Notes and Warrants, and in compliance with all applicable laws. (b) True, correct and complete execution copies of all Transaction Documents shall have been delivered to the Purchasers and their counsel, who shall be satisfied with the form and substance thereof. The Purchasers shall be satisfied with (i) the terms of the subordination of the Notes, (ii) the liens and rights granted to the Senior Lender pursuant to the Senior Debt Documents and the Senior Subordination Agreement, and (iii) the Purchasers' rights to enforce and exercise Liens granted to the Purchasers. 5.7 Fees; Transaction Expenses. Golub Associates, LLC or its designee shall have received the fee referred to in Section 2.6 and shall have been reimbursed the Costs and Expenses incurred in connection with the Transaction. The Corporations shall have paid or reimbursed the Purchasers or their designee for the finder's fee payable to Larkspur Capital Corporation, as set forth in the Commitment Letter referred to in Section 15.5 hereof. The Corporations shall also have paid any stand-by fee payable pursuant to Section 3 of the "Other Provisions" Section of the Summary Term Sheet attached to the Commitment Letter referred to in Section 15.5 hereof. 5.8 Legal Structure and Capitalization. The Purchasers shall be satisfied with the legal structure and capitalization of the Corporations and the Trust, and all documentation relating thereto; and evidence of the equity ownership of each Corporation and the Trust shall have been delivered to the Purchasers and shall be satisfactory in form and substance to them. 5.9 Additional Matters. All corporate and other proceedings, and all documents, instruments and other legal matters in connection with the Purchaser Transactions shall be satisfactory in form and substance to the Purchasers, in their discretion; the Purchasers and their counsel shall be satisfied that each of the Corporations is in compliance with all matters described in Section 4 and Section 5 of this Agreement, and the Purchasers shall have received information, documentation and certifications regarding any matter or question that may affect, or be related to, such compliance, satisfactory to the Purchasers in their discretion. 5.10 Due Diligence; No Adverse Change or Events. The Purchasers shall have completed their due diligence investigations of the Corporations and the results thereof shall be satisfactory to the Purchasers in their discretion; and there shall not exist in the Purchasers' 29 judgment (i) any event or condition that has had or would have a Material Adverse Effect or a material adverse effect upon the ability of the Corporations to meet, or upon the likelihood of their meeting, the Projections, or (ii) any law or regulation which, in the opinion of the Purchasers' counsel, prevents or prohibits any Purchaser from funding its purchase of the Notes and Warrants or maintaining its investment therein, or which would adversely affect the economic benefits expected to be realized by the Purchasers in the Transactions. 5.11 Minimum EBITDA. The Company shall have minimum EBITDA for the twelve-month period ending on the date of the latest Financial Statements of not less than $11,300,000 (as adjusted for adjustments and add-backs reasonably acceptable to the Purchasers). The chief financial officer of USHG shall provide a certificate to the Purchasers at Closing, certifying (a) as to the Company's EBITDA for the twelve-month period ending on the date of the latest Financial Statements, (b) that such EBITDA was determined in accordance with GAAP, and (c) that such officer has no reason to believe the Company's EBITDA for the twelve-month period ending on the last day of the month during which the Closing occurs will be less than the minimum described in the first sentence of this Section. 5.12 Compliance With Sources and Uses. The Company and USHG shall have provided the Purchasers with a statement of the sources and uses of funds in connection with the closing of the Transactions, which sources and uses shall conform to that set forth on Schedule 5.12 hereto. Any variance from the sources and uses set forth in Schedule 5.12 shall be approved by the Purchasers, in their discretion, and the Company and USHG shall provide documentation satisfactory to the Purchasers that the items listed on such statement are true and accurate in all respects. Any non-compliance with or variance from the statement of sources and uses shall be described on an attachment to Schedule 5.12. Without limitation of the foregoing, the BOA Indebtedness shall be repaid in full at the Closing with the proceeds of the Senior Debt and the Notes, the liens securing the BOA Indebtedness shall be released at the Closing, and BOA shall have authorized the filing of UCC-3 termination statements in respect of such liens. 5.13 Closing Certificates. On or prior to the Closing Date, the Purchasers shall have received: (a) a solvency certificate from the chief financial officer of USHG certifying on behalf of the Corporations that: (i) the fair saleable value of the assets of the Corporations taken as a whole exceeds and will, immediately following the closing of the Transactions, exceed the amount that will be required to be paid on or in respect of the then existing Indebtedness of the Corporations taken as a whole, as such Indebtedness matures; (ii) the Corporations taken as a whole do not and will not have, immediately following the closing of the Transactions, unreasonably small capital to carry out their respective businesses as now conducted or as proposed to be conducted; and (iii) the Corporations taken as a whole do not intend to incur Indebtedness beyond their ability to pay such Indebtedness as it matures; (b) certificates of insurance complying with the requirements of Section 6.5 for the business and properties of the Corporations, in form and substance reasonably satisfactory to the Purchasers; and 30 (c) a certificate of the chief executive officer of USHG certifying on behalf of the Corporations that (i) all of the representations and warranties of the Corporations set forth in the Transaction Documents are true, complete and accurate in all respects as of the Closing Date, and (ii) as of the Closing Date, the Corporations have complied with and performed all of the covenants and agreements, and satisfied all of the conditions, to be complied with, performed or satisfied by the Corporations pursuant to the Transaction Documents on or prior to the Closing Date. 5.14 Stockholders Agreement. On or prior to the Closing Date, USHG and its principal stockholders (Robert Kassel, Richard Raleigh and Richard Grandy) shall have entered into a Stockholders Agreement which effectively provide the rights and privileges to the Purchasers set forth on Exhibit F attached hereto. 5.15 Junior Subordinated Debentures. The Purchasers shall be satisfied with the terms of the subordination of the Junior Subordinated Debentures to the Notes; and USHG shall have given the Purchasers a power of attorney to exercise (under the circumstances set forth in Section 7.18 (b)) USHG's rights to defer the payment of interest on the Junior Subordinated Debentures pursuant to Section 3.11 of the Junior Subordinated Indenture and Section I.D of the Officers' Certificate and Company Order dated April 17, 1998 specifying certain terms of the Junior Subordinated Debentures. 5.16 Noncompetition and Nonsolicitation Agreements. Each of Robert Kassel, Richard Grandy and Richard Kurz shall have entered into (or be subject to) noncompetition and nonsolicitation agreements with the Corporations in form and substance satisfactory to the Purchasers. 5.17 Golub Consulting Agreement. The Company and USHG shall have entered into a Consulting Agreement in form and substance satisfactory to the Purchasers with Golub Associates, LLC or its designee (the "Golub Consulting Agreement"), providing, among other things, for the payment to Golub Associates, LLC or its designee of a monitoring fee of $54,500 per year for so long as any Notes, Warrants or Warrant Securities are owned by the Purchasers. 5.18 Waco Lease Renewal. The Company shall have received a written commitment by the landlord to renew the lease of the Company's premises in Waco, Texas, on terms satisfactory to the Purchasers. SECTION 6. AFFIRMATIVE COVENANTS. Each of the Company and USHG hereby agrees that, so long as this Agreement is in effect but subject to the provisions of Section 13 hereof: 6.1 Financial and Other Information. Each of the Company and USHG will keep, and will cause its Subsidiaries to keep, proper books of record and account in which full 31 and true entries will be made of all dealings or transactions relating to their business and affairs, and each of the Company and USHG shall cause to be furnished to each Purchaser: (a) as soon as practicable and in any event within thirty (30) days after the end of each month (including the last month of the fiscal year) (i) unaudited consolidated and consolidating statements of income, retained earnings and cash flows of USHG and its consolidated Subsidiaries for such month and the fiscal year-to-date period, and unaudited consolidated and consolidating balance sheets of USHG and its consolidated Subsidiaries as of the end of such month, prepared in accordance with GAAP consistent with past practice, subject to changes resulting from normal fiscal year-end adjustment, and (ii) in comparative form, figures for the actual results for the corresponding month and fiscal year-to-date periods in the immediately preceding fiscal year and amounts projected for such month pursuant to Section 6.1(d), together with a written report providing explanations of any material variances; (b) as soon as filed with the SEC and in any event within fifty (50) days after the end of each fiscal quarter including the fourth quarter, (i) unaudited consolidated and consolidating statements of income, retained earnings and cash flows of USHG and its consolidated Subsidiaries for such quarter and for the period from the beginning of the then current fiscal year to the end of such quarter, and unaudited consolidated and consolidating balance sheets of USHG and its consolidated Subsidiaries as of the end of such quarter, all of which statements and balance sheets shall be in reasonable detail, prepared in accordance with GAAP consistent with past practice, and certified as accurate by the chief financial officer of USHG, subject to changes resulting from normal fiscal year-end adjustment, and (ii) in comparative form, figures for the actual results for the corresponding periods in the immediately preceding fiscal year and amounts projected for such periods pursuant to Section 6.1(d), together with a written report providing explanations of any material variances; (c) as soon as filed with the SEC and in any event within one hundred five (105) days after the end of each fiscal year, (i) consolidated and consolidating statements of income, retained earnings and cash flows of USHG and its consolidated Subsidiaries for such fiscal year, and consolidated balance sheets of USHG and its consolidated Subsidiaries as of the end of such fiscal year, setting forth in each case, in comparative form, corresponding figures for the period covered by the preceding annual audit and as of the end of the preceding fiscal year, all of which statements and balance sheets shall be in reasonable detail and reasonably satisfactory in scope to the Purchasers and prepared by BDO Seidman, LLP or another respected firm of independent certified public accountants selected by USHG and reasonably satisfactory to the Purchasers, whose opinion shall be unqualified and shall be prepared in accordance with GAAP and generally accepted auditing standards, provided, that each Purchaser hereby agrees that such Purchaser will consider satisfactory any Big 5 accounting firm retained by USHG, and (ii) any accountants' comment letter on USHG's and its consolidated Subsidiaries' internal financial or accounting systems or controls which shall be issued, as well as copies of all other reports submitted by USHG's accountants; provided, that USHG shall request such a comment letter to be prepared in connection with each audit; 32 (d) as soon as practicable and in any event before the end of each fiscal year, an operating budget and projected financial statements for each month of the next succeeding fiscal year (including a statement of underlying assumptions), in the same format as the financial statements provided pursuant to Sections 6.1(a), (b) and (c); (e) (i) as soon as practicable, and in any event at the same time as any notice is given to the Senior Lender (but in no event later than three (3) Business Days after any officer of the Company or USHG obtains knowledge of the occurrence of an event or the existence of a circumstance giving rise to a such a default, Default or Event of Default), notice of any default under the Senior Debt and all Defaults and Events of Default hereunder, and (ii) any other notice, certificate or other document or information given to or received from the Senior Lender not later than five (5) Business Days after the date thereof; (f) with reasonable promptness, such other business or financial data as the Purchasers may reasonably request, including without limitation all forms and information requested or required by the U.S. Small Business Administration as a result of any Purchaser being a small business investment company; (g) if USHG or the Company shall otherwise prepare or have available financial statements and other information for USHG and its Subsidiaries on a consolidated and/or consolidating basis, or shall provide its Board of Directors with any financial information not otherwise provided for herein, it shall also furnish the same to the Purchasers in addition to the financial statements and other information for USHG and its Subsidiaries required to be furnished pursuant to the foregoing provisions of this Section 6.1; (h) together with each delivery of financial statements required by Section 6.1(c), a certificate of the accountants who performed the audit in connection with such statements (i) stating that they have reviewed Section 7.19 and Exhibit F hereof (Financial Covenants) and that, in making the audit necessary to the issuance of a report on such financial statements, they have obtained no knowledge of any Default or Event of Default or, if such accountants have obtained knowledge of a Default or Event of Default, specifying the nature and period of existence thereof, and (ii) setting forth the calculations necessary to establish whether or not USHG and its Subsidiaries were in compliance with the covenants as provided in Section 7.19 and Exhibit F as of the date of such statements. Each of the Company and USHG authorizes the Purchasers to discuss the financial condition of the Corporations with USHG's independent certified public accountant and agrees that such discussion or communication shall be without liability to either the Purchasers or USHG's independent certified public accountants. USHG shall deliver a letter addressed to such accountants authorizing them to comply with the provisions of this Section 6.1(h); in any event, such accountants are irrevocably authorized to rely upon a copy of this Agreement as authority for such discussions and communications; and 33 (i) together with each delivery of financial statements required by Sections 6.1(a) and (b), (i) a certificate of the Company's president or chief financial officer (A) stating that, based on an examination sufficient to enable an informed statement, no Default or Event of Default exists or, if such is not the case, specifying such Default or Event of Default and its nature, when it occurred, whether it is continuing and the steps being taken by the Company with respect to such Default or Event of Default, and (B) setting forth the calculations necessary to establish whether or not the Company was in compliance with the covenants provided for in Section 7.19 and Exhibit F as of the date of such statements, (ii) a detailed report that provides a discussion of the operations and financial condition of USHG and its Subsidiaries for the period covered by such financial statements and a summary and discussion of other matters significant to the business, (iii) copies of USHG's internally prepared consolidated sales projections for each of the next 12 months, which projections shall be updated monthly, (iv) monthly point of sale data for the Corporations' ten largest customers, and (v) monthly sales and margins of the Corporations by customer and product line. Such certificate, report, sales projections, point of sale data and monthly sales and margin information shall be in form reasonably satisfactory to the Purchasers. Each Purchaser shall keep confidential all information concerning the Corporations furnished by the Company or USHG pursuant to this Section 6.1, as well as all other information concerning the Corporations acquired by the Purchasers by virtue of their status as Purchasers under the Purchaser Documents or as a result of their (or their representatives') attendance as non-voting observers at meetings of the Board of Directors of any of the Corporations (including information acquired as a result of any inspection conducted in accordance with Section 6.2 below); provided, that a Purchaser may communicate such information to such Purchaser's officers, employees, attorneys, accountants, consultants and owners, subject to the same confidentiality provisions applicable to such Purchaser. A Purchaser may also disclose such information to any Governmental Authority having jurisdiction over such Purchaser, to the extent required by such Governmental Authority, provided that (except in the case of disclosures to the U.S. Small Business Administration by a Purchaser which is a Small Business Investment Company) such Purchaser shall use reasonable efforts to notify the Company or USHG prior to such disclosure so that the Company or USHG will have a reasonable amount of time to contest such disclosure if it wishes to do so. A Purchaser may also disclose such information to any other Person in connection with such Purchaser's sale of any participations in, or assignments of, the Notes, Warrants or Warrant Securities, provided that such Person shall execute a confidentiality agreement requiring the recipient to maintain the confidentiality of the information to the same extent as required hereunder for the Purchaser. Following any Default or Event of Default or as may be reasonably necessary to effect the exercise of rights hereunder, a Purchaser may disclose information to others in connection with the exercise of such Purchaser's rights hereunder or under any of the other Purchaser Documents and as may be required by applicable law. 6.2 Inspection. Any Purchaser or its designee shall have the right from time to time, at the Corporations' expense, to call (after three (3) Business Days' prior written notice) at the place or places of business of any of the Corporations during ordinary business hours (a) to inspect, audit and check any of its books, records, journals, orders and receipts, as well as 34 any correspondence and other data relating to its business or to any transactions among the parties to the Transaction Documents, and (b) to discuss its affairs, finances and business with any of its officers or directors; provided that such inspections, audits, checks or discussions are not materially disruptive to the normal operation of the businesses of the Corporations, and provided, further, that, the Corporations shall not be required to pay for more than one such inspection per fiscal year in the absence of an Event of Default. 6.3 Conduct of Business. Each of the Company and USHG shall, and shall cause each Subsidiary to, (a) maintain its corporate existence, (b) maintain in full force and effect all bonds, franchises, qualifications, patents and trademarks, and all governmental licenses, permits and authorizations, in each case which are material to the conduct of its business, (c) maintain in full force and effect all leases, contracts and other rights, and all non-governmental licenses, permits and authorizations, in each case the loss of which would have a Material Adverse Effect, (d) pay when due all amounts payable under, and comply with all covenants and agreements under, all leases, contracts and agreements to which such Corporation is a party, if a default with respect to such obligation would or could reasonably be expected to have a Material Adverse Effect, (e) continue in the businesses in which it is currently engaged, and limit its operations to the businesses in which it is currently engaged and businesses substantially similar and meaningfully related to such businesses, (f) comply with all applicable laws, orders, regulations and ordinances of all Governmental Authorities, except for such laws, orders, regulations and ordinances the violation of which would not be reasonably likely to have a Material Adverse Effect, and (g) maintain its Property in good working order. 6.4 Taxes. Each of the Company and USHG shall pay, and cause its Subsidiaries to pay, all of their respective (i) license fees, bonding premiums and related taxes and charges, (ii) real and personal property taxes, assessments and charges, (iii) franchise, income, unemployment, use, excise, old age benefit, withholding, sales and other taxes and (iv) other governmental charges assessed against any of them, or payable by any of them, in each case at such times and in such manner as to prevent any penalty from accruing or any Lien from attaching to any of their property; provided, that the applicable Corporation shall have the right to contest in good faith, by an appropriate proceeding promptly initiated and diligently conducted, the validity, amount or imposition of any such tax, assessment or charge, and upon such good faith contest to delay or refuse payment thereof, if it establishes adequate reserves to cover such contested taxes, assessments or charges. 6.5 Property, Liability and Business Interruption Insurance; Key-Man Insurance. Each of the Company and USHG shall, and shall cause each of its Subsidiaries to, maintain insurance to such extent and covering such risks as shall be required by law or by any agreement to which any of such Corporations is a party, and, in any event, keep and maintain their properties and businesses insured against such risks as are ordinarily insured against (and in such amounts, and subject to such deductibles as are ordinarily obtained) by prudent Persons engaged in similar businesses similarly situated with financially sound insurers reasonably acceptable to the Purchasers. Each of the Company and USHG shall maintain, and cause each of its Subsidiaries to maintain, at the Corporations' expense, such public liability insurance, third party property damage insurance and business interruption insurance, in such amounts and 35 with such deductibles, as is reasonably acceptable to the Purchasers and as is customary for similar businesses similarly situated. All such policies of insurance shall be in form and substance similar to policies maintained by prudently managed companies similarly situated and shall be issued by insurers having A.M. Best ratings no less than A. Upon request, each of the Company and USHG shall deliver to each Purchaser a certified copy of each such policy of insurance and evidence of payment of all premiums therefor. Upon request of the Purchasers, the Company shall obtain, and maintain in full force and effect for the benefit of the Company for so long as any of the Notes are outstanding, key-man insurance in the amount of $2,000,000 on the life of Richard Grandy, provided he is reasonably insurable. 6.6 Pension Plans. Each of the Company and USHG shall (i) deliver to the Purchasers promptly, and in any event within 30 days, any written notice, letter or communication received by any Corporation from the PBGC, the U.S. Internal Revenue Service or any other Governmental Authority with respect to any Plan, if such notice could result in any material liability to any Corporation, (ii) provide the Purchasers with copies of any annual report filed by any Corporation with the PBGC in connection with any Plan, promptly after the filing thereof, and (iii) notify the Purchasers prior to terminating any Plan if such termination could result in any material liability to any Corporation. 6.7 Notice of Suits, Adverse Changes in Business and Defaults. Each of the Company and USHG shall, as soon as possible, give the Purchasers written notice of the occurrence of any of the events listed below, and, in any case, shall give the Purchasers written notice of the occurrence of any of such events within the earlier of (i) five (5) Business Days after senior management obtains knowledge thereof, and (ii) fifteen (15) Business Days after the occurrence thereof: (a) any proceeding(s) being instituted or threatened to be instituted by or against any Corporation in any federal, state, local or foreign court or before any Governmental Authority in which the amount in controversy exceeds $250,000 (unless the same is covered by insurance and arises in the ordinary course of business) or in which injunctive relief is requested, and any litigation, proceeding, investigation or claim that relates in any material way to (i) any of the Transaction Documents, or (ii) the Certificate or Articles of Incorporation, as amended, or By-laws, as amended, of any Corporation; (b) any change in the business, assets or condition, financial or otherwise, of any Corporation which can reasonably be expected to have a Material Adverse Effect; (c) the occurrence of any "Default" or "Event of Default" as defined in any of the Senior Debt Documents; (d) the occurrence of any material default under any other material lease, contract or other agreement to which any Corporation is a party; and (e) the occurrence of any Default or Event of Default. 36 6.8 Environmental Laws. (a) Each of the Company and USHG shall promptly notify and furnish the Purchasers with a copy of any and all Environmental Notices which are received by any Corporation on or after the date hereof. Each of the Company and USHG shall, and shall cause its Subsidiaries to, take prompt and appropriate action in response to any and all such Environmental Notices, and shall promptly furnish the Purchasers with a description of the applicable Corporation's Response thereto. Each of the Company and USHG shall promptly notify the Purchasers of any event or state of facts which would reasonably be expected to result in an Environmental Notice. (b) Each of the Company and USHG shall, and cause each of its Subsidiaries to, (i) comply in all material respects with all Environmental Laws, (ii) obtain, comply in all material respects with and maintain any and all material licenses, approvals, registrations or permits required by Environmental Laws, (iii) conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under Environmental Laws, and (iv) promptly comply with all lawful orders and directives of all Governmental Authorities respecting Environmental Laws (and provide copies of all such orders and directives to the Purchasers), except, in each case, to the extent that the same are being contested in good faith by appropriate proceedings and the pendency of such proceedings could not be reasonably expected to have a Material Adverse Effect. (c) Each of the Company and USHG shall defend, indemnify and hold harmless each of the Purchasers and their respective employees, agents, officers and directors, from and against any claims, demands, penalties, fines, liabilities, settlements, damages, costs and expenses of whatever kind or nature known or unknown, contingent or otherwise (including without limitation attorneys' and consultants' fees, investigation and laboratory fees, court costs and litigation expenses), arising out of, or in any way relating to (i) any Environmental Laws applicable to any of the Corporations, any of their operations, or any real property owned or operated by any of them, (ii) any orders, requirements or demands of any Governmental Authority or any private party related to any Environmental Laws or to Hazardous Materials, or (iii) the actual or alleged presence of Hazardous Materials on any property previously, now or hereafter owned, leased or otherwise held by any of the Corporations. The indemnity set forth in this paragraph (c) shall survive any termination of this Agreement. 6.9 Notices Relating to Transactions. Each of the Company and USHG shall promptly provide the Purchasers with copies of all amendments, consent letters, waivers or modifications to, and any material notices or reports provided by any Person to any Corporation pursuant to the terms of or in connection with, any of the Transactions or any of the Transaction Documents, or any Corporation's certificate or articles of incorporation, as amended or bylaws, as amended, or by any Corporation to any such Person. Without limiting the foregoing, each of the Company and USHG agrees to notify the Purchasers of the effective date and amount of any prepayment pursuant to the Senior Loan Agreement or permanent reduction of any commitment to lend on a revolving basis. 6.10 Board Observation Rights. Each of USHG and the Company (i) shall cause one representative of the Purchasers to be permitted to attend and observe all meetings of the Boards of Directors of each of USHG and its Subsidiaries and all committees thereof, (ii) 37 shall cause the Purchasers to be given notice of all such meetings, at the same time as furnished to the directors of the applicable Corporation, (iii) shall cause the reasonable out-of-pocket costs and expenses of the Purchasers' representative to be paid, (iv) shall cause such representative to be compensated at the same level as the most highly compensated non-employee member of each of USHG's and its Subsidiaries' Boards of Directors for his service as such (regardless of whether the compensation of such non-employee member for his services as a director is paid in the form of a directors' fee or consultant's fee or other type of fee or compensation), (v) shall indemnify the Purchasers' representative to the same extent as members of such Boards of Directors (to the extent permitted by law), (vi) shall cause to be provided to the Purchasers' representative all notices, documents and information furnished to the directors of the applicable Corporation whether at or in anticipation of a meeting, an action by written consent or otherwise, at the same time furnished to such directors, (vii) shall cause the Purchasers' representative to be notified of, and permitted to participate by telephone in, emergency meetings of such Boards of Directors and all committees thereof, (viii) shall cause the Purchasers' representative to be provided with copies of the minutes of all such meetings at the time such minutes are furnished to the directors of the applicable Corporation, (ix) shall cause regularly-scheduled meetings of the Boards of Directors of each Corporation to be held no less frequently than three times a year at regular intervals, provided that only one such meeting need be in person and the other two may be by telephone conference call, (x) upon the request of the Purchasers, shall obtain and maintain in force directors' and officers' liability insurance in an amount reasonably acceptable to the Purchasers, (xi) shall cause the creation and maintenance on USHG's Board of an audit committee composed solely of outside directors, the responsibility of which shall be to fulfill all functions recommended by the Auditing Standards Board of the AICPA as well as monitoring and reviewing all major accounting policies and auditor relationships of such Corporation, and (xii) shall cause the creation and maintenance on USHG's Board of a compensation committee composed solely of outside directors, the responsibility of which shall be to monitor and review compensation plans, stock option plans, other Plans, annual performance objectives for senior executives, and the achievement of these performance objectives. 6.11 Notice of Amendment of Senior Loan Agreement. The Company (a) shall not enter into any amendment of the Senior Loan Agreement without providing the Purchasers with advance written notice of the proposed terms of such amendment not less than five (5) Business Days prior to the making of such amendment, and (b) without the prior written consent of a majority in interest of the Purchasers, shall not enter into any amendment of the Senior Loan Agreement, or in any other manner modify or supplement or alter by agreement or waiver, the Senior Loan Agreement, the purpose of which is (i) a voluntary permanent reduction of any revolving credit facility provided under the Senior Loan Agreement or (ii) violative of Section 7.15 hereof. 6.12 Option to Provide Mezzanine Financing (a) Prior to offering any subordinated debt or other mezzanine financing (with or without warrants or any other "equity kicker") of any Corporation after the Closing Date (a "Mezzanine Financing"), the Company and USHG will first give, or cause the issuer Corporation to give, to the Purchasers the right, for the same price and upon the same terms (and subject to the same due diligence, time table and other conditions) as are to be made available to other proposed offeree(s), to provide all or 38 part (at the Purchasers' option) of such Mezzanine Financing proposed to be offered by such Corporation. The Purchasers shall have a period of thirty (30) days after receiving written notice of any such proposed Mezzanine Financing to indicate whether they intend to provide (subject to final due diligence, documentation and customary conditions) all or part of the Mezzanine Financing to be raised (and any such notice shall be given not less than sixty (60) nor more than ninety (90) days prior to the closing of any such Mezzanine Financing, and shall be accompanied by such information as may be reasonably necessary to evaluate the terms of the proposed Mezzanine Financing, including without limitation any information furnished or to be furnished to other proposed offeree(s)); provided, that the Purchasers shall exercise reasonable efforts to promptly evaluate the terms of the proposed offering. The Company and USHG will offer, or cause the issuer Corporation to offer, such rights to the Purchasers pro rata based on the principal amount of Notes held by each, provided that if a Purchaser does not exercise such rights in full, the Company and USHG will offer, or cause the issuer Corporation to offer, such rights pro rata to the Purchasers who exercise their rights under this Section 6.12(a). In the event the Purchasers do not exercise in full their right to provide such Mezzanine Financing, the issuer Corporation may offer any remaining portion of such Mezzanine Financing to other Persons on terms which (in the reasonable opinion of the Purchasers) are no more advantageous to such other Persons in any material respect than the terms of the offer to the Purchasers (herein referred to as "Comparable Terms"), provided that the closing of the offering to such other Persons is consummated within ninety (90) days after the Purchasers have declined to provide all or part of such Mezzanine Financing. In the event that the offering to such other Persons is not on Comparable Terms, or in the event that the offering to such other Persons is not consummated within such ninety (90)-day period, then the Company and USHG will again offer, or cause the issuer Corporation to again offer, the proposed Mezzanine Financing to the Purchasers in compliance with all of the provisions of this Section 6.12(a). (b) During the thirty (30) day period referred to in the second sentence of Section 6.12(a) above, the Company and USHG will allow, and will cause the other Corporations to allow, the Purchasers and their respective representatives all reasonably requested access to the Corporations' assets, records, personnel and relevant third parties for the purpose of completing all due diligence investigations deemed reasonably necessary or advisable by the Purchasers in connection with determining whether to exercise their right to provide any Mezzanine Financing referred to in Section 6.12(a). 6.13 Use of Proceeds. The Company and USHG shall use the proceeds of the sale of the Notes and Warrants solely as described in the statement of sources and uses referred to in Section 5.12. 6.14 New Subsidiary Security Agreements and Guaranties. To the extent the creation or existence of any additional Subsidiary (other than one in existence on the Closing Date) is permitted pursuant to Section 7.5 or consented to by the Purchasers, each of the Company and USHG shall cause each such Subsidiary to execute a security agreement and a Guaranty in substantially the same forms as the Security Agreement and Guaranty executed and delivered on the Closing Date by each Subsidiary which existed on the Closing Date. 39 6.15 Reservation of Warrant Securities. (a) USHG will at all times have authorized, and reserve and keep available, free from pre-emptive rights and free of all Liens, restrictions, rights and claims of others, for the purpose of enabling it to satisfy any obligation to issue shares of Common Stock upon any exercise of the Common Warrants, the number of shares of Common Stock issuable upon exercise of all outstanding Common Warrants. Upon any issuance of Common Warrant Shares to a holder of Common Warrants upon exercise thereof, such Common Warrant Shares shall be free of all pre-emptive rights, Liens, restrictions, rights and claims of others (except for Liens, if any, created by the holders thereof). (b) USHG will at all times keep available, free of all Liens, restrictions, rights and claims of others, for the purpose of enabling it to satisfy its obligation to sell Preferred Securities upon any exercise of the Preferred Warrants, the number of Preferred Securities purchasable upon exercise of all outstanding Preferred Warrants. Upon any sale of Preferred Securities to a holder of Preferred Warrants upon exercise thereof, such Preferred Securities shall be free of all Liens, restrictions, rights and claims of others (except for Liens, if any, created by the holders thereof). SECTION 7. NEGATIVE COVENANTS. Each of the Company and USHG hereby agrees that, so long as this Agreement is in effect but subject to the provisions of Section 13 hereof: 7.1 Liens or Encumbrances. Neither the Company nor USHG will create or suffer to exist, or permit any Subsidiary to create or suffer to exist, any Lien upon any of its Property, income or profits, whether now owned or hereafter acquired, and will not enter into or suffer to exist, or permit any Subsidiary to enter into or suffer to exist, any agreement that would be inconsistent with the Purchasers' exercise of exclusive rights to Liens on the Corporations' Property excepting the rights of the Senior Lender and the following: (i) Liens at any time granted in favor the Purchasers (including pursuant to the Security Documents), and Liens at any time granted to the Senior Lender (including, without limitation, pursuant to the Senior Debt Documents as in effect on the Closing Date); and, so long as the Senior Loan Agreement is in effect, the Liens referred in clauses (b), (d), (e), (f) and (h) of the definition of "Permitted Encumbrances" as defined in the Senior Loan Agreement as in effect on the Closing Date; (ii) Liens not exceeding $50,000 in the aggregate outstanding at any one time consisting of (A) Liens for taxes (excluding any Lien imposed pursuant to any of the provisions of ERISA) not yet due or that are being actively and diligently contested in good faith and (B) statutory Liens arising in the ordinary course of such Corporation's business by operation of law or regulation, but only if payment in respect of any such Lien is not at the time required or such Liens are being actively and diligently contested; 40 (iii) Purchase Money Liens securing Purchase Money Indebtedness permitted pursuant to Section 7.2(v) below; (iv) Liens securing Indebtedness of one of the Company's Subsidiaries to the Company or another such Subsidiary; (v) reservations, exceptions, easements, rights-of-way and other similar encumbrances affecting the real Property of the Corporations that do not interfere with the ordinary conduct of the business of the Corporations; (vi) such other Liens existing on the Closing Date which are set forth on Schedule 4.8; and (vii) such other Liens as the Purchasers may hereafter approve in writing. 7.2 Indebtedness. Neither the Company nor USHG will incur, create, assume, become or be liable in any manner with respect to any Indebtedness, or permit any Subsidiary to do so, except: (i) the Indebtedness evidenced by the Notes and other obligations of the Corporations under this Agreement and the other Purchaser Documents, (ii) Senior Debt provided by the original Senior Lender (subject, however, to the limitations set forth in the definition of "Senior Obligations" contained in the Senior Subordination Agreement), or any renewal or refinancing thereof permitted pursuant to Section 7.15 (in the event of any such permitted refinancing, all references herein to "Senior Debt", "Senior Debt Documents", "Senior Lender" and "Senior Loan Agreement" shall be appropriately adjusted to apply to the refinancing, (iii) Indebtedness of any of the Corporations (including any renewal or refinancing of any such Indebtedness) which is subordinated to the Notes on terms acceptable to the Purchasers, (iv) other Indebtedness of the Corporations which is to continue after the Closing Date and is identified on Schedule 7.2 hereto and is included in the Statement of Sources and Uses attached as Schedule 5.12 hereto, (v) Indebtedness of the Corporations secured by Purchase Money Liens and Indebtedness of the Corporations under Capital Leases not to exceed $1,000,000 in the aggregate, (vi) trade payables and accrued expenses of the Corporations incurred in accordance with customary practices and in the ordinary course of business; and (vii) extensions of credit made by any Corporation to a wholly-owned Subsidiary of the Company. 41 7.3 Consolidations, Mergers or Acquisitions. Neither the Company nor USHG will, or will permit any Subsidiary or Egarden Inc. to, recapitalize or consolidate with, merge with, acquire the Capital Stock of, or otherwise acquire all or any substantial part of the assets or Properties of any other Person except that (i) a wholly-owned Subsidiary of USHG may merge into a wholly-owned Subsidiary of the Company, (ii) a wholly-owned Subsidiary of the Company may merge into another wholly-owned Subsidiary of the Company, and (iii) a Subsidiary of the Company may merge into the Company. 7.4 Investments or Loans. Neither the Company nor USHG will, or will permit any Subsidiary to, acquire any Property in exchange for cash or other Property, whether in the form of an acquisition of securities or other Indebtedness or obligations, or the purchase or acquisition by any of the Corporations of any other Property, or a loan, advance, capital contribution or subscription, except acquisitions of the following: (i) investments in one or more Subsidiaries of the Company or USHG to the extent existing on the Closing Date; (ii) fixed assets to be used in the business of the Corporations so long as the acquisition costs thereunder constitute Capital Expenditures permitted hereunder; (iii) goods held for sale or lease or to be used in the manufacture of goods or the rendition of services by any of the Corporations in the ordinary course of business; (iv) Cash Equivalents; (v) loans to employees made after the Closing Date not in excess of an aggregate of $100,000 at any one time outstanding; (vi) loans to employees outstanding on the Closing Date, provided that (A) the principal amount of such loans is not increased and any repayment of all or part of such loans is not re-lent, (B) no such loans or portions thereof may be reduced or forgiven (other than by repayment thereof to the applicable lending Corporation), and (C) the terms of such loans may be amended (including any extension of the maturity thereof) only by USHG's Board of Directors (without participation of Robert Kassel, except in the case of Board action by unanimous written consent without a meeting) at any time when no Default or Event of Default exists under Section 9.1(a) hereof and no "Default" or "Event of Default" exists under Section 10.1 of the Senior Loan Agreement, provided that any such loans shall in any event become due and payable 180 days prior to the date on which the Notes become due and payable in full; and (vii) accounts receivable arising from transactions in the ordinary course of business; contingent liabilities represented by endorsements of negotiable instruments for collection or deposit in the ordinary course of business; advances, deposits, down payments and prepayments on account of firm purchase orders made in the ordinary course of business. 42 As used above, "Cash Equivalents" shall mean (1) marketable direct obligations issued or unconditionally guaranteed by the United States Government and backed by the full faith and credit of the United States Government having maturities of not more than twelve (12) months from the date of acquisition; (2) domestic certificates of deposit and time deposits having maturities of not more than twelve (12) months from the date of acquisition, banker's acceptances having maturities of not more than twelve (12) months from the date of acquisition and overnight bank deposits, in each case issued by any commercial bank organized under the laws of the United States, any state thereof or the District of Columbia, which at the time of acquisition are rated A-1 or better by Standard & Poor's Corporation or P-1 or better by Moody's Investors Service, Inc., or any successor thereto, and not subject to offset rights in favor of such bank arising from any banking relationship with such bank; (3) repurchase obligations with a term of not more than thirty (30) days for underlying securities of the types described in clauses (1) and (2) entered into with any financial institution meeting the qualifications specified in clause (2); and (4) commercial paper having at the time of investment therein or a contractual commitment to invest therein a rating of A-1 or better by Standard & Poor's Corporation or P-1 or better by Moody's Investors Service, Inc., or any successor thereto, and having a maturity within nine (9) months after the date of acquisition thereof. 7.5 Subsidiaries. Neither the Company nor USHG will create or have (or permit any Subsidiary to create or have) any Subsidiaries other than the Subsidiaries in existence on the Closing Date and other Subsidiaries which are wholly-owned by the Company or by another wholly-owned Subsidiary of the Company. In addition, (i) each of the Company and USHG shall cause each Subsidiary to comply with all the covenants and provisions of this Agreement (including, without limitation, the covenants set forth in Section 6.14 hereof), and (ii) the financial covenants contained herein shall apply to USHG and its Subsidiaries on a consolidated basis. 7.6 Disposal of Property. (a) Neither the Company nor USHG will sell, lease, transfer or otherwise dispose of any of its Properties, assets (including Capital Stock) or rights, or permit any Subsidiary or Egarden Inc. to do so, except (i) sales of inventory in the ordinary course of business, (ii) sales or other dispositions in the ordinary course of business of equipment which is obsolete, uneconomical or no longer useful in its business or which is being replaced with other equipment of substantially equal or greater utility, (iii) dispositions of obsolete inventory, and (iv) other sales or dispositions of Property in an arm's length transaction to a third party which is not an Affiliate of any of the Corporations where (v) at least 75% of the consideration received by the applicable Corporation is in cash, (w) the consideration received is not less than the fair market value of the Property sold or disposed of, (x) the cash portion of the proceeds of the sale or disposition are applied to payment of Indebtedness for money borrowed, (y) the aggregate fair market value of the Property so sold or disposed of, together with all other Property sold or disposed of in any 12-month period, shall not exceed 5% of the Corporations' tangible assets as at the beginning of such 12-month period, and (z) in the case of any such sale or disposition of Property by Egarden Inc., USHG and the Company shall exercise commercially reasonable efforts to obtain the release of the Corporations from any further liability or contingent liability in respect of the obligations of Egarden Inc. (including without limitation in respect of the equipment leases listed in Item 1 of 43 Schedule 7.2.), provided that (in the event USHG and the Company are unable to obtain such release in spite of such commercially reasonable efforts) the Corporations shall be permitted to pay up to $90,000 per annum in order to prevent a default under any Egarden Inc. obligations for which the Corporations remain contingently liable. (b) Notwithstanding anything to the contrary contained in Section 7.6(a), any Corporation which is not a Material Corporation may sell, lease, transfer or otherwise dispose of any of its Properties, assets (other than Capital Stock) or rights, and any Corporation may sell its interest in the Capital Stock of a Subsidiary which is not a Material Corporation, in each case in an arm's length transaction to a third party which is not an Affiliate of any of the Corporations for consideration which is not less than the fair market value of the Property sold or disposed of. (c) Nothing contained in this Section 7.6 is intended to impair the Purchasers' rights under Section 3.1(b)(ii) hereof. 7.7 Limitation on Certain Restrictions on Subsidiaries. Neither the Company nor USHG will, nor will it permit any of its Subsidiaries or Egarden Inc. to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any such Subsidiary to (a) pay dividends or make any other distributions on its Capital Stock or any other interest or participation in its profits owned by any of the Corporations, or pay any Indebtedness owed to any of the Corporations, (b) make loans or advances to any of the Corporations or (c) transfer any of its properties or assets to any of the Corporations, except for such encumbrances or restrictions existing under or by reason of (i) applicable law, (ii) this Agreement and the other Purchaser Documents, (iii) the Senior Debt Documents, (iv) customary provisions restricting subletting or assignment of any lease governing any leasehold interest of any of the Corporations, (v) customary provisions restricting assignment of any licensing agreement (in which any of the Corporations is the licensee) or other contract entered into by any of the Corporations in the ordinary course of business, (vi) restrictions on the transfer of any asset pending the close of the sale of such asset, and (vii) restrictions on the transfer of any asset subject to a Lien permitted by Section 7.1 hereof. 7.8 Tax Consequences of Certain Transactions. Neither the Company nor USHG shall cause or permit any merger or consolidation of, or any recapitalization or issuance of Capital Stock by, or any similar transaction involving, any of its Subsidiaries or Egarden Inc., unless, in the reasonable opinion of counsel for the Company and USHG, such transaction would not result in material adverse tax consequences to any of the Corporations or to the Purchasers. 7.9 Dividends, Stock Redemptions, Etc. (a) While any Note is outstanding, neither the Company nor USHG will (i) declare or pay, or set apart any funds for the payment of, any dividends in any fiscal year on any shares of its Capital Stock, or (ii) apply any of its funds, Property or assets to, or set apart any funds, Property or assets for, the purchase, redemption or retirement of, or make any Distribution, by reduction of capital or otherwise, in respect of any of its shares of Capital Stock, whether now or hereafter outstanding; provided, 44 however, that the Company may make Distributions to USHG to permit the payment by USHG of (i) professional fees, taxes and other ordinary course of business operating expenses (including salaries and other employee compensation) incurred by USHG solely in its capacity as parent corporation of the Company, provided that the aggregate amounts of such Distributions to USHG in any fiscal year shall not exceed the aggregate amount of the applicable expenses for such fiscal year (as set forth in USHG's budget for such fiscal year as approved by the Purchasers) by more than ten percent (10%), and (ii) interest on the Junior Subordinated Debentures under the conditions specified in Section 7.18(b) hereof. (b) While any Common Warrants or Common Warrant Shares are held by Purchasers, USHG will not (i) declare or pay, or set apart any funds for the payment of, any dividends in any fiscal year on any shares of its Common Stock, or (ii) apply any of its funds, Property or assets to, or set apart any funds, Property or assets for, the purchase, redemption or retirement of, or make any Distribution, by reduction of capital or otherwise, in respect of any of its shares of Common Stock or Rights therefor, whether now or hereafter outstanding; unless, in the case of clauses (i) and (ii) above, USHG offers each Purchaser holding Common Warrants and/or Common Warrant Shares the option to receive the Applicable Portion of such dividend, purchase, redemption, retirement or Distribution. For this purpose, the "Applicable Portion" shall mean the higher of the following: (A) in the same proportion that the number of Common Warrant Shares (or Common Warrants therefor) owned by a Purchaser bears to the number of shares of Common Stock (or Rights therefor) that USHG proposes to pay a dividend on or to purchase, redeem, retire or make a Distribution in respect of, and (B) in the same proportion that the number of Common Warrant Shares (or Common Warrants therefor) owned by a Purchaser bears to the number of shares of Common Stock (or Rights therefor) owned by all Affiliates of USHG that USHG proposes to pay a dividend on or to purchase, redeem, retire or make a Distribution in respect of. (c) While any Preferred Warrants or Preferred Warrant Securities are held by Purchasers, neither USHG nor the Company will, or permit the Trust or any Subsidiary to, apply any of its funds, Property or assets to, or set apart any funds, Property or assets for, the purchase, redemption or retirement of, or make any Distribution, by reduction of capital or otherwise, in respect of any of the Preferred Securities or Rights therefor, whether now or hereafter outstanding; unless, in each case, each Purchaser holding Preferred Warrants and/or Preferred Warrant Securities is offered the option to receive the Applicable Portion of such purchase, redemption, retirement or Distribution. For this purpose, the "Applicable Portion" shall mean the higher of the following: (A) in the same proportion that the number of Preferred Warrant Securities (or Preferred Warrants therefor) owned by a Purchaser bears to the number of Preferred Securities (or Rights therefor) that the Trust or any Corporation proposes to purchase, redeem, retire or make a Distribution in respect of, and (B) in the same proportion that the number of Preferred Warrant Securities (or Preferred Warrants therefor) owned by a Purchaser bears to the number of Preferred Securities (or Rights therefor) owned by all Affiliates of USHG that the Trust or any Corporation proposes to purchase, redeem, retire or make a Distribution in respect of. 7.10 Issuance of Additional Capital Stock by Subsidiaries. None of the Subsidiaries of the Company will issue any additional Capital Stock or equity interests of any 45 kind or character, other than to the Company or another Subsidiary of the Company; and none of the direct Subsidiaries of USHG or Egarden Inc. will issue any additional Capital Stock or equity interests of any kind or character, other than to USHG. For the avoidance of doubt, USHG may issue additional Capital Stock at any time. 7.11 Operating Leases. Neither the Company nor USHG will, nor will it permit any Subsidiary to, enter into any leases other than Capital Leases which would cause the annual payment obligations of the Corporations under all leases to exceed $500,000 in the aggregate. 7.12 Fiscal Year End. Neither the Company nor USHG will, nor will it permit any Subsidiary to, change its fiscal year end from June 30 of each year. 7.13 Transactions with Affiliates. Neither the Company nor USHG will, nor will it permit any Subsidiary to, transfer any cash or Property to any officer, director, employee or Affiliate, enter into any contract or transaction with any such Person, or modify any outstanding contract or transaction with any such Person, including without limitation the purchase, lease, sale or exchange of Property or the rendering of any service to any such Person, except (a) transactions in the ordinary course of business disclosed in advance in writing to the Purchasers, on an arm's length basis on terms no less favorable than terms which would have been obtainable from a Person other than an Affiliate, (b) employment contracts and compensation arrangements set forth on Schedule 4.22 and any modification, extension, renewal or replacement thereof which is approved by the Compensation Committee of USHG's Board of Directors, and (c) loans to employees to the extent permitted under Section 7.4 hereof. 7.14 ERISA. Neither the Company nor USHG will, nor will it permit any Subsidiary or ERISA Affiliate to: (i) engage in any transaction in connection with which such Corporation or ERISA Affiliate could be subject to either a material civil penalty assessed pursuant to the provisions of Section 502 of ERISA or a material tax imposed under the provisions of Section 4975 of the Code; (ii) terminate any Pension Plan in a "distress termination" under Section 4041 of ERISA; (iii) fail to make payment when due of all material amounts which, under the provisions of any Plan, such Corporation or ERISA Affiliate is required to pay as contributions thereto, or, with respect to any Pension Plan, permit to exist any material "accumulated funding deficiency" (within the meaning of Section 302 of ERISA and Section 412 of the Code), whether or not waived, with respect thereto; or (iv) adopt an amendment to any Pension Plan requiring the provision of security under Section 307 of ERISA or Section 401(a)(29) of the Code. 7.15 Certain Amendments of Senior Debt Documents and Other Transaction Documents; Refinancing of Senior Debt. Neither the Company nor USHG will amend, modify 46 or alter, or permit to be amended, modified or altered, (a) any of the Senior Debt Documents or the Indebtedness thereunder (in a refinancing thereof or otherwise), if the effect would be (i) to increase the interest rate on any Senior Debt (other than through the application of the default rate of interest as set forth in the Senior Debt Documents), (ii) to extend the final maturity date of the Senior Debt to a date later than April 15, 2007, (iii) to cause the amount of the Senior Debt to exceed the limitations set forth in the definition of "Senior Obligations" contained in the Senior Subordination Agreement as in effect on the Closing Date or in Section 8.1 of the Senior Subordination Agreement as in effect on the Closing Date, or (iv) adding any financial tests or ratios which are more restrictive than those included in the Senior Debt Documents on the Closing Date, or (b) any of the other Transaction Documents in any way which would adversely affect the Purchasers. Neither the Company nor USHG will, nor will it permit any of its Subsidiaries to, enter into any refinancing of the Senior Debt Documents which would change the terms of the Senior Debt in any respect which would not be permitted in the case of an amendment, modification or alteration pursuant to the foregoing provisions of this Section 7.15. 7.16 Other Amendments. Neither the Company nor USHG will, nor will it permit any of its Subsidiaries to amend, modify or change its certificate or articles of incorporation or other charter documents (including, without limitation, by the filing or modification of any certificate of designation), certificate of formation, limited liability company agreement or by-laws (or the equivalent organizational documents), as applicable, or amend or modify any agreement entered into by it with respect to its Capital Stock or other equity interests (including any stockholders' agreement), or enter into any new agreement with respect to its Capital Stock or other equity interests, unless such amendment, modification, change or other action contemplated by this Section could not reasonably be expected to be adverse to the interests of the Purchasers in any material respect. 7.17 Accounting Methods. Neither the Company nor USHG will, nor will it suffer or permit any Subsidiary to, make any significant change in accounting treatment or reporting practices, except (a) as required by GAAP, (b) a change in the depreciation method employed thereby to straight line depreciation or (c) a change in a Subsidiary's accounting treatment or reporting practices to conform the accounting practices or reporting practices of newly acquired Subsidiaries to the methods used by USHG and the Company. 7.18 Payments on Subordinated Debt. (a) Except as provided in Section 7.18(b) below, neither the Company nor USHG will (i) make, nor permit any Subsidiary to make, any principal payment of or interest payment on, or purchase or acquire, or prepay, any Indebtedness which is subordinate to the Notes (or any Guaranty thereof) except in accordance with the provisions of the subordination thereof, or (ii) permit any notes or agreements evidencing Indebtedness which is subordinate to the Notes (or any Guaranty thereof), or any subordination agreement executed in connection therewith, to be modified or amended or any agreement or consent to be given thereunder whereby (x) any provisions thereof relating to the subordination thereof to the Notes (or any Guaranty thereof) are waived, modified or discharged, or (y) there is any acceleration of the maturities therein provided. 47 (b) Notwithstanding anything to the contrary contained in Section 7.18(a) above but subject to Section 7.18(c) below, the Company may make Distributions to USHG to permit USHG to make scheduled payments of interest on the Junior Subordinated Debentures so long as (i) there shall not be in effect any notice from the Agent to the Company stating that the Company is prohibited from making such payment, which notice the Agent shall be entitled to give if any Default or Event of Default shall have occurred and be continuing, provided that, solely in the case of an Event of Default resulting from the Company's and USHG's failure to deliver the financial information required pursuant to Section 6.1 hereof, such Event of Default shall be continuing for a period thirty (30) days or more, (ii) the Corporations have achieved the Required EBITDA and (iii) after giving effect to the interest payment on the Junior Subordinated Debentures (or any Distribution by any Corporation to USHG to permit the same), the Corporations would have Consolidated Excess Cash of $500,000 in the months of March and April, and $1,000,000 in all other months. To the extent that the Company is permitted to make a distribution to USHG pursuant to the preceding sentence, USHG shall be permitted to make the corresponding interest payment. In furtherance of the foregoing restrictions on payments in respect of the Junior Subordinated Debentures, USHG hereby appoints the Agent as its attorney, with full power to execute and deliver, in the name and stead of USHG, notices invoking deferral of interest payments ("Interest Deferral Notices") in respect of the Junior Subordinated Debentures as contemplated by the Junior Subordinated Indenture, for such periods as the Agent may determine (including any extensions thereof in accordance with the Junior Subordinated Indenture), provided that the Agent shall not exercise such power until the first to occur of (A) an Event of Default under Section 9.1(a) hereof, (B) an acceleration of the maturity of the Notes, and (C) the sixth (6th) Business Day prior to the date on which an "Event of Default" would exist under the Junior Subordinated Indenture if such deferral were not invoked. Without limiting the Agent's right pursuant to the preceding sentence, the Agent agrees to provide USHG with a copy of any notice sent by the Agent invoking a deferral pursuant to the Indenture. USHG further covenants (w) that it will give Interest Deferral Notices prior to the time that the Agent would have the right to do so under the terms of the preceding sentence, (y) that it will deliver to the Agent, immediately upon USHG's receipt thereof, a copy of any notice received by USHG pursuant to Section 13.4 of the Junior Subordinated Indenture instituting a payment block with respect to the Junior Subordinated Debentures, and (z) that it will give the Agent prompt notice of its anticipated inability to make a payment on the Junior Subordinated Debentures when due, or of its failure to make any such payment on the due date thereof. (c) If payments of interest on the Junior Subordinated Debentures have been deferred pursuant to Section 3.11 of the Junior Subordinated Indenture and Section I.D of the Officers' Certificate and Company Order dated April 17, 1998 specifying certain terms of the Junior Subordinated Debentures, then payments of such interest may be resumed only if (i) the Corporations have achieved the Required EBITDA, (ii) after giving effect to the payment of all current interest and all accrued and unpaid interest on the Junior Subordinated Debentures (or any Distribution by any Corporation to USHG to permit the same), the Corporations would have Consolidated Excess Cash of $500,000 in the months of March and April, and $1,000,000 in all other months, and (iii) after resumption of such interest payments, USHG would have the right to immediately defer such interest payments again pursuant to Section 3.11 of the Junior 48 Subordinated Indenture and Section I.D of the Officers' Certificate and Company Order dated April 17, 1998 specifying certain terms of the Junior Subordinated Debentures. 7.19 Financial Covenants. Each of the Company and USHG will observe, and will cause its Subsidiaries to observe, the covenants set forth on Exhibit F hereto. Each of the Company and USHG will give notice to the Purchasers promptly upon any change in the financial covenants set forth in the Senior Loan Agreement from those set forth therein on the Closing Date, and acknowledges that upon any receipt of such notice, the Purchasers, in their discretion, may amend Exhibit F to conform the covenants set forth therein to such change. SECTION 8. SUBORDINATION The Purchasers covenant and agree that the indebtedness evidenced by the Notes and the liens granted pursuant to the Security Documents shall be subordinate and junior in right of payment to the Senior Debt and the liens securing the Senior Debt, in the manner and to the extent set forth in the Senior Subordination Agreement. Neither the Company nor USHG will make (or give any notice in respect of), nor will it permit any of its Subsidiaries to make (or give any notice in respect of), any voluntary, optional or mandatory payment or prepayment on or redemption or acquisition for value of (including, in each case, without limitation, by way of depositing with any Person money or securities before due for the purposes of paying when due), any Senior Debt or make any other payment in respect thereof (whether for principal, interest or other amounts) except as otherwise expressly permitted by the Senior Loan Agreement and the Senior Subordination Agreement. SECTION 9. EVENTS OF DEFAULT. 9.1 Events of Default. The occurrence of any of the following events shall constitute an "Event of Default" hereunder: (a) all or any portion of the principal of the Notes, or premium (if any) or interest on the Notes, or any other amounts payable under the Purchaser Documents, is not paid when due, and such failure continues for more than five (5) calendar days; or (b) a breach by the Company or USHG of any of the covenants, conditions, promises or agreements contained in Section 7 hereof or in Section 6.1, 6.5, 6.7, 6.9-6.12 or 6.14 hereof or in Section 2.3 of Exhibit C hereto; or (c) a breach by any of the Corporations of any of the covenants, conditions, promises or agreements contained in any Purchaser Document (other than those specified in Sections 9.1(a) or (b) above), provided, that if such breach is by its nature susceptible of cure, the Corporations shall have a period of thirty (30) days from the occurrence of such breach within which to cure the same before such breach becomes an Event of Default; or (d) any warranty or representation heretofore, now or hereafter made by any of the Corporations in or pursuant to any of the Purchaser Documents or the Senior Debt 49 Documents shall prove to be, or to have been, untrue or incorrect in any material respect on the date as of which made; or any material schedule, certificate, statement, report, financial data, notice or other information furnished at any time by or on behalf of any of the Corporations to the Purchasers under or pursuant to the Purchaser Documents is untrue or incorrect in any material respect on the date as of which made; or (e) a judgment or order requiring payment in excess of insurance coverage by more than $250,000 shall be rendered against any of the Corporations and such judgment or order shall remain unsatisfied or undischarged or unbonded and in effect for thirty (30) consecutive days without a stay of enforcement or execution; or (f) a notice of Lien, levy or assessment (other than a Permitted Lien) is filed or recorded with respect to any material portion of the assets of any of the Corporations by any party, or action is taken or commenced by any Governmental Authority on account of any taxes or debts owing at any time or times hereafter which results in a Lien (other than a Permitted Lien) upon any material portion of the assets of any of the Corporations; or (g) any material portion of the assets of any of the Corporations is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes within the possession of any receiver, trustee, custodian or assignee for the benefit of creditors; or (h) a proceeding under 11 U.S.C. ss.ss.101 et seq., as amended, and any similar or successor Federal statute, and the rules and regulations thereunder (collectively, the "Bankruptcy Code"), seeking an order for relief or under any other bankruptcy, reorganization, arrangement of debt, insolvency, readjustment of debt or receivership law or statute is filed against any of the Corporations and such proceeding is not dismissed within sixty (60) days of the date of its filing, or a proceeding under the Bankruptcy Code seeking an order for relief or under any bankruptcy, reorganization, arrangement of debt, insolvency, readjustment of debt or receivership law or statute is filed by any of the Corporations, or any of the Corporations makes an assignment for the benefit of creditors, or any of the Corporations takes any corporate action to authorize any of the foregoing; or (i) any of the Corporations voluntarily or involuntarily dissolves or is dissolved, or its existence terminates or is terminated without the consent of the Purchasers (other than pursuant to a Subsidiary merger permitted hereunder); or (j) any of the Corporations becomes insolvent or fails generally to pay its debts as they become due; or (k) any of the Corporations fails to pay any principal of or interest on any Indebtedness having an outstanding principal amount of $250,000 or more ("Material Indebtedness") (including without limitation any such Indebtedness assumed or guaranteed) for a period longer than the grace period, if any, provided for such payment (unless and then only so long as waived by the holder thereof); or any default under any 50 instrument or agreement evidencing, creating, securing or otherwise relating to Material Indebtedness (including without limitation any guaranty or assumption agreement relating to such Material Indebtedness) or other event occurs and continues beyond any applicable grace period, and the effect of such default or other event is to cause, or to permit the holder or holders of such Material Indebtedness (or their representative) to cause, such Material Indebtedness (or the obligations under any such guaranty or assumption agreement) to become due and payable prior to the stated maturity thereof; or (l) a Change of Control shall occur; or Richard Grandy shall cease for any reason to hold the office of chief operating officer of the Company and USHG unless as a result of his death or disability and he is succeeded by a Person acceptable to the Purchasers within 90 days after such occurrence; (m) a Reportable Event shall occur which a majority in interest of the Purchasers, in their discretion, shall determine in good faith constitutes grounds for the termination by the PBGC of any Plan or for the appointment by the appropriate United States district court of a trustee for any Plan, or if any Plan shall be terminated resulting in a liability in excess of $250,000 to the Corporations or any such trustee shall be requested or appointed, or if any of the Corporations is in "default" (as defined in Section 4219(c)(5) of ERISA) with respect to payments to a Multiemployer Plan resulting from such Corporation's complete or partial withdrawal from such Plan; or (n) any Guaranty shall cease to be in full force and effect (other than as a result of a Subsidiary merger permitted hereunder), or any Guarantor shall so assert; or any Subsidiary shall fail to execute and deliver a Guaranty upon request of the Purchasers; or (o) the Purchasers' security interest under the Security Documents or rights under the other Purchaser Documents shall be impaired for any reason; or the Corporations' ability to fulfill their obligations and comply with their covenants under any of the Purchaser Documents shall be impaired in any material respect; or any action or proceeding is commenced by any of the Corporations, or on their behalf, that would result, in the Purchasers' judgment, in such impairment; or any Subsidiary shall fail to execute and deliver a Security Agreement (or join in the Security Agreement) upon request of the Purchasers; or (p) there shall occur any material damage to, or loss, theft or destruction of, any material assets of any of the Corporations, or any strike, lockout, labor dispute, embargo, condemnation, act of God or public enemy, or other casualty, which in any such case causes, for more than ten (10) consecutive days, the cessation or substantial curtailment of revenue producing activities at any facility of any of the Corporations if such event or circumstance is not covered by business interruption insurance and would have a Material Adverse Effect; or 51 (q) any of the Corporations shall be convicted of (i) a state or federal misdemeanor where such conviction would have a Material Adverse Effect or (ii) a state or federal felony; or (r) if, prior to the maturity of the "Term Loan" (as defined in the Senior Loan Agreement), the Senior Lender shall not continue to make available to the Corporations a committed revolving line of credit upon terms comparable to those applicable to the line of credit described in the Senior Loan Agreement as in effect on the Closing Date; or (s) the occurrence of any "Default" or "Event of Default" as defined in the Senior Loan Agreement, if the effect thereof is to cause any Indebtedness outstanding thereunder to become due and payable prior to the stated maturity thereof. If an Event of Default under paragraph (h) or (i) of this Section 9 shall occur, the Notes and all other amounts owing under this Agreement shall automatically become due and payable. Upon the occurrence of any other Event of Default, and at any time thereafter, if such Event of Default shall then be continuing, subject to the provisions of Section 10, the holders of a majority in outstanding principal amount of the Notes may, by written notice to the Company, declare due and payable the principal of, premium, if any, and interest on, the Notes and all other amounts owing under this Agreement, whereupon the same shall be immediately due and payable. In the event that the Notes become or are declared due and payable prior to their stated maturity, the same shall become due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived. 9.2 Consultants. Upon the occurrence of a Default or Event of Default, the Company shall retain, at the Purchasers' request and the Company's expense, consultants and accountants to evaluate the Corporations' financial condition, business, operations and prospects. Such Persons shall, in all cases, be acceptable to the Purchasers. Each of the Company and USHG shall cooperate fully with such evaluation and in connection therewith shall make available such senior executives and other members of management and all information, books and records requested by such Persons. Each of the Company and USHG shall cause such Persons to share all results, reports and other data generated as a result of such evaluation with the Purchasers. 9.3 Other Costs and Expenses. Each of the Company and USHG shall be obligated to pay, upon demand, all costs and expenses paid or incurred by the Purchasers (a) in enforcing their rights and remedies under this Agreement or any of the other Purchaser Documents, or (b) in connection with the prosecution or defense of any claim in any way arising out of, related to or connected with this Agreement or any of the other Purchaser Documents, all of which costs and expenses shall include the reasonable fees and disbursements of counsel and of experts and other consultants retained by the Purchasers. The foregoing shall not be construed to limit any other provision of this Agreement or the other Purchaser Documents regarding costs and expenses to be paid by the Corporations. 52 SECTION 10. CONSENTS. Any provision in this Agreement to the contrary notwithstanding, with the written consents of Purchasers holding more than fifty percent (50%) of the aggregate principal amount then outstanding of the Notes, or after the Notes have been paid in full, more than fifty percent (50%) of the Warrants and Warrant Securities taken together (counting the Common Warrants as one Common Warrant Share for each Common Warrant Share issuable upon exercise of the Common Warrants; and counting the Preferred Warrants as one Preferred Security for each Preferred Security of the Trust purchasable from USHG upon exercise of the Preferred Warrants) then held by all Purchasers, the Company may be relieved from the effect of any Event of Default or the Company or USHG may be relieved from compliance with any covenant, agreement or undertaking contained herein or in any instrument executed and delivered as herein provided, except the terms of the Warrants, the provisions of Section 3.5 and Exhibit E-1 and Exhibit E-2 hereto (Registration Rights) and the provisions for the payment or prepayment of the Notes. SECTION 11. SECURITIES LAW MATTERS. 11.1 Securities Act. Each Purchaser acknowledges (a) that the Notes and Warrants being acquired by such Purchaser are not being registered under the Securities Act on the ground that the issuance thereof is exempt from registration under Section 4(2) of the Securities Act as not involving any public offering, and (b) that the Company's and USHG's reliance on such exemption is predicated in part on the representation hereby made to the Company and USHG by such Purchaser that it is an "accredited investor" within the meaning of Regulation D promulgated under the Securities Act, and (except as provided in Section 12) is acquiring its Notes and Warrants for investment for its own account, with no present intention of dividing its participation with others or reselling or otherwise distributing the same, subject, nevertheless, to any requirement of law that the disposition of its property shall at all times be within its control. Except as provided in Section 12, none of the Purchasers is aware of any particular occasion, event or circumstance upon the occurrence or happening of which it intends to dispose of its Notes and Warrants. 11.2 Resales. (a) None of the Purchasers or Investors (as defined in Section 12.2) will sell or transfer all or any part of its Notes, Warrants or Warrant Securities except: (i) pursuant to Rule 144 under the Securities Act; (ii) pursuant to any other exemption from, or otherwise in a transaction not subject to, the registration requirements of the Securities Act (as confirmed in an opinion delivered by the transferor's counsel , to the effect that the proposed transfer may be effected without registration under the Securities Act); (iii) in a transfer by a Purchaser to any Affiliate or wholly-owned Subsidiary of the Purchaser; or by a Purchaser to Investors as contemplated by Section 12.2; or 53 (iv) pursuant to an effective registration statement under the Securities Act. (b) The restrictions set forth in Section 11.2(a) shall terminate and cease to be effective with respect to any Notes, Warrants or Warrant Securities registered under the Securities Act or transferred pursuant to Rule 144, or if the Company or USHG, as applicable, receives an opinion of counsel reasonably satisfactory to it to the effect that the securities represented thereby need no longer be subject to such restrictions in order to ensure compliance with the Securities Act. Whenever such restrictions shall so terminate the holder or transferee of such Notes, Warrants or Warrant Securities shall be entitled to receive from the Company or USHG, as applicable, without expense (other than transfer taxes, if any), certificates for such Notes, Warrants or Warrant Securities not bearing the first legend set forth in Section 11.3, at which time the Company or USHG, as applicable, will terminate or remove any transfer restrictions relating thereto. In addition, the Company or USHG, as applicable, will issue (or cause to be issued) certificates for the Notes, Warrants or Warrant Securities without all or part of the second legend set forth in Section 11.3 whenever this Agreement, the Warrant Agreement and the Stockholders Agreement cease to restrict the transfer of the securities evidenced by such certificate. 11.3 Legends. Each Warrant and each certificate for Warrant Securities issued to the Purchasers or to a subsequent transferee or holder shall bear legends in substantially the following form: [THIS WARRANT AND THE UNDERLYING SHARES] [THE SHARES] REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EXEMPTION FROM, OR OTHERWISE IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF SUCH ACT. IN ADDITION, THIS WARRANT AND THE UNDERLYING SHARES MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH THE CONDITIONS SPECIFIED IN THE NOTE AND WARRANT PURCHASE, GUARANTY AND SECURITY AGREEMENT, THE WARRANT AGREEMENT AND THE STOCKHOLDERS AGREEMENT, EACH DATED AS OF NOVEMBER 15, 2001, BETWEEN U.S. HOME & GARDEN INC. AND THE INITIAL HOLDERS OF THE WARRANTS NAMED THEREIN, COMPLETE AND CORRECT COPIES OF WHICH ARE AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF U.S. HOME & GARDEN INC. AND WILL BE FURNISHED TO THE HOLDER HEREOF UPON WRITTEN REQUEST AND WITHOUT CHARGE. SECTION 12. TRANSFERS. 12.1 Transfers. Subject only to compliance with the requirements of Section 11.2 and the Stockholders Agreement (if applicable), each Purchaser shall be entitled to assign and transfer all or any part of its Notes, Warrants and Warrant Securities, or any interest or 54 participation therein, and its related rights under this Agreement and, if applicable, the Warrant Agreement and the Stockholders Agreement. Upon the assignment or transfer by such Purchaser of all or any part of its Notes, Warrants or Warrant Securities or its interest therein (except in public offering registered under the Securities Act, or a sale pursuant to Rule 144 thereunder), the term "Purchaser" as used herein shall thereafter include, to the extent of the interest so assigned or transferred, the assignee or transferee of such interest. Notwithstanding the foregoing, there shall be no more than ten (10) Purchasers at any one time hereunder. 12.2 Participations. A Purchaser may wish to grant participations in its Notes, Warrants or Warrant Securities and related rights under the Purchaser Documents to other accredited investors ("Investors") pursuant to a participation agreement; provided, however, that at the time any such participation is granted, the Purchaser granting such participation will so inform the Company or USHG, as applicable, and furnish it the representation of each participating Investor (in form and substance reasonably acceptable to the Company or USHG, as applicable) that such Investor is acquiring his, her or its participation with no present intention of reselling or distributing the same; and provided, further, that such participation agreement shall provide that the Purchaser granting the participation shall retain the sole right to take or refrain from taking any action under the Purchaser Documents, except that such participation agreement may provide that such Purchaser shall not, without the consent of the participant, agree to any amendment or waiver that would have the effect of (i) extending the maturity date of the Notes or (ii) reducing any amount payable under the Notes, to the extent that the participant would be affected thereby. If at any time a Purchaser wishes to assign and transfer of record into the name of an Investor his, her or its participation and related rights and obligations arising under the Purchaser Documents, the Company and/or USHG, as applicable, and the other Purchasers will execute and deliver such agreements and instruments as the transferring Purchaser may reasonably request (including without limitation new Notes and certificates for Warrants and Warrant Securities in such amounts as the transferring Purchaser may request) to effect the assignment and transfer to such Investor (in his, her or its own name) of such participation, or such part thereof as may be so assigned and transferred. 12.3 Issuance of New Notes. The Company will at any time, at its expense, at the request of a holder of a Note of a Series, and upon surrender of such Note for such purpose, issue a new Note or Notes of the same Series in exchange therefor, payable to the order of the holder or (subject to Section 11.2) such Person or Persons as may be designated by such holder, dated the last date to which interest has been paid on the surrendered Note, or, if such exchange shall take place prior to the due date of the first interest payment, the Closing Date, in such denominations as may be requested, in an aggregate principal amount equal to the unpaid principal amount of the Note so surrendered and substantially in the form of such surrendered Note with appropriate revisions. Upon such exchange the term "Note" as used herein shall include such new Note or Notes. SECTION 13. EFFECTIVENESS OF AGREEMENT. The covenants and all terms contained in this Agreement shall continue in full force and effect for the benefit of each Purchaser holding a Note for so long as such Note is outstanding or there are any unpaid or unsatisfied obligations in respect of such Note owing 55 under any of the Purchaser Documents, and such covenants and terms shall continue thereafter for the benefit of each Purchaser holding Warrants or Warrant Securities, except that the following provisions shall terminate and be of no further force and effect on and after the Notes have been paid in full and all obligations in respect of the Notes owing under any of the Purchaser Documents have been paid and satisfied in full: Sections 3.1 through 3.4, 6.3(e), 6.4 through 6.6, 6.8(a) and (b), 6.10, 6.11, 6.13, 6.14, 7.1 through 7.7, 7.9(a), 7.11, 7.12, 7.15 through 7.19, 9.1 and 9.2. All other provisions of this Agreement shall survive such payment and satisfaction, provided, however, that after such payment and satisfaction (i) the inspections referred to in Section 6.2 shall be at the Purchasers' expense and shall be limited to no more than two in any fiscal year, and (ii) the provisions of Section 6.12 shall continue in full force and effect until the third anniversary of such payment and satisfaction. In connection with the Purchasers' continuing right to receive financial information pursuant to Section 6.1 and certain other information pursuant to Section 6.7, the Purchasers agree to continue to abide by the confidentiality provisions contained in the last paragraph of Section 6.1. No termination of any covenant, representation, warranty or other provision of this Agreement or any other Purchaser Document, whether after the repayment of the Notes and all amounts owing under the Purchaser Documents in respect thereof or otherwise, shall in any way suspend, eliminate or nullify the right of any Purchaser holding Warrants or Warrant Securities to pursue rights and remedies arising out of a breach or default which occurred prior to the date of termination, whether known or unknown as of such date. SECTION 14. JUDICIAL PROCEEDINGS. (a) Each of the Company and USHG irrevocably submits to the non-exclusive jurisdiction of any state or federal court sitting in the City of New York over any suit, action or proceeding arising out of or relating to this Agreement or any of the other Purchaser Documents. To the fullest extent it may effectively do so under applicable law, each of the Company and USHG irrevocably waives and agrees not to assert, by way of motion, as a defense or otherwise, any claim that it is not subject to the jurisdiction of any such court, any objection that it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. (b) Each of the Company and USHG agrees, to the fullest extent it may effectively do so under applicable law, that a judgment in any suit, action or proceeding of the nature referred to in paragraph (a) above brought in any such court shall, subject to such rights of appeal on issues other than jurisdiction as may be available, be conclusive and binding upon it and may be enforced in the courts of the United States of America or the State of New York (or any other courts to the jurisdiction of which it is or may be subject) by a suit upon such judgment. (c) Each of the Company and USHG consents to service of process in any suit, action or proceeding of the nature referred to in paragraph (a) above by mailing a copy thereof by registered or certified mail, postage prepaid, return receipt requested, to its address specified in or designated pursuant to Section 15.1. Such service (i) shall be deemed in every respect effective service of process upon the Company or USHG, as the case may be, in any such suit, 56 action or proceeding and (ii) shall, to the fullest extent permitted by law, be taken and held to be valid personal service upon and personal delivery to the Company or USHG, as the case may be. (d) Nothing in this Section 14 shall affect the right of any of the Purchasers to serve process in any manner permitted by law, or limit any right that any of the Purchasers may have to bring proceedings against any of the Corporations in the courts of any jurisdiction or to enforce in any lawful manner a judgment obtained in one (1) jurisdiction in any other jurisdiction. (e) Upon breach or default by any Corporation with respect to any obligation hereunder or under any of the other Purchaser Documents, the Purchasers (or their agents) shall be entitled to protect and enforce their rights at law, or in equity or by other appropriate proceedings for specific performance of such obligation, or for an injunction against such breach or default, or in aid of the exercise of any power or remedy granted hereby or thereby or by law. SECTION 15. MISCELLANEOUS. 15.1 Notices. All notices, requests, demands or other communications to or upon the respective parties hereto shall be in writing and shall be deemed to have been given or made, and all financial statements, information and the like required to be delivered hereunder shall be deemed to have been delivered, either (a) three (3) Business Days after deposited in the United States certified mail, return receipt requested, with postage prepaid, or (b) one (1) Business Day after delivery to a nationally recognized courier, designated for overnight delivery with all fees prepaid, in either case addressed to the Company or USHG at 655 Montgomery Street, San Francisco, CA 94111, Attn: Robert Kassel, Chief Executive Officer (Telecopier No.: (415) 616-8110), and to the Purchasers at their respective addresses set forth on Exhibit A hereto, or to such other address as any of them shall specify in writing to the others. The Company shall maintain a register of the holders of the Notes, and USHG shall maintain registers of the holders of the Warrants and Warrant Securities, each of which registers shall contain the last address specified as provided in the preceding sentence. Upon reasonable request of any Purchaser, the Company or USHG will deliver to such Purchaser, at the Company's or USHG's expense, additional copies of all financial statements, information and the like required to be provided to the Purchasers hereunder, subject to the confidentiality provisions of Section 6.1. 15.2 Cumulative Remedies, Etc. No failure or delay on the part of any of the Purchasers in exercising any right, power or privilege hereunder, and no course of dealing between any Corporation and the Purchasers, or any of them, shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude the simultaneous or later exercise of any other right, power or privilege. The rights and remedies herein expressly provided are cumulative and not exclusive of any rights or remedies which the Purchasers, or any of them, would otherwise have. No notice to or demand on any Corporation in any case shall entitle such Corporation to any other or further notice or demand in similar or 57 other circumstances or constitute a waiver of the rights of the Purchasers, or any of them, to take any other or further action in any circumstances without notice or demand. 15.3 No Oral Changes; Assignment; Survival of Representations. This Agreement may not be changed or terminated orally. This Agreement shall be binding upon the Company, USHG and the Purchasers and their successors and assigns. Neither the Company nor USHG shall make any assignment of its rights under this Agreement or subject this Agreement or its rights hereunder to any Lien; and any such Lien shall be absolutely void and unenforceable as against the Purchasers. All agreements, representations and warranties made herein or in writing otherwise in connection herewith shall survive the issuance of the Notes and Warrants. 15.4 Several Obligations. The Purchasers shall not be jointly obligated hereunder; their obligations are several. The sales of the Notes and Warrants to the Purchasers shall be deemed separate sales to each Purchaser. Notwithstanding any provision of this Agreement, the Company and USHG shall not be obligated to sell less than all of the Notes and Warrants, and no Purchaser shall be obligated to purchase any of the Notes and Warrants unless all of the Notes and Warrants are sold. 15.5 Costs and Expenses The Corporations shall pay within five (5) days after receipt of written request therefor all reasonable fees, costs and expenses of the Purchasers incurred in connection with, or otherwise payable by the Corporations with respect to: (a) the preparation, negotiation, execution, delivery, administration, default, collection, waiver or amendment of any terms of this Agreement and the other Purchaser Documents (including, without limitation, any environmental and other "due diligence" investigations); (b) the preparation, negotiation, execution and delivery of the letter of intent dated as of September 20, 2001 and the commitment letter dated as of October 11, 2001, as amended as of October 30, 2001, between Golub Associates Incorporated and USHG (including, without limitation, the commitment fee described in the term sheet attached thereto); (c) the Purchasers' exercise, preservation or enforcement of any of their rights, remedies or options hereunder (including, without limitation, pursuant to Sections 9.2 and 9.3 hereof); (d) the granting, perfecting and protecting of liens upon and security interests in any collateral now or hereafter securing the Corporations' obligations under this Agreement and the other Purchaser Documents; and (e) the prosecution or defense of any claim in any way arising out of, related to or connected with this Agreement or any of the other Purchaser Documents; including in each case, without limitation, (i) fees and expenses of outside legal counsel or the allocated costs of in-house legal counsel for the Agent and the Purchasers, provided that the fees of separate counsel to individual Purchasers (i.e., of counsel in addition to counsel for the Agent and the Purchasers) may not be so charged to the Corporations with respect to matters not involving an amendment, waiver or similar matter or enforcement matters following an Event of Default, (ii) accounting, consulting, brokerage or other similar professional fees or expenses, (iii) any fees and expenses associated with travel or other costs relating to any appraisals or examinations conducted in connection with the Corporations' obligations under this Agreement and the other Purchaser Documents or any collateral therefor (including, without limitation, the collateral described in the Security Agreement), (iv) all filing fees and other taxes and fees payable or determined to be payable in connection therewith, including, without limitation, documentary, stamp and 58 similar taxes and assessments and all recording and filing fees charged by any Governmental Authority; and (v) all other costs and expenses incurred by the Purchasers as are payable by the Corporations pursuant to Sections 9.2, 9.3 and 15.8 hereof or pursuant to any other provision of this Agreement or any of the other Purchaser Documents. All of the foregoing fees, costs and expenses are referred to herein collectively as the "Costs and Expenses". The Costs and Expenses shall bear interest at the default rate described in Section 3.1(d) hereof from the due date thereof until the same are paid. The Company, USHG and (by executing this Agreement where indicated below) the other Corporations hereby acknowledge that their obligations under this Section 15.5 (I) are joint and several, (II) are secured by any and all collateral now or hereafter securing the Corporations' obligations under the Purchaser Documents (including, without limitation, the Guaranties and the collateral described in the Security Documents), (III) shall survive any termination of this Agreement and (IV) are absolute and unconditional regardless of whether or not the Transactions are consummated. 15.6 Loss or Destruction of Note. Upon receipt by the Company of notice of the loss, theft, destruction or mutilation of any Note, and (in the case of loss, theft or destruction) of indemnity satisfactory to the Company (the Purchasers' undertaking shall be satisfactory indemnity in the case of loss, theft or destruction of any Note owned by the Purchaser), and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender or cancellation of such Note, if mutilated, the Company shall make and deliver a new Note of like tenor in lieu of the lost, stolen, destroyed or mutilated Note. 15.7 Allocation of Payments among Purchasers. (a) The Purchasers of each Series of Notes agree among themselves that, with respect to all sums received by such Purchasers applicable to the payment of principal of, premium (if any) or interest on the Notes of such Series, equitable adjustment will be made among such Purchasers so that, in effect, all such sums shall be shared ratably by all of such Purchasers holding Notes of such Series, whether received by voluntary payment, by realization upon security, by the exercise of the right of setoff, by counter-claim or cross-action or by the enforcement of any or all of the Notes of such Series. If any Purchaser receives any payment on its Notes of a Series in excess of its pro rata portion of amounts relating to all Notes of such Series, then such Purchaser receiving such excess payment shall purchase for cash from the other Purchasers holding Notes of such Series shares in their Notes of such Series in such amounts as shall result in a ratable participation by all of the Purchasers holding Notes of such Series in the aggregate unpaid amount of Notes of such Series then outstanding. In addition to the provisions set forth in this Section 15.7, two or more of the Purchasers may enter into agreements among themselves for the allocation of proceeds, and if requested, the Company hereby agrees to abide by such agreements. (b) The provisions of Section 15.7(a) above relate to the allocation of payments received among the holders of Notes of the same Series, and such provisions shall not detract from the provisions of Section 3.1(f) hereof, which primarily relate to the allocation of amounts between the Series A Notes, on the one hand, and the Series B Notes, on the other hand. 15.8 Indemnification Generally. Each of the Company and USHG agrees to indemnify and hold harmless each Purchaser, its Subsidiaries, and any subsequent holder of the 59 Notes or the Warrants, and their respective directors, officers, employees, stockholders, partners and Affiliates, to the maximum extent permitted by law, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, reasonable costs, reasonable expenses and disbursements of any kind or nature whatsoever with respect to the Transactions or the Transaction Documents, any operations or activities of any of the Corporations, the execution, delivery, enforcement, performance and administration of the Purchaser Documents and the use of the proceeds of the issuance and sale of the Notes and Warrants, or any other matter, claim or event related to, or arising out of the Transactions, the Transaction Documents or the matters contemplated therein (all the foregoing, collectively, the "indemnified liabilities"); provided, that neither the Company nor USHG shall have any obligation hereunder to any indemnified party with respect to indemnified liabilities arising from the gross negligence or willful misconduct of such indemnified party. The obligations of the Company and USHG under this Section 15.8 shall survive and continue to be in full force and effect notwithstanding the termination of this Agreement. 15.9 Governing Law. This Agreement, the other Purchaser Documents and the other agreements and instruments executed as provided herein and therein, and the rights and obligations of the parties hereunder and thereunder, shall be construed and interpreted in accordance with and governed by the internal laws of the State of New York. 15.10 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 15.11 Captions; Gender. The descriptive headings of the Sections of this Agreement are inserted for convenience only and shall not affect the meaning, construction or interpretation of any of the provisions hereof. The use of the neuter form of a pronoun shall be deemed, where appropriate, to include the masculine and feminine forms of such pronoun. 15.12 Survival; Right to Indemnification. All representations, warranties, covenants, and obligations in this Agreement, the certificates delivered pursuant to Section 5 hereof, and any other certificate or document delivered pursuant to this Agreement will survive the Closing. The right to indemnification, payment of damages or other remedy based on such representations, warranties, covenants, and obligations will not be affected by any investigation conducted with respect to, or any knowledge acquired (or capable of being acquired) at any time, whether before or after the execution and delivery of this Agreement or the Closing Date, with respect to the accuracy or inaccuracy of or compliance with, any such representation, warranty, covenant, or obligation. The waiver of any condition based on the accuracy of any representation or warranty, or on the performance of or compliance with any covenant or obligation, will not affect the right to indemnification, payment or damages, or other remedy based on such representations, warranties, covenants, and obligations. 15.13 Purchasers May Perform. If any of the Corporations fails to perform any agreement contained herein or in the other Purchaser Documents, the Purchasers may, but shall not be obligated to, perform or cause the performance of such agreement, and the costs and 60 expenses incurred by the Purchasers in connection therewith shall constitute Costs and Expenses hereunder. 15.14. Integration. This Agreement (including all Exhibits and Schedules attached hereto and all certificates and other documents executed and delivered in connection herewith or pursuant hereto) constitutes the entire understanding and agreement of the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements and understandings, written and oral, among the parties with respect to the subject matter hereof, including, without limitation, the letter of intent and commitment letter referred to in Section 15.5; provided, however, that the following provisions of such commitment letter shall survive in the event the Closing is not consummated: "Expenses", "Non-Funding Fee", "Confidentiality of Commitment and No-Shop Undertaking", "Applicable Law; Jurisdiction" and "Jury Trial Waiver; Indemnification". 15.15 Severability. An term of provision of this Agreement or of any of the other Purchaser Documents which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and conditions of this Agreement or of any of the other Purchaser Documents or affecting the validity or unenforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement or of any of the other Purchaser Documents is so broad as to be unenforceable, the provision that be interpreted to be only so broad as is enforceable. 15.16 Waiver of Jury Trial and Damages . EACH OF THE COMPANY AND USHG AND THE PURCHASERS MUTUALLY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY JURISDICTION, COURT AND PROCEEDING WITH RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OF THIS AGREEMENT, THE OTHER PURCHASER DOCUMENTS, THE OTHER TRANSACTION DOCUMENTS, OR ANY INSTRUMENT OR DOCUMENT DELIVERED PURSUANT HERETO OR THERETO OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY, INCLUDING, WITHOUT LIMITATION, ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS OR ACTIONS OF CREDITOR RELATING TO THE ADMINISTRATION OR ENFORCEMENT OF THIS AGREEMENT, THE OTHER PURCHASER DOCUMENTS OR THE OTHER TRANSACTION DOCUMENTS, AND AGREE THAT NEITHER PARTY WILL SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. EXCEPT AS PROHIBITED BY LAW, EACH OF THE COMPANY AND USHG WAIVES ANY RIGHT WHICH IT MAY HAVE TO CLAIM OR RECOVER IN ANY PROCEEDING REFERRED TO IN THE PRECEDING SENTENCE ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL OR OTHER TYPE OF DAMAGES OTHER THAN ACTUAL DAMAGES. EACH OF THE COMPANY AND USHG HEREBY CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE PURCHASERS HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE PURCHASERS WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING 61 WAIVERS. EACH OF THE COMPANY AND USHG ACKNOWLEDGES THAT THE FOREGOING WAIVERS CONSTITUTE A MATERIAL INDUCEMENT FOR THE PURCHASERS TO ENTER INTO THIS AGREEMENT AND PURCHASE THE NOTES. BY EXECUTING AND DELIVERING THIS AGREEMENT, EACH OF THE COMPANY AND USHG CONFIRMS THAT THE FOREGOING WAIVERS ARE INFORMED AND FREELY MADE. [Remainder of page intentionally left blank; signature page follows] 62 If you are in agreement with the foregoing Note and Warrant Purchase, Guaranty and Security Agreement, please sign in the space provided below. - -------------------------------------------------------------------------------- Company: USHG: EASY GARDENER, INC. U.S. HOME & GARDEN INC. By: ________________________ By: ________________________ Name/Title: Name/Title: - -------------------------------------------------------------------------------- The undersigned Corporations hereby agree to the provisions of Section 3.3 and Exhibit C (Grant of Security Interest; Appointment of Collateral Agent), Section 3.4 and Exhibit D (Guaranty), and Section 15.5 (Costs and Expenses). - -------------------------------------------------------------------------------- GOLDEN WEST AGRI-PRODUCTS, INC. WEATHERLY CONSUMER PRODUCTS GROUP, INC. By: ________________________ By: ________________________ Name/Title: Name/Title: - -------------------------------------------------------------------------------- AMPRO INDUSTRIES, INC. WEATHERLY CONSUMER PRODUCTS, INC. By: ________________________ By: ________________________ Name/Title: Name/Title: - -------------------------------------------------------------------------------- WEED WIZARD ACQUISTION CORP. By: ________________________ Name/Title: - -------------------------------------------------------------------------------- 63 The foregoing is hereby accepted and agreed to as of the date first above written: - -------------------------------------------------------------------------------- Purchasers: Purchasers (cont'd): - ----------- -------------------- LEG PARTNERS DEBENTURE SBIC, L.P. By: Golub Debenture GP, LLC, LEG CO-INVESTORS, LLC its general partner By: ___________________________ By: ________________________________ Gregory W. Cashman, Gregory W. Cashman, Vice President Authorized Signatory - -------------------------------------------------------------------------------- LEG PARTNERS III, L.P. LEG CO-INVESTORS II, LLC By: Golub GP III, LLC, its general partner By: ________________________________ By: ___________________________ Gregory W. Cashman, Vice President Gregory W. Cashman, Manager - -------------------------------------------------------------------------------- LEG PARTNERS III SBIC, L.P. 555 MADISON INVESTORS, LLC By: Golub PS-GP, LLC, its general partner By: ________________________________ By: ___________________________ Gregory W. Cashman, Vice President Gregory W. Cashman, Manager - -------------------------------------------------------------------------------- EXHIBIT A TO NOTE AND WARRANT PURCHASE, GUARANTY AND SECURITY AGREEMENT U.S. HOME & GARDEN, INC. EASY GARDENER, INC. NOTE AND WARRANT PURCHASE, GUARANTY AND SECURITY AGREEMENT List of Purchasers
Common Preferred Total Purchase Purchasers Series A Notes Series B Notes Warrants Options Price ---------- -------------- -------------- -------- ------- ----- LEG Partners Debenture SBIC, L.P. $5,555,556 N/A N/A N/A $5,000,000 LEG Partners III, L.P. $215,129 N/A N/A N/A $193,616 LEG Partners III SBIC, L.P. N/A $824,384 3.6108% 3.6108% $824,456 LEG Co-Investors, LLC $54,658 $7,808 0.0342% 0.0342% $57,001 LEG Co-Investors II, LLC $143,836 $20,548 N/A N/A $150,000 555 Madison Investors, LLC $23,973 $3,425 0.1050% 0.1050% $25,002 555 Madison Avenue, 30th Floor New York, NY 10022 Attn: Gregory W. Cashman Telecopier No.:212-750-5505 TOTALS: $5,993,151 $856,164 3.7500% 3.7500% $6,250,075
EXHIBIT B-1 TO NOTE AND WARRANT PURCHASE, GUARANTY AND SECURITY AGREEMENT THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AS AMENDED OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF REGISTRATION THEREUNDER OR AN EXEMPTION THEREFROM AS PROVIDED IN THE PURCHASE AGREEMENT REFERRED TO HEREIN. THIS NOTE IS SUBORDINATED TO CERTAIN SENIOR INDEBTEDNESS OF THE COMPANY. THE HOLDER OF THIS NOTE BY ITS ACCEPTANCE HEREOF COVENANTS AND AGREES THAT AMOUNTS OWING WITH RESPECT TO THIS NOTE SHALL BE SUBORDINATED IN ACCORDANCE WITH THE PROVISIONS OF THE SUBORDINATION AGREEMENT DATED AS OF NOVEMBER 15, 2001 AMONG PNC BANK, NATIONAL ASSOCIATION, THE CORPORATIONS AND THE INITIAL HOLDER OF THIS NOTE, AND THE HOLDER ACCEPTS AND AGREES TO BE BOUND BY SUCH PROVISIONS. EASY GARDENER, INC. 16% Series A Senior Subordinated Note $__________ November __, 2001 FOR VALUE RECEIVED, the undersigned, EASY GARDENER, INC., a Delaware corporation (the "Company"), hereby unconditionally promises to pay to the order of __________________________ (together with any successors and/or assigns, the "Purchaser"), in lawful money of the United States of America and in immediately available funds, the principal amount of ___________________ DOLLARS ($__________) on November 19, 2007. The undersigned further agrees to pay interest in like money at such office on the unpaid principal amount hereof at the rates per annum and on the dates specified in Sections 3.1(c) and (d) of the Purchase Agreement (as hereinafter defined) until paid in full. All payments hereunder shall be made for the account of the Purchaser at its office located at 555 Madison Avenue, 30th Floor, New York, NY 10022, or to such other address as the Purchaser may designate in accordance with the terms of the Purchase Agreement. If any principal of or interest on this Note is not paid when due or there exists an Event of Default under the Purchase Agreement, this Note shall bear interest thereafter, at a rate of 4% per annum in excess of the rate otherwise applicable, accrued monthly, until the Interest Payment Date next following either, as applicable, the date on which such overdue 1 principal or interest is paid in full, or the date on which such other Default or Event of Default is cured. This Note is one of the 16% Series A Senior Subordinated Notes, identical in all respects except as to principal amount and payee, issued by the Company pursuant to and subject to the terms of a certain Note and Warrant Purchase, Guaranty and Security Agreement dated as of November 15, 2001 (the "Purchase Agreement") among the Company, U.S. Home and Garden Inc. and the original Purchasers listed on Exhibit A thereto. Capitalized terms used but not otherwise defined herein shall have the meanings set forth in the Purchase Agreement. Reference is made to the Purchase Agreement for a description of the agreements of the parties, the circumstances under which the maturity of this Note may be accelerated, and the obligations of the Company to pay the costs of enforcement of this Note (including reasonable fees and expenses of counsel) incurred by the holder of this Note. In the event that this Note becomes or is declared due and payable prior to its stated maturity, this Note shall become due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived. The Company has the right under certain circumstances to prepay this Note in whole or in part, and is obligated to make certain mandatory prepayments on this Note, in each case as provided in the Purchase Agreement. This Note is secured by, and entitled to the benefits of, the Security Documents referred to in the Purchase Agreement. This Note is to be construed and interpreted in accordance with and governed by the internal laws of the State of New York. EASY GARDENER, INC. By: ____________________________ Name: Title: 2 EXHIBIT B-2 TO NOTE AND WARRANT PURCHASE, GUARANTY AND SECURITY AGREEMENT THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AS AMENDED OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF REGISTRATION THEREUNDER OR AN EXEMPTION THEREFROM AS PROVIDED IN THE PURCHASE AGREEMENT REFERRED TO HEREIN. THIS NOTE IS SUBORDINATED TO CERTAIN SENIOR INDEBTEDNESS OF THE COMPANY. THE HOLDER OF THIS NOTE BY ITS ACCEPTANCE HEREOF COVENANTS AND AGREES THAT AMOUNTS OWING WITH RESPECT TO THIS NOTE SHALL BE SUBORDINATED IN ACCORDANCE WITH THE PROVISIONS OF THE SUBORDINATION AGREEMENT DATED AS OF NOVEMBER 15, 2001 AMONG PNC BANK, NATIONAL ASSOCIATION, THE CORPORATIONS AND THE INITIAL HOLDER OF THIS NOTE, AND THE HOLDER ACCEPTS AND AGREES TO BE BOUND BY SUCH PROVISIONS. EASY GARDENER, INC. 14% Series B Senior Subordinated Note $_____________ November __, 2001 FOR VALUE RECEIVED, the undersigned, EASY GARDENER, INC., a Delaware corporation (the "Company"), hereby unconditionally promises to pay to the order of __________________________ (together with any successors and/or assigns, the "Purchaser"), in lawful money of the United States of America and in immediately available funds, the principal amount of ___________________ DOLLARS ($__________) on November 19, 2007. The undersigned further agrees to pay interest in like money at such office on the unpaid principal amount hereof at the rates per annum and on the dates specified in Sections 3.1(c) and (d) of the Purchase Agreement (as hereinafter defined) until paid in full. All payments hereunder shall be made for the account of the Purchaser at its office located at 555 Madison Avenue, 30th Floor, New York, NY 10022, or to such other address as the Purchaser may designate in accordance with the terms of the Purchase Agreement. If any principal of or interest on this Note is not paid when due or there exists an Event of Default under the Purchase Agreement, this Note shall bear interest thereafter, at the rate of, at a rate of 4% per annum in excess of the rate otherwise applicable, accrued monthly, until the Interest Payment Date next following either, as applicable, the date on which such 1 overdue principal or interest is paid in full, or the date on which such other Default or Event of Default is cured. This Note is one of the 14% Series B Senior Subordinated Notes, identical in all respects except as to principal amount and payee, issued by the Company pursuant to and subject to the terms of a certain Note and Warrant Purchase, Guaranty and Security Agreement dated as of November 15, 2001 (the "Purchase Agreement") among the Company, U.S. Home and Garden Inc. and the original Purchasers listed on Exhibit A thereto. Capitalized terms used but not otherwise defined herein shall have the meanings set forth in the Purchase Agreement. Reference is made to the Purchase Agreement for a description of the agreements of the parties, the circumstances under which the maturity of this Note may be accelerated, and the obligations of the Company to pay the costs of enforcement of this Note (including reasonable fees and expenses of counsel) incurred by the holder of this Note. In the event that this Note becomes or is declared due and payable prior to its stated maturity, this Note shall become due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived. The Company has the right under certain circumstances to prepay this Note in whole or in part, and is obligated to make certain mandatory prepayments on this Note, in each case as provided in the Purchase Agreement. This Note is secured by, and entitled to the benefits of, the Security Documents referred to in the Purchase Agreement. This Note is to be construed and interpreted in accordance with and governed by the internal laws of the State of New York. EASY GARDENER, INC. By: ____________________________ Name: Title: 2 EXHIBIT C TO NOTE AND WARRANT PURCHASE, GUARANTY AND SECURITY AGREEMENT THE SECURITY INTEREST GRANTED HEREBY IS SUBORDINATED TO THE LIENS GRANTED BY THE CORPORATIONS TO THE SENIOR LENDER PURSUANT TO THE SENIOR LOAN AGREEMENT. THE PURCHASERS COVENANT AND AGREE THAT THE LIENS GRANTED HEREBY SHALL BE SUBORDINATED IN ACCORDANCE WITH THE PROVISIONS OF THE SUBORDINATION AGREEMENT DATED AS OF NOVEMBER 15, 2001 AMONG PNC BANK, NATIONAL ASSOCIATION, THE CORPORATIONS AND THE PURCHASERS. Grant of Security Interest; Appointment of Collateral Agent This Exhibit C is part of the Note and Warrant Purchase, Guaranty and Security Agreement dated as of November 15, 2001 among U.S. Home & Garden, Inc. ("USHG"), Easy Gardener, Inc. (the "Company"), USHG's other Subsidiaries and the Purchasers named therein (the "Purchase Agreement"). SECTION 1. DEFINITIONS. 1.1 Uniform Commercial Code Terms. All terms used herein and defined in the Uniform Commercial Code as adopted in the State of New York from time to time shall have the meaning given therein unless otherwise defined herein. To the extent the definition of any category or type of collateral is expanded by any amendment, modification or revision to the Uniform Commercial Code, such expanded definition will apply automatically as of the date of such amendment, modification or revision. 1.2 Capitalized Terms. Capitalized terms used in this Exhibit C and not otherwise defined herein shall have the meanings given to such terms in the Purchase Agreement. The following terms used in this Exhibit C shall have the meanings indicated below: "Agent" shall mean Golub Associates Incorporated, as the collateral agent for the Purchasers appointed pursuant to Section 3 of this Exhibit C, and shall include its successors and assigns. "Collateral", with respect to any Person, shall mean and include: (a) all Receivables (including, in the case of the Company, all Intercompany Notes); (b) all Equipment; (c) all General Intangibles; (d) all Inventory; 1 (e) all Subsidiary Stock; and (f) all of such Person's right, title and interest in and to (i) its respective goods and other property including, but not limited to, all merchandise returned or rejected by Customers, relating to or securing any of the Receivables; (ii) all of such Person's rights as a consignor, a consignee, an unpaid vendor, mechanic, artisan, or other lienor, including stoppage in transit, setoff, detinue, replevin, reclamation and repurchase; (iii) all additional amounts due to such Person from any Customer relating to the Receivables; (iv) other property, including warranty claims, relating to Equipment; (v) all of such Person's contract rights, rights of payment which have been earned under a contract right, instruments (including promissory notes), documents, chattel paper (including electronic chattel paper), warehouse receipts, deposit accounts, letters of credit and money; (vi) all commercial tort claims (whether now existing or hereafter arising); (vii) if and when obtained by such Person, all real and personal property of third parties in which such Person has been granted a lien or security interest as security for the payment or enforcement of Receivables; and (viii) any other goods, personal property or real property now owned or hereafter acquired in which such Person has expressly granted a security interest or may in the future grant a security interest to the Agent and the Purchasers hereunder, or in any amendment or supplement hereto or thereto, or under any other agreement between the Agent or the Purchasers (on the one hand) and such Person, on the other hand; (g) all of such Person's ledger sheets, ledger cards, files, correspondence, records, books of account, business papers, computers, computer software (owned by such Person or in which it has an interest), computer programs, tapes, disks and documents relating to the items referred to in any of the foregoing clauses (a), (b), (c), (d), (e) or (f); and (h) all proceeds and products of the items referred to in any of the foregoing clauses (a), (b), (c), (d), (e), (f) or (g) in whatever form, including, but not limited to: cash, deposit accounts (whether or not comprised solely of proceeds), certificates of deposit, insurance proceeds (including hazard, flood and credit insurance), negotiable instruments and other instruments for the payment of money, chattel paper, security agreements, documents, eminent domain proceeds, condemnation proceeds and tort claim proceeds. "Customer" of any Person shall mean and include the account debtor with respect to any Receivable and/or the prospective purchaser of goods, services or both with respect to any contract or contract right, and/or any party who enters into or proposes to enter into any contract or other arrangement with such Person, pursuant to which such Person is to deliver any personal property or perform any services. "Equipment" of any Person shall mean and include all of such Person's goods (other than Inventory) whether now owned or hereafter acquired and wherever located including, without limitation, all equipment, machinery, apparatus, motor vehicles, fittings, furniture, furnishings, fixtures, parts, accessories and all replacements and substitutions therefor or accessions thereto. 2 "General Intangibles" of any Person shall mean and include all of such Person's general intangibles, whether now owned or hereafter acquired including, without limitation, all payment intangibles, all choses in action, causes of action, corporate or other business records, inventions, designs, patents, patent applications, equipment formulations, manufacturing procedures, quality control procedures, trademarks, trademark applications, service marks, trade secrets, goodwill, copyrights, design rights, software, computer information, source codes, codes, records and dates, registrations, licenses, franchises, customer lists, tax refunds, tax refund claims, computer programs, all claims under guaranties, security interests or other security held by or granted to such Person to secure payment of any of the Receivables by a Customer (other than to the extent covered by Receivables) all rights of indemnification and all other intangible property of every kind and nature (other than Receivables). "Intercompany Notes" shall have the meaning given thereto in the Senior Loan Agreement. "Inventory" of any Person shall mean and include all of such Person's now owned or hereafter acquired goods, merchandise and other personal property, wherever located, to be furnished under any consignment arrangement, contract of service or held for sale or lease, all raw materials, work in process, finished goods and materials and supplies of any kind, nature or description which are or might be used or consumed in such Person's business or used in selling or furnishing such goods, merchandise and other personal property, and all documents of title or other documents representing them. "Obligations" shall mean and include any and all loans, advances, debts, liabilities, obligations, covenants and duties owing by the Company or any Guarantor to the Purchasers or the Agent or to any other direct or indirect subsidiary or affiliate of the Agent or any Purchaser of any kind or nature, present or future (including, without limitation, any interest accruing thereon after maturity, or after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding relating to the Company or any Guarantor, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding), whether or not evidenced by any note, guaranty or other instrument, whether arising under any agreement, instrument or document (including, without limitation, this Agreement and the other Purchaser Documents), whether or not for the payment of money, whether arising by reason of an extension of credit, loan or guarantee, or in any other manner, whether direct or indirect (including those acquired by assignment or participation), absolute or contingent, joint or several, due or to become due, now existing or hereafter arising, contractual or tortious, liquidated or unliquidated, regardless of how such indebtedness or liabilities arise or by what agreement or instrument they may be evidenced or whether evidenced by any agreement or instrument, including, but not limited to, any and all of the Company's Indebtedness and/or liabilities under the Purchase Agreement, the other Purchaser Documents or under any other agreement between the Agent or the Purchasers (on the one hand) and the Company or any Guarantor (on the other hand) and any amendments, extensions, renewals or increases, and all costs and expenses of the Agent and any Purchaser incurred in the documentation, negotiation, modification, enforcement, collection or otherwise in connection with any of the foregoing, including but not limited to reasonable attorneys' fees and expenses and all obligations of the Company and the Guarantors to the Agent or the Purchasers to perform acts or refrain from taking any action. 3 "Receivables" of any Person shall mean and include all of such Person's accounts, contract rights, instruments (including those evidencing indebtedness owed to such Person by its Affiliates), documents, chattel paper (including electronic chattel paper), general intangibles relating to accounts, drafts and acceptances, credit card receivables and all other forms of obligations owing to such Person arising out of or in connection with the sale or lease of Inventory or the rendition of services, all supporting obligations, guarantees and other security therefor, whether secured or unsecured, now existing or hereafter created, and whether or not specifically sold or assigned to the Agent and the Purchasers hereunder. "Subsidiary Stock" shall mean, with respect to any Person, all of the issued and outstanding shares of capital stock of such Person's Subsidiaries. SECTION 2. COLLATERAL; GENERAL TERMS 2.1 Security Interest in the Collateral. To secure the prompt payment and performance to the Agent and each Purchaser of the Obligations, each Corporation hereby assigns, pledges and grants to the Agent for the ratable benefit of each Purchaser a continuing security interest in and to all of its Collateral, whether now owned or existing or hereafter acquired or arising and wheresoever located. Each Corporation shall mark its books and records as may be necessary or appropriate to evidence, protect and perfect the Agent's and the Purchasers' security interest and shall cause its financial statements to reflect such security interest. Each Corporation shall promptly provide the Agent with written notice of all commercial tort claims, such notice to contain the case title together with the applicable court and a brief description of the claim(s). Upon delivery of each such notice, such Corporation shall be deemed to hereby grant to the Agent and the Purchasers a security interest and lien in and to such commercial tort claims and all proceeds thereof. 2.2 Perfection of Security Interest. Each Corporation shall take all action that may be necessary or desirable, or that the Agent may request, so as at all times to maintain the validity, perfection, enforceability and priority of the Agent's and the Purchasers' security interest in the Collateral (subject only to the prior security interest in favor of the Senior Lender) or to enable the Agent to protect, exercise or enforce its or the Purchasers' rights hereunder and in the Collateral, including, but not limited to, (i) immediately discharging all Liens other than Permitted Liens, (ii) obtaining landlords' or mortgagees' lien waivers, (iii) subject to the Senior Lender's prior rights under Section 4.2(iii) of the Senior Loan Agreement, delivering to the Agent, endorsed or accompanied by such instruments of assignment as the Agent may specify, and stamping or marking, in such manner as the Agent may specify, any and all chattel paper, instruments, letters of credits and advices thereof and documents evidencing or forming a part of the Collateral, (iv) subject to the Senior Lender's prior rights under Section 4.2(iv) of the Senior Loan Agreement, entering into warehousing, lockbox and other custodial arrangements satisfactory to the Agent (provided that any such arrangements other than lockboxes shall be reasonable), and (v) executing and delivering financing statements, control agreements, instruments of pledge, mortgages, notices and assignments, in each case in form and substance satisfactory to the Agent, relating to the creation, validity, perfection, maintenance or continuation of the Agent's and the Purchasers' security interest 4 under the Uniform Commercial Code or other applicable law. The Agent is hereby authorized to file financing statements signed by the Agent instead of the Corporations in accordance with the Uniform Commercial Code as adopted in the State of New York from time to time. By signing the Purchase Agreement, each Corporation hereby authorizes the Agent to file against such Corporation one or more financing continuation or amendment statements pursuant to the Uniform Commercial Code in form and substance satisfactory to the Agent (which statements may have a description of collateral which is broader than that set forth herein). All charges, expenses and fees the Agent or the Purchasers may incur in doing any of the foregoing, and any local taxes relating thereto, shall be added to the Obligations, or, at the Agent's option, shall be paid to the Agent for the ratable benefit of the Purchasers immediately upon demand. 2.3 Disposition of Collateral. The Corporations will safeguard and protect all Collateral for the Agent's and the Purchasers' general account and make no disposition thereof whether by sale, lease or otherwise except as permitted by Section 7.6 of the Purchase Agreement. 2.4 Preservation of Collateral. At any time when a Default or Event of Default has occurred and is continuing, in addition to the rights and remedies set forth in the Purchase Agreement (but subject to the Senior Subordination Agreement), the Agent: (a) may at any time take such steps as the Agent deems necessary to protect the Agent's and the Purchasers' interest in and to preserve the Collateral, including the hiring of such security guards or the placing of other security protection measures as the Agent may deem appropriate; (b) may employ and maintain at any of the Corporations' premises a custodian who shall have full authority to do all acts necessary to protect the Agent's and the Purchasers' interests in the Collateral; (c) may lease warehouse facilities to which the Agent may move all or part of the Collateral; (d) may use the Corporations' owned or leased lifts, hoists, trucks and other facilities or equipment for handling or removing the Collateral; and (e) shall have, and is hereby granted, a right of ingress and egress to the places where the Collateral is located, and may proceed over and through any of the Corporations' owned or leased property, except as otherwise disclosed on Schedule C-2.4. Subject to the Senior Lender's prior rights under the penultimate sentence of Section 4.4 of the Senior Loan Agreement, the Corporations shall cooperate fully with all of the Agent's efforts to preserve the Collateral and will take such actions to preserve the Collateral as the Agent may direct. All of the Agent's and the Purchasers' expenses of preserving the Collateral, including any expenses relating to the bonding of a custodian, shall be charged to the Company and added to the Obligations. 2.5 Ownership of Collateral. With respect to the Collateral, at the time the Collateral becomes subject to the Agent's and the Purchasers' security interest: (a) the applicable Corporation shall be the sole owner of and fully authorized and able to sell, transfer, pledge and/or grant a security interest (subject only to Purchase Money Liens) in each and every item of its respective Collateral to the Agent for the ratable benefit of the Purchasers, subject only to the prior security interest in favor of the Senior Lender granted pursuant to the Senior Loan Agreement; and, except for Permitted Liens, the Collateral shall be free and clear of all Liens and encumbrances whatsoever; (b) each document and agreement executed by the Corporations (or any of them) or delivered to the Agent or any Purchaser in connection with this Agreement shall be true and correct in all respects; (c) all signatures and endorsements of any Corporation that appear on such documents and agreements shall be genuine and such 5 Corporation shall have full capacity to execute same; and (d) each Corporation's Equipment and Inventory shall be located as set forth on Schedule C-2.5 and shall not be removed from such location(s) without the prior written consent of the Agent except with respect to the sale of Inventory in the ordinary course of business and Equipment to the extent permitted in Section 2.3 hereof or Section 7.6 of the Purchase Agreement. 2.6 Defense of the Agent's and the Purchasers' Interests. Until (a) payment and performance in full of all of the Obligations and (b) termination of this Agreement, the Agent's and the Purchasers' interests in the Collateral shall continue in full force and effect. During such period no Corporation shall, without the Agent's prior written consent, pledge, sell (except as permitted by Section 7.6 of the Purchase Agreement), assign, transfer, create or suffer to exist a Lien upon or encumber or allow or suffer to be encumbered in any way except for Permitted Liens, any part of the Collateral. The Corporations shall defend the Agent's and the Purchasers' interests in the Collateral against any and all Persons whatsoever (other than with respect to Permitted Liens). At any time following demand by the Agent for payment of all Obligations, the Agent shall have the right (subject to the Senior Subordination Agreement) to take possession of the indicia of the Collateral and the Collateral in whatever physical form contained, including without limitation: labels, stationery, documents, instruments and advertising materials. If the Agent exercises this right to take possession of the Collateral, the Corporations shall, upon demand, assemble it in the best manner possible and make it available to the Agent at a place reasonably convenient to the Agent. In addition, with respect to all Collateral, the Agent (on behalf of the Purchasers) shall be entitled to all of the rights and remedies set forth herein and further provided by the Uniform Commercial Code or other applicable law. Subject to the Senior Subordination Agreement, at any time the Corporations shall, if reasonably requested by the Agent, and if an Event of Default shall have occurred and be continuing, the Agent may, at its option, instruct all suppliers, carriers, forwarders, warehousers or others receiving or holding cash, checks, Inventory, documents or instruments in which the Agent holds a security interest for the benefit of the Purchasers to deliver the same to the Agent and/or subject to the Agent's order and if they shall come into any Corporation's possession, they, and each of them, shall be held by such Corporation in trust as the Agent's trustee, and such Corporation will immediately deliver them to the Agent in their original form together with any necessary endorsement. 2.7 Books and Records. Each Corporation shall (a) keep proper books of record and account in which full, true and correct entries will be made of all dealings or transactions of or in relation to its business and affairs; (b) set up on its books accruals with respect to all taxes, assessments, charges, levies and claims; and (c) on a reasonably current basis set up on its books, from its earnings, allowances against doubtful Receivables, advances and investments and all other proper accruals (including without limitation by reason of enumeration, accruals for premiums, if any, due on required payments and accruals for depreciation, obsolescence, or amortization of properties), which should be set aside from such earnings in connection with its business. All determinations pursuant to this subsection shall be made in accordance with, or as required by, GAAP consistently applied in the opinion of such independent public accountant as shall then be regularly engaged by the Corporations. 2.8 Financial Disclosure. Each Corporation hereby irrevocably authorizes and directs all accountants and auditors employed by such Corporation at any time when any 6 Obligations are outstanding to exhibit and deliver to the Agent and each Purchaser copies of any of such Corporation's financial statements, trial balances or other accounting records of any sort in the accountant's or auditor's possession, and to disclose to the Agent and each Purchaser any information such accountants may have concerning such Corporation's financial status and business operations. Each Corporation hereby authorizes all federal, state and municipal authorities to furnish to the Agent and each Purchaser copies of reports or examinations relating to such Corporation, whether made by such Corporation or otherwise; however, the Agent and each Purchaser will attempt to obtain such information or materials directly from the Corporations prior to obtaining such information or materials from such accountants or such authorities. 2.9 Compliance with Laws. The Collateral at all times shall be maintained in accordance with the requirements of all insurance carriers which provide insurance with respect to the Collateral so that such insurance shall remain in full force and effect. 2.10 - 2.13 [Reserved]. 2.14 Payment of Leasehold Obligations. Each Corporation shall at all times pay, when and as due (subject to any applicable grace or cure periods), its rental obligations under all leases under which it is a tenant, and shall otherwise comply, in all material respects, with all other terms of such leases and keep them in full force and effect and, at the Agent's request will provide evidence of having done so; provided, that no Corporation shall be in default of its obligations under this Section 4.14 if such Corporation reserves amounts necessary to satisfy its obligations under any such lease in connection with any good faith dispute with the landlord of the premises subject to such lease and during the pendency of such dispute the Collateral, the Agent's and the Purchasers' Lien therein and such Corporation's occupancy of the leased premises remain unimpaired. 2.15 Receivables. (a) Nature of Receivables. Each of the Receivables shall be a bona fide and valid account representing a bona fide indebtedness incurred by the Customer therein named, for a fixed sum as set forth in the invoice relating thereto (provided immaterial or unintentional invoice errors shall not be deemed to be a breach hereof) with respect to an absolute sale or lease and delivery of goods upon stated terms of the applicable Corporation, or work, labor or services theretofore rendered by such Corporation as of the date each Receivable is created. Same shall be due and owing in accordance with such Corporation's standard terms of sale without dispute, setoff or counterclaim except as may be stated on the accounts receivable schedules delivered by the Company to the Agent. (b) Solvency of Customers. Each Customer, to the best of the Corporations' knowledge, as of the date each Receivable is created, is and will be solvent and able to pay all Receivables on which the Customer is obligated in full when due or with respect to such Customers of the Corporations who are not solvent, the applicable Corporation has set up on its books and in its financial records bad debt reserves adequate to cover such Receivables. 7 (c) Location of Corporations. The Company's chief executive office is located at 3022 Franklin Avenue, Waco, Texas 76702-1025. The Company maintains its records pertaining to the Receivables primarily at its chief executive office and all other records pertaining to the Receivables are maintained at one or more of the locations described on Schedule C-2.15(c). Until written notice is given to the Agent by any Corporation of any other office at which any Corporation keeps its records pertaining to Receivables, all such records shall be kept at such executive office and the locations described on Schedule C-2.15(c). (d) [Reserved]. (e) Notification of Assignment of Receivables. At any time following the occurrence and during the continuation of a Default or Event of Default) (but subject to the Senior Subordination Agreement), the Agent shall have the right to send notice of the assignment of, and the Agent's and the Purchasers' security interest in, the Receivables to any and all Customers or any third party holding or otherwise concerned with any of the Collateral. Thereafter (but subject to the Senior Subordination Agreement), the Agent shall have the sole right to collect the Receivables, take possession of the Collateral, or both. The Agent's and the Purchasers' actual collection expenses, including, but not limited to, stationery and postage, telephone and telegraph, secretarial and clerical expenses and the salaries of any collection personnel used for collection, may be charged to the Company and added to the Obligations. (f) Power of the Agent to Act on the Corporations' Behalf. Subject to the Senior Subordination Agreement, the Agent shall have the right to receive, endorse, assign and/or deliver in the name of the Agent or any Corporation any and all checks, drafts and other instruments for the payment of money relating to the Receivables, and each Corporation waives notice of presentment, protest and non-payment of any instrument so endorsed. Each Corporation hereby constitutes the Agent or the Agent's designee as such Corporation's attorney with power to do the following (to the extent not prohibited by the Senior Subordination Agreement): (i) to endorse such Corporation's name upon any notes, acceptances, checks, drafts, money orders or other evidences of payment or Collateral; (ii) to sign such Corporation's name on any invoice or bill of lading relating to any of the Receivables, drafts against Customers, assignments and verifications of Receivables; (iii) to send verifications of Receivables to any Customer; (iv) to sign such Corporation's name on all financing statements or any other documents or instruments deemed necessary or appropriate by the Agent to preserve, protect, or perfect the Agent's and the Purchasers' interest in the Collateral and to file same; (v) to demand payment of the Receivables; (vi) to enforce payment of the Receivables by legal proceedings or otherwise; (vii) to exercise all of such Corporation's rights and remedies with respect to the collection of the Receivables and any other Collateral; (viii) to settle, adjust, compromise, extend or renew the Receivables; (ix) to settle, adjust or compromise any legal proceedings brought to collect Receivables; (x) to prepare, file and sign such Corporation's name on a proof of claim in bankruptcy or similar document against any Customer; (xi) to prepare, file and sign such Corporation's name on any notice of Lien, assignment or satisfaction of Lien or similar document in connection with the Receivables; and (xii) to do all other acts and things necessary to carry out this Agreement; provided that (A) the Agent shall only take the actions referred to in clauses (ii), (v), (vi), (vii), 8 (viii), (ix) and (xii) following the occurrence and during the continuance of an Event of Default, and (B) unless an Event of Default is continuing, Agent shall only take the actions referred to in clauses (x) and (xi) if the applicable Corporation has not done so promptly following the Agent's request. All acts of said attorney or designee are hereby ratified and approved, and said attorney or designee shall not be liable for any acts of omission or commission nor for any error of judgment or mistake of fact or of law, unless done maliciously or with gross (not mere) negligence; this power being coupled with an interest is irrevocable while any of the Obligations remain unpaid. The Agent shall have the right at any time following the occurrence of an Event of Default (but subject to the Senior Subordination Agreement), to change the address for delivery of mail addressed to any Corporation to such address as the Agent may designate and to receive, open and dispose of all mail addressed to such Corporation. (g) No Liability. Neither the Agent nor any Purchaser shall, under any circumstances or in any event whatsoever, have any liability for any error or omission or delay of any kind occurring in the settlement, collection or payment of any of the Receivables or any instrument received in payment thereof, or for any damage resulting therefrom. Following the occurrence of and during the continuance of an Event of Default or Default, the Agent may, without notice or consent from any Corporation, sue upon or otherwise collect, extend the time of payment of, compromise or settle for cash, credit or upon any terms any of the Receivables or any other securities, instruments or insurance applicable thereto and/or release any obligor thereof. The Agent is authorized and empowered to accept, following the occurrence and during the continuance of an Event of Default (but subject to the Senior Subordination Agreement) the return of the goods represented by any of the Receivables, without notice to or consent by any Corporation, all without discharging or in any way affecting any Corporation's liability hereunder or under the other Purchaser Documents. (h) [Reserved]. (i) Adjustments. No Corporation will, without the Agent's consent, compromise or adjust any material amount of the Receivables (or extend the time for payment thereof) or accept any material returns of merchandise or grant any additional discounts, allowances or credits thereon except for those compromises, extensions, adjustments, returns, discounts, credits and allowances as have been heretofore customary in the business of such Corporation. 2.16 Inventory. To the extent Inventory held for sale or lease has been produced by a Corporation, it has been and will be produced by such Corporation in accordance with the Federal Fair Labor Standards Act of 1938, as amended, and all rules, regulations and orders thereunder. 2.17 Maintenance of Equipment. The Equipment shall be maintained in good operating condition and repair (reasonable wear and tear excepted) and all necessary replacements of and repairs thereto shall be made so that the value and operating efficiency of the Equipment shall be maintained and preserved. No Corporation shall use or operate the Equipment in violation of any law, statute, ordinance, code, rule or regulation. The Corporations shall have the right to sell Equipment to the extent set forth in Section 2.3 hereof. 9 2.18 Exculpation of Liability. Nothing herein contained shall be construed to constitute the Agent or any Purchaser as any Corporation's agent for any purpose whatsoever, nor shall the Agent or any Purchaser be responsible or liable for any shortage, discrepancy, damage, loss or destruction of any part of the Collateral wherever the same may be located and regardless of the cause thereof. Neither the Agent nor any Purchaser, whether by anything herein or in any assignment or otherwise, assumes any of the Corporations' obligations under any contract or agreement assigned to the Agent or such Purchaser, and neither the Agent nor any Purchaser shall be responsible in any way for the performance by such Corporation of any of the terms and conditions thereof. 2.19 [Reserved]. 2.20 Financing Statements. As of the Closing Date, except as respects the financing statements filed by the Agent and the Senior Lenders (or their agent) and the financing statements described on Schedule 4.8, no financing statement covering any of the Collateral or any proceeds thereof is on file in any public office. Following the Closing Date, except as respects the financing statements filed by the Agent and the Senior Lenders (or their agent), the financing statements described on Schedule 4.8 and Permitted Liens, no financing statement covering any of the Collateral or any proceeds thereof is on file in any public office. 2.21 Release of Liens. Upon payment and satisfaction in full of the Notes and of all obligations in respect of the Notes owing under any of the Purchaser Documents, the Agent shall release its security interest in the Collateral. SECTION 3. APPOINTMENT OF COLLATERAL AGENT. 3.1 Appointment. Each Purchaser hereby irrevocably designates and appoints Golub Associates Incorporated as the agent (the "Agent") of such Purchaser with respect to all matters relating to the Collateral and the grant to the Agent for the ratable benefit of the Purchasers of a security interest in the Collateral pursuant to this Exhibit C, and each Purchaser irrevocably authorizes the Agent to take such action on its behalf under the provisions of this Exhibit C and the other Purchaser Documents as the Agent deems appropriate and to exercise all powers of the Purchasers under this Exhibit C and the other Purchaser Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Exhibit C or the other Purchaser Documents, the Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any Purchaser, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Exhibit C or the other Purchaser Documents or otherwise exist against the Agent. 3.2 Delegation of Powers. The Agent may exercise any of its powers under this Exhibit C or the other Purchaser Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such powers. The Agent shall not be responsible for the negligence or misconduct of any agents or attorneys in-fact selected by it with reasonable care. 10 3.3 Exculpatory Provisions. Neither the Agent nor any of its officers, directors, partners, employees, agents, attorneys-in-fact or affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such person under or in connection with this Exhibit C or the other Purchaser Documents (except for its or such person's own gross negligence or willful misconduct) or (ii) responsible in any manner to any of the Purchasers for any recitals, statements, representations or warranties made by any Corporation or any officer thereof contained in this Exhibit C or the other Purchaser Documents or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Exhibit C or the other Purchaser Documents or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Exhibit C or the other Purchaser Documents or for any failure of any Corporation to perform its obligations hereunder or thereunder. The Agent shall not be under any obligation to any Purchaser to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Exhibit C or the other Purchaser Documents, or to inspect the properties, books or records of any Corporation. 3.4 Reliance by Agent. The Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper person or persons and upon advice and statements of legal counsel (including without limitation counsel to the Corporations), independent accountants and other experts selected by the Agent. The Agent may deem and treat the payee of any Note as the owner thereof for all purposes unless a written notice of assignment, negotiation or transfer thereof shall have been filed with the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Exhibit C or the other Purchaser Documents unless it shall first receive such advice or concurrence of a majority in interest of the holders of the Notes (the "Required Holders") as it deems appropriate or it shall first be indemnified to its satisfaction by the holders of such Notes against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Exhibit C or the other Purchaser Documents in accordance with a request of the Required Holders, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Purchasers and all future holders of the Notes. 3.5 Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any default (a "Default") or event of default ("Event of Default") under the Purchase Agreement unless the Agent has received notice from a Purchaser or any Corporation referring to the Purchase Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". In the event that the Agent receives such a notice, the Agent shall give notice thereof to the Purchasers. The Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Holders; provided that unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Required Holders. 11 3.6 Non-Reliance on Agent and Other Purchasers. Each Purchaser expressly acknowledges that neither the Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates has made any representations or warranties to it and that no act by the Agent hereinafter taken, including any review of the affairs of the Corporations, shall be deemed to constitute any representation or warranty by the Agent to any Purchaser. Each Purchaser represents to the Agent that it has, independently and without reliance upon the Agent or any other Purchaser, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Corporations and made its own decision to purchase the Notes and Warrants and enter into this Agreement and the other Purchaser Documents. Each Purchaser also represents that it will, independently and without reliance upon the Agent or any other Purchaser, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Exhibit C or the other Purchaser Documents, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Corporations. The Agent shall not have any duty or responsibility to provide any Purchaser with any credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of the Corporations which may come into the possession of the Agent or any of its officers, directors, employees, agents, attorneys-in-fact or affiliates. 3.7 Indemnification. The Purchasers agree to indemnify the Agent in its capacity as such (to the extent not reimbursed by the Corporations and without limiting the obligation of the Corporations to do so), ratably according to the respective outstanding amounts of their Notes, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including without limitation at any time following the payment of any of the Notes or the termination of the Purchaser Documents) be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of this Exhibit C, the other Purchaser Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Agent under or in connection with any of the foregoing; provided that no Purchaser shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting solely from the Agent's gross negligence or willful misconduct. The agreements in this subsection shall survive the payment of the Notes and all other amounts payable under the Purchaser Documents in respect of the Notes. 3.8 Agent in Its Individual Capacity. The Agent and its affiliates may make loans to, purchase notes of, make and acquire investments in, and generally engage in any kind of business with any Corporation as though the Agent were not the Agent under this Exhibit C or the other Purchaser Documents. With respect to any securities issued to it, the Agent shall have the same rights and powers under this Exhibit C or the other Purchaser Documents as any Purchaser and may exercise the same as though it were not the Agent, and the terms "Purchaser" and "Purchasers" shall include the Agent in its individual capacity. 12 3.9 Successor Agent. The Agent may resign as Agent upon 10 days' notice to the Purchasers. If the Agent shall resign, then the Required Holders shall appoint from among the Purchasers (or an Affiliate thereof) a successor agent for the Purchasers, whereupon such successor agent shall succeed to the rights, powers and duties of the Agent, and the term "Agent" shall mean such successor agent effective upon its appointment, and the former Agent's rights, powers and duties as Agent shall be terminated, without any other or further act or deed on the part of such former Agent or any of the Purchasers or any of the parties to the Purchaser Documents. After any retiring Agent's resignation as Agent, the provisions of this Section 3 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Exhibit C and the other Purchaser Documents. 13 EXHIBIT D TO NOTE AND WARRANT PURCHASE, GUARANTY AND SECURITY AGREEMENT THIS GUARANTY IS SUBORDINATED TO THE GUARANTY CONTAINED IN ARTICLE XIV OF THE SENIOR LOAN AGREEMENT. THE PURCHASERS COVENANT AND AGREE THAT THIS GUARANTY SHALL BE SUBORDINATED IN ACCORDANCE WITH THE PROVISIONS OF THE SUBORDINATION AGREEMENT DATED AS OF NOVEMBER 15, 2001 AMONG PNC BANK, NATIONAL ASSOCIATION, THE COMPANY, THE GUARANTORS AND THE PURCHASERS. Guaranty This Exhibit D is part of the Note and Warrant Purchase, Guaranty and Security Agreement dated as of November 15, 2001 among U.S. Home & Garden, Inc. ("USHG"), Easy Gardener, Inc. (the "Company"), USHG's other Subsidiaries and the Purchasers named therein (the "Purchase Agreement"). SECTION 1. DEFINITIONS. Capitalized terms used in this Exhibit D and not otherwise defined herein shall have the meanings given to such terms in the Purchase Agreement. The following terms used in this Exhibit D shall have the meanings indicated below: "Agent" shall mean Golub Associates Incorporated, as the collateral agent for the Purchasers appointed pursuant to Section 3 of Exhibit C to the Purchase Agreement, and shall include its successors and assigns. "Guaranty" shall mean any guaranty of the obligations of the Company executed by a Guarantor in favor of the Agent or the Purchasers, whether pursuant to this Exhibit D or otherwise. "Obligations" shall have the meaning given thereto in Exhibit C to the Purchase Agreement. SECTION 2. GUARANTY. 2.1 Guaranty. Each Guarantor hereby unconditionally guaranties the full and prompt payment and performance when due, whether by acceleration or otherwise, and at all times thereafter, of any and all present and future Obligations of any type or nature of the Company or any other Person (including, without limitation, any other Guarantor) to the Agent and the Purchasers arising under or related to this Agreement or any other Purchaser Document and/or any one or more of them, whether due or to become due, matured or unmatured, 1 liquidated or unliquidated, or contingent or noncontingent, including obligations of performance as well as obligations of payment, including interest on any of the foregoing whether accruing before or after any bankruptcy or insolvency case or proceeding involving any Guarantor, the Company or any other Person and, if interest on any portion of such obligations ceases to accrue by operation of law by reason of the commencement of such case or proceeding, including such interest as would have accrued on any such portion of such obligations if such case or proceeding had not commenced, and further agrees to pay all expenses (including reasonable attorneys' fees and legal expenses) paid or incurred by the Agent or any Purchaser in endeavoring to collect any of the foregoing, or any part thereof, and in enforcing the obligations of such Guarantor (collectively, the "Liabilities"). Each Guarantor agrees that, in the event of the dissolution, bankruptcy or insolvency of the Company, or the inability or failure of the Company to pay its debts as they become due, or an assignment by the Company for the benefit of creditors, or the commencement of any case or proceeding in respect of the Company under any bankruptcy, insolvency or similar laws, and if such event shall occur at a time when any of the Liabilities may not then be due and payable, such Guarantor will pay to the Agent, for the benefit of the Agent and the Purchasers, forthwith the full amount which would be payable hereunder by such Guarantor if all Liabilities were then due and payable. This Guaranty shall in all respects be a continuing, absolute and unconditional guaranty of payment and performance (and not of collection), and shall remain in full force and effect (notwithstanding, without limitation, the dissolution of any Guarantor). 2.2 Guarantors' Obligations Unconditional. The covenants and agreements of each Guarantor set forth in this Guaranty shall be primary obligations of such Guarantor, and such obligations shall be continuing, absolute and unconditional, shall not be subject to any counterclaim, setoff, deduction, diminution, abatement, recoupment, suspension, deferment, reduction or defense (other than full and strict compliance by such Guarantor with its obligations hereunder), whether based upon any claim that the Company or any other Person may have against the Agent, any Purchaser or any other Person or otherwise, and shall remain in full force and effect without regard to, and shall not be released, discharged or in any way affected by, any circumstance or condition whatsoever (whether or not any Guarantor or the Company shall have any knowledge or notice thereof) including, without limitation: A. any amendment, modification, addition, deletion, supplement or renewal to or of or other change in the Liabilities or this Agreement or the other Purchaser Documents or any related instrument or agreement, or any other instrument or agreement applicable thereto or any of the parties to such agreements, or to any collateral, or any furnishing or acceptance of additional security for, guaranty of or right of offset with respect to, any of the Liabilities; or the failure of any security or the failure of the Agent or any Purchaser to perfect or insure any interest in any Collateral; B. any failure, omission or delay on the part of any Corporation, the Agent or any Purchaser to conform or comply with any term of any instrument or agreement referred to in clause (A) above; 2 C. any waiver, consent, extension, indulgence, compromise, release or other action or inaction under or in respect of any instrument, agreement, guaranty, right of offset or security referred to in clause (A) above or any obligation or liability of any Corporation, the Agent or any Purchaser, or any exercise or non-exercise by the Agent or any Purchaser of any right, remedy, power or privilege under or in respect of any such instrument, agreement, guaranty, right of offset or security or any such obligation or liability; D. any bankruptcy, insolvency, reorganization, arrangement, readjustment, composition, liquidation or similar proceeding with respect to any Corporation, the Agent, any Purchaser or any other Person or any of their respective properties or creditors, or any action taken by any trustee or receiver or by any court in any such proceeding; E. any limitation on the liability or obligations of any Person under the Purchaser Documents or any other related instrument or agreement, the Liabilities, any collateral security for the Liabilities or any other guaranty of the Liabilities or any discharge, termination, cancellation, frustration, irregularity, invalidity or unenforceability, in whole or in part, of any of the foregoing, or any other agreement, instrument, guaranty or security referred to in clause (A) above or any term of any thereof; F. any merger or consolidation of the Company or any Guarantor into or with any other Person or any sale, lease or transfer of any of the assets of the Company or any Guarantor to any other Person; G. any change in the ownership of any of the equity interests of the Company or any Guarantor or any corporate change in the Company or any Guarantor; or H. any other occurrence or circumstance whatsoever, whether similar or dissimilar to the foregoing and any other circumstance that might otherwise constitute a legal or equitable defense or discharge of the liabilities of a guarantor or surety or that might otherwise limit recourse against a Guarantor. The obligations of each Guarantor set forth herein constitute the full recourse obligations of such Guarantor, enforceable against it to the full extent of all its assets and properties. Each Guarantor waives any and all notice of the creation, renewal, extension or accrual of any of the Liabilities and notice of or proof of reliance by the Agent and the Purchasers upon this Guaranty or acceptance of this Guaranty, and the Liabilities, and any of them, shall conclusively be deemed to have been created, contracted or incurred in reliance upon this Guaranty. Each Guarantor unconditionally waives, to the extent permitted by law: (a) acceptance of this Guaranty and proof of reliance by the Agent and the Purchasers hereon; (b) notice of any of the matters referred to in the foregoing clauses A through H hereof, or any right to consent or assent to any thereof; (c) all notices that may be required by statute, rule of law or otherwise, now or hereafter in effect, to preserve intact any rights against such 3 Guarantor, including without limitation, any demand, presentment, protest, proof or notice of nonpayment under this Agreement or any other Purchaser Document or any related instrument or agreement, and notice of default or any failure on the part of any Corporation to perform and comply with any covenant, agreement, term or condition of this Agreement, any other Purchaser Document or any related instrument or agreement; (d) any right to the enforcement, assertion or exercise against any Corporation of any right, power, privilege or remedy conferred in this Agreement, any other Purchaser Document or any related instrument or agreement or otherwise; (e) any requirement of diligence on the part of any Person; (f) any requirement of the Agent or any Purchaser to take any action whatsoever, to exhaust any remedies or to mitigate the damages resulting from a default under this Agreement, any other Purchaser Document or any related instrument or agreement; (g) any notice of any sale, transfer or other disposition by any Person of any right under, title to or interest in this Agreement, any other Purchaser Document or any related instrument or agreement relating thereto or any collateral for the Liabilities; and (h) any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge, release or defense of a guarantor or surety, or that might otherwise limit recourse against a Guarantor (including, without limitation, any and all benefits under California Civil Code Sections 2809, 2810, 2819, 2822, 2825, 2845, 2846, 2847, 2848, 2849, 2850, 2899 and 3433). Without limiting the foregoing, each Guarantor hereby absolutely, unconditionally and irrevocably waives and agrees not to assert or take advantage of any defense based upon an election of remedies by the Agent or any Purchaser, including an election to proceed by non-judicial rather than judicial foreclosure, which destroys or impairs any right of subrogation of such Guarantor or the right of such Guarantor to proceed against any Person for reimbursement or both. Each Guarantor agrees that this Guaranty shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of the Company or any other Guarantor is rescinded or must be otherwise restored by the Agent or any Purchaser, whether as a result of any proceedings in bankruptcy or reorganization or otherwise. Each Guarantor further agrees that, without limiting the generality of this Guaranty, if an Event of Default shall have occurred and be continuing and the Agent or any Purchaser is prevented by applicable law from exercising its remedies under the Purchaser Documents, the Agent and the Purchasers shall be entitled to receive hereunder from each Guarantor (but subject to the Senior Subordination Agreement), upon demand therefor, the sums which would have otherwise been due from the Company had such remedies been exercised. 2.3 Subordination. A. Subordination to Senior Obligations. (a) Each Guarantor hereby covenants and agrees that, as provided herein, all indebtedness, intercompany charges and other sums owing and claims of any nature whatsoever owed to such Guarantor by any other Corporation ("Intercompany Obligations"), the payment of the principal of and interest thereon and any lien or security interest therefor are hereby expressly made subordinate and subject in right of payment to the prior payment in full of: (i) all obligations now or hereafter incurred by any of the Corporations under any of the Purchaser Documents, (ii) interest thereon (including, 4 without limitation, any such interest accruing subsequent to the filing by or against any of the Corporations of any proceeding brought under Chapter 11 of 11 U.S.C. ss.101 et seq., as from time to time hereafter amended and any successor or similar statute ("Bankruptcy Code"), whether or not such interest is allowed as a claim pursuant to the provisions of such Chapter), and (iii) all fees, expenses, indemnities and other amounts now or hereafter payable pursuant to or in connection with the Purchase Agreement and all other Purchaser Documents (collectively the "Senior Obligations"), and any lien on any property or asset securing the Senior Obligations. (b) No payment or prepayment of any Intercompany Obligations (whether of principal, interest or otherwise) shall be made by any Corporation at any time prior to the indefeasible payment in full, in cash, of the Senior Obligations, provided that the Corporations may make payments (not prepayments) of Intercompany Obligations in the ordinary course of business to the extent that at the time of, and immediately after giving effect to, any such payment, no Default or Event of Default exists. B. Payment Over of Proceeds Upon Bankruptcy. In the event of (i) any insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding in connection therewith, relative to any Corporation or to its creditors as such, or to its properties or assets, or (ii) any liquidation, dissolution or other winding-up of any Corporation, whether voluntary or involuntary and whether or not involving insolvency or bankruptcy, or (iii) any assignment for the benefit of creditors or any other marshaling of assets or liabilities of any Corporation, then and in any such event the holders of Senior Obligations shall be entitled to receive payment in full of all amounts due on or in respect of Senior Obligations, in cash or in any other manner acceptable to the holders of Senior Obligations, before any Corporation is entitled to receive any payment or distribution of any kind or character on account of principal of or interest on any Intercompany Obligations of such Corporation, and to that end the holders of Senior Obligations shall be entitled to receive, for application to the payment thereof, any payment or distribution of assets of such Corporation of any kind or character including, without limitation, securities that are subordinated in right of payment to all Senior Obligations to substantially the same extent as, or to a greater extent than, as provided in this Guaranty, that may be payable or deliverable in respect of this Guaranty in any such case, proceeding, dissolution, liquidation or other winding-up or event referred to in clauses (i) through (iii) above. C. Payments to be Held in Trust. In the event that a Guarantor shall receive any payment or distribution of assets of any Corporation of any kind or character in respect of the Intercompany Obligations in contravention of the foregoing Subsection A or B, then and in such event such payment or distribution shall be received and held by such Corporation in trust for the Agent and the Purchasers, and (subject to the Senior Subordination Agreement) shall be paid over or delivered forthwith to the Agent, the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other Person making payment or distribution of assets of the Corporation in trust for the holders of the Senior Obligations, and for application to the payment of, all Senior Obligations remaining unpaid, to the extent necessary to pay all Senior Obligations in full, in cash or in any other manner acceptable to the Agent, after giving effect to any concurrent payment or distribution to or for the Senior Obligations. 5 D. Waiver. Each Guarantor hereby waives presentment, demand for payment, notice of protest and all other demands and notices in connection with the delivery, acceptance, performance or enforcement hereof. E. Legend. Each Guarantor hereby covenants to cause any instrument from time to time evidencing any Intercompany Obligations to have fixed upon it a legend which reads substantially as follows: "This instrument is subject to Section 2.3 of Exhibit D to the Note and Warrant Purchase, Guaranty and Security Agreement dated as of November 15, 2001 among U.S. Home & Garden, Inc. ("USHG"), Easy Gardener, Inc., USHG's other Subsidiaries and the Purchasers named therein, which, among other things, contains provisions subordinating the maker's obligations to the holders of Senior Obligations (as defined in Section 2.3 of Exhibit D to said Agreement), to which provisions the holder of this instrument, by acceptance hereof, agrees." F. No Disposition. No Guarantor will sell, assign, pledge, encumber or otherwise dispose of any of the Intercompany Obligations owed to it, provided that such Guarantor may forgive Intercompany Obligations or contribute Intercompany Obligations to a Corporation. 2.4 Waiver of Subrogation. Each Guarantor hereby irrevocably waives, solely for the benefit of Agent and the Lenders, until the indefeasible repayment in full of the Obligations, any claim or other rights which it may now or hereafter acquire that arise from the existence, payment, performance or enforcement of such Guarantor's obligations under this Guaranty or any guaranty in favor of the Senior Lender, including any right of subrogation, reimbursement, exoneration, or indemnification, any right to participate in any claim or remedy of the Agent and the Purchasers (or the Senior Lender) against any of the Corporations or any of their assets which the Agent or any Purchaser (or the Senior Lender) now have or hereafter acquires, whether or not such claim, remedy or right arises in equity, or under contract, statute or common law, including the right to take or receive from any Corporation, directly or indirectly, in cash or other property or by set-off or in any manner, payment or security on account of such claim or other rights. If any amount shall be paid to a Guarantor in violation of the preceding sentence and the Liabilities shall not have been indefeasibly paid in full in cash, such amount shall be deemed to have been paid to such Guarantor for the benefit of, and held in trust for, the Agent and the Purchasers, and shall forthwith be paid to the Agent to be credited and applied pursuant to the terms of this Agreement. Each Guarantor acknowledges that it will receive substantial direct and indirect benefits from the issuance and sale of the Notes and Warrants and that the waiver set forth in this paragraph is knowingly made in contemplation of such benefits. 2.5 Fraudulent Transfer Limitation. If, in any action to enforce this Guaranty or any proceeding to allow or adjudicate a claim under this Guaranty, a court of competent jurisdiction determines that enforcement of this Guaranty against any Guarantor for the full amount of the Guaranteed Obligations is not lawful under, or would be subject to avoidance under, Section 548 of the Bankruptcy Code or any applicable provision of comparable state law, the liability 6 of such Guarantor under this Guaranty shall be limited to the maximum amount lawful and not subject to avoidance under such law. 2.6 Contribution Among Guarantors. The Guarantors desire to allocate among themselves, in a fair and equitable manner, their rights of contribution from each other when any payment is made by one of the Guarantors under this Guaranty. Accordingly, if any payment is made by a Guarantor under this Guaranty (a "Funding Guarantor") that exceeds its Fair Share, the Funding Guarantor shall be entitled to a contribution from each other Guarantor in the amount of such other Guarantor's Fair Share Shortfall, so that all such contributions shall cause each Guarantor's Aggregate Payments to equal its Fair Share. For these purposes: (a) "Fair Share" means, with respect to a Guarantor as of any date of determination, an amount equal to (i) the ratio of (x) the Adjusted Maximum Amount of such Guarantor to (y) the aggregate Adjusted Maximum Amounts of all Guarantors, multiplied by (ii) the aggregate amount paid on or before such date by all Funding Guarantors under this Guaranty. (b) "Fair Share Shortfall" means, with respect to a Guarantor as of any date of determination, the excess, if any, of the Fair Share of such Guarantor over the Aggregate Payments of such Guarantor. (c) "Adjusted Maximum Amount" means, with respect to a Guarantor as of any date of determination, the maximum aggregate amount of the liability of such Guarantor under this Guaranty, limited to the extent required under Section 2.5 (except that, for purposes solely of this calculation, any assets or liabilities arising by virtue of any rights to or obligations of contribution under this Section 2.6 shall not be counted as assets or liabilities of such Guarantor). (d) "Aggregate Payments" means, with respect to a Guarantor as of any date of determination, the aggregate net amount of all payments made on or before such date by such Guarantor under this Guaranty (including, without limitation, under this Section 2.6). The amounts payable as contributions hereunder shall be determined by the Funding Guarantor as of the date on which the related payment or distribution is made by the Funding Guarantor, and such determination shall be binding on the other Guarantors absent manifest error. The allocation and right of contribution among the Guarantors set forth in this Section 2.6 shall not be construed to limit in any way the liability of any Guarantor under this Guaranty. 2.7 Future Guarantors. Any other Person who may hereafter become a Subsidiary of any Corporation may and shall become a Guarantor under this Agreement and become bound by the terms and conditions hereof by executing and delivering an instrument of joinder. 2.8 Joint and Several Obligation. This Guaranty and all liabilities of each Guarantor hereunder shall be the joint and several obligation of each Guarantor and may be freely enforced against each Guarantor, for the full amount of the Liabilities (subject to Section 2.5), without regard to whether enforcement is sought or available against any other Guarantor. 7 2.9 No Waiver. No delay in the exercise of any right or remedy shall operate as a waiver thereof, and no single or partial exercise of any right or remedy shall preclude other or further exercise thereof or the exercise of any other right or remedy; nor shall any modification or waiver of any of the provisions of this Guaranty be binding upon the Agent and the Purchasers except as expressly set forth in a writing duly signed and delivered on their behalf. 2.10 Representations and Warranties. Each Guarantor hereby expressly reaffirms each representation and warranty made in this Agreement with respect to such Guarantor and its property. 8 EXHIBIT E-1 TO NOTE AND WARRANT PURCHASE, GUARANTY AND SECURITY AGREEMENT Registration Rights (Common Stock) This Exhibit E-1 is part of the Note and Warrant Purchase, Guaranty and Security Agreement dated as of November 15, 2001 among U.S. Home & Garden, Inc. ("USHG"), Easy Gardener, Inc. (the "Company"), USHG's other Subsidiaries and the Purchasers named therein (the "Purchase Agreement"). SECTION 1. Definitions. Capitalized terms used in this Exhibit E-1 and not otherwise defined herein shall have the meanings given to such terms in the Purchase Agreement. The following terms used in this Exhibit E-1 shall have the meanings indicated below: "Holders" shall mean any holders from time to time of Registrable Securities who are Purchasers under the Purchase Agreement. "Registrable Securities" shall mean (i) the Common Warrants and Common Warrant Shares and (ii) Common Stock and any other Capital Stock, equity interest or other securities issuable or issued by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or other transaction of the character referred to in Section 9(b) of the Common Warrant Agreement; provided, however, that USHG shall have no obligation to register any Common Warrants, and each holder of Common Warrants who desires to include in a registration any shares of Common Stock issuable upon exercise of such Common Warrants will (if requested to do so by USHG) exercise all or part of its Common Warrants prior to the effectiveness of such registration as required to permit the inclusion therein of such underlying shares. SECTION 2. Registration. (a) Incidental Registration Rights. In the case of any proposed registration of Common Stock or other securities of USHG under the Securities Act, whether or not for sale for its own account, on any form which can include Registrable Securities (other than Form S-4), USHG will give at least 30 days' prior written notice of the filing thereof to all Holders. (1) USHG's notice shall afford the Holders an opportunity to elect within 15 days after receipt thereof to include in such filing all or any part of their Registrable Securities; provided, that, in the case of an underwritten public offering, the managing underwriter administering such offering may reduce the number of Registrable Securities to be included in such offering if, in the reasonable opinion of such managing underwriter, the inclusion in such offering of all Registrable Securities requested to be registered would materially and adversely affect the marketing of the entire offering (the number of Registrable Securities to be included in such offering being herein referred to as the "Permissible Securities"). If the aggregate number of Registrable Securities which the Holders thereof desire to include in such filing exceeds the number of Permissible Securities, then each such Holder shall be entitled to include that number of Registrable Securities which bears the same ratio to the number of Permissible Securities as the number of Registrable Securities such Holder desires to include bears to the number of Registrable Securities all such Holders desire to include. (2) USHG agrees that any Holder entitled to include Registrable Securities in any such registration may assign or transfer such right to include such Registrable Securities to any other Holder or Holders. (3) USHG shall be obligated under this Section 2(a) to afford the Holders the right to participate in each and every such registration taking place until all Registrable Securities have been included in registrations and sold or sold pursuant to Rule 144. (b) Short Form Registrations. In addition to the registration rights provided in Section 2(a) above, the holders of a majority of the Registrable Securities shall be entitled to request by written notice to USHG from time to time that USHG register the offering and sale of all or a portion of the Registrable Securities on Form S-3 (or any successor or similar short form registration), provided that USHG is eligible for such registration. Upon receipt of such written notice, if USHG is then eligible to use Form S-3 (or any successor or similar short form registration), USHG will thereupon notify all other Purchasers of such request. Upon the written request of any such other Purchasers after receipt from USHG of such notification, USHG will use its best efforts to cause such of the Registrable Securities as may be requested by any Purchasers (including the Purchaser giving the initial notice of intent to register hereunder) to be registered under the Securities Act in accordance with the terms of this Section 2. USHG will use its best efforts to qualify for use of a registration statement on Form S-3 (or any successor or similar short form registration) as early as practicable. USHG shall not be required to file more than one registration statement pursuant to this Section 2(b) in any 12 month period or more than two registration statements pursuant to this Section 2(b) in all. (c) Expenses of Registration. The costs and expenses of all registrations and qualifications under the Securities Act and applicable state securities laws and of all other actions, which USHG is required to take or effect pursuant to this Section 2 (including without limitation all registration and filing fees, printing expenses and reasonable fees and disbursements of counsel) shall be paid by USHG, except that the Holders shall bear their pro rata share of any underwriting discount or commission, or other similar selling expenses; provided, that USHG shall not be required to pay the fees and expenses of more than one counsel for the selling Holders. (d) Opinion of Counsel as Alternative. The registration rights granted to the Holders under this Section 2 shall be subject to the condition that any registration of Registrable Securities proposed to be effected need not be effected if USHG shall deliver to the Holders requesting such registration an opinion, satisfactory to such Holders and their counsel, of Blank Rome Comisky & McCauley LLP or other counsel satisfactory to such Holders to the effect that the proposed sale or disposition for which registration was requested does not require registration under the Securities Act, but such opinion shall not rely on the availability 2 of sales utilizing the provisions of Rule 144 if doing so would impose on the Holder any volume restrictions, or any pre-sale notification or similar restriction on the free sale of the Registrable Securities. USHG hereby indemnifies the Holders, and each of them, against and holds them harmless from all damages, losses, liabilities (including liability for rescission), costs and expenses which they may incur under the Securities Act or otherwise by reason of their proceeding in accordance with such opinion of counsel. (e) USHG's Registration Obligations. If and whenever USHG is obligated by the provisions of this Section 2 to effect the registration of any Registrable Securities under the Securities Act, as expeditiously as reasonably possible USHG will, or will use its best efforts to, as the case may be, to: (1) Prepare and file with the SEC a registration statement with respect to such Registrable Securities. (2) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective until the earlier of the sale of all Registrable Securities covered thereby and the expiration of a period of nine months after the date such registration statement became effective (except that any registration statement on Form S-3 or similar short-form shall be maintained for not less than two years), and comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such registration statement. (3) Furnish to each selling Holder such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents, as such Holder may reasonably request. (4) Register or qualify the Registrable Securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions (subject to the approval of any managing underwriter involved) as the selling Holders shall request, and do any and all other acts and things which may be reasonably necessary or advisable to enable such Holders to consummate the disposition in such jurisdictions of such Registrable Securities; provided, however, that USHG shall not be obligated, by reason thereof, to qualify as a foreign corporation or subject itself to taxation as doing business in any such jurisdiction. (5) Notify the selling Holders and their counsel promptly after USHG shall receive notice that any registration statement, supplement or amendment has become effective, or that any registration statement is required to be amended or supplemented, or that any stop order has been issued. (f) Indemnification. USHG agrees to indemnify and hold harmless each Holder, its officers or directors, affiliates and each Person, if any, who controls such Holder within the meaning of the Securities Act, from and against any losses, claims, damages, liabilities and expenses (under such Act, at common law or otherwise) caused by any untrue statement or alleged untrue 3 statement of a material fact or omission to state a material fact required to be stated or necessary to make the statements therein not misleading in any registration statement or preliminary or final prospectus or filing for state registration or qualification, or any amendment or supplement thereto, except insofar as such losses, claims, damages, liabilities or expenses are caused by any such untrue statement contained in or omission from information furnished in writing to USHG by such Holder expressly for use therein. (g) Agreement as to Underwriters. If the offering pursuant to any registration statement provided for under this Section 2 is made, at the election of USHG, through underwriters, USHG agrees to enter into an underwriting agreement in customary form with such underwriters and to indemnify such underwriters, their officers and directors, if any, and each Person who controls such underwriters within the meaning of the Securities Act, to the same extent as provided in Section 2(f) with respect to the indemnification of a Holder. (h) No Special Audit. USHG shall not be required to conduct any special audit (or any audit not in the ordinary course of its business) in connection with any registration hereunder. 4 EXHIBIT E-2 TO NOTE AND WARRANT PURCHASE, GUARANTY AND SECURITY AGREEMENT Registration Rights (Preferred Securities) This Exhibit E-2 is part of the Note and Warrant Purchase, Guaranty and Security Agreement dated as of November 15, 2001 among U.S. Home & Garden, Inc. ("USHG"), Easy Gardener, Inc. (the "Company"), USHG's other Subsidiaries and the Purchasers named therein (the "Purchase Agreement"). SECTION 1. Definitions. Capitalized terms used in this Exhibit E-2 and not otherwise defined herein shall have the meanings given to such terms in the Purchase Agreement. The following terms used in this Exhibit E-2 shall have the meanings indicated below: "Holders" shall mean any holders from time to time of Registrable Securities who are Purchasers under the Purchase Agreement. "Registrable Securities" shall mean (i) the Preferred Warrants and Preferred Warrant Securities and (ii) Preferred Securities and any other securities issuable or issued by way of securities dividend or securities split or in connection with a combination of securities, recapitalization, merger, consolidation or other reorganization or other transaction of the character referred to in Section 9(b) of the Preferred Warrant Agreement; provided, however, that USHG shall have no obligation to cause the Trust to register any Preferred Warrants, and each holder of Preferred Warrants who desires to include in a registration any Preferred Securities issuable upon exercise of such Preferred Warrants will (if requested to do so by USHG or the Trust) exercise all or part of its Preferred Warrants prior to the effectiveness of such registration as required to permit the inclusion therein of such underlying securities. SECTION 2. Registration. (a) Incidental Registration Rights. In the case of any proposed registration of Preferred Securities or other securities of the Trust under the Securities Act, whether or not for sale for its own account, on any form which can include Registrable Securities (other than Form S-4), USHG will (or will cause the Trust to) give at least 30 days' prior written notice of the filing thereof to all Holders. (1) such notice shall afford the Holders an opportunity to elect within 15 days after receipt thereof to include in such filing all or any part of their Registrable Securities; provided, that, in the case of an underwritten public offering, the managing underwriter administering such offering may reduce the number of Registrable Securities to be included in such offering if, in the reasonable opinion of such managing underwriter, the inclusion in such offering of all Registrable Securities requested to be registered would materially and adversely affect the marketing of the entire offering (the number of Registrable Securities to be included in such offering being herein referred to as the "Permissible Securities"). If the aggregate number of Registrable Securities which the Holders thereof desire to include in such filing exceeds the number of Permissible Securities, then each such Holder shall be entitled to include that number of Registrable Securities which bears the same ratio to the number of Permissible Securities as the number of Registrable Securities such Holder desires to include bears to the number of Registrable Securities all such Holders desire to include. (2) USHG agrees that any Holder entitled to include Registrable Securities in any such registration may assign or transfer such right to include such Registrable Securities to any other Holder or Holders. (3) USHG shall be obligated under this Section 2(a) to cause the Trust to afford the Holders the right to participate in each and every such registration taking place until all Registrable Securities have been included in registrations and sold or sold pursuant to Rule 144. (b) Short Form Registrations. In addition to the registration rights provided in Section 2(a) above, the holders of a majority of the Registrable Securities shall be entitled to request by written notice to USHG from time to time that USHG cause the registration by the Trust of the offering and sale of all or a portion of the Registrable Securities on Form S-3 (or any successor or similar short form registration), provided that the Trust is eligible for such registration. Upon receipt of such written notice, if the Trust is then eligible to use Form S-3 (or any successor or similar short form registration), USHG will thereupon notify all other Purchasers of such request. Upon the written request of any such other Purchasers after receipt from USHG of such notification, USHG will use its best efforts to cause such of the Registrable Securities as may be requested by any Purchasers (including the Purchaser giving the initial notice of intent to register hereunder) to be registered under the Securities Act in accordance with the terms of this Section 2. USHG will use its best efforts to cause the Trust to qualify for use of a registration statement on Form S-3 (or any successor or similar short form registration) as early as practicable. The Trust shall not be required to file more than one registration statement pursuant to this Section 2(b) in any 12 month period or more than two registration statements pursuant to this Section 2(b) in all. (c) Expenses of Registration. The costs and expenses of all registrations and qualifications under the Securities Act and applicable state securities laws and of all other actions, which USHG is required to take or effect (or cause the Trust to take or effect) pursuant to this Section 2 (including without limitation all registration and filing fees, printing expenses and reasonable fees and disbursements of counsel) shall be paid by USHG, except that the Holders shall bear their pro rata share of any underwriting discount or commission, or other similar selling expenses; provided, that USHG shall not be required to pay the fees and expenses of more than one counsel for the selling Holders. (d) Opinion of Counsel as Alternative. The registration rights granted to the Holders under this Section 2 shall be subject to the condition that any registration of Registrable Securities proposed to be effected need not be effected if USHG shall deliver (or cause the Trust to deliver) to the Holders requesting such registration an opinion, satisfactory to such Holders and their counsel, of Blank Rome Comisky & McCauley LLP or other counsel satisfactory to 2 such Holders to the effect that the proposed sale or disposition for which registration was requested does not require registration under the Securities Act, but such opinion shall not rely on the availability of sales utilizing the provisions of Rule 144 if doing so would impose on the Holder any volume restrictions, or any pre-sale notification or similar restriction on the free sale of the Registrable Securities. USHG hereby indemnifies the Holders, and each of them, against and holds them harmless from all damages, losses, liabilities (including liability for rescission), costs and expenses which they may incur under the Securities Act or otherwise by reason of their proceeding in accordance with such opinion of counsel. (e) Registration Obligations. If and whenever USHG is obligated by the provisions of this Section 2 to cause the registration of any Registrable Securities under the Securities Act, as expeditiously as reasonably possible USHG will, or will use its best efforts to, as the case may be, cause the Trust to: (1) Prepare and file with the SEC a registration statement with respect to such Registrable Securities. (2) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective until the earlier of the sale of all Registrable Securities covered thereby and the expiration of a period of nine months after the date such registration statement became effective (except that any registration statement on Form S-3 or similar short-form shall be maintained for not less than two years), and comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such registration statement. (3) Furnish to each selling Holder such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents, as such Holder may reasonably request. (4) Register or qualify the Registrable Securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions (subject to the approval of any managing underwriter involved) as the selling Holders shall request, and do any and all other acts and things which may be reasonably necessary or advisable to enable such Holders to consummate the disposition in such jurisdictions of such Registrable Securities; provided, however, that the Trust shall not be obligated, by reason thereof, to qualify as a foreign corporation or subject itself to taxation as doing business in any such jurisdiction. (5) Notify the selling Holders and their counsel promptly after USHG or the Trust shall receive notice that any registration statement, supplement or amendment has become effective, or that any registration statement is required to be amended or supplemented, or that any stop order has been issued. 3 (f) Indemnification. USHG agrees to indemnify and hold harmless each Holder, its officers or directors, affiliates and each Person, if any, who controls such Holder within the meaning of the Securities Act, from and against any losses, claims, damages, liabilities and expenses (under such Act, at common law or otherwise) caused by any untrue statement or alleged untrue statement of a material fact or omission to state a material fact required to be stated or necessary to make the statements therein not misleading in any registration statement or preliminary or final prospectus or filing for state registration or qualification, or any amendment or supplement thereto, except insofar as such losses, claims, damages, liabilities or expenses are caused by any such untrue statement contained in or omission from information furnished in writing to USHG or the Trust by such Holder expressly for use therein. (g) Agreement as to Underwriters. If the offering pursuant to any registration statement provided for under this Section 2 is made, at the election of USHG, through underwriters, USHG agrees to cause the Trust to enter into an underwriting agreement in customary form with such underwriters and to indemnify such underwriters, their officers and directors, if any, and each Person who controls such underwriters within the meaning of the Securities Act, to the same extent as provided in Section 2(f) with respect to the indemnification of a Holder. (h) No Special Audit. USHG shall not be required to conduct any special audit (or any audit not in the ordinary course of its business) in connection with any registration hereunder. 4 EXHIBIT F TO NOTE AND WARRANT PURCHASE, GUARANTY AND SECURITY AGREEMENT Financial Covenants This Exhibit F is part of the Note and Warrant Purchase, Guaranty and Security Agreement dated as of November 15, 2001 among U.S. Home & Garden, Inc. ("USHG"), Easy Gardener, Inc. (the "Company"), USHG's other Subsidiaries and the Purchasers named therein (the "Purchase Agreement"). 1. Definitions. Capitalized terms used in this Exhibit F and not otherwise defined herein shall have the meanings given to such terms in the Purchase Agreement. In addition, certain terms used in this Exhibit F have the meanings given thereto in Section 3 below. 2. Financial Covenants. Each of USHG and the Company will observe, and will cause its consolidated subsidiaries to observe, the financial covenants set forth in this Exhibit F, which are hereby incorporated by reference into Section 7.19 of the Purchase Agreement as if set forth in full therein. All of the financial covenants set forth herein or in the Purchase Agreement and related definitions shall be applied to USHG and its consolidated subsidiaries, and for purposes of all financial covenants the terms "Corporations" and "Subsidiaries" shall be deemed to include USHG and all its consolidated subsidiaries (regardless of whether or not a particular subsidiary qualifies as a "Subsidiary" or a "Corporation" for other purposes of the Purchase Agreement). 2.1 Ratio of Consolidated Senior Funded Debt to Consolidated EBITDA. USHG and the Company shall not permit the Corporations' ratio of Consolidated Senior Funded Debt to Consolidated EBITDA for the most recent four quarter period for which Financial Statements have been delivered pursuant to Sections 6.1(b) and 6.1(c) of the Purchase Agreement to be greater than: Quarter Ended Maximum Ratio ------------- ------------- December 2001 2.75 March 2002 4.00 June 2002 2.50 September 2002 2.10 December 2002 2.10 March 2003 3.50 June 2003 2.25 September 2003 2.10 December 2003 2.10 March 2004 3.25 June 2004 2.00 September 2004 2.10 December 2004 2.10 March 2005 3.25 June 2005 2.00 September 2005 2.10 December 2005 2.10 March 2006 3.25 June 2006 2.00 September 2006 2.10 December 2006 2.10 March 2007 3.25 June 2007 2.00 September 2007 2.10 2.2. Ratio of Consolidated Total Funded Debt to Consolidated EBITDA. USHG and the Company shall not permit the Corporations' ratio of Consolidated Total Funded Debt to Consolidated EBITDA for the most recent four quarter period for which Financial Statements have been delivered pursuant to Sections 6.1(b) and 6.1(c) of the Purchase Agreement to be greater than: Quarter Ended Maximum Ratio ------------- ------------- December 2001 13.50 March 2002 11.25 June 2002 9.00 September 2002 8.00 December 2002 8.25 March 2003 9.75 June 2003 7.50 September 2003 7.00 December 2003 7.25 March 2004 8.50 June 2004 7.00 September 2004 6.50 December 2004 6.75 March 2005 8.50 June 2005 7.00 September 2005 6.50 December 2005 6.75 March 2006 8.50 June 2006 7.00 September 2006 6.50 December 2006 6.75 March 2007 8.50 June 2007 7.00 September 2007 6.50 2.3. Ratio of Consolidated Operating Cash Flow to Consolidated Senior Debt Service. USHG and the Company shall not permit, for any period of four consecutive fiscal quarters, commencing with the period ending December 31, 2001, the Corporations' ratio of (a) Consolidated Operating Cash Flow to (b) Consolidated Senior Debt Service, to be less than: 2 Quarter Ended Maximum Ratio ------------- ------------- December 2001 2.25 March 2002 3.00 June 2002 3.00 September 2002 3.00 December 2002 3.00 March 2003 3.25 June 2003 3.25 September 2003 3.25 December 2003 3.25 March 2004 3.50 June 2004 3.50 September 2004 3.50 December 2004 3.50 March 2005 4.00 June 2005 4.00 September 2005 4.00 December 2005 4.00 March 2006 4.00 June 2006 4.00 September 2006 4.00 December 2006 4.00 March 2007 4.00 June 2007 4.00 September 2007 4.00 2.4. Ratio of Consolidated Operating Cash Flow to Consolidated Total Debt Service. USHG and the Company shall not permit, for any period of four consecutive fiscal quarters, commencing with the period ending December 31, 2001, the Corporations' ratio of (a) Consolidated Operating Cash Flow to (b) Consolidated Total Debt Service, to be less than: Quarter Ended Maximum Ratio ------------- ------------- December 2001 0.60 March 2002 0.85 June 2002 0.95 September 2002 1.05 December 2002 1.05 March 2003 1.15 June 2003 1.15 September 2003 and each fiscal quarter thereafter 1.20 2.5. Minimum Consolidated EBITDA. USHG and the Company shall not permit the Corporations' Consolidated EBITDA to be less than the amount set forth below opposite the month in which such determination is made, in each case for the 3 applicable Determination Period, for which purpose "Determination Period" shall mean the period of 12 consecutive months ended on the last day of the second month ended prior to the date of determination (by way of illustration, for a determination made during the month of March 2002, the Determination Period will be the 12-month period ended on January 31, 2002): Minimum Consolidated Month of Determination EBITDA ---------------------- -------------------- December 2001 $4,925,000 January 2002 $5,425,000 February 2002 $5,875,000 March 2002 $5,825,000 April 2002 $6,625,000 May 2002 $8,100,000 June 2002 $8,550,000 July 2002 $8,700,000 August 2002 $9,575,000 September 2002 $9,600,000 October 2002 $9,550,000 November 2002 $9,525,000 December 2002 $9,475,000 January 2003 $9,525,000 February 2003 $9,550,000 March 2003 $9,750,000 April 2003 $9,975,000 May 2003 $10,200,000 June 2003 $10,375,000 July 2003 $10,500,000 August 2003 $10,525,000 September 2003 $10,500,000 October 2003 $10,475,000 November 2003 $10,425,000 December 2003 $10,375,000 January 2004 $10,425,000 February 2004 $10,450,000 March 2004 $10,675,000 April 2004 $10,925,000 May 2004 $11,175,000 June 2004 $11,350,000 July 2004 $11,500,000 August 2004 $11,525,000 September 2004 $11,500,000 Thereafter $11,450,000 2.6. Consolidated Capital Expenditures. USHG and the Company will not permit the Corporations to make or incur any Capital Expenditures if, after giving effect 4 thereto, the aggregate of all Capital Expenditures made by the Corporations would exceed $1,500,000 in any fiscal year. 3. Definitions Applicable to Financial Covenants. The following terms used in this Exhibit have the meanings indicated below: "Capital Assets" shall mean fixed assets of the Corporations, both tangible (such as land, buildings, fixtures, machinery and equipment) and intangible (such as patents, copyrights, trademarks, franchises and goodwill); provided, however, that Capital Assets shall not include any item customarily charged directly as an expense or depreciated over a useful life of twelve (12) months or less in accordance with GAAP. "Consolidated EBITDA" shall mean for any period of determination EBITDA of the Corporations for such period. "Consolidated Operating Cash Flow" shall mean (a) consolidated EBITDA of the Corporations less (b) the sum of (i) unfinanced Capital Expenditures of the Corporations plus (ii) net cash payments for taxes of the Corporations for the applicable period. "Consolidated Senior Funded Debt" shall mean Consolidated Total Funded Debt less the amount of Indebtedness of the Corporations in respect of the Junior Subordinated Debentures, including accrued but unpaid interest thereon. "Consolidated Senior Debt Service" shall mean for any period the sum of (a) interest expense of the Corporations for such period, excluding interest expense in respect of the Junior Subordinated Debentures, plus (b) principal payments on Indebtedness of the Corporations required to be made during such period, excluding payments to reduce the principal of the Revolving Advances (as such term is defined in the Senior Loan Agreement). "Consolidated Total Funded Debt" shall mean all Funded Debt of the Corporations. "Consolidated Total Debt Service" shall mean for any period the sum of (a) interest expense of the Corporations for such period, plus (b) principal payments on Indebtedness of the Corporations required to be made during such period, excluding payments to reduce the principal of the Revolving Advances (as such term is defined in the Senior Loan Agreement). 5 SCHEDULE 5.12 TO NOTE AND WARRANT PURCHASE, GUARANTY AND SECURITY AGREEMENT Statement of Sources and Uses (000 omitted)
Uses Sources - ---- ------- PNC Fee 330 Available cash $2,225 PNC expenses 100 Funded senior debt 5,296 Available unfunded senior debt 2,949 Available unfunded senior debt 2,949 Refinance existing debt 14,888 Funded senior bank term loan 2,000 BOA interest and fee 40 Senior subordinated debt (net of expenses) 5,837 ------- ------- TOTAL $18,307 TOTAL $18,307
================================================================================ NOTE AND WARRANT PURCHASE, GUARANTY AND SECURITY AGREEMENT ------------------------------------ EASY GARDENER, INC. $5,993,151 Principal Amount 16% Series A Senior Subordinated Notes Due November 19, 2007 $856,164 Principal Amount 14% Series B Senior Subordinated Notes Due November 19, 2007 ------------------------------------ U.S. HOME & GARDEN INC. Warrants for Common Stock $.001 par value Options for 9.4% Cumulative Trust Preferred Securities issued by U.S. Home & Garden Trust I and owned by U.S. Home & Garden Inc. ------------------------------------ ================================================================================ as of November 15, 2001 U.S. HOME & GARDEN INC. EASY GARDENER, INC. Note and Warrant Purchase, Guaranty and Security Agreement TABLE OF CONTENTS SECTION 1. DEFINITIONS 2 SECTION 2. PURCHASE AND SALE OF NOTES AND WARRANTS 13 2.1 Notes 13 2.2 Common Warrants 13 2.3 Preferred Warrants 13 2.4 Payment of Purchase Price 13 2.5 Tax Reporting 14 2.6 Fees and Expenses 14 2.7 Manner of Payment 14 SECTION 3. TERMS OF THE NOTES; USE OF PROCEEDS; REGISTRATION RIGHTS 14 3.1 Terms of the Notes 14 (a) Optional Prepayments 14 (b) Mandatory Prepayments 15 (c) Interest 16 (d) Default Rate of Interest 16 (e) Maximum Legal Rate of Interest 16 (f) Application of Payments 16 (g) Agreements Between Note Holders and Subordination Agreements 16 (h) Indemnity for Interrupted Funding 16 3.2 Use of Proceeds 17 3.3 Grant of Security Interest 17 3.4 Guaranty 17 3.5 Registration Rights 17 SECTION 4. REPRESENTATIONS AND WARRANTIES 17 4.1 Corporate Existence; Capitalization 18 4.2 Authority 19 4.3 Due Execution and Delivery; Binding Effect 19 4.4 Consents; Governmental Approvals 19 4.5 Absence of Conflicts 19 4.6 No Default 20 4.7 Financial Data 20 4.8 Title to Property and Assets; Condition 22 4.9 Solvency 22 4.10 Taxes 22 4.11 Margin Securities 23 4.12 Subsidiaries; Joint Ventures 23 4.13 Litigation and Proceedings 23 4.14 Defaults; Adverse Changes 23 4.15 Insurance 24 4.16 Patents, Trademarks, Licenses, etc. 24 i 4.17 Environmental Matters 24 4.18 Investment Bankers' or Finders' Fees 25 4.19 Investment Company Act 25 4.20 Disclosure 25 4.21 Pension Plans 25 4.22 Compensation and Benefits 26 4.23 Labor Relations 26 4.24 Trade and Consumer Relations and Practices 26 4.25 Other Agreements 27 SECTION 5. CONDITIONS PRECEDENT 28 5.1 Consolidated Excess Cash 28 5.2 Purchaser Documents 28 5.3 Legal Opinions 28 5.4 Other Documents 28 5.5 Representations and Warranties; No Default or Event of Default 28 5.6 Purchaser Transactions; Other Transactions 29 5.7 Fees; Transaction Expenses 29 5.8 Legal Structure and Capitalization 29 5.9 Additional Matters 29 5.10 Due Diligence; No Adverse Change or Events 29 5.11 Minimum EBITDA 30 5.12 Compliance With Sources and Uses 30 5.13 Closing Certificates 30 5.14 Stockholders Agreement 31 5.15 Junior Subordinated Debentures 31 5.16 Noncompetion and Nonsolicitation Agreements 31 5.17 Golub Consulting Agreement 31 5.18 Waco Lease Renewal 31 SECTION 6. AFFIRMATIVE COVENANTS 31 6.1 Financial and Other Information 31 6.2 Inspection 34 6.3 Conduct of Business 35 6.4 Taxes 35 6.5 Property, Liability and Business Interruption Insurance; Key-Man Insurance 35 6.6 Pension Plans 36 6.7 Notice of Suits, Adverse Changes in Business and Defaults 36 6.8 Environmental Laws 37 6.9 Notices Relating to Transactions 37 6.10 Board Observation Rights 37 6.11 Notice of Amendment of Senior Loan Agreement 38 6.12 Option to Provide Mezzanine Financing 38 6.13 Use of Proceeds 39 6.14 New Subsidiary Security Agreements and Guaranties 39 6.15 Reservation of Warrant Securities 40 SECTION 7. NEGATIVE COVENANTS 40 7.1 Liens or Encumbrances 40 ii 7.2 Indebtedness 41 7.3 Consolidations, Mergers or Acquisitions 42 7.4 Investments or Loans 42 7.5 Subsidiaries 43 7.6 Disposal of Property 43 7.7 Limitation on Certain Restrictions on Subsidiaries 44 7.8 Tax Consequences of Certain Transactions 44 7.9 Dividends, Stock Redemptions, Etc 44 7.10 Issuance of Additional Capital Stock by Subsidiaries 45 7.11 Operating Leases 46 7.12 Fiscal Year End 46 7.13 Transactions with Affiliates 46 7.14 ERISA 46 7.15 Amendment and Modification of Senior Debt Documents and Other Transaction Documents; Refinancing of Senior Debt 46 7.16 Other Amendments 47 7.17 Accounting Methods 47 7.18 Payments on Subordinated Debt 47 7.19 Financial Covenants 49 SECTION 8. SUBORDINATION 49 SECTION 9. EVENTS OF DEFAULT 49 9.1 Events of Default 49 9.2 Consultants 52 9.3 Other Costs and Expenses 52 SECTION 10. CONSENTS 53 SECTION 11. SECURITIES LAW MATTERS 53 11.1 Securities Act 53 11.2 Resales 53 11.3 Legends 54 SECTION 12. TRANSFERS 54 12.1 Transfers 54 12.2 Participations 55 12.3 Issuance of New Notes 55 SECTION 13. EFFECTIVENESS OF AGREEMENT 55 SECTION 14. JUDICIAL PROCEEDINGS 56 SECTION 15. MISCELLANEOUS 57 15.1 Notices 57 15.2 Cumulative Remedies, Etc. 57 15.3 No Oral Changes; Assignment; Survival of Representations 58 15.4 Several Obligations 58 15.5 Costs and Expenses 58 15.6 Loss or Destruction of Note 59 15.7 Allocation of Payments among Purchasers 59 15.8 Indemnification Generally 59 15.9 Governing Law 60 15.10 Counterparts 60 iii 15.11 Captions; Gender 60 15.12 Survival; Right to Indemnification 60 15.13 Purchasers May Perform 60 15.14 Integration 61 15.15 Severability 61 15.16 Waiver of Jury Trial and Damages 61 LIST OF EXHIBITS EXHIBIT A -- List of Purchasers EXHIBIT B-1 -- Form of Series A Note EXHIBIT B-2 -- Form of Series B Note EXHIBIT C -- Grant of Security Interest; Appointment of Collateral Agent EXHIBIT D -- Guaranty EXHIBIT E-1 -- Registration Rights (Common Stock) EXHIBIT E-2 -- Registration Rights (Preferred Securities) EXHIBIT F -- Financial Covenants LIST OF SCHEDULES Schedule 4.1(a) -- States of Incorporation and Qualification of the Corporations 4.1(b) -- Table of Stock, Warrant and Option Holders 4.4 -- Consents; Governmental Approvals 4.7(b) -- Projections 4.7(c) -- Pro Forma Balance Sheet 4.7(c)(iv) -- Accounts Payable Reserves 4.7(d) -- Calculation of Availability 4.8 -- Permitted Liens 4.10 -- Taxes 4.12 -- Subsidiaries 4.13 -- Litigation and Proceedings 4.15 -- Insurance 4.16 -- Intellectual Property 4.17 -- Environmental Matters 4.21 -- Pension Plans 4.22 -- Compensation and Benefits 4.25 -- Material Agreements 5.12 -- Statement of Sources and Uses and Exceptions Thereto 7.2 -- Indebtedness C-2.4 -- Access to Collateral (Exceptions) C-2.5 -- Locations of Equipment and Inventory C-2.15(c) -- Executive Offices; Location of Records Relating to Receivables iv U.S. HOME & GARDEN INC. WARRANT AGREEMENT WARRANT AGREEMENT dated as of November 15, 2001 between U.S. Home & Garden Inc., a Delaware corporation (the "Issuer"), and the holders from time to time of the Warrants referred to herein (the "Holders"). WHEREAS, the Holders, the Issuer, the Issuer's wholly-owned subsidiary Easy Gardener, Inc. (the "Company") and the Issuer's other Subsidiaries are parties to a Note and Warrant Purchase, Guaranty and Security Agreement dated as of the date hereof (as the same may be amended, supplemented or otherwise modified from time to time, the "Purchase Agreement") providing, among other things, for the purchase by the Holders (which are also "Purchasers" party to such Agreement) of any or all of (i) $5,993,151 principal amount of the Company's 16% Series A Senior Subordinated Notes due November 19, 2007 (the "Series A Notes"), (ii) $856,164 principal amount of the Company's 14% Series B Senior Subordinated Notes due November 19, 2007 (the "Series B Notes"; and, together with the Series A Notes, the "Notes"), and (iii) the Common Warrants and Preferred Warrants described therein; and WHEREAS, the Issuer has agreed to issue the Warrants on the terms set forth in this Agreement and the Purchase Agreement (the "Common Warrants" referred to in the Purchase Agreement being the Warrants referred to herein); NOW, THEREFORE, in consideration of the premises the Issuer and the Holders agree as follows: SECTION 1. Definitions. Capitalized terms used herein which are defined in the Purchase Agreement and are not otherwise defined herein shall have the respective meanings given thereto in the Purchase Agreement; and the following terms used herein shall have the meanings indicated below, unless the context otherwise requires: "Aggregate Warrant Percentage" shall have the meaning given thereto in Section 2(a). "Agreement" or "Warrant Agreement" shall mean this Warrant Agreement, together with all Exhibits hereto, as may be amended, modified or supplemented from time to time with the consent of the Holders in accordance with Section 15, and shall include all provisions incorporated herein by reference from the Purchase Agreement, which incorporated provisions shall continue in full force and effect for the benefit of the Holders as originally in effect unless modified with the consent of the Holders in accordance with Section 15. "Closing Date" shall mean the date of the closing of the issuance and sale of the Warrants to the Holders pursuant to the Purchase Agreement and this Agreement. "Commission" shall have the meaning given thereto in Section 11(b). "Common Stock" shall mean the Issuer's Common Stock, $.001 par value. "Convertible Securities" shall mean (a) any stock, notes or other securities convertible into or exchangeable, directly or indirectly, for shares of Common Stock (whether or not such right to convert or exchange is immediately exercisable or is "in the money"), (b) any other security, note or agreement which provides the holder thereof with a payment, repayment amount, appreciation right or liquidation preference (i) calculated by reference to, or arising from, the value of the Issuer upon a sale, merger, recapitalization or similar event, or (ii) based upon the value, whether market or appraisal, of the Common Stock, and (c) any agreement to issue shares of Common Stock or issue or enter into such other stock, notes, securities or agreements described in the foregoing clauses (a) or (b). "Exchange Act" shall have the meaning given thereto in Section 11(b). "Exercise Price" shall have the meaning given thereto in Section 3. "Expiration Date" shall mean the first to occur of: (i) the first date on or after the payment and satisfaction in full of the Notes (including all accrued and unpaid interest, premium, if any, and principal) and of all obligations of the Corporations under the Purchase Agreement in respect of the Notes, including the payment of all Costs and Expenses (the "Note Payment Date"), when all of the following conditions shall have been satisfied: (A) the Issuer shall have duly executed and delivered to the Holders a Warrant Agreement in the form of Exhibit C hereto (a "Share Warrant Agreement") providing for the issuance upon exercise of all Warrants to be issued pursuant thereto ("Share Warrants") of that number of Warrant Shares as would have been issuable in the aggregate to all Holders hereunder if all Warrants outstanding hereunder on the Note Payment Date had been exercised in full on such date; and (B) delivery to each Holder hereunder of a Share Warrant certificate in the form of Exhibit A to the Share Warrant Agreement for such Holder's applicable share of the aggregate number of Share Warrants issuable pursuant to the Share Warrant Agreement as provided in clause (A) above; and (ii) May 19, 2009 or, if such day is not a Business Day, the next succeeding Business Day. "Fully-Diluted Common Stock" shall have the meaning given thereto in Section 2(b). 2 "Market Price" of Common Stock shall mean the average of the daily market prices of Common Stock over a period of 20 consecutive business days prior to the day as of which "Market Price" is being determined. The market price for each such business day shall be the average of the closing sales prices on such day of the Common Stock on the principal domestic stock exchange on which the Common Stock is then listed, or if there shall have been no sales on any such exchange on such day, the average of the highest bid and lowest asked prices on such exchange at the end of such day, or, if the Common Stock shall not be so listed, the closing sales price in the NASDAQ System on such day, or if there shall have been no sales in the NASDAQ System on such day, the average of the highest bid and lowest asked prices on the NASDAQ System on such day, or if the Common Stock shall not be quoted in the NASDAQ System, the average of the high and low bid and asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization. If the Common Stock is listed on any domestic exchange the term "business days" as used in this paragraph shall mean business days on which such exchange is open for trading. If at any time the Common Stock is not listed on any domestic exchange or quoted in the NASDAQ System or the domestic over-the-counter market, the "Market Price" shall be the fair market value of a share of Common Stock as determined in good faith by the Board of Directors of the Issuer (giving due regard to any recent sales or valuations of Common Stock) or, if the holders of a majority of the Warrants shall, in the exercise of their sole discretion, object to such determination, as determined by appraisal pursuant to the following paragraph of this definition; provided, that if any valuation or appraisal has been made of the Issuer or its Common Stock for any reason within six months prior to any date as of which the Market Price is to be determined hereunder, then the Holders shall be entitled, at their option, to rely on such appraisal and such valuation or appraisal shall be binding on the Issuer unless any event shall have occurred since the date of such valuation or appraisal which, in the reasonable opinion of the Holders of a majority of the Warrants, manifestly affects the continued validity of such appraisal. If the Holders of a majority of the Warrants shall object to the determination of Market Price made by the Issuer's Board of Directors pursuant to the preceding paragraph, then Market Price shall be determined as of the end of the most recent complete fiscal quarter of the Issuer ended prior to the date of determination (taking into account actual performance subsequent thereto and projections for future periods), and shall be determined by appraisal as follows: Within fifteen (15) days after receipt by the Issuer of notice that an appraisal is desired, the Issuer and the Holders of a majority of the Warrants shall jointly appoint an appraiser for the purpose of determining Market Price. Such appraiser shall be an investment banking or advisory firm with experience in valuing companies of a comparable size, and in a comparable industry, as the Issuer, which investment banking or advisory firm shall be either a firm of recognized national standing or a regional firm of good national reputation. If there shall be a dispute as to the selection of such appraiser, then the appraiser shall be appointed by the American Arbitration Association upon application by the Issuer or the Holders of a majority of the Warrants. The Issuer and the Holders of a majority of the Warrants shall be afforded reasonable opportunities to discuss the appraisal with such appraiser. The determination of Market Price by such appraiser shall be final and binding upon the Issuer and the Holders of Warrants. The fees and expenses of 3 the appraiser and, if any, of the American Arbitration Association, shall be borne by the Issuer unless the determination of Market Price by such appraiser is the same as the determination of Market Price made by the Board of Directors (or less favorable to the Holders), in which case the fees and expenses of such appraiser shall be borne equally by the Issuer and the Holders of Warrants. "Options" shall mean any warrants (including the Warrants), options (including options granted pursuant to any stock option plan), agreements or other rights to subscribe for or to purchase, directly or indirectly, shares of Common Stock (whether or not such warrants, options or other rights are immediately exercisable or are "in the money"). Options shall include any warrants, options or other agreements or rights to subscribe for or to purchase, directly or indirectly, Convertible Securities or other Options (whether or not such warrants, options or other rights are immediately exercisable or are "in the money") and agreements or plans under which the Issuer may issue Common Stock, Options or Convertible Securities in exchange for services of any kind, whether to be rendered by an employee, consultant, individual, entity or third party of any kind. "Securities Act" shall have the meaning given thereto in Section 11(b). "Warrant" shall mean a Warrant certificate, in the form of Exhibit A hereto, and shall also mean the right upon exercise thereof to acquire one Warrant Share. "Warrant Office" shall mean the office or agency of the Issuer at which the Warrant Register shall be maintained and where the Warrants may be presented for exercise, exchange, substitution and transfer, which office or agency will be the office of the Issuer at 655 Montgomery Street, San Francisco, CA 94111. The Warrant Office may be changed by the Issuer pursuant to notice in writing to the registered Holders of the Warrants. "Warrant Register" shall mean the register, in the form of Exhibit B hereto, maintained by the Issuer at the Warrant Office. "Warrant Shares" shall mean the shares of Common Stock issuable or issued upon exercise of the Warrants, and any other Common Stock, Convertible Securities, capital stock, equity interest, or other securities issuable or issued in respect of Warrants or Warrant Shares by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or other transaction of the character referred to in Section 9(b). SECTION 2. Issuance of Warrants. (a) The Issuer will issue to the Holders on the Closing Date, in exchange for payment of the purchase price for the "Common Warrants" specified in Section 2.2 of the Purchase Agreement, Warrants to purchase that number of shares of Common Stock representing in the aggregate three and three quarters percent (3.75%) of the Issuer's Fully-Diluted Common Stock (as defined below) at the time of exercise (the "Aggregate Warrant Percentage"). The 4 Warrants purchased by each Holder are set forth on Exhibit B attached hereto. The Warrants shall be exercisable at any time after the Closing Date until 5:00 P.M. (local time at the Warrant Office) on the Expiration Date. (b) The Issuer's "Fully-Diluted Common Stock" at any time of determination shall mean the sum of (A) the number of shares of Common Stock issued and outstanding at such time, plus (B) the number of shares of Common Stock issuable upon exercise of all outstanding Options (including the Warrants) and conversion or exchange of all Convertible Securities issued and outstanding at such time (provided that if any such shares qualify as both Options and Convertible Securities, they shall be counted only once), plus (C) the number of shares of Common Stock which the Issuer is otherwise obligated or potentially obligated to issue under any agreement, understanding or arrangement or otherwise. Where any Convertible Security does not indicate a specific or fixed number of shares of Common Stock to be issued thereunder or in connection therewith, the number of shares of Common Stock issuable thereunder or in connection therewith for purposes of calculating Fully-Diluted Common Stock shall equal the greater of (I) the maximum number of shares of Common Stock described as issuable thereunder or in connection therewith or (II) such number of shares of Common Stock as would represent any profit sharing, liquidation preference amount, appreciation right, share or percentage of the Issuer's value as if such Convertible Security was converted (at the then-applicable Market Price if no conversion price is otherwise provided in such Convertible Security) into shares of Common Stock. Fully-Diluted Common Stock shall not include any shares owned or held by or for the account of the Issuer or any Subsidiary. SECTION 3. Exercise Price. At any time of determination, the price (the "Exercise Price") at which a Holder may purchase each Warrant Share issuable upon exercise of such Holder's Warrants shall be determined as follows: (A) as to that number of Warrant Shares as shall represent up to such Holder's Adjusted Warrant Percentage of the Issuer's shares of Common Stock outstanding at such time of determination, the Exercise Price shall be equal to $0.40; and (B) as to that number of Warrant Shares as shall represent up to such Holder's Adjusted Warrant Percentage of the Issuer's shares of Common Stock issuable upon exercise, exchange or conversion of all Options and Convertible Securities outstanding at such time of determination, the Exercise Price shall be equal to the lower of (x) the weighted average exercise, exchange or conversion price of all such Options and Convertible Securities on the Closing Date (which the Issuer hereby represents is $2.3983) and (y) the weighted average exercise, exchange or conversion price of all such Options and Convertible Securities on the date of exercise; provided, however, that (1) if the exercise price of any Options which are outstanding on the Closing Date ("Repriced Options") is reduced to an amount which is less than the then applicable Warrant Exercise Price determined in accordance with the foregoing provisions of this clause (B), then the Exercise Price for the Warrant Shares referred to in this clause (B) shall be reduced to such lower exercise price applicable to such Repriced Options, and (2) if Options or Convertible Securities are issued after the Closing Date 5 ("New Rights") having an exercise or conversion price which is less than the then applicable Warrant Exercise Price determined in accordance with the foregoing provisions of this clause (B), then the Exercise Price for the Applicable Portion of the Warrant Shares referred to in this clause (B) shall be reduced to such lower exercise or conversion price applicable to such New Rights. The Issuer hereby represents that 6,595,242 shares of its Common Stock are issuable upon exercise, exchange or conversion of all Options and Convertible Securities outstanding on the Closing Date, and that the weighted average exercise, exchange or conversion price thereof as of the Closing Date is $2.3983. For purposes of this Section 3, a Holder's "Adjusted Warrant Percentage" shall mean, as of any time of determination, the percentage of the Issuer's Fully-Diluted Common Stock issuable at such time pursuant to such Holder's Warrants. A Holder's Adjusted Warrant Percentage shall initially be the Warrant Percentage indicated for such Holder on Exhibit B hereto and shall be reduced upon each exercise of less than all of such Holder's Warrants by the portion of such Holder's Warrants exercised at such time. For example, if one third of a Holder's Warrants are exercised at the same time and there have been no prior exercises by such Holder, then such Holder's Adjusted Warrant Percentage would be two-thirds of such Holder's initial Warrant Percentage. For purposes of clause (B) of this Section 3, the "Applicable Portion" of each issuance of New Rights shall be the quotient of (x) the number of shares of Common Stock issuable upon exercise or conversion of all New Rights issued in such issuance divided by (y) the number of shares of Common Stock issuable upon exercise or conversion of all Options (other than the Warrants) and Convertible Securities outstanding at the time of such issuance. SECTION 4. Exercise of Warrants. (a) The rights represented by any Warrant issued pursuant hereto may be exercised by the Holder thereof, in whole or in part, by delivering to the Warrant Office: (i) the Warrant, together with a properly completed Election to Purchase in the form attached thereto; (ii) at the Holder's option, either (A) a check or bank draft in the amount of the aggregate Exercise Price for the shares of Common Stock to be purchased, (B) any promissory notes or debt securities of the Issuer or the Company (including Notes) that may have been issued to the Holder thereof, so that amounts outstanding thereunder may be offset against the aggregate Exercise Price for the shares of Common Stock to be purchased, or (C) Common Stock, preferred stock, Warrants or other securities of the Issuer having a Market Price equal to the aggregate Exercise Price for the shares of Common Stock to be purchased. For purposes of this Section 4: (I) the Market Price per share of Common Stock at any time shall be determined in accordance with the definition of Market Price, (II) the Market Price per Warrant at any time shall be the Market Price 6 per share of Common Stock minus the Exercise Price then in effect, and (III) the Market Price of other securities shall be as reasonably determined by the Issuer's Board of Directors in accordance with the principles set forth in the definition of Market Price; and (iii) any representations or documents or information from the Holder of the Warrants that the Issuer may reasonably require in order to comply with the requirements of the Securities Act with respect of such issuance and in order to comply with the provisions of Section 8 of this Agreement. Upon such exercise the Issuer shall issue and deliver to or to the order of the registered Holder(s) of such Warrant, and in such name or names as such registered Holder(s) may designate, one or more stock certificate(s) for the Warrant Shares to be issued upon such exercise of such Warrant. Any person(s) so designated to be named therein shall be deemed to have become the Holder(s) of record of such Warrant Shares as of the date of delivery to the Issuer at the Warrant Office of the Warrant and the Exercise Price therefor as provided in clauses (i) and (ii) above. (b) If a Warrant is exercised in part at any time, a new Warrant or Warrants shall be issued for the unexercised portion of such Warrant. Each new Warrant so issued shall bear any legend required by Section 11.3 of the Purchase Agreement, if the Warrant presented in connection with a partial exercise thereof bore such legend. All Warrants surrendered upon exercise shall be canceled. (c) The Issuer will pay all taxes (other than any applicable income or similar taxes payable by the Holders) attributable to the initial issuance of Warrant Shares upon the exercise of the Warrants; provided, that the Issuer shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue of any Warrant or any certificate for Warrant Shares in a name other than that of the registered Holder of the Warrant surrendered for exercise. SECTION 5. Registration, Transfer and Exchange of Certificates. (a) The Issuer shall maintain at the Warrant Office a Warrant Register for registration of the Warrants and transfers thereof. The Issuer may deem and treat the registered Holder(s) of the Warrants as the absolute owner(s) thereof for the purpose of any exercise thereof or any distribution to the Holder(s) thereof, and for all other purposes. (b) The Issuer shall register the transfer of any outstanding Warrant in the Warrant Register upon surrender to the Issuer at the Warrant Office of such Warrant, accompanied (if so required by it) by one or more duly executed instruments of transfer in form satisfactory to the Issuer. Upon any such registration of transfer, one or more new Warrant(s) evidencing such transferred Warrant shall be issued to the transferee(s) and the surrendered Warrant shall be canceled. If less than all of a surrendered Warrant is to be transferred, new Warrant(s) shall be issued to the surrendering Holder evidencing the remaining balance of the surrendered Warrant. 7 (c) Each Warrant may, at the option of the Holder(s) thereof, be surrendered to the Issuer at the Warrant Office to be exchanged for one or more new Warrants of like tenor and exercisable in the aggregate for a like number of Warrant Shares. Warrants surrendered for exchange shall be canceled. (d) No charge shall be made for any such transfer or exchange except for any tax or other governmental charge imposed in connection therewith. Except as provided in Section 11 or 12 of the Purchase Agreement, each Warrant issued upon transfer or exchange shall bear any legend required by Section 11.3 of the Purchase Agreement if the Warrant presented for transfer or exchange bore such legend. SECTION 6. Mutilated or Missing Warrant. If any Warrant is mutilated, lost, stolen or destroyed, the Issuer shall issue, in exchange and substitution for and upon cancellation of the mutilated Warrant, or in lieu of and substitution for the Warrant lost, stolen or destroyed, a new Warrant of like tenor and representing rights to acquire an equivalent share in the Issuer, but only upon receipt of evidence satisfactory to the Issuer of such loss, theft or destruction of such Warrant and, if requested, indemnity satisfactory to it. No service charge shall be made for any such substitution, but all reasonable charges associated with any stamp, tax or other governmental duty that may be imposed in relation thereto shall be borne by the Holder of such Warrant. Each Warrant issued in any such substitution shall bear any legend required by Section 11.3 of the Purchase Agreement if the Warrant for which such substitution was made bore such legend. SECTION 7. Reservation and Issuance of Warrant Shares. (a) The Issuer will at all times have authorized, and reserve and keep available, free from pre-emptive rights, for the purpose of enabling it to satisfy any obligation to issue Warrant Shares upon the exercise of the Warrants, the aggregate number of Warrant Shares issuable upon exercise of all outstanding Warrants. (b) The Issuer covenants that all Warrant Shares will, upon issuance in accordance with the terms of this Agreement, be fully paid and nonassessable and free from all taxes with respect to the issuance thereof and from all liens, charges and security interests created by the Issuer. SECTION 8. Obtaining of Governmental Approvals and Stock Exchange Listings. The Issuer will, at its own expense, (a) obtain and keep effective any and all permits, consents and approvals of governmental agencies and authorities which may from time to time be required of the Issuer in order to issue Warrant Shares upon exercise of the Warrants, and otherwise to perform its obligations hereunder, and (b) take all action which may be necessary so that the Warrant Shares, immediately upon their issuance upon the exercise of Warrants, will be listed on the principal securities exchange, if any, on which shares of the Common Stock of the Issuer are then listed. 8 SECTION 9. Additional Anti-Dilution Provisions. (a) Payments to Holders in Connection with Certain Dividends. In the event that the Issuer declares a stock split, stock dividend, or dividend of any kind, whether in cash, securities or other property, upon the Common Stock (including any dividend payable in Common Stock, Options or Convertible Securities), then, at the option of each Holder of Warrants: (i) lawful and adequate provisions shall be made whereby the Issuer shall maintain in reserve and available such dividend property, and such Holder shall thereafter have the right to purchase and/or receive, as the case may be, upon exercise of its Warrants (on the terms and conditions specified in this Agreement, and in addition to the Warrant Shares purchasable by such Holder immediately prior to the declaration of such dividend), such shares of stock, securities or property as are distributable with respect to outstanding shares of Common Stock equal to the number of Warrant Shares purchasable by such Holder immediately prior to such declaration, to the end that the provisions hereof (including without limitation provisions for adjustments of the number of shares receivable upon exercise) shall thereafter be applicable, as nearly as may be, in relation to such shares of stock, securities or property; or (ii) the Exercise Price of such Holder's Warrants shall be reduced by the per share amount of such dividend. (b) Reorganizations and Asset Sales. If any capital reorganization or reclassification of the Capital Stock of the Issuer, or any consolidation or merger of the Issuer with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then the following provisions shall also apply: (i) as a condition of such reorganization, reclassification, consolidation, merger or sale (except as otherwise provided below in this Section 9(b), lawful and adequate provisions shall be made whereby each Holder shall thereafter have the right to purchase and receive upon the terms and conditions specified in this Agreement and in lieu of the Warrant Shares immediately theretofore receivable upon the exercise of his or its Warrant, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of Warrant Shares immediately theretofore so receivable had such reorganization, reclassification, consolidation, merger or sale not taken place, and in any such case appropriate provision shall be made with respect to the rights and interests of such Holder to the end that the provisions hereof (including without limitation provisions for adjustments of the number of shares receivable upon exercise of a Warrant) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise of a Warrant; 9 (ii) the Issuer shall not effect any such consolidation, merger or sale unless prior to or simultaneously with the consummation thereof the successor corporation (if other than the Issuer) resulting from such consolidation or merger or the corporation purchasing such assets shall assume by written instrument executed and mailed or delivered to each Holder at the last address of such Holder appearing on the books of the Issuer, the obligation to deliver to such Holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such Holder may be entitled to receive. Upon written request by the Holder of any Warrant such successor corporation will issue a new Warrant revised to reflect the modifications in this Agreement effected pursuant to this Section 9(b); and (iii) if a purchase, tender or exchange offer is made to and accepted by the holders of more than 50% of the outstanding shares of Common Stock of the Issuer, the Issuer shall not effect any consolidation, merger or sale with the person, firm or corporation having made such offer or with any affiliate of such person, firm or corporation, unless prior to the consummation of such consolidation, merger or sale each Holder of a Warrant shall have been given a reasonable opportunity to then elect to receive upon the exercise of his or its Warrant either the stock, securities or assets then issuable with respect to the Common Stock of the Issuer or the stock, securities or assets, or the equivalent, issued to previous holders of the Common Stock in accordance with such offer. (c) Notice of Adjustment. Within three (3) Business Days after any Holder shall request the same, but in any event within thirty (30) after the end of each fiscal quarter including the fourth quarter (and without the need for any request therefor), the Issuer shall deliver to each Holder a certificate signed by its President, Vice President, Treasurer or Secretary setting forth the adjusted number of Warrant Shares issuable upon exercise of the Warrants or specifying the other shares of stock, securities or assets receivable as a result of any change in the rights of the Holders occurring by reason of events specified in this Agreement, or setting forth the adjusted Exercise Price, as the case may be, and showing in reasonable detail the facts and calculations upon which such adjustments or other changes are based, including a statement of the consideration received or to be received by the Issuer for, and the amount of, any Common Stock, Options and Convertible Securities issued since the last such certificate delivered pursuant hereto (or since the Closing Date in the case of the first such certificate). (d) Disputes. In the event that there is any dispute as to the computation of the number of Warrant Shares required to be issued upon exercise of Warrants or as to the computation of the Exercise Price (in which the Holders of a majority of the Warrant Shares issuable upon exercise of all outstanding Warrants shall join), the Holders will retain an independent and nationally recognized accounting firm to conduct, at the Issuer's expense, an audit of the computations pursuant to the terms hereof involved in such dispute, including the financial statements or other information upon which such computations were based. The determination of such nationally recognized accounting firm shall, in the absence of manifest error, be binding upon the Holders and the Issuer. If there shall be a dispute as to the selection of such nationally recognized accounting firm, such firm shall be appointed by the American Institute of Certified Public Accountants if willing, otherwise the American Arbitration 10 Association, upon application by the Issuer or the Holders of a majority of the Warrant Shares issuable upon exercise of all outstanding Warrants, with notice to the others. The fees and expenses of such accounting firm and, if any, the American Institute of Certified Public Accountants or the American Arbitration Association (as applicable), shall be borne by the Issuer unless the computation by such accounting firm of such number of Warrant Shares or Exercise Price is the same as the computations thereof made by the Issuer (or less favorable to the Holders), in which case the fees and expenses of such accounting firm shall be borne equally by the Issuer and the Holders of Warrants. (e) Securities other than Common Stock. If at any time, as a result of an adjustment made pursuant to this Section 9, the Holder of any Warrant thereafter exercised shall become entitled to receive any securities of the Issuer other than shares of Common Stock, thereafter the number of such other securities so receivable upon exercise of any Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Warrant Shares contained in this Section 9, and the provisions of this Agreement with respect to the Warrant Shares shall apply on like terms to such other securities. SECTION 10. Notices to Warrant Holders. In case at any time the Issuer proposes: (a) to declare a cash dividend upon Common Stock; (b) to declare or pay, or set apart any funds for the payment of, any dividends on any shares of its Common Stock or make any other Distribution (as defined in the Purchase Agreement) to the holders of its Common Stock; (c) to apply any of its funds, property or assets to, or set apart any funds, property or assets for, the purchase, redemption or retirement of, or make any Distribution, by reduction of capital or otherwise, in respect of any of its shares of Common Stock or in respect of any Options or Convertible Securities exercisable or exchangeable for or convertible into shares of Common Stock, whether now or hereafter outstanding; (d) to issue any shares of capital stock, Options or Convertible Securities (except pursuant to the exercise of Warrants or Options or the conversion or exchange of Convertible Securities in accordance with their terms); (e) to offer for subscription pro rata to the holders of any of its capital stock or Convertible Securities any additional shares of stock of any class or other rights; (f) to effect any capital reorganization, or reclassification of the Capital Stock of the Issuer, or consolidation or merger of the Issuer with another Person, or sale or other disposition of greater than 25% of the net value of its assets; or (g) to effect a voluntary or involuntary dissolution, liquidation or winding up of the Issuer, 11 then, in any one or more of said cases, the Issuer shall give the Holder of any Warrant (i) at least 10 Business Days' (but not more than 90 days') prior written notice of the date on which the books of the Issuer shall close or a record shall be taken for such dividend, redemption, Distribution or subscription rights or for determining rights to vote in respect of any such issuance, reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, and (ii) in the case of any such issuance, reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, at least 10 Business Days' (but not more than 90 days') prior written notice of the date when the same shall take place (provided, however, that, (1) in the case of clause (d) above, an issuance of securities which has been approved by the Issuer's Board of Directors pursuant to a stock option plan or stock incentive plan of the Issuer shall not require any prior written notice to the Holders, provided that the Issuer includes information as to such issuance in the next succeeding officer's certificate delivered to the Holders pursuant to Section 9(c) hereof, and (2) in the case of any other issuance referred to in clause (d) above, no more than 5 Business Day's prior written notice of such issuance need be given to the Holders). Such notice in accordance with the foregoing clause (i) shall also specify, in the case of any such dividend, redemption, Distribution or subscription rights, the date on which the holders of Common Stock shall be entitled thereto, and such notice in accordance with the foregoing clause (ii) shall also specify the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up, as the case may be. The failure to give the notice required by this Section 10 or any defect therein shall not affect the legality or validity of any Distribution, right, warrant, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up, or the vote upon any action. SECTION 11. Securities Law Matters; Transfers; Rule 144 and Rule 144A Covenants. (a) The provisions of Section 11 (Securities Law Matters) and 12 (Transfers) of the Purchase Agreement are hereby incorporated by reference herein as if set forth in full herein. (b) With a view to making available certain rules and regulations of the Securities and Exchange Commission (the "Commission") which may permit the sale of Warrants and Warrant Shares without registration, the Issuer agrees that at any time when its securities are registered under that Securities and Exchange Act of 1934 (the "Exchange Act") that it will: (i) make and keep public information available as those terms are understood and defined in Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"), or any successor provision thereto; (ii) so long as Rule 144A is available to the Holders, make and keep available the information specified in Rule 144A(d)(4) under the Securities Act or any successor provision thereto; 12 (iii) file with the Commission in a timely manner all reports and other documents required of the Issuer under the Exchange Act; and (iv) furnish to each Holder upon request a written statement by the Issuer as to its compliance with the information or reporting requirements of Rule 144 and Rule 144A or any successor provision thereto, and of the Securities Act and the Exchange Act, and a copy of the most recent annual or quarterly report of the Issuer filed with the Commission. SECTION 12. Registration Rights. The provisions of Section 3.5 and Exhibit E-1 of the Purchase Agreement (Registration Rights) are hereby incorporated by reference herein as if set forth in full herein. SECTION 13. Covenants of Issuer. So long as any Holder shall hold a Warrant or any Warrant Shares, the Issuer shall abide by all of the covenants and agreements set forth in the Purchase Agreement, provided, however, that upon full and complete payment of the Notes and all other amounts due under the Purchase Agreement in respect of the Notes, the following sections of the Purchase Agreement shall be terminated and have no further force or effect after such repayment: Sections 3.1 through 3.4, 6.3(e), 6.4 through 6.6, 6.8(a) and (b), 6.10, 6.11, 6.13, 6.14, 7.1 through 7.7, 7.9(a), 7.11, 7.12, 7.15 through 7.19, 9.1 and 9.2. All other provisions of the Purchase Agreement shall survive such repayment, provided, however, that after such repayment (i) the inspections referred to in Section 6.2 of the Purchase Agreement shall be at the Holders' expense and shall be limited to no more than two in any fiscal year, and (ii) the provisions of Section 6.12 of the Purchase Agreement shall continue in full force and effect until the third anniversary of such repayment. In connection with the Holders' continuing right to receive financial information pursuant to Section 6.1 of the Purchase Agreement and certain other information pursuant to Section 6.7 of the Purchase Agreement, the Holders agree to continue to abide by the confidentiality provisions contained in the last paragraph of Section 6.1 of the Purchase Agreement. No termination of any covenant, representation, warranty, or other provision of the Purchase Agreement or any other Purchaser Document, whether after the repayment of the Notes or otherwise, shall in any way suspend, eliminate or nullify the right of any holder of Warrants to pursue rights and remedies arising out of a breach or default which occurred prior to the date of termination, whether known or unknown as of such date. So long as any Holder shall hold a Warrant or any Warrant Shares, the Issuer shall not, without the prior written consent of the Holders of a majority of the Warrant Shares issued or issuable upon exercise of all outstanding Warrants, enter into any agreement with any holder or prospective holder of any securities of the Issuer which would allow such holder or prospective holder to include such securities in any registration referred to in Section 12 hereof, unless under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of its securities will not reduce the number of Warrant Shares which are included. SECTION 14. Effectiveness of Certain Provisions of the Purchase Agreement. Any Holder (whether or not such Holder also holds Notes) shall be deemed a "Purchaser" under, and as that term is defined in, the Purchase Agreement. 13 SECTION 15. Amendments and Waivers. Any provision of this Agreement may be amended, supplemented, waived, discharged or terminated by a written instrument signed by the Issuer and the Holders of a majority of the Warrant Shares issued or issuable upon exercise of all outstanding Warrants; provided, that the Exercise Price may not be increased, the percentage of the Issuer's Fully-Diluted Common Stock issuable upon exercise of the Warrants may not be reduced, the Expiration Date may not be changed to an earlier date and this Section may not be amended except with the consent of each Holder which would be affected thereby. SECTION 16. Provisions of Other Agreements. Whenever the Purchase Agreement or any provision thereof is referred to herein or in any instrument furnished hereunder as expressing or constituting a covenant, term, condition or limitation of this Agreement or of such instrument or as expressing or constituting a representation herein or therein (a) any such provision shall be regarded as though incorporated herein or therein at length, (b) except as otherwise provided herein or in such instrument the terms used in such agreement or the provision thereof referred to shall have the meanings set forth in such agreement, and (c) any covenant or other provision incorporated herein by reference from such agreement shall continue in effect for the benefit of the Holders so long as this Agreement shall remain in effect. Except as otherwise specifically provided herein, and except for amendments or modifications to which the Holders consent in writing in accordance with Section 15, no modification of or amendment to, or waiver or termination of, any provision of any of said agreement and no payment of the indebtedness outstanding thereunder or satisfaction or cancellation thereof, or termination of said agreement, shall modify, amend, waive, terminate or otherwise affect any provision thereof as referred to in this Agreement or in any instrument furnished hereunder, which provision, for the purpose of this Agreement and such instrument, shall remain unmodified and in full force and effect. SECTION 17. Specific Performance. The Holders of the Warrants and/or Warrant Shares shall have the right to specific performance by the Issuer of the provisions of this Agreement. The Issuer hereby irrevocably waives, to the extent that it may do so under applicable law, any defense based on the adequacy of a remedy at law which may be asserted as a bar to the remedy of specific performance in any action brought against the Issuer for specific performance of this Agreement by the Holders. SECTION 18. Notices. All notices, requests, demands or other communications to or upon the respective parties hereto shall be in writing and shall be deemed to have been given or made, and all financial statements, information and the like required to be delivered hereunder shall be deemed to have been delivered, either (a) three (3) Business Days after deposited in the United States certified mail, return receipt requested, with postage prepaid, or (b) one (1) Business Day after delivery to a nationally recognized courier, designated for overnight delivery with all fees prepaid, in either case addressed to the Issuer at the Warrant Office, Attn: Chief Executive Officer, and to the Holders at their respective addresses set forth on the Warrant Register, or to such other address as any of them shall specify in writing to the others. The Issuer shall cause the Warrant Register to contain current addresses for each of the Holders. 14 SECTION 19. Binding Effect; Assignability. This Agreement shall be binding upon and inure to the benefit of the Issuer, its successors and assigns, the Holders and the registered Holders from time to time of the Warrants and the Warrant Shares. SECTION 20. Termination. This Agreement shall terminate and be of no further force and effect at the close of business on the Expiration Date or the date on which none of the Warrants or Warrant Shares shall be outstanding, except that the provisions of Sections 15 (Amendments and Waivers), 17 (Specific Performance), 18 (Notices), 19 (Binding Effect; Assignability), 20 (Termination) and 22 (Governing Law) shall continue in full force and effect after such termination. SECTION 21. Counterparts. This Agreement may be executed in one or more separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. SECTION 22. Governing Law. This Agreement and each Warrant shall be governed by and construed in accordance with the laws of the State of New York. [Remainder of page intentionally left blank; signature page follows] 15 IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement of U.S. Home & Garden Inc. to be duly executed and delivered by their proper and duly authorized officers, as of the date and year first above written. Issuer: U.S. HOME & GARDEN INC. By: _____________________________________ Name/Title: Holders: LEG PARTNERS III SBIC, L.P. by Golub PS-GP, LLC, its general partner By: _____________________________________ Gregory W. Cashman, Vice President LEG CO-INVESTORS, LLC By: _____________________________________ Gregory W. Cashman, Authorized Signatory 555 MADISON INVESTORS, LLC By: _____________________________________ Gregory W. Cashman, Manager 16 EXHIBIT A TO WARRANT AGREEMENT [FORM OF WARRANT] THIS WARRANT AND THE UNDERLYING SHARES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EXEMPTION FROM, OR OTHERWISE IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF SUCH ACT. IN ADDITION, THIS WARRANT AND THE UNDERLYING SHARES MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH THE CONDITIONS SPECIFIED IN THE WARRANT AGREEMENT DATED AS OF NOVEMBER 15, 2001 BETWEEN THE ISSUER AND THE INITIAL HOLDERS OF THE WARRANTS THEREIN NAMED, A COPY OF WHICH IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE ISSUER AND WILL BE FURNISHED TO THE HOLDER HEREOF UPON WRITTEN REQUEST AND WITHOUT CHARGE. WARRANT to Purchase Common Stock of U.S. HOME & GARDEN INC. No. W- ____________, 20__ This Warrant certifies that , or registered assigns, is the registered holder of a warrant (the "Warrant") to purchase from U.S. HOME & GARDEN INC., a Delaware corporation (the "Issuer"), up to that number of shares of the Issuer's Common Stock, $.001 par value ("Common Stock"), as shall represent _____% of the Issuer's "Fully-Diluted Common Stock" (as defined in the Warrant Agreement referred to below) at the time of exercise of this Warrant. The number of shares (the "Warrant Shares") issuable upon exercise of this Warrant shall be calculated in accordance with the Warrant Agreement. This Warrant may be exercised at any time prior to 5:00 P.M., local time of the Warrant Office, on the Expiration Date (as defined in the Warrant Agreement), by surrender of this Warrant, execution and delivery of an Election to Purchase in the form attached hereto and payment of the Exercise Price at the office of the Issuer at 655 Montgomery Street, San Francisco CA 94111, or such other address as the Issuer may specify in writing to the registered holder of this Warrant (the "Warrant Office"). The aggregate Exercise Price for the shares of Common Stock being purchased may be paid by delivery of either (i) a certified check or bank draft or (ii) certain stock, notes or securities of the Issuer or the Company, all as provided in Section 4(a) of the Warrant Agreement. A - 1 The Issuer may deem and treat the registered holder(s) of this Warrant as the absolute owner(s) hereof (notwithstanding any notation of ownership or other writing hereon made by anyone), for the purpose of any exercise hereof and of any distribution to the holder(s) hereof, and for all other purposes, and the Issuer shall not be affected by any notice to the contrary. This Warrant is one of the Warrants referred to in the Warrant Agreement dated as of November 15, 2001 between the Issuer and the initial Holders named therein (the "Warrant Agreement"). The Warrant Agreement is hereby incorporated by reference in and made a part of this Warrant and is hereby referred to for a description of the rights, limitation of rights, obligations, duties and immunities of the Issuer and the Holder. Unless otherwise defined herein, all capitalized terms used in this Warrant have the meanings assigned to them in or pursuant to the Warrant Agreement. IN WITNESS WHEREOF, the Issuer has caused this Warrant to be signed by its duly authorized officers and has caused its corporate seal to be affixed hereunto. U.S. HOME & GARDEN INC. By: _____________________________ Name: Title: (CORPORATE SEAL) ATTEST: _____________________________ , Secretary A - 2 ANNEX I TO WARRANT [Form of] ELECTION TO PURCHASE [To be executed upon exercise of Warrant] The undersigned hereby elects to exercise the right, represented by the attached Warrant of U.S. Home & Garden Inc., a Delaware corporation (the "Issuer"), to purchase _____ shares of Common Stock of the Issuer ("Warrant Shares"), and further elects to pay the aggregate Exercise Price therefor by delivery of [a check or bank draft] [stock, notes or securities of the Issuer or the Company], as provided in Section 4(a) of the Warrant Agreement referred to in the attached Warrant. The undersigned requests that a certificate for such Warrant Shares be registered in the name of _______________ whose address is ______________ and that such certificate be delivered to _______________ whose address is _______________. If said number of Warrant Shares is less than all of the Warrant Shares purchasable under the attached Warrant, the undersigned requests that a new Warrant representing the remaining balance of the Warrant Shares be registered in the name of _________________ whose address is and that such Warrant be delivered to __________________ whose address is . Signature:_________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) Date:_______________, 20___ EXHIBIT B TO WARRANT AGREEMENT U.S. HOME & GARDEN INC. Warrant Register Warrant Warrant Certificate No. Name and Address of Holder Percentage --------------- -------------------------- ---------- W-1 LEG Partners III SBIC, L.P. 3.6108% W-2 LEG Co-Investors, LLC 0.0342% W-3 555 Madison Investors, LLC 0.1050% 555 Madison Avenue, 30th Floor New York, NY 10022 Attn: Gregory W. Cashman Telecopier No.:212-750-5505 TOTAL: 3.7500% ====== B - 1 EXHIBIT C TO WARRANT AGREEMENT [Form of Share Warrant Agreement] U.S. HOME & GARDEN INC. WARRANT AGREEMENT WARRANT AGREEMENT dated as of ___________, 20__ (1) between U.S. Home & Garden Inc., a Delaware corporation (the "Issuer"), and the holders from time to time of the Warrants referred to herein (the "Holders"). WHEREAS, the Issuer and the Holders are parties to a Warrant Agreement dated as November 15, 2001 (the "Percentage Warrant Agreement") which provides for the execution and delivery of this Warrant Agreement on the "Expiration Date" as defined in the Percentage Warrant Agreement (the "Percentage Warrant Agreement Expiration Date"); WHEREAS, the Percentage Warrant Agreement was executed and delivered in connection with the Note and Warrant Purchase, Guaranty and Security Agreement dated as of November 15, 2001 (as the same may be amended, supplemented or otherwise modified from time to time, the "Purchase Agreement") among the Holders, the Issuer, the Issuer's wholly-owned subsidiary Easy Gardener, Inc. (the "Company") and the Issuer's other Subsidiaries; WHEREAS, the Purchase Agreement provided, among other things, for the issuance and sale to the Holders (which are also "Purchasers" party to such Agreement) of any or all of (i) $5,993,151 principal amount of the Company's 16% Series A Senior Subordinated Notes due November 19, 2007 (the "Series A Notes"), (ii) $856,164 principal amount of the Company's 14% Series B Senior Subordinated Notes due November 19, 2007 (the "Series B Notes"; and, together with the Series A Notes, the "Notes"), and (iii) the Common Warrants and Preferred Warrants described therein; WHEREAS, the "Common Warrants" referred to in the Purchase Agreement were initially the "Warrants" referred to in the Percentage Warrant Agreement (such Warrants, the "Percentage Warrants"), but upon execution and delivery of this Agreement on or after the Percentage Warrant Agreement Expiration Date, the "Common Warrants" referred to in the Purchase Agreement shall be the Warrants referred to herein; and WHEREAS, this Agreement shall only become effective on the Percentage Warrant Agreement Expiration Date; - ---------- (1) Insert the Percentage Warrant Agreement Expiration Date. References in this Agreement to "the date hereof" refer to the date of the execution and delivery of this Warrant Agreement, which shall be the Percentage Warrant Agreement Expiration Date. References in the footnotes below to the "Adjusted Warrant Percentage" shall have the meaning given thereto in the Percentage Warrant Agreement. C - 1 NOW, THEREFORE, in consideration of the premises the Issuer and the Holders agree as follows: SECTION 1. Definitions. Capitalized terms used herein which are defined in the Purchase Agreement and are not otherwise defined herein shall have the respective meanings given thereto in the Purchase Agreement; and the following terms used herein shall have the meanings indicated below, unless the context otherwise requires: "Agreement" or "Warrant Agreement" shall mean this Warrant Agreement, together with all Exhibits hereto, as may be amended, modified or supplemented from time to time with the consent of the Holders in accordance with Section 15, and shall include all provisions incorporated herein by reference from the Purchase Agreement, which incorporated provisions shall continue in full force and effect for the benefit of the Holders as originally in effect unless modified with the consent of the Holders in accordance with Section 15. "Commission" shall have the meaning given thereto in Section 11(b). "Common Stock" shall mean the Issuer's Common Stock, $.001 par value. "Convertible Securities" shall mean (a) any stock, notes or other securities convertible into or exchangeable, directly or indirectly, for shares of Common Stock (whether or not such right to convert or exchange is immediately exercisable or is "in the money"), (b) any other security, note or agreement which provides the holder thereof with a payment, repayment amount, appreciation right or liquidation preference (i) calculated by reference to, or arising from, the value of the Issuer upon a sale, merger, recapitalization or similar event, or (ii) based upon the value, whether market or appraisal, of the Common Stock, and (c) any agreement to issue shares of Common Stock or issue or enter into such other stock, notes, securities or agreements described in the foregoing clauses (a) or (b). "Exchange Act" shall have the meaning given thereto in Section 11(b). "Exercise Price" shall have the meaning given thereto in Section 3. "Expiration Date" shall mean May 19, 2009 or, if such day is not a Business Day, the next succeeding Business Day. "Market Price" of Common Stock shall mean the average of the daily market prices of Common Stock over a period of 20 consecutive business days prior to the day as of which "Market Price" is being determined. The market price for each such business day shall be the average of the closing sales prices on such day of the Common Stock on the principal domestic stock exchange on which the Common Stock is then listed, or if there shall have been no sales on any such exchange on such day, the average of the highest bid and lowest asked prices on such exchange at the end of such day, or, if the Common Stock shall not be so listed, the average of the closing sales prices in the NASDAQ System on such day, or if there shall have been no sales in the NASDAQ System on such day, the average of the highest bid and C - 2 lowest asked prices on the NASDAQ System on such day, or if the Common Stock shall not be quoted in the NASDAQ System, the average of the high and low bid and asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization. If the Common Stock is listed on any domestic exchange the term "business days" as used in this paragraph shall mean business days on which such exchange is open for trading. If at any time the Common Stock is not listed on any domestic exchange or quoted in the NASDAQ System or the domestic over-the-counter market, the "Market Price" shall be the fair market value of a share of Common Stock as determined in good faith by the Board of Directors of the Issuer (giving due regard to any recent sales or valuations of Common Stock) or, if the holders of a majority of the Warrants shall, in the exercise of their sole discretion, object to such determination, as determined by appraisal pursuant to the following paragraph of this definition; provided, that if any valuation or appraisal has been made of the Issuer or its Common Stock for any reason within six months prior to any date as of which the Market Price is to be determined hereunder, then the Holders shall be entitled, at their option, to rely on such appraisal and such valuation or appraisal shall be binding on the Issuer unless any event shall have occurred since the date of such valuation or appraisal which, in the reasonable opinion of the Holders of a majority of the Warrants, manifestly affects the continued validity of such appraisal. If the Holders of a majority of the Warrants shall object to the determination of Market Price made by the Issuer's Board of Directors pursuant to the preceding paragraph, then Market Price shall be determined as of the end of the most recent complete fiscal quarter of the Issuer ended prior to the date of determination (taking into account actual performance subsequent thereto and projections for future periods), and shall be determined by appraisal as follows: Within fifteen (15) days after receipt by the Issuer of notice that an appraisal is desired, the Issuer and the Holders of a majority of the Warrants shall jointly appoint an appraiser for the purpose of determining Market Price. Such appraiser shall be an investment banking or advisory firm with experience in valuing companies of a comparable size, and in a comparable industry, as the Issuer, which investment banking or advisory firm shall be either a firm of recognized national standing or a regional firm of good national reputation. If there shall be a dispute as to the selection of such appraiser, then the appraiser shall be appointed by the American Arbitration Association upon application by the Issuer or the Holders of a majority of the Warrants. The Issuer and the Holders of a majority of the Warrants shall be afforded reasonable opportunities to discuss the appraisal with such appraiser. The determination of Market Price by such appraiser shall be final and binding upon the Issuer and the Holders of Warrants. The fees and expenses of the appraiser and, if any, of the American Arbitration Association, shall be borne by the Issuer unless the determination of Market Price by such appraiser is the same as the determination of Market Price made by the Board of Directors (or less favorable to the Holders), in which case the fees and expenses of such appraiser shall be borne equally by the Issuer and the Holders of Warrants. "Options" shall mean any warrants (including the Warrants), options (including options granted pursuant to any stock option plan), agreements or other rights to subscribe for or to purchase, directly or indirectly, shares of Common Stock (whether or not such warrants, C - 3 options or other rights are immediately exercisable or are "in the money"). Options shall include any warrants, options or other agreements or rights to subscribe for or to purchase, directly or indirectly, Convertible Securities or other Options (whether or not such warrants, options or other rights are immediately exercisable or are "in the money") and agreements or plans under which the Issuer may issue Common Stock, Options or Convertible Securities in exchange for services of any kind, whether to be rendered by an employee, consultant, individual, entity or third party of any kind. "Securities Act" shall have the meaning given thereto in Section 11(b). "Warrant" shall mean a Warrant certificate, in the form of Exhibit A hereto, and shall also mean the right upon exercise thereof to acquire one Warrant Share. "Warrant Office" shall mean the office or agency of the Issuer at which the Warrant Register shall be maintained and where the Warrants may be presented for exercise, exchange, substitution and transfer, which office or agency will be the office of the Issuer at 655 Montgomery Street, San Francisco, CA 94111. The Warrant Office may be changed by the Issuer pursuant to notice in writing to the registered Holders of the Warrants. "Warrant Register" shall mean the register, in the form of Exhibit B hereto, maintained by the Issuer at the Warrant Office. "Warrant Shares" shall mean the shares of Common Stock issuable or issued upon exercise of the Warrants, and any other Common Stock, Convertible Securities, capital stock, equity interest, or other securities issuable or issued in respect of Warrants or Warrant Shares by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or other transaction of the character referred to in Section 9(f). SECTION 2A. Representations and Warranties. The Issuer hereby represents and warrants as follows: (a) the Issuer's Capital Stock consists of ___________ shares of Common Stock and __________ shares of Preferred Stock, $.001 par value, all of which shares have been duly authorized; (b) of such authorized shares of Common Stock, ________ shares of Common Stock have been duly issued and are fully paid and nonassessable and outstanding; (c) the Warrant Shares issuable to the Holders upon exercise of the Warrants would, if issued on the date hereof, represent C.CC%(2) of the sum of (i) ________ shares, being the number of shares of Common Stock outstanding on the date hereof, plus (ii) - ---------- (2) Insert the aggregate percentage of fully-diluted Common Stock represented by the Percentage Warrants outstanding on the Percentage Warrant Expiration Date. C - 4 _______ shares, being the number of shares issuable upon exercise of all Options (other than the Warrants) and conversion of all Convertible Securities which will be outstanding immediately after issuance of the Warrants, plus (iii) XXXXX shares, being the number of Warrant Shares; (d) other than the Warrants and any Options or Convertible Securities taken into account in determining the number of shares referred to in Section 2A(c)(ii) above, there are no outstanding Options or Convertible Securities or obligations to issue any Options or Convertible Securities; and (e) Schedule 2A(e) hereto correctly sets forth the outstanding Capital Stock of the Issuer, including Common Stock issuable upon exercise of Options or conversion or exchange of Convertible Securities. SECTION 2B. Issuance of Warrants. The Issuer will issue to the Holders on the Percentage Warrant Agreement Expiration Date, simultaneously with expiration of the Percentage Warrant Agreement, Warrants to purchase XXXXX shares of Common Stock, subject to adjustment as provided in Section 9. The Warrants shall be exercisable at any time after the Closing Date until 5:00 P.M. (local time at the Warrant Office) on the Expiration Date. SECTION 3. Exercise Price. The price (the "Exercise Price") at which a Holder may purchase each Warrant Share issuable upon exercise of such Holder's Warrants shall be determined as follows, provided that such Exercise Price shall be subject to adjustment as provided in Section 9(e): (A) as to an aggregate of ________ (3) Warrant Shares (being the Warrant Shares referred to in Section 3(A) of the Percentage Warrant Agreement), the Exercise Price shall be equal to _________ (4); and (B) as to an aggregate of ________ (5) Warrant Shares (being the Warrant Shares referred to in Section 3(B) of the Percentage Warrant Agreement), the Exercise Price(s) shall be as follows:(6) - ---------- (3) Insert that number of Warrant Shares that equals the product of (i) the sum of the Adjusted Warrant Percentages of all Holders, times (ii) the number of shares of Common Stock outstanding on the Percentage Warrant Agreement Expiration Date. (4) Insert the exercise price which was applicable pursuant to Section 3(A) of the Percentage Warrant Agreement on the Percentage Warrant Agreement Expiration Date. (5) Insert that number of Warrant Shares that equals the product of (i) the sum of the Adjusted Warrant Percentages of all Holders, times (ii) the number of shares of Common Stock issuable upon exercise, exchange or conversion of all Options and Convertible Securities outstanding on the Percentage Warrant Agreement Expiration Date. The sum of the number of Warrant Shares referred to in this clause (B) and the number of Warrant Shares referred to in clause (A) above shall be XXXXX Warrant Shares, being the number of Warrant Shares referred to in Section 2A(c)(iii) above. (6) Insert the exercise price(s) which were applicable pursuant to Section 3(B) of the Percentage Warrant Agreement on the Percentage Warrant Agreement Expiration Date. C - 5 Number of Warrant Shares Exercise Price ------------------------ -------------- ________________ ___________ ________________ ___________ SECTION 4. Exercise of Warrants. (a) The rights represented by any Warrant issued pursuant hereto may be exercised by the Holder thereof, in whole or in part, by delivering to the Warrant Office: (i) the Warrant, together with a properly completed Election to Purchase in the form attached thereto; (ii) at the Holder's option, either (A) a check or bank draft in the amount of the aggregate Exercise Price for the shares of Common Stock to be purchased, (B) any promissory notes or debt securities of the Issuer or the Company that may have been issued to the Holder thereof, so that amounts outstanding thereunder may be offset against the aggregate Exercise Price for the shares of Common Stock to be purchased, or (C) Common Stock, preferred stock, Warrants or other securities of the Issuer having a Market Price equal to the aggregate Exercise Price for the shares of Common Stock to be purchased. For purposes of this Section 4: (I) the Market Price per share of Common Stock at any time shall be determined in accordance with the definition of Market Price, (II) the Market Price per Warrant at any time shall be the Market Price per share of Common Stock minus the Exercise Price then in effect, and (III) the Market Price of other securities shall be as reasonably determined by the Issuer's Board of Directors in accordance with the principles set forth in the definition of Market Price; and (iii) any representations or documents or information from the Holder of the Warrants that the Issuer may reasonably require in order comply with the requirements of the Securities Act with respect of such issuance and in order to comply with the provisions of Section 7(c) of this Agreement. Upon such exercise the Issuer shall issue and deliver to or to the order of the registered Holder(s) of such Warrant, and in such name or names as such registered Holder(s) may designate, one or more stock certificate(s) for the Warrant Shares to be issued upon such exercise of such Warrant. Any person(s) so designated to be named therein shall be deemed to have become the Holder(s) of record of such Warrant Shares as of the date of delivery to the Issuer at the Warrant Office of the Warrant and the Exercise Price therefor as provided in clauses (i) and (ii) above. (b) If a Warrant is exercised in part at any time, a new Warrant or Warrants shall be issued for the unexercised portion of such Warrant. Each new Warrant so issued shall bear any legend required by Section 11.3 of the Purchase Agreement, if the Warrant presented in connection with a partial exercise thereof bore such legend. All Warrants surrendered upon exercise shall be canceled. C - 6 (c) The Issuer will pay all taxes (other than any applicable income or similar taxes payable by the Holders) attributable to the initial issuance of Warrant Shares upon the exercise of the Warrants; provided, that the Issuer shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue of any Warrant or any certificate for Warrant Shares in a name other than that of the registered Holder of the Warrant surrendered for exercise. SECTION 5. Registration, Transfer and Exchange of Certificates. (a) The Issuer shall maintain at the Warrant Office a Warrant Register for registration of the Warrants and transfers thereof. The Issuer may deem and treat the registered Holder(s) of the Warrants as the absolute owner(s) thereof for the purpose of any exercise thereof or any distribution to the Holder(s) thereof, and for all other purposes. (b) The Issuer shall register the transfer of any outstanding Warrant in the Warrant Register upon surrender to the Issuer at the Warrant Office of such Warrant, accompanied (if so required by it) by one or more duly executed instruments of transfer in form satisfactory to the Issuer. Upon any such registration of transfer, one or more new Warrant(s) evidencing such transferred Warrant shall be issued to the transferee(s) and the surrendered Warrant shall be canceled. If less than all of a surrendered Warrant is to be transferred, new Warrant(s) shall be issued to the surrendering Holder evidencing the remaining balance of the surrendered Warrant. (c) Each Warrant may, at the option of the Holder(s) thereof, be surrendered to the Issuer at the Warrant Office to be exchanged for one or more new Warrants of like tenor and exercisable in the aggregate for a like number of Warrant Shares. Warrants surrendered for exchange shall be canceled. (d) No charge shall be made for any such transfer or exchange except for any tax or other governmental charge imposed in connection therewith. Except as provided in Section 11 or 12 of the Purchase Agreement, each Warrant issued upon transfer or exchange shall bear any legend required by Section 11.3 of the Purchase Agreement if the Warrant presented for transfer or exchange bore such legend. SECTION 6. Mutilated or Missing Warrant. If any Warrant is mutilated, lost, stolen or destroyed, the Issuer shall issue, in exchange and substitution for and upon cancellation of the mutilated Warrant, or in lieu of and substitution for the Warrant lost, stolen or destroyed, a new Warrant of like tenor and representing rights to acquire an equivalent share in the Issuer, but only upon receipt of evidence satisfactory to the Issuer of such loss, theft or destruction of such Warrant and, if requested, indemnity satisfactory to it. No service charge shall be made for any such substitution, but all reasonable charges associated with any stamp, tax or other governmental duty that may be imposed in relation thereto shall be borne by the Holder of such Warrant. Each Warrant issued in any such substitution shall bear any legend required by Section 11.3 of the Purchase Agreement if the Warrant for which such substitution was made bore such legend. C - 7 SECTION 7. Reservation and Issuance of Warrant Shares; Governmental Approvals and Stock Exchange Listings. (a) The Issuer will at all times have authorized, and reserve and keep available, free from pre-emptive rights, for the purpose of enabling it to satisfy any obligation to issue Warrant Shares upon the exercise of the Warrants, the aggregate Warrant Shares issuable upon exercise of all outstanding Warrants. (b) The Issuer covenants that all Warrant Shares will, upon issuance in accordance with the terms of this Agreement, be fully paid and nonassessable and free from all taxes with respect to the issuance thereof and from all liens, charges and security interests created by the Issuer. (c) The Issuer will, at its own expense, (i) obtain and keep effective any and all permits, consents and approvals of governmental agencies and authorities which may from time to time be required of the Issuer in order to issue Warrant Shares upon exercise of the Warrants, and otherwise to perform its obligations hereunder, and (ii) take all action which may be necessary so that the Warrant Shares, immediately upon their issuance upon the exercise of Warrants, will be listed on the principal securities exchange, if any, on which shares of the Common Stock of the Issuer are then listed. SECTION 8. Dividends and Distributions. In the event that the Issuer declares a stock split, stock dividend, or dividend of any kind, whether in cash, securities or other property, upon the Common Stock (including any dividend payable in Common Stock, Options or Convertible Securities), then, at the option of each Holder of Warrants: (i) lawful and adequate provisions shall be made whereby the Issuer shall maintain in reserve and available such dividend property, and such Holder shall thereafter have the right to purchase and/or receive, as the case may be, upon exercise of its Warrants (on the terms and conditions specified in this Agreement, and in addition to the Warrant Shares purchasable by such Holder immediately prior to the declaration of such dividend), such shares of stock, securities or property as are distributable with respect to outstanding shares of Common Stock equal to the number of Warrant Shares purchasable by such Holder immediately prior to such declaration, to the end that the provisions hereof (including without limitation provisions for adjustments of the number of shares receivable upon exercise) shall thereafter be applicable, as nearly as may be, in relation to such shares of stock, securities or property; or (ii) the Exercise Price of such Holder's Warrants shall be reduced by the per share amount of such dividend. SECTION 9. Adjustment of Number of Warrant Shares Purchasable and Exercise Price. Prior to the Expiration Date, the number of Warrant Shares purchasable upon the exercise of each Warrant is subject to adjustment from time to time upon the occurrence of any of the events C - 8 enumerated in this Section 9, and the Exercise Price is subject to adjustment as provided in Section 9(e). (a) In the event that the Issuer shall at any time after the date of this Agreement (i) declare a dividend on the Common Stock in shares or other securities of the Issuer (other than debt securities covered by Section 8), (ii) split or subdivide the outstanding Common Stock, (iii) combine the outstanding Common Stock into a smaller number of shares, or (iv) issue by reclassification of its Common Stock any shares or other securities of the Issuer (other than debt securities covered by Section 8, and other than as a result of a change from par to no par value stock or from no par to par value stock), then, in each such event, the number of Warrant Shares purchasable upon exercise of each Warrant immediately prior thereto shall be adjusted so that the holder shall be entitled to receive the kind and number of such shares or other securities of the Issuer which the holder would have owned or have been entitled to receive after the happening of any of the events described above, had such Warrant been exercised immediately prior to the happening of such event (or any record date with respect thereto). Such adjustment shall be made whenever any of the events listed above shall occur. An adjustment made pursuant to this Section 9(a) shall become effective immediately after the effective date of the event retroactive to the record date, if any, for the event. (b) (i) In the event that the Issuer shall at any time after the date of this Agreement issue any shares of Common Stock (excluding shares of Common Stock issued upon the conversion or exchange of Convertible Securities or upon exercise of Options, in each case to the extent provided in the first proviso to Section 9(b)(ii) below, and excluding shares of Common Stock issued upon exercise of the Warrants, and excluding any shares of Common Stock issued under the circumstances contemplated in Section 9(a) above) without consideration or at a price per share less than the Market Price per share of Common Stock in effect immediately prior to the time of the issuance of such Common Stock (and prior to the time of the public announcement of such issuance) (the "Pre-Event Market Price"), then in each such event (an "Adjustment Event"), the number of Warrant Shares purchasable upon exercise of each Warrant immediately prior thereto (the "Initial Number") shall be adjusted so that the holder of any Warrant exercised shall be entitled to receive the number of shares of Common Stock determined by multiplying the Initial Number by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding immediately prior to such Adjustment Event plus the number of additional shares of Common Stock issued for purchase in such Adjustment Event and of which the denominator shall be the number of shares of Common Stock outstanding immediately prior to such Adjustment Event plus the number of shares of Common Stock which the aggregate issuance price of the total number of shares of Common Stock issued in such Adjustment Event would purchase at the Pre-Event Market Price per share of Common Stock; provided, however, that no such adjustment shall be made for the issuance of shares of Common Stock under the circumstances contemplated in Section 9(f) hereof. C - 9 (ii) In the event that at any time after the date of this Agreement, the Issuer shall in any manner issue or sell any Convertible Securities or grant any Options, and the minimum price per share for which shares of Common Stock are issuable pursuant to such Options or upon conversion or exchange of such Convertible Securities (determined by dividing (A) the total amount, if any, received or receivable by the Issuer as consideration for the granting of such Options, or issuance or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration payable to the Issuer upon the exercise of such Options, plus, in the case of such Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the conversion or exchange thereof, by (B) the total maximum number of shares of Common Stock issuable pursuant to such Options or upon the conversion or exchange of the total maximum amount of such Convertible Securities) shall be less than the Market Price per share of Common Stock in effect immediately prior to the time of the granting of such Options or issuance or sale of such Options or Convertible Securities (and prior to the time of the public announcement of such grant, issuance or sale), then the total maximum number of shares of Common Stock issuable pursuant to such Options or upon conversion or exchange of the total maximum amount of such Convertible Securities issued or issuable upon the exercise of such Options shall (as of the date of the granting of such Options or issuance or sale of such Convertible Securities) be deemed to be outstanding and to have been issued or sold for purposes of Section 9(b)(i) hereof for the minimum price per share as so determined; provided, that, except as provided in the following proviso, no further adjustment of the number of Warrant Shares issuable upon exercise of the Warrants shall be made upon the actual issue of shares of Common Stock so deemed to have been issued, and further provided, that, upon the expiration or termination of any unexercised Options or conversion or exchange privileges for which any adjustment was made pursuant to Section 9(b)(i) and this Section 9(b)(ii) (or if the purchase price provided for in any Option referred to in this Section 9(b)(ii), the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities referred to in this Section 9(b)(ii), or the rate at which any Convertible Securities referred to in this Section 9(b)(ii) are convertible into or exchangeable for Common Stock shall change at any time), then the number of Warrant Shares issuable upon exercise of the Warrants shall be readjusted, and shall thereafter be such number as would have prevailed had the number of Warrant Shares issuable upon exercise of the Warrants been originally adjusted (or had the original adjustment not been required, as the case may be) on the basis of (A) the shares of Common Stock, if any, actually issued or sold upon the exercise of such Options or conversion or exchange privileges (or the revised number of shares subject to such exercise) and (B) the consideration actually received (or receivable, in the case of such revised number of shares subject to such exercise) by the Issuer upon such exercise plus the consideration, if any, actually received by the Issuer for the issuance, sale or grant of all of such Options or Convertible Securities whether or not exercised; provided, however, that no such readjustment shall have the effect of decreasing the number of Warrant Shares issuable upon exercise of the Warrants by an amount in excess of the amount of the adjustment initially made for the issuance, sale or grant of such Options or Convertible Securities. C - 10 (iii) In case any subscription price may be paid in a consideration part or all of which shall be in a form other than cash, or in the case of the issuance of securities by the Issuer in connection with an acquisition, merger or other business combination, the value of the consideration received for such securities shall be as determined in good faith by the Board of Directors of the Issuer or, if the holders of a majority of the Warrants shall, in the exercise of their sole discretion, object to such determination, the value of such consideration shall be as determined by appraisal by an independent investment banking firm mutually selected by the Issuer and the holders of a majority of the Warrants. If there shall be a dispute as to the selection of such firm, then such firm shall be appointed by the American Arbitration Association upon application by the Issuer or the Holders of a majority of the Warrants. The fees and expenses of such firm and, if any, of the American Arbitration Association, shall be borne by the Issuer unless the determination of the value of such consideration made by such appraiser is equal to or less than the determination of the value of such consideration made by the Board of Directors, in which case the fees and expenses of such firm shall be borne equally by the Issuer and the Holders of Warrants. Shares of Common Stock owned by or held for the account of the Issuer or any majority-owned Subsidiary shall not be deemed outstanding for the purpose of any computation pursuant to this Section 9(b). (c) No adjustment in the number of Warrant Shares shall be required unless such adjustment would require an increase or decrease of at least 1% in the aggregate number of Warrant Shares purchasable upon exercise of all Warrants provided that any adjustments which by reason of this Section 9(c) are not required to be made shall be carried forward and taken into account in any subsequent adjustment; provided, however, that notwithstanding the foregoing, all such adjustments shall be made no later than three years from the date of the first event that would have required an adjustment but for this Section 9(c). All calculations under this Section 9 shall be made to the nearest cent or to the nearest hundredth of a share, as the case may be. (d) If at any time, as a result of an adjustment made pursuant to this Section 9, the Holder of any Warrant thereafter exercised shall become entitled to receive any securities of the Issuer other than shares of Common Stock, thereafter the number of such other securities so receivable upon exercise of any Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Warrant Shares contained in this Section 9, and the provisions of this Agreement with respect to the Warrant Shares shall apply on like terms to such other securities. (e) Whenever the number of Warrant Shares purchasable upon the exercise of each Warrant is adjusted, the Exercise Price per Warrant Share payable upon exercise of each Warrant shall be adjusted by multiplying such Exercise Price immediately prior to such adjustment by a fraction, the numerator of which shall be the number of Warrant Shares purchasable upon the exercise of each Warrant immediately prior to such adjustment, and the denominator of which shall be the number of Warrant Shares purchasable immediately after such adjustment. (f) In the event of any capital reorganization of the Issuer, or of any reclassification of the Common Stock (other than a reclassification referred to in Section 9(a)(iv) above), or in case of the consolidation of the Issuer with or the merger of the Issuer with or into C - 11 any other corporation or of the sale of the properties and assets of the Issuer as, or substantially as, an entirety to any other corporation, each Warrant shall, after such capital reorganization, reclassification of Common Stock, consolidation, merger or sale, and in lieu of being exercisable for Warrant Shares, be exercisable, upon the terms and conditions specified in this Warrant Agreement, for the number of shares of stock or other securities or assets to which a holder of the number of Warrant Shares purchasable (at the time of such capital reorganization, reclassification of Common Stock, consolidation, merger or sale) upon exercise of such Warrant would have been entitled upon such capital reorganization, reclassification of Common Stock, consolidation, merger or sale; and in any such case, if necessary, the provisions set forth in this Section 9 with respect to the rights thereafter of the holders of the Warrants shall be appropriately adjusted so as to be applicable, as nearly as they may reasonably be, to any shares of stock or other securities or assets thereafter deliverable on the exercise of the Warrants. The Issuer shall not effect any such consolidation, merger or sale, unless prior to or simultaneously with the consummation thereof, the successor corporation (if other than the Issuer) resulting from such consolidation or merger or the corporation purchasing such assets or the appropriate corporation or entity shall assume, by written instrument, the obligation to deliver to the holder of each Warrant the shares of stock, securities or assets to which, in accordance with the foregoing provisions, such holder may be entitled and all other obligations of the Issuer under this Warrant Agreement. The provisions of this Section 9(f) shall apply to successive reorganizations, reclassifications, consolidations, mergers and sales. (g) Irrespective of any adjustments in the Exercise Price or the number or kind of shares purchasable upon exercise of the Warrants, any Warrant certificate theretofore or thereafter issued may continue to express the same Exercise Price per share and number and kind of shares as are stated on the Warrant certificates initially issuable pursuant to this Agreement. (h) If any question shall at any time arise with respect to the adjusted Exercise Price of the Warrants or the number of Warrant Shares issuable upon exercise of the Warrants, such question shall be determined by an investment banking or advisory firm of the type described in, and selected in the manner provided in, the last paragraph of the definition of "Market Price". The Issuer and the Holders of a majority of the Warrants shall be afforded reasonable opportunities to discuss matters relating to such adjustment with such firm. The determination of such firm shall be final and binding upon the Issuer and the Holders of Warrants. The fees and expenses of such firm (and any incurred in the selection of such firm) shall be borne by the Issuer unless the computation by such firm of such adjusted Exercise Price or number of Warrant Shares is the same as the computations thereof made by the Issuer (or less favorable to the Holders), in which case the fees and expenses of such firm shall be borne equally by the Issuer and the Holders of Warrants. SECTION 10. Notices to Warrant Holders. (a) Upon any adjustment of the Exercise Price or number of Warrant Shares issuable upon exercise pursuant to Section 9, the Issuer shall promptly, but in any event within 10 Business Days thereafter, cause to be given to each of the registered holders of the Warrants, at its address appearing on the Warrant Register by first-class mail, postage prepaid, a certificate signed by its chief financial officer setting forth the Exercise Price as so adjusted and/or the number of shares of Common Stock issuable upon the exercise of each Warrant as so adjusted and describing in reasonable detail the facts accounting for such C - 12 adjustment and the method of calculation used. Where appropriate, such certificate may be given in advance and included as a part of the notice required to be mailed under the other provisions of this Section 10. (b) In case at any time the Issuer proposes: (i) to declare a cash dividend upon Common Stock; (ii) to declare or pay, or set apart any funds for the payment of, any dividends on any shares of its Common Stock or make any other Distribution (as defined in the Purchase Agreement) to the holders of its Common Stock; (iii) to apply any of its funds, property or assets to, or set apart any funds, property or assets for, the purchase, redemption or retirement of, or make any Distribution, by reduction of capital or otherwise, in respect of any of its shares of Common Stock or in respect of any Options or Convertible Securities exercisable or exchangeable for or convertible into shares of Common Stock, whether now or hereafter outstanding; (iv) to issue any shares of capital stock, Options or Convertible Securities (except pursuant to the exercise of Warrants or Options or the conversion or exchange of Convertible Securities in accordance with their terms); (v) to offer for subscription pro rata to the holders of any of its capital stock or Convertible Securities any additional shares of stock of any class or other rights; (vi) to effect any capital reorganization, or reclassification of the Capital Stock of the Issuer, or consolidation or merger of the Issuer with another Person, or sale or other disposition of greater than 25% of the net value of its assets; or (vii) to effect a voluntary or involuntary dissolution, liquidation or winding up of the Issuer, then, in any one or more of said cases, the Issuer shall give the Holder of any Warrant (x) at least 10 Business Days' (but not more than 90 days') prior written notice of the date on which the books of the Issuer shall close or a record shall be taken for such dividend, redemption, Distribution or subscription rights or for determining rights to vote in respect of any such issuance, reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, and (y) in the case of any such issuance, reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, at least 10 Business Days' (but not more than 90 days') prior written notice of the date when the same shall take place (provided, however, that, (1) in the case of clause (iv) above, an issuance of securities which has been approved by the Issuer's Board of Directors pursuant to a stock option plan or stock incentive plan of the Issuer shall not require any prior written notice to the Holders, provided that the Issuer includes information as to such issuance in the next succeeding certificate of its chief financial officer delivered to the Holders pursuant to Section 10(a) above, and (2) in the case of C - 13 any other issuance referred to in clause (iv) above, no more than 5 Business Day's prior written notice of such issuance need be given to the Holders). Such notice in accordance with the foregoing clause (x) shall also specify, in the case of any such dividend, redemption, Distribution or subscription rights, the date on which the holders of Common Stock shall be entitled thereto, and such notice in accordance with the foregoing clause (y) shall also specify the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up, as the case may be. The failure to give the notice required by this Section 10 or any defect therein shall not affect the legality or validity of any Distribution, right, warrant, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up, or the vote upon any action. SECTION 11. Securities Law Matters; Transfers; Rule 144 and Rule 144A Covenants. (a) The provisions of Section 11 (Securities Law Matters) and 12 (Transfers) of the Purchase Agreement are hereby incorporated by reference herein as if set forth in full herein. (b) With a view to making available certain rules and regulations of the Securities and Exchange Commission (the "Commission") which may permit the sale of Warrants and Warrant Shares without registration, the Issuer agrees that at any time when its securities are registered under that Securities and Exchange Act of 1934 (the "Exchange Act") that it will: (i) make and keep public information available as those terms are understood and defined in Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"), or any successor provision thereto; (ii) so long as Rule 144A is available to the Holders, make and keep available the information specified in Rule 144A(d)(4) under the Securities Act or any successor provision thereto; (iii) file with the Commission in a timely manner all reports and other documents required of the Issuer under the Exchange Act; and (iv) furnish to each Holder upon request a written statement by the Issuer as to its compliance with the information or reporting requirements of Rule 144 and Rule 144A or any successor provision thereto, and of the Securities Act and the Exchange Act, and a copy of the most recent annual or quarterly report of the Issuer filed with the Commission. SECTION 12. Registration Rights. The provisions of Section 3.5 and Exhibit E-1 of the Purchase Agreement (Registration Rights) are hereby incorporated by reference herein as if set forth in full herein. SECTION 13. Covenants of Issuer. So long as any Holder shall hold a Warrant or any Warrant Shares, the Issuer shall abide by all of the covenants and agreements set forth in the C - 14 Purchase Agreement, other than those set forth in the following Sections of the Purchase Agreement: Sections 3.1 through 3.4, 6.3(e), 6.4 through 6.6, 6.8(a) and (b), 6.10, 6.11, 6.13, 6.14, 7.1 through 7.7, 7.9(a), 7.11, 7.12, 7.15 through 7.19, 9.1 and 9.2; provided, however, that (i) the inspections referred to in Section 6.2 of the Purchase Agreement shall be at the Holders' expense and shall be limited to no more than two in any fiscal year, and (ii) the provisions of Section 6.12 of the Purchase Agreement shall continue in full force and effect until the third anniversary of such repayment. In connection with the Holders' continuing right to receive financial information pursuant to Section 6.1 of the Purchase Agreement and certain other information pursuant to Section 6.7 of the Purchase Agreement, the Holders agree to continue to abide by the confidentiality provisions contained in the last paragraph of Section 6.1 of the Purchase Agreement. Notwithstanding the foregoing, the Holders shall have the right to pursue rights and remedies arising out of a breach or default of the Sections listed above which occurred prior to the payment in full of the Notes and all other amount due under the Purchase Agreement in respect of the Notes, whether known or unknown as of such date. So long as any Holder shall hold a Warrant or any Warrant Shares, the Issuer shall not, without the prior written consent of the Holders of a majority of the Warrant Shares issued or issuable upon exercise of all outstanding Warrants, enter into any agreement with any holder or prospective holder of any securities of the Issuer which would allow such holder or prospective holder to include such securities in any registration referred to in Section 12 hereof, unless under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of its securities will not reduce the number of Warrant Shares which are included. SECTION 14. Effectiveness of Certain Provisions of the Purchase Agreement. Any Holder shall be deemed a "Purchaser" under, and as that term is defined in, the Purchase Agreement. SECTION 15. Amendments and Waivers. Any provision of this Agreement may be amended, supplemented, waived, discharged or terminated by a written instrument signed by the Issuer and the Holders of a majority of the Warrant Shares issued or issuable upon exercise of all outstanding Warrants; provided, that the Exercise Price may not be increased, the number of shares of Common Stock issuable upon exercise of the Warrants may not be reduced, the Expiration Date may not be changed to an earlier date and this Section may not be amended except with the consent of each Holder which would be affected thereby. SECTION 16. Provisions of Other Agreements. Whenever the Purchase Agreement or any provision thereof is referred to herein or in any instrument furnished hereunder as expressing or constituting a covenant, term, condition or limitation of this Agreement or of such instrument or as expressing or constituting a representation herein or therein (a) any such provision shall be regarded as though incorporated herein or therein at length, (b) except as otherwise provided herein or in such instrument the terms used in such agreement or the provision thereof referred to shall have the meanings set forth in such agreement, and (c) any covenant or other provision incorporated herein by reference from such agreement shall continue in effect for the benefit of the Holders so long as this Agreement shall remain in effect. Except as otherwise specifically provided herein, and except for amendments or modifications to which the Holders consent in C - 15 writing in accordance with Section 15, no modification of or amendment to, or waiver or termination of, any provision of any of said agreement and no payment of the indebtedness outstanding thereunder or satisfaction or cancellation thereof, or termination of said agreement, shall modify, amend, waive, terminate or otherwise affect any provision thereof as referred to in this Agreement or in any instrument furnished hereunder, which provision, for the purpose of this Agreement and such instrument, shall remain unmodified and in full force and effect. SECTION 17. Specific Performance. The Holders of the Warrants and/or Warrant Shares shall have the right to specific performance by the Issuer of the provisions of this Agreement. The Issuer hereby irrevocably waives, to the extent that it may do so under applicable law, any defense based on the adequacy of a remedy at law which may be asserted as a bar to the remedy of specific performance in any action brought against the Issuer for specific performance of this Agreement by the Holders. SECTION 18. Notices. All notices, requests, demands or other communications to or upon the respective parties hereto shall be in writing and shall be deemed to have been given or made, and all financial statements, information and the like required to be delivered hereunder shall be deemed to have been delivered, either (a) three (3) Business Days after deposited in the United States certified mail, return receipt requested, with postage prepaid, or (b) one (1) Business Day after delivery to a nationally recognized courier, designated for overnight delivery with all fees prepaid, in either case addressed to the Issuer at the Warrant Office, Attn: Chief Executive Officer, and to the Holders at their respective addresses set forth on the Warrant Register, or to such other address as any of them shall specify in writing to the others. The Issuer shall cause the Warrant Register to contain current addresses for each of the Holders. SECTION 19. Binding Effect; Assignability. This Agreement shall be binding upon and inure to the benefit of the Issuer, its successors and assigns, the Holders and the registered Holders from time to time of the Warrants and the Warrant Shares. SECTION 20. Termination. This Agreement shall terminate and be of no further force and effect at the close of business on the Expiration Date or the date on which none of the Warrants shall be outstanding, except that the provisions of Sections 15 (Amendments and Waivers), 17 (Specific Performance), 18 (Notices), 19 (Binding Effect; Assignability), 20 (Termination) and 22 (Governing Law) shall continue in full force and effect after such termination. SECTION 21. Counterparts. This Agreement may be executed in one or more separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. SECTION 22. Governing Law. This Agreement and each Warrant shall be governed by and construed in accordance with the laws of the State of New York. [Remainder of page intentionally left blank; signature page follows] C - 16 IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement of U.S. Home & Garden Inc. to be duly executed and delivered by their proper and duly authorized officers, as of the date and year first above written. Issuer: U.S. HOME & GARDEN INC. By: _____________________________________ Name/Title: Holders: LEG PARTNERS III SBIC, L.P. by Golub PS-GP, LLC, its general partner By: _____________________________________ Gregory W. Cashman, Vice President LEG CO-INVESTORS, LLC By: _____________________________________ Gregory W. Cashman, Authorized Signatory 555 MADISON INVESTORS, LLC By: _____________________________________ Gregory W. Cashman, Manager C - 17 ================================================================================ U.S. HOME & GARDEN INC. and THE HOLDERS NAMED HEREIN WARRANT AGREEMENT ================================================================================ as of November 15, 2001 U.S. HOME & GARDEN INC. WARRANT AGREEMENT Table of Contents SECTION 1. Definitions 1 SECTION 2. Issuance of Warrants 4 SECTION 3. Exercise Price 5 SECTION 4. Exercise of Warrants 6 SECTION 5. Registration, Transfer and Exchange of Certificates 7 SECTION 6. Mutilated or Missing Warrant 8 SECTION 7. Reservation and Issuance of Warrant Shares 8 SECTION 8. Obtaining of Governmental Approvals and Stock Exchange Listings 8 SECTION 9. Additional Anti-Dilution Provisions 9 (a) Payments to Holders in Connection with Certain Dividends 9 (b) Reorganizations and Asset Sales 9 (c) Notice of Adjustment 10 (d) Disputes 10 (e) Securities other than Common Stock 11 SECTION 10. Notices to Warrant Holders 11 SECTION 11. Securities Law Matters; Transfers; Rule 144 and Rule 144A Covenants. 12 SECTION 12. Registration Rights 13 SECTION 13. Covenants of Company 13 SECTION 14. Effectiveness of Certain Provisions of the Purchase Agreement 13 SECTION 15. Amendments and Waivers 14 SECTION 16. Provisions of Other Agreements 14 SECTION 17. Specific Performance 14 SECTION 18. Notices 14 SECTION 19. Binding Effect; Assignability 15 SECTION 20. Termination 15 SECTION 21. Counterparts 15 SECTION 22. Governing Law 15
Exhibit A - Form of Warrant Exhibit B - Warrant Register Exhibit C - Form of Share Warrant i U.S. HOME & GARDEN INC. OPTION AGREEMENT (Option to purchase 9.4% Cumulative Trust Preferred Securities of U.S. Home & Garden Trust I owned by U.S. Home & Garden Inc.) OPTION AGREEMENT dated as of November 15, 2001 between U.S. Home & Garden Inc., a Delaware corporation ("USHG"), and the holders from time to time of the Options or Option Securities referred to herein (the "Holders"). WHEREAS, the Holders, USHG, USHG's wholly-owned subsidiary Easy Gardener, Inc. (the "Company") and USHG's other Subsidiaries are parties to a Note and Warrant Purchase, Guaranty and Security Agreement dated as of the date hereof (as the same may be amended, supplemented or otherwise modified from time to time, the "Purchase Agreement") providing, among other things, for the purchase by the Holders (which are also "Purchasers" party to such Agreement) of any or all of (i) $5,993,151 principal amount of the Company's 16% Series A Senior Subordinated Notes due November 19, 2007 (the "Series A Notes"), (ii) $856,164 principal amount of the Company's 14% Series B Senior Subordinated Notes due November 19, 2007 (the "Series B Notes"; and, together with the Series A Notes, the "Notes"), and (iii) the Common Warrants and Preferred Warrants described therein; WHEREAS, the "Preferred Warrants" referred to in the Purchase Agreement are the Options referred to herein; WHEREAS, the Options referred to herein grant the Holders the right to purchase from USHG such number of 9.4% Cumulative Trust Preferred Securities, liquidation amount $25 per Preferred Security ("Preferred Securities"), originally issued by USHG's subsidiary U.S. Home & Garden Trust I (the "Trust") as represents in the aggregate not less than three and three quarters percent (3.75%) of the Fully-Diluted Preferred Securities (as defined herein); and WHEREAS, the Holders understand that the Preferred Securities were issued by the Trust, but that the Options herein granted by USHG represent the right to purchase from USHG (and not from the Trust) Preferred Securities originally issued by the Trust which are owned by USHG because USHG purchased such Preferred Securities from certain holders thereof; NOW, THEREFORE, in consideration of the premises USHG and the Holders agree as follows: SECTION 1. Definitions. Capitalized terms used herein which are defined in the Purchase Agreement and are not otherwise defined herein shall have the respective meanings given thereto in the Purchase Agreement; and the following terms used herein shall have the meanings indicated below, unless the context otherwise requires: "Agreement" or "Option Agreement" shall mean this Option Agreement, together with all Exhibits hereto, as may be amended, modified or supplemented from time to time with the consent of the Holders in accordance with Section 15, and shall include all provisions incorporated herein by reference from the Purchase Agreement or any other agreement, which incorporated provisions shall continue in full force and effect for the benefit of the Holders as originally in effect unless modified with the consent of the Holders in accordance with Section 15. "Commission" shall have the meaning given thereto in Section 11(b). "Convertible Securities" shall mean (a) any stock, notes or other securities of USHG or the Trust convertible into or exchangeable, directly or indirectly, for Preferred Securities (whether or not such right to convert or exchange is immediately exercisable or is "in the money"), (b) any other security, note or agreement of USHG or the Trust which provides the holder thereof with a payment, repayment amount, appreciation right or liquidation preference (i) calculated by reference to, or arising from, the value of the Trust upon a sale, merger, recapitalization or similar event, or (ii) based upon the value, whether market or appraisal, of the Preferred Securities, and (c) any agreement of USHG or the Trust to issue or sell Preferred Securities or to issue, sell or enter into such other stock, notes, securities or agreements described in the foregoing clauses (a) or (b). "Exchange Act" shall have the meaning given thereto in Section 11(b). "Exercise Price" shall have the meaning given thereto in Section 3. "Expiration Date" shall mean May 19, 2009 or, if such day is not a Business Day, the next succeeding Business Day. "Fully-Diluted Preferred Securities" shall have the meaning given thereto in Section 2(b). "Market Price" of a Preferred Security shall mean the average of the daily market prices of a Preferred Security over a period of 20 consecutive business days prior to the day as of which "Market Price" is being determined. The market price for each such business day shall be the average of the closing sales prices on such day of a Preferred Security on the principal domestic stock exchange on which Preferred Securities are then listed, or if there shall have been no sales on any such exchange on such day, the average of the highest bid and lowest asked prices on such exchange at the end of such day, or, if the Preferred Securities shall not be so listed, the closing sales price in the NASDAQ System on such day, or if there shall have been no sales in the NASDAQ System on such day, the average of the highest bid and lowest asked prices on the NASDAQ System on such day, or if the Preferred Securities shall not be quoted in the NASDAQ System, the average of the high and low bid and asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization. If the Preferred Securities are listed on any domestic exchange the term "business days" as used in this paragraph shall mean business days on which such exchange is open for trading. 2 If at any time the Preferred Securities are not listed on any domestic exchange or quoted in the NASDAQ System or the domestic over-the-counter market, the "Market Price" shall be the fair market value of a Preferred Security as determined in good faith by the Board of Directors of USHG (giving due regard to any recent sales or valuations of Preferred Securities) or, if the holders of a majority of the Options shall, in the exercise of their sole discretion, object to such determination, as determined by appraisal pursuant to the following paragraph of this definition; provided, that if any valuation or appraisal has been made of the Trust or its Preferred Securities for any reason within six months prior to any date as of which the Market Price is to be determined hereunder, then the Holders shall be entitled, at their option, to rely on such appraisal and such valuation or appraisal shall be binding on USHG unless any event shall have occurred since the date of such valuation or appraisal which, in the reasonable opinion of the Holders of a majority of the Options, manifestly affects the continued validity of such appraisal. If the Holders of a majority of the Options shall object to the determination of Market Price made by USHG's Board of Directors pursuant to the preceding paragraph, then Market Price shall be determined as of the end of the most recent complete fiscal quarter of the Trust ended prior to the date of determination (taking into account actual performance subsequent thereto and projections for future periods), and shall be determined by appraisal as follows: Within fifteen (15) days after receipt by USHG of notice that an appraisal is desired, USHG and the Holders of a majority of the Options shall jointly appoint an appraiser for the purpose of determining Market Price. Such appraiser shall be an investment banking or advisory firm with experience in valuing trusts or other special purpose entities such as the Trust, which investment banking or advisory firm shall be either a firm of recognized national standing or a regional firm of good national reputation. If there shall be a dispute as to the selection of such appraiser, then the appraiser shall be appointed by the American Arbitration Association upon application by USHG or the Holders of a majority of the Options. USHG and the Holders of a majority of the Options shall be afforded reasonable opportunities to discuss the appraisal with such appraiser. The determination of Market Price by such appraiser shall be final and binding upon USHG and the Holders of Options. The fees and expenses of the appraiser and, if any, of the American Arbitration Association, shall be borne by USHG unless the determination of Market Price by such appraiser is the same as the determination of Market Price made by the Board of Directors (or less favorable to the Holders), in which case the fees and expenses of such appraiser shall be borne equally by USHG and the Holders of Options. "Option" shall mean an Option certificate, in the form of Exhibit A hereto, and shall also mean the right upon exercise thereof to acquire one Option Security. "Option Office" shall mean the office or agency of USHG at which the Option Register shall be maintained and where the Options may be presented for exercise, exchange, substitution and transfer, which office or agency will be the office of USHG at 655 Montgomery Street, San Francisco, CA 94111. The Option Office may be changed by USHG pursuant to notice in writing to the registered Holders of the Options. "Option Percentage" shall have the meaning given thereto in Section 2(a). 3 "Option Register" shall mean the register, in the form of Exhibit B hereto, maintained by USHG at the Option Office. "Option Securities" shall mean the Preferred Securities purchasable or purchased upon exercise of the Options, and any other Preferred Securities, Rights, Convertible Securities, capital stock, equity interest, or other securities issuable or issued in respect of Options or Option Securities by way of securities dividend or securities split or in connection with a combination of securities, recapitalization, merger, consolidation or other reorganization or other transaction of the character referred to in Section 9(b). "Preferred Security" shall mean an undivided beneficial interest in the assets of the Trust designated as "9.4% Cumulative Trust Preferred Securities", having a Liquidation Amount of $25 per security and having the rights provided therefor in the Trust Agreement, including the right to receive Distributions and a Liquidation Distribution as provided in the Trust Agreement. "Rights" shall mean any warrants, options (including the Options), agreements or other rights to subscribe for or to purchase, directly or indirectly, from USHG or the Trust, Preferred Securities (whether or not such warrants, options or other rights are immediately exercisable or are "in the money"). Rights shall include any warrants, options or other agreements or rights to subscribe for or to purchase, directly or indirectly, from USHG or the Trust, Convertible Securities or other Rights (whether or not such warrants, options or other rights are immediately exercisable or are "in the money") and agreements or plans under which USHG or the Trust may issue or sell securities in exchange for services of any kind, whether to be rendered by an employee, consultant, individual, entity or third party of any kind. "Securities Act" shall have the meaning given thereto in Section 11(b). "Trust Agreement" shall mean the Trust's Amended and Restated Trust Agreement dated as of April ___, 1998 among USHG, as Depositor, Wilmington Trust Company, as Property Trustee, Wilmington Trust Company, as Delaware Trustee, and the Administrative Trustee named therein, pursuant to which, among other things, the Preferred Securities were issued. SECTION 2. Grant of Options. (a) USHG will grant to the Holders on the Closing Date, in exchange for payment of the purchase price for the "Preferred Warrants" specified in Section 2.3 of the Purchase Agreement, Options to purchase that number of Preferred Securities representing in the aggregate three and three quarters percent (3.75%) of the Fully-Diluted Preferred Securities (as defined below) at the time of exercise (the "Option Percentage"). The Options purchased by each Holder and the corresponding portion of the Option Percentage represented thereby is set forth on Exhibit B attached hereto. The Options shall be exercisable at any time after the Closing Date until 5:00 P.M. (local time at the Option Office) on the Expiration Date. 4 (b) "Fully-Diluted Preferred Securities" at any time of determination shall mean the sum of (A) the number of Preferred Securities issued by the Trust and outstanding at such time, plus (B) the number of Preferred Securities subject to issuance or sale upon exercise of all outstanding Rights (including the Options) and conversion or exchange of all Convertible Securities issued and outstanding at such time (provided that if any such securities qualify as both Options and Convertible Securities, they shall be counted only once), plus (C) the number of Preferred Securities which USHG or the Trust is otherwise obligated or potentially obligated to issue or sell under any agreement, understanding or arrangement or otherwise. Where any Convertible Security does not indicate a specific or fixed number of Preferred Securities to be issued or sold thereunder or in connection therewith, the number of Preferred Securities issuable thereunder or in connection therewith for purposes of calculating Fully-Diluted Preferred Securities shall equal the greater of (I) the maximum number of Preferred Securities described as issuable thereunder or in connection therewith or (II) such number of Preferred Securities as would represent any profit sharing, liquidation preference amount, appreciation right, share or percentage of the Trust's value as if such Convertible Security was converted (at the then-applicable Market Price if no conversion price is otherwise provided in such Convertible Security) into Preferred Securities. Fully-Diluted Preferred Securities shall not include any securities owned or held by or for the account of the Trust. SECTION 3. Exercise Price. At any time of determination, the price (the "Exercise Price") at which a Holder may purchase each Option Security issuable upon exercise of such Holder's Options shall be $12.10. SECTION 4. Exercise of Options. (a) The rights represented by any Option granted pursuant hereto may be exercised by the Holder thereof, in whole or in part, by delivering to the Option Office: (i) the Option, together with a properly completed Election to Purchase in the form attached thereto; (ii) at the Holder's option, either (A) a check or bank draft in the amount of the aggregate Exercise Price for the Preferred Securities to be purchased, (B) any promissory notes or debt securities of USHG or the Company (including Notes) that may have been issued to the Holder thereof, so that amounts outstanding thereunder may be offset against the aggregate Exercise Price for the Preferred Securities to be purchased, or (C) Preferred Securities, Options, Convertible Securities, capital stock or other securities of USHG or the Trust having a Market Price equal to the aggregate Exercise Price for the Preferred Securities to be purchased. For purposes of this Section 4: (I) the Market Price per Preferred Security at any time shall be determined in accordance with the definition of Market Price, (II) the Market Price per Option at any time shall be the Market Price per Preferred Security minus the Exercise Price then in effect, and (III) the Market Price of other securities shall be as reasonably determined by USHG's Board of Directors in accordance with the principles set forth in the definition of Market Price; and 5 (iii) any representations or documents or information from the Holder of the Options that USHG may reasonably require in order to comply with the requirements of the Securities Act with respect of such issuance and in order to comply with the provisions of Section 8 of this Agreement. Upon such exercise USHG shall transfer, assign and deliver (or shall cause the Trust to issue and deliver) to or to the order of the registered Holder(s) of such Option, and in such name or names as such registered Holder(s) may designate, one or more certificate(s) for the Option Securities to be sold upon such exercise of such Option. Any person(s) so designated to be named therein shall be deemed to have become the Holder(s) of record of such Option Securities as of the date of delivery to USHG at the Option Office of the Option and the Exercise Price therefor as provided in clauses (i) and (ii) above. (b) If an Option is exercised in part at any time, a new Option or Options shall be issued for the unexercised portion of such Option. Each new Option so issued shall bear any legend required by Section 11.3 of the Purchase Agreement, if the Option presented in connection with a partial exercise thereof bore such legend. All Options surrendered upon exercise shall be canceled. (c) USHG will pay all taxes (other than any applicable income or similar taxes payable by the Holders) attributable to the sale of Option Securities upon the exercise of the Options; provided, that USHG shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue of any Option or any certificate for Option Securities in a name other than that of the registered Holder of the Option surrendered for exercise. SECTION 5. Registration, Transfer and Exchange of Certificates. (a) USHG shall maintain at the Option Office an Option Register for registration of the Options and transfers thereof. USHG may deem and treat the registered Holder(s) of the Options as the absolute owner(s) thereof for the purpose of any exercise thereof or any distribution to the Holder(s) thereof, and for all other purposes. (b) USHG shall register the transfer of any outstanding Option in the Option Register upon surrender to USHG at the Option Office of such Option, accompanied (if so required by it) by one or more duly executed instruments of transfer in form satisfactory to USHG. Upon any such registration of transfer, one or more new Option(s) evidencing such transferred Option shall be issued to the transferee(s) and the surrendered Option shall be canceled. If less than all of a surrendered Option is to be transferred, new Option(s) shall be issued to the surrendering Holder evidencing the remaining balance of the surrendered Option. (c) Each Option may, at the option of the Holder(s) thereof, be surrendered to USHG at the Option Office to be exchanged for one or more new Options of like tenor and exercisable in the aggregate for a like number of Option Securities. Options surrendered for exchange shall be canceled. 6 (d) No charge shall be made for any such transfer or exchange except for any tax or other governmental charge imposed in connection therewith. Except as provided in Section 11 or 12 of the Purchase Agreement, each Option issued upon transfer or exchange shall bear any legend required by Section 11.3 of the Purchase Agreement if the Option presented for transfer or exchange bore such legend. SECTION 6. Mutilated or Missing Option. If any Option is mutilated, lost, stolen or destroyed, USHG shall issue, in exchange and substitution for and upon cancellation of the mutilated Option, or in lieu of and substitution for the Option lost, stolen or destroyed, a new Option of like tenor and representing rights to acquire an equivalent number of Preferred Securities, but only upon receipt of evidence satisfactory to USHG of such loss, theft or destruction of such Option and, if requested, indemnity satisfactory to it. No service charge shall be made for any such substitution, but all reasonable charges associated with any stamp, tax or other governmental duty that may be imposed in relation thereto shall be borne by the Holder of such Option. Each Option issued in any such substitution shall bear any legend required by Section 11.3 of the Purchase Agreement if the Option for which such substitution was made bore such legend. SECTION 7. Reservation and Sale of Option Securities. (a) USHG will at all times keep available, free of all Liens, restrictions, rights and claims of others, for the purpose of enabling it to satisfy its obligation to sell Preferred Securities upon any exercise of the Options, the number of Preferred Securities purchasable upon exercise of all outstanding Options. Upon any sale of Preferred Securities to a holder of Options upon exercise thereof, such Preferred Securities shall be free of all Liens, restrictions, rights and claims of others. (b) USHG covenants that all Option Securities will, upon sale to a Holder upon exercise of an Option, be fully paid and nonassessable and free from all taxes with respect to the sale thereof (other than any applicable income or similar taxes payable by the Holders) and from all Liens, restrictions, rights and claims of others (except for Liens, if any, created by the Holder thereof). SECTION 8. Obtaining of Governmental Approvals and Stock Exchange Listings. USHG will, or will cause the Trust to, at its or the Trust's expense, (a) obtain and keep effective any and all permits, consents and approvals of governmental agencies and authorities which may from time to time be required in order to sell Option Securities upon exercise of the Options, and otherwise to perform its obligations hereunder, and (b) take all action which may be necessary so that the Option Securities, immediately upon their sale upon the exercise of Options, will be listed on each securities exchange, if any, on which Preferred Securities are then listed. 7 SECTION 9. Additional Anti-Dilution Provisions. (a) Payments to Holders in Connection with Certain Dividends. In the event that the Trust declares a securities split, securities dividend, or dividend of any kind, whether in cash, securities or other property, upon the Preferred Securities (including any dividend payable in Preferred Securities, Rights or Convertible Securities), then at the option of each Holder: (i) lawful and adequate provisions shall be made whereby USHG shall maintain in reserve and available such dividend property, and such Holder shall thereafter have the right to purchase and/or receive, as the case may be, upon exercise of its Options (on the terms and conditions specified in this Agreement, and in addition to the Option Securities purchasable by such Holder immediately prior to the declaration of such dividend), such securities or property as are distributable with respect to outstanding Preferred Securities equal to the number of Option Securities purchasable by such Holder immediately prior to such declaration, to the end that the provisions hereof (including without limitation provisions for adjustments of the number of securities receivable upon exercise) shall thereafter be applicable, as nearly as may be, in relation to such securities or property; or (ii) the Exercise Price of such Holder's Options shall be reduced by the per security amount of such dividend. (b) Reorganizations and Asset Sales. If any capital reorganization or reclassification of the securities of the Trust, or any consolidation or merger of the Trust with another entity, or the sale of all or substantially all of its assets to another person or entity shall be effected in such a way that holders of Preferred Securities shall be entitled to receive securities or assets with respect to or in exchange for Preferred Securities, then the following provisions shall also apply: (i) as a condition of such reorganization, reclassification, consolidation, merger or sale (except as otherwise provided below in this Section 9(b)), lawful and adequate provisions shall be made whereby each Holder shall thereafter have the right to purchase and receive upon the terms and conditions specified in this Agreement and in lieu of the Option Securities immediately theretofore receivable upon the exercise of his or its Option, such securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding Preferred Securities equal to the number of Option Securities immediately theretofore so receivable had such reorganization, reclassification, consolidation, merger or sale not taken place, and in any such case appropriate provision shall be made with respect to the rights and interests of such Holder to the end that the provisions hereof (including without limitation provisions for adjustments of the number of securities receivable upon exercise of an Option) shall thereafter be applicable, as nearly as may be, in relation to any securities or assets thereafter deliverable upon the exercise of an Option; (ii) USHG shall not permit the Trust to effect any such consolidation, merger or sale unless prior to or simultaneously with the consummation thereof the successor entity 8 (if other than USHG) resulting from such consolidation or merger or the person or entity purchasing such assets shall assume by written instrument executed and mailed or delivered to each Holder at the last address of such Holder appearing on the books of USHG, the obligation to deliver to such Holder such securities or assets as, in accordance with the foregoing provisions, such Holder may be entitled to receive, and all other liabilities and obligations of USHG hereunder. Upon written request by the Holder of any Option USHG or such successor person or entity will issue or grant a new Option revised to reflect the modifications in this Agreement effected pursuant to this Section 9(b); and (iii) if a purchase, tender or exchange offer is made to and accepted by the holders of more than 50% of the outstanding Preferred Securities of the Trust, USHG shall not permit the Trust to effect any consolidation, merger or sale with the person or entity having made such offer or with any affiliate of such person or entity, unless prior to the consummation of such consolidation, merger or sale each Holder of an Option shall have been given a reasonable opportunity to then elect to receive upon the exercise of his or its Option either the securities or assets then issuable with respect to the Preferred Securities or the securities or assets, or the equivalent, issued to previous holders of Preferred Securities in accordance with such offer. (c) Notice of Adjustment. Whenever the number of Option Securities issuable upon the exercise of the Options shall be adjusted as herein provided, or the rights of Holders shall change by reason of other events specified herein, USHG shall compute the adjusted number of Option Securities in accordance with the provisions hereof and shall prepare a certificate signed by its President, Vice President, Treasurer or Secretary setting forth the adjusted number of Option Securities purchasable upon exercise of the Options or specifying the other securities or assets receivable as a result of such change in rights, and showing in reasonable detail the facts and calculations upon which such adjustments or other changes are based, including a statement of the consideration received or to be received by USHG or the Trust for, and the amount of, any Preferred Securities, Rights and Convertible Securities issued since the last such adjustment or change (or since the date hereof in the case of the first adjustment or change). USHG shall cause to be mailed to each Holder of an Option copies of such officer's certificate together with a notice stating that the number of Option Securities purchasable upon exercise of the Options has been adjusted and setting forth the adjusted number of Option Securities purchasable upon exercise of such Holder's Option. (d) Disputes. In the event that there is any dispute as to the computation of the number of Option Securities required to be sold upon exercise of Options (in which the Holders of a majority of the Option Securities issuable upon exercise of all outstanding Options shall join), the Holders will retain an independent and nationally recognized accounting firm to conduct, at USHG's expense, an audit of the computations pursuant to the terms hereof involved in such dispute, including the financial statements or other information upon which such computations were based. The determination of such nationally recognized accounting firm shall, in the absence of manifest error, be binding upon the Holders and USHG. If there shall be a dispute as to the selection of such nationally recognized accounting firm, such firm shall be 9 appointed by the American Institute of Certified Public Accountants if willing, otherwise the American Arbitration Association, upon application by USHG or the Holders of a majority of the Option Securities issuable upon exercise of all outstanding Options, with notice to the others. The expenses of such accounting firm and, if any, the American Institute of Certified Public Accountants or the American Arbitration Association (as applicable), shall be borne by USHG unless the computation by such accounting firm of such number of Option Securities is the same as the computations thereof made by USHG (or less favorable to the Holders), in which case the fees and expenses of such accounting firm shall be borne equally by USHG and the Holders of Options. (e) Securities other than Preferred Securities. If at any time, as a result of an adjustment made pursuant to this Section 9, the Holder of any Option thereafter exercised shall become entitled to receive any securities other than Preferred Securities, thereafter the number of such other securities so receivable upon exercise of any Option shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Option Securities contained in this Section 9, and the provisions of this Agreement with respect to the Option Securities shall apply on like terms to such other securities. SECTION 10. Notices to Option Holders. In case at any time the Trust proposes: (a) to declare a cash dividend upon Preferred Securities; (b) to declare or pay, or set apart any funds for the payment of, any dividends on any Preferred Securities or make any other Distribution (as defined in the Purchase Agreement) to the holders of its Preferred Securities; (c) to apply any of its funds, property or assets to, or set apart any funds, property or assets for, the purchase, redemption or retirement of, or make any Distribution, by reduction of capital or otherwise, in respect of any of its Preferred Securities or in respect of any Rights or Convertible Securities exercisable or exchangeable for or convertible into Preferred Securities, whether now or hereafter outstanding; (d) to issue or sell any Preferred Securities, Rights or Convertible Securities (except pursuant to the exercise of Options or Rights or the conversion or exchange of Convertible Securities in accordance with their terms); (e) to offer for subscription pro rata to the holders of Preferred Securities or Convertible Securities any additional securities of any class or other rights; (f) to effect any capital reorganization, or reclassification of the securities of the Trust, or consolidation or merger of the Trust with another Person, or sale or other disposition of greater than 25% of the net value of its assets; or (g) to effect a voluntary or involuntary dissolution, liquidation or winding up of the Trust, 10 then, in any one or more of said cases, USHG shall give (or cause the Trust to give) the Holder of any Option (i) at least 10 Business Days' (but not more than 90 days') prior written notice of the date on which the books of the Trust shall close or a record shall be taken for such dividend, redemption, Distribution or subscription rights or for determining rights to vote in respect of any such issuance, reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, and (ii) in the case of any such issuance, reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, at 10 Business Days' (but not more than 90 days') prior written notice of the date when the same shall take place (provided that no more than 5 Business Day's prior written notice need be given of an issuance referred to in clause (d) above). Such notice in accordance with the foregoing clause (i) shall also specify, in the case of any such dividend, redemption, Distribution or subscription rights, the date on which the holders of Preferred Securities shall be entitled thereto, and such notice in accordance with the foregoing clause (ii) shall also specify the date on which the holders of Preferred Securities shall be entitled to exchange their Preferred Securities for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up, as the case may be. The failure to give the notice required by this Section 10 or any defect therein shall not affect the legality or validity of any Distribution, right, Option, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up, or the vote upon any action. SECTION 11. Securities Law Matters; Transfers; Rule 144 and Rule 144A Covenants. (a) The provisions of Section 11 (Securities Law Matters) and 12 (Transfers) of the Purchase Agreement are hereby incorporated by reference herein as if set forth in full herein. (b) With a view to making available certain rules and regulations of the Securities and Exchange Commission (the "Commission") which may permit the sale of Options and Option Securities without registration, USHG agrees that at any time when securities of the Trust are registered under that Securities and Exchange Act of 1934 (the "Exchange Act") that USHG will cause the Trust to: (i) make and keep public information available as those terms are understood and defined in Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"), or any successor provision thereto; (ii) so long as Rule 144A is available to the Holders, make and keep available the information specified in Rule 144A(d)(4) under the Securities Act or any successor provision thereto; (iii) file with the Commission in a timely manner all reports and other documents required of the Trust under the Exchange Act; and (iv) furnish to each Holder upon request a written statement by the Trust as to its compliance with the information or reporting requirements of Rule 144 and Rule 144A or 11 any successor provision thereto, and of the Securities Act and the Exchange Act, and a copy of the most recent annual or quarterly report of the Trust filed with the Commission. SECTION 12. Registration Rights. The provisions of Section 3.5 and Exhibit E-2 of the Purchase Agreement (Registration Rights) are hereby incorporated by reference herein as if set forth in full herein. SECTION 13. Covenants of USHG. So long as any Holder shall hold an Option or any Option Securities, USHG shall abide by all of the covenants and agreements set forth in the Purchase Agreement, provided, however, that upon full and complete payment of the Notes and all other amounts due under the Purchase Agreement in respect of the Notes, the following sections of the Purchase Agreement shall be terminated and have no further force or effect after such repayment: Sections 3.1 through 3.4, 6.3(e), 6.4 through 6.6, 6.8(a) and (b), 6.10, 6.11, 6.13, 6.14, 7.1 through 7.7, 7.9(a), 7.11, 7.12, 7.15 through 7.19, 9.1 and 9.2. All other provisions of the Purchase Agreement shall survive such repayment, provided, however, that after such repayment (i) the inspections referred to in Section 6.2 of the Purchase Agreement shall be at the Holders' expense and shall be limited to no more than two in any fiscal year, and (ii) the provisions of Section 6.12 of the Purchase Agreement shall continue in full force and effect until the third anniversary of such repayment. In connection with the Holders' continuing right to receive financial information pursuant to Section 6.1 of the Purchase Agreement and certain other information pursuant to Section 6.7 of the Purchase Agreement, the Holders agree to continue to abide by the confidentiality provisions contained in the last paragraph of Section 6.1 of the Purchase Agreement. No termination of any covenant, representation, warranty, or other provision of the Purchase Agreement or any other Purchaser Document, whether after the repayment of the Notes or otherwise, shall in any way suspend, eliminate or nullify the right of any holder of Options to pursue rights and remedies arising out of a breach or default which occurred prior to the date of termination, whether known or unknown as of such date. So long as any Holder shall hold an Option or any Option Securities, USHG shall not, without the prior written consent of the Holders of a majority of the Option Securities purchased or purchasable upon exercise of all outstanding Options, enter into (or permit the Trust to enter into) any agreement with any holder or prospective holder of any securities of the Trust which would allow such holder or prospective holder to include such securities in any registration referred to in Section 12 hereof, unless under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of its securities will not reduce the number of Option Securities which are included. SECTION 14. Effectiveness of Certain Provisions of the Purchase Agreement. Any Holder (whether or not such Holder also holds Notes) shall be deemed a "Purchaser" under, and as that term is defined in, the Purchase Agreement. SECTION 15. Amendments and Waivers. Any provision of this Agreement may be amended, supplemented, waived, discharged or terminated by a written instrument signed by USHG and the Holders of a majority of the Option Securities purchased or purchasable upon exercise of all outstanding Options; provided, that the Exercise Price may not be increased, the percentage of the Fully-Diluted Preferred Securities issuable upon exercise of the Options may 12 not be reduced, the Expiration Date may not be changed to an earlier date and this Section may not be amended except with the consent of each Holder which would be affected thereby. SECTION 16. Provisions of Other Agreements. Whenever the Purchase Agreement or any provision thereof is referred to herein or in any instrument furnished hereunder as expressing or constituting a covenant, term, condition or limitation of this Agreement or of such instrument or as expressing or constituting a representation herein or therein (a) any such provision shall be regarded as though incorporated herein or therein at length, (b) except as otherwise provided herein or in such instrument the terms used in such agreement or the provision thereof referred to shall have the meanings set forth in such agreement, and (c) any covenant or other provision incorporated herein by reference from such agreement shall continue in effect for the benefit of the Holders so long as this Agreement shall remain in effect. Except as otherwise specifically provided herein, and except for amendments or modifications to which the Holders consent in writing in accordance with Section 15, no modification of or amendment to, or waiver or termination of, any provision of any of said agreement and no payment of the indebtedness outstanding thereunder or satisfaction or cancellation thereof, or termination of said agreement, shall modify, amend, waive, terminate or otherwise affect any provision thereof as referred to in this Agreement or in any instrument furnished hereunder, which provision, for the purpose of this Agreement and such instrument, shall remain unmodified and in full force and effect. SECTION 17. Specific Performance. The Holders of the Options and/or Option Securities shall have the right to specific performance by USHG of the provisions of this Agreement. USHG hereby irrevocably waives, to the extent that it may do so under applicable law, any defense based on the adequacy of a remedy at law which may be asserted as a bar to the remedy of specific performance in any action brought against USHG for specific performance of this Agreement by the Holders. SECTION 18. Notices. All notices, requests, demands or other communications to or upon the respective parties hereto shall be in writing and shall be deemed to have been given or made, and all financial statements, information and the like required to be delivered hereunder shall be deemed to have been delivered, either (a) three (3) Business Days after deposited in the United States certified mail, return receipt requested, with postage prepaid, or (b) one (1) Business Day after delivery to a nationally recognized courier, designated for overnight delivery with all fees prepaid, in either case addressed to USHG at the Option Office, Attn: Chief Executive Officer, and to the Holders at their respective addresses set forth on the Option Register, or to such other address as any of them shall specify in writing to the others. USHG shall cause the Option Register to contain current addresses for each of the Holders. SECTION 19. Binding Effect; Assignability. This Agreement shall be binding upon and inure to the benefit of USHG, its successors and assigns, the Holders and the registered Holders from time to time of the Options and the Option Securities. SECTION 20. Termination. This Agreement shall terminate and be of no further force and effect at the close of business on the Expiration Date or the date on which none of the Options or Option Securities shall be outstanding, except that the provisions of Sections 15 13 (Amendments and Waivers), 17 (Specific Performance), 18 (Notices), 19 (Binding Effect; Assignability), 20 (Termination) and 22 (Governing Law) shall continue in full force and effect after such termination. SECTION 21. Counterparts. This Agreement may be executed in one or more separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. SECTION 22. Governing Law. This Agreement and each Option shall be governed by and construed in accordance with the laws of the State of New York. [Remainder of page intentionally left blank; signature page follows] 14 IN WITNESS WHEREOF, the parties hereto have caused this Option Agreement of U.S. Home & Garden Inc. to be duly executed and delivered by their proper and duly authorized officers, as of the date and year first above written. USHG: U.S. HOME & GARDEN INC. By: _____________________________________ Name/Title: Holders: LEG PARTNERS III SBIC, L.P. by Golub PS-GP, LLC, its general partner By: _____________________________________ Gregory W. Cashman, Vice President LEG CO-INVESTORS, LLC By: _____________________________________ Gregory W. Cashman, Authorized Signatory 555 MADISON INVESTORS, LLC By: _____________________________________ Gregory W. Cashman, Manager 15 EXHIBIT A TO OPTION AGREEMENT [FORM OF OPTION] THIS OPTION AND THE UNDERLYING SECURITIES REPRESENTED BY THIS OPTION HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EXEMPTION FROM, OR OTHERWISE IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF SUCH ACT. IN ADDITION, THIS OPTION AND THE UNDERLYING SECURITIES MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH THE CONDITIONS SPECIFIED IN THE OPTION AGREEMENT DATED NOVEMBER 15, 2001 BETWEEN U.S. HOME & GARDEN INC. ("USHG") AND THE INITIAL HOLDERS OF THE OPTIONS THEREIN NAMED, A COPY OF WHICH IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF USHG AND WILL BE FURNISHED TO THE HOLDER HEREOF UPON WRITTEN REQUEST AND WITHOUT CHARGE. OPTION to purchase 9.4% Cumulative Trust Preferred Securities of U.S. Home & Garden Trust I owned by U.S. Home & Garden Inc. No. O- __________, 20__ This Option certifies that , or registered assigns, is the registered holder of an Option (the "Option") to purchase from U.S. HOME & GARDEN INC., a Delaware corporation ("USHG"), up to that number of 9.4% Cumulative Trust Preferred Securities, liquidation amount $25 per Preferred Security ("Preferred Securities"), originally issued by USHG's subsidiary U.S. Home & Garden Trust I (the "Trust"), as shall represent ___% of the "Fully-Diluted Preferred Securities" (as defined in the Option Agreement referred to below) at the time of exercise of this Option. The number of Preferred Securities (the "Option Securities") issuable upon exercise of this Option shall be calculated in accordance with the Option Agreement. This Option may be exercised at any time prior to 5:00 P.M., local time of the Option Office, on May 19, 2009 or, if such day is not a Business Day, the next succeeding Business Day (the "Expiration Date"), by surrender of this Option, execution and delivery of an Election to Purchase in the form attached hereto and payment of the Exercise Price at the office of USHG at 655 Montgomery Street, San Francisco CA 94111, or such other address as USHG may specify in writing to the registered holder of this Option (the "Option Office"). The aggregate Exercise Price for the Preferred Securities being purchased may be paid by delivery of either (i) a certified check or bank draft or (ii) certain stock, notes or A - 1 securities of USHG, the Company or the Trust, all as provided in Section 4(a) of the Option Agreement. USHG may deem and treat the registered holder(s) of this Option as the absolute owner(s) hereof (notwithstanding any notation of ownership or other writing hereon made by anyone), for the purpose of any exercise hereof and of any distribution to the holder(s) hereof, and for all other purposes, and USHG shall not be affected by any notice to the contrary. This Option is one of the Options referred to in the Option Agreement dated as of November 15, 2001 between USHG and the initial Holders named therein (the "Option Agreement"). The Option Agreement is hereby incorporated by reference in and made a part of this Option and is hereby referred to for a description of the rights, limitation of rights, obligations, duties and immunities of USHG and the Holder. Unless otherwise defined herein, all capitalized terms used in this Option have the meanings assigned to them in or pursuant to the Option Agreement. IN WITNESS WHEREOF, USHG has caused this Option to be signed by its duly authorized officers and has caused its corporate seal to be affixed hereunto. U.S. HOME & GARDEN INC. By: ____________________________ Name: Title: (CORPORATE SEAL) ATTEST: ____________________________ , Secretary A - 2 ANNEX I TO OPTION [Form of] ELECTION TO PURCHASE [To be executed upon exercise of Option to purchase 9.4% Cumulative Trust Preferred Securities of U.S. Home & Garden Trust I owned by U.S. Home & Garden Inc.] The undersigned hereby elects to exercise the right, represented by the attached Option of U.S. Home & Garden Inc., a Delaware corporation ("USHG"), to purchase from USHG _______ 9.4% Cumulative Trust Preferred Securities, liquidation amount $25 per Preferred Security ("Preferred Securities"), originally issued by USHG's subsidiary U.S. Home & Garden Trust I ("Option Securities"), and further elects to pay the aggregate Exercise Price therefor by delivery of [a check or bank draft] [stock, notes or securities of USHG, the Company or the Trust], as provided in Section 4(a) of the Option Agreement referred to in the attached Option. The undersigned requests that a certificate for such Option Securities be registered in the name of _______________ whose address is ______________ and that such certificate be delivered to _______________ whose address is _______________. If said number of Option Securities is less than all of the Option Securities purchasable under the attached Option, the undersigned requests that a new Option representing the remaining balance of the Option Securities be registered in the name of _________________ whose address is and that such Option be delivered to __________________ whose address is . Signature:_________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Option) Date:_______________, 20___ EXHIBIT B TO OPTION AGREEMENT U.S. HOME & GARDEN INC. Option Register Option Option Certificate No. Name and Address of Holder Percentage --------------- -------------------------- ---------- O-1 LEG Partners III SBIC, L.P. 3.6108% O-2 LEG Co-Investors, LLC 0.0342% O-3 555 Madison Investors, LLC 0.1050% 555 Madison Avenue, 30th Floor New York, NY 10022 Attn: Gregory W. Cashman Telecopier No.:212-750-5505 TOTAL: 3.7500% ====== B - 1 ================================================================================ U.S. HOME & GARDEN INC. and THE HOLDERS NAMED HEREIN OPTION AGREEMENT ================================================================================ November 15, 2001 U.S. HOME & GARDEN INC. OPTION AGREEMENT Table of Contents SECTION 1. Definitions 1 SECTION 2. Grant of Options 4 SECTION 3. Exercise Price 5 SECTION 4. Exercise of Options 5 SECTION 5. Registration, Transfer and Exchange of Certificates 6 SECTION 6. Mutilated or Missing Option 7 SECTION 7. Reservation and Sale of Option Securities 7 SECTION 8. Obtaining of Governmental Approvals and Stock Exchange Listings 7 SECTION 9. Additional Anti-Dilution Provisions 8 (a) Payments to Holders in Connection with Certain Dividends 8 (b) Reorganizations and Asset Sales 8 (c) Notice of Adjustment 9 (d) Disputes 9 (e) Securities other than Common Stock 10 SECTION 10. Notices to Option Holders 10 SECTION 11. Securities Law Matters; Transfers; Rule 144 and Rule 144A Covenants. 11 SECTION 12. Registration Rights 12 SECTION 13. Covenants of USHG 12 SECTION 14. Effectiveness of Certain Provisions of the Purchase Agreement 12 SECTION 15. Amendments and Waivers 12 SECTION 16. Provisions of Other Agreements 13 SECTION 17. Specific Performance 13 SECTION 18. Notices 13 SECTION 19. Binding Effect; Assignability 13 SECTION 20. Termination 14 SECTION 21. Counterparts 14 SECTION 22. Governing Law 14
Exhibit A - Form of Option Exhibit B - Option Register i U. S. HOME & GARDEN INC. Stockholders Agreement STOCKHOLDERS AGREEMENT dated as of November 15, 2001 among U. S. HOME & GARDEN INC., a Delaware corporation ("USHG"), and USHG's stock, option, warrant and/or convertible security holders who become parties hereto from time to time (the "Holders"). WHEREAS, each of the Holders is the record and beneficial owner of the Securities (as defined in Section 1) indicated opposite such Holder's name on Schedule 1 hereto, as such Schedule may be amended or supplemented from time to time; and WHEREAS, the Holders desire to provide herein for certain matters relating to the transfers of Securities by the Management Holders (as hereinafter defined); NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows: 1. Definitions. As used in this Agreement the following terms shall have the following meanings (capitalized terms used in this Agreement and not otherwise defined herein shall have the meaning assigned to such terms in the Purchase Agreement referred to below): "Agreement" or "this Agreement" means this Agreement and all Exhibits and Schedules hereto. "Common Equivalent" means (i) each share of Common Stock and (ii) the right upon exercise of an Option (including the Warrants) or conversion of a Convertible Security to obtain one share of Common Stock. "Common Stock" means USHG's Common Stock, $.001 par value. "Convertible Securities" shall mean (a) any stock, notes or other securities convertible into or exchangeable, directly or indirectly, for shares of Common Stock (whether or not such right to convert or exchange is immediately exercisable or is "in the money"), (b) any other security, note or agreement which provides the holder thereof with a payment, repayment amount, appreciation right or liquidation preference (i) calculated by reference to, or arising from, the value of USHG upon a sale, merger, recapitalization or similar event, or (ii) based upon the value, whether market or appraisal, of the Common Stock, and (c) any agreement to issue shares of Common Stock or issue or enter into such other stock, notes, securities or agreements described in the foregoing clauses (a) or (b). "Excluded Transfer" shall mean any transfer of Securities by a Management Holder (a) to any Family Member of such Management Holder or to the executor or administrator of such Management Holder, or to a trust or partnership primarily for the benefit of such Management Holder or his Family Members, provided that the transferee becomes a party to this Agreement as a Management Holder bound by all the obligations hereunder applicable to a Management Holder, (b) made as a bona fide gift to a bona fide charitable organization, or (c) in a bona fide public market sale or sale pursuant to Rule 144. "Family Member" of a Management Holder means (i) any parent, spouse or sibling of such Management Holder, or (ii) a lineal descendant (including legally adopted descendants), or the spouse of any such descendant, of such Management Holder or of any of his siblings. "Family Transferee" of a Management Holder shall mean a transferee of a Management Holder referred to in clause (a) of the definition of "Excluded Transfer". "Holder" means each Holder listed on Schedule 1 hereto and any Person who hereafter becomes a Holder pursuant to the terms of this Agreement. "Investors" means the holders from time to time of Warrants and/or Warrant Shares. "Management Holder" means any of Robert Kassel, Richard Raleigh and Richard Grandy, and any other Person who from time to time becomes a party hereto as a Management Holder. "Options" shall mean any warrants (including the Warrants), options (including options granted pursuant to any stock option plan), agreements or other rights to subscribe for or to purchase, directly or indirectly, shares of Common Stock (whether or not such warrants, options or other rights are immediately exercisable or are "in the money"). Options shall include any warrants, options or other agreements or rights to subscribe for or to purchase, directly or indirectly, Convertible Securities or other Options (whether or not such warrants, options or other rights are immediately exercisable or are "in the money") and agreements or plans under which the Issuer may issue Common Stock, Options or Convertible Securities in exchange for services of any kind, whether to be rendered by an employee, consultant, individual, entity or third party of any kind. "Person" means an individual, a corporation, a partnership, a limited liability company, an association, a trust or any other entity or organization, including a government or political subdivision or any agency or instrumentality thereof. "Purchase Agreement" means the Note and Warrant Purchase, Guaranty and Security Agreement dated as of the date hereof among USHG and its Subsidiaries, as such Purchase Agreement may be amended, supplemented or otherwise modified from time to time. "Rule 144" shall mean Rule 144, as amended, of the Securities and Exchange Commission under the Securities Act. "Securities" means shares of Stock, Options or Convertible Securities. 2 "Securities Act" means the Securities Act of 1933, as amended. "Stock" means any shares of capital stock of USHG, whether preferred stock or common stock (and including the Common Stock). "transfer" means any sale, assignment, transfer, gift, encumbrance or other disposition of Securities. "Warrants" means the Warrants issued from time to time pursuant to (i) the Warrant Agreement dated as of the date hereof among USHG and the Holders, as the same may be amended, modified or supplemented from time to time (the "Percentage Warrant Agreement"), and (ii) the Warrant Agreement, as amended, modified or supplemented from time to time, among USHG and the Holders to be executed and delivered on the "Expiration Date" as defined in the Percentage Warrant Agreement. "Warrant Shares" means shares of Common Stock or other securities issued or issuable upon exercise of the Warrants. 2. Restrictions on Certain Transfers by Management Holders. (a) During the term of this Agreement, none of the Securities now owned or hereafter acquired by any Management Holder may be transferred (other than in the case of a transfer referred to in clause (b) or (c) of the definition of "Excluded Transfer" or a transfer to a Person who is a Holder prior to such transfer or a transfer in which the Investors are offered the right to participate in accordance with Section 3 below) unless the proposed recipient of such Securities shall become a party to this Agreement as a "Management Holder" and shall deliver to USHG a written agreement to the effect that the Securities to be received in such proposed transfer are subject to this Agreement. (b) No Securities owned by any Management Holder or his Family Transferees may be transferred except in an Excluded Transfer or in accordance with Section 3 hereof. 3. Tag-Along Right. (a) In the event that any one or more of the Management Holders (a "Selling Holder") proposes to transfer Securities (other than in an Excluded Transfer), then the Selling Holder(s) shall deliver to each of the Investors a written notice (the "Sale Notice") to such effect, containing a description of the proposed transaction and the terms thereof. Upon delivery of the Sale Notice, each of the Investors shall have the right to require the Selling Holder(s) to arrange for the sale to the proposed transferee(s) of a percentage of such Investor's Securities equal to the highest percentage of any Selling Holder's holdings of Securities that any Selling Holder desires to transfer to the transferee(s), on terms and conditions at least as favorable to such Investor as the terms and conditions set out in the Sale Notice. (b) If the transferee(s) will not purchase all of the Securities which the Selling Holders and each Investor desire to transfer pursuant to this Section 3, then the number of Securities to be transferred which each Holder shall be permitted to transfer to such transferee(s) 3 shall be the same proportion of the aggregate number of Securities as the number of Securities held by such Holder bear to all Securities held by the Selling Holders and all Investors desiring to participate in the transfer to the transferee(s). (c) Notwithstanding anything to the contrary contained in Section 3(a) or (b), in the event that the Securities to be transferred include shares of Common Stock, Investors holding Warrants shall be entitled to participate in the sale of such Common Stock based on the number of Warrant Shares issuable upon exercise of all their Warrants, and shall exercise such number of Warrants prior to the proposed transfer as may be necessary to deliver the requisite number of shares of Common Stock to the proposed transferee, unless the proposed transferee desires to purchase such number of Warrants rather than the underlying shares of Common Stock. Any such purchase of Warrants shall be on the same terms and conditions set forth in the Sale Notice with respect to Common Stock, except that the price payable by the transferee(s) for Warrants shall be net of the exercise price then effective under such Warrants. (d) Each Investor may exercise its right under this Section 3 by written notice to the Selling Holder(s) who gave the Sale Notice given within ten (10) days after the date on which such Investor receives the Sale Notice. 4. Restrictive Legends. To the extent any of the Securities held by a Management Holder are evidenced by certificate(s), such certificate(s) shall contain a restrictive legend substantially as follows: "THE SALE, ASSIGNMENT, TRANSFER, PLEDGE, ENCUMBRANCE, OR OTHER DISPOSITION OF THE SHARES EVIDENCED BY THIS CERTIFICATE, OR ANY INTEREST IN SUCH SHARES, ARE RESTRICTED BY THE TERMS OF A STOCKHOLDERS AGREEMENT DATED AS OF NOVEMBER 15, 2001, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION. NO SUCH SALE, ASSIGNMENT, TRANSFER, PLEDGE, ENCUMBRANCE OR OTHER DISPOSITION SHALL BE EFFECTIVE UNLESS AND UNTIL THE TERMS AND CONDITIONS OF SUCH STOCKHOLDERS AGREEMENT SHALL HAVE BEEN COMPLIED WITH IN FULL." 5. Representations and Warranties of the Holders. Each Holder hereby represents and warrants as follows: (a) This Agreement has been duly executed and delivered by such Holder and constitutes the valid and binding obligation of such Holder enforceable in accordance with its terms. (b) Neither the execution nor the delivery of this Agreement, nor the consummation of the transactions contemplated hereby, nor compliance with the terms and provisions hereof, will conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any applicable law, or any order, writ, injunction or decree of any court, administrator or arbitrator, or any agreement or instrument which is applicable to such Holder, under which such Holder is obligated or by which any of such Holder's property is bound. 4 6. General Provisions. 6.1 Notices. All notices, requests and other communications to any party hereunder shall be in writing (including telecopy or similar writing) and shall be given to USHG at 655 Montgomery Street, San Francisco, CA 94111, Attn: Robert Kassel, Chief Executive Officer (Telecopier No.: (415) 616-8110), and to any Holder at his or its address set forth on Schedule 1 hereto, or such other address as such party may hereafter specify for the purpose by notice to the other parties. Except as otherwise provided herein, each such notice, request or other communication to a party shall be effective (a) if given by mail, three (3) business days after being deposited in the mails registered or certified, return receipt requested, with postage prepaid, addressed to such party as aforesaid, or (b) if given by any other means, when delivered to such party at its address specified as provided in this Section. 6.2 Equitable Relief. The parties hereto agree that legal remedies may be inadequate to enforce the provisions of this Agreement and that equitable relief, including specific performance and injunctive relief, may be used to enforce the provisions of this Agreement. 6.3 Additional Parties. Any Person who hereafter becomes a party hereto as a Holder shall be bound by all obligations and entitled to all rights and privileges of a Management Holder or an Investor, as the case may be, as if such Person had been an original signatory to this Agreement. 6.4 Amendments; Termination. Any provision of this Agreement may be amended or terminated only by a written agreement signed by (i) Investors holding at least a majority of the Warrants and Warrant Shares then subject to this Agreement and (ii) Management Holders holding at least a majority of the Common Equivalents then subject to this Agreement held by all Management Holders. 6.5 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective personal representatives, heirs, successors and assigns (including any transferee of Securities). 6.6 Termination. This Agreement shall terminate on May 19, 2009. 6.7 Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Delaware. 6.8 Counterparts; Effectiveness. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 6.9 Captions. The captions in this Agreement are included for convenience of reference only, do not constitute a part hereof and shall be disregarded in the interpretation or construction hereof. 5 6.10 Entire Agreement. This Agreement constitutes the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes all previous agreements, whether written or oral, relating to the same subject matter. [Rest of page intentionally left blank] 6 IN WITNESS WHEREOF, USHG and the Holders have duly executed this Stockholders Agreement as of the day and year first above written. - -------------------------------------------------------------------------------- USHG: Investors: U.S. HOME & GARDEN INC. LEG PARTNERS III SBIC, L.P. by Golub PS-GP, LLC, its general partner By: ____________________________ Name: By: _________________________________ Title: Gregory W. Cashman, Vice President - -------------------------------------------------------------------------------- Management Holders: LEG CO-INVESTORS, LLC By: _________________________________ ____________________________ Gregory W. Cashman, Authorized Robert Kassel Signatory 555 MADISON INVESTORS, LLC ____________________________ By: _________________________________ Richard Raleigh Gregory W. Cashman, Manager - -------------------------------------------------------------------------------- ____________________________ Richard Grandy - -------------------------------------------------------------------------------- 7 SCHEDULE 1 TO STOCKHOLDERS AGREEMENT U. S. HOME & GARDEN INC. List of Holders and Securities Owned - -------------------------------------------------------------------------------- Holder Common Stock Options Warrants - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Robert Kassel 323,788* 2,229,333 263,160 Richard Raleigh 2,000 761,911 0 Richard Grandy 934,396 150,000 0 c/o U. S. Home & Garden Inc. 655 Montgomery Street San Francisco, CA 94111 Telecopier No.: (415) 616-8110 - -------------------------------------------------------------------------------- LEG Partners III SBIC, L.P. 3.6108% LEG Co-Investors, LLC 0.0342% 555 Madison Investors, LLC 0.1050% 555 Madison Avenue, 30th Floor New York, NY 10022 Attn: Gregory W. Cashman Telecopier No.: (212) 750-5505 - -------------------------------------------------------------------------------- TOTALS - -------------------------------------------------------------------------------- *Includes 208,388 shares whose issuance to Mr. Kassel has been deferred pursuant to the terms of USHG's Non-Qualified Deferred Compensation Plan for Select Employees. 8 CONSULTING AGREEMENT CONSULTING AGREEMENT, dated as of November 15, 2001 by and between U.S. Home & Garden Inc. and Easy Gardener, Inc. (collectively, the "Company"), and Golub Associates, LLC (the "Consultant"). WHEREAS, the Company desires to retain the Consultant to provide, and the Consultant desires to provide, certain management and financial consulting services as hereinafter provided; NOW, THEREFORE, in consideration of the promises and commitments set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending legally to be bound, hereby agree as follows: 1. Definitions. Capitalized terms used herein without definition having the meanings given thereto in the Note and Warrant Purchase, Guaranty and Security Agreement dated as of the date hereof among the Company, its Subsidiaries and the Purchasers named therein, as amended from time to time. 2. Term. (a) The Company shall retain the Consultant hereunder for a period commencing on the Closing Date and ending on the Termination Date, unless sooner terminated by mutual written agreement of the parties hereto. The period during which this Agreement remains in effect shall be referred to hereinafter as the "Term". (b) The "Termination Date" shall mean the earlier of (i) the date on which the Consultant terminates by notifying the Company of such termination, or (ii) the date on which the Company terminates by notifying the Consultant of such termination; provided, that no termination by the Company shall occur so long as any of the initial Purchasers or any of their respective Affiliates owns any Notes, Warrants or Warrant Securities. 3. Duties of Consultant. (a) As used in this Section, the term "Consultant" shall include employees of the Consultant or its Affiliates and any other individuals providing services on behalf of the Consultant or its Affiliates. (b) During the Term, the Consultant shall be reasonably available from time to time to consult with, and provide financial and strategic advice to, management of the Company on matters involving and relating to the Company's corporate, financial and management structure and operation, subject to the limits of the Consultant's experience and expertise. In particular, the Consultant shall review, and respond to management requests concerning, the following matters: (i) the Company's capital and overall financial structure, including equity and/or debt capitalization, off-balance sheet financing, cash flow considerations and strategic plans for capital spending and asset financing; (ii) acquisition and divestiture opportunities and strategies, but not in the role of intermediary or investment banker representing the Company; (iii) terms and conditions of third-party financing and/or major corporate transactions (including both acquisitions and dispositions), but not in the role of a broker, investment banker, financial advisor, underwriter or similar representative representing the Company in negotiating and effecting a transaction with third parties; (iv) review of monthly, quarterly and annual financial results and development of annual business plans and financial projections; and (v) such other financial and/or strategic management and financial consulting services as the parties may agree upon from time to time. (c) Consultant shall be reasonably available to management of the Company for telephone consultations and, as reasonably and mutually acceptable to the parties, periodic meetings with management of the Company. 4. Compensation; Payment of Expenses; Further Retention. (a) The Company shall pay the Consultant annually in advance for the services of the Consultant hereunder at the rate of $54,500 per annum, with the first such payment due on the Closing Date and subsequent payments due on each annual anniversary of the Closing Date. (b) If the Company shall perform work or provide services at the Company's request, and if the cost of performing such work or providing such services, calculated at the Consultant's standard hourly or per diem rates, as applicable, would exceed $4,500 in any month, the Consultant shall so notify the Company (prior to performing such work) and be entitled to additional compensation for such work or services before having any obligation to continue to perform such work or provide such services. (c) If the Company shall engage any employee of the Consultant on a full or part time basis, the Consultant shall be separately compensated for providing the services of such employee, on an hourly, per diem or other mutually agreed basis. (d) The Company also shall reimburse the Consultant, promptly upon demand, for reasonable out-of-pocket expenses incurred by the Consultant and/or its employees and agents in connection with the performance of the Consultant's duties under this Agreement, including expenses for travel, lodging, meals and transportation; provided, that, at the Company's request, the Consultant shall submit to the Company documentation and invoices reasonably acceptable to the Company prior to reimbursement. (e) The Company shall pay the annual amount referred to in paragraph (a) above on the due dates specified therein, without the need for any invoice therefor from the Consultant. The Consultant will submit to the Company invoices setting forth any additional amounts due hereunder, which shall be payable within 30 days of the invoice date. -2- (f) Any amounts payable pursuant to paragraph (b), (c) or (d) above shall be in addition to the compensation payable pursuant to paragraph (a) above. 5. Limitation on Liability of Consultant; Indemnification. (a) None of the Consultant or any of its Affiliates, or any of their respective members, managers, directors, officers, employees, consultants, contractors, agents or Affiliates, shall be liable, responsible or accountable in damages or otherwise to the Company or any of its members, managers, directors, officers, employees, agents or Affiliates for any error of judgment by the Consultant or for any loss suffered by the Company arising out of services provided by the Consultant pursuant to this Agreement, except for such errors or losses resulting from willful misfeasance or gross negligence of the Consultant in the performance of its duties under this Agreement. (b) To the fullest extent permitted by applicable law, the Company shall indemnify and hold harmless the Consultant and its Affiliates, and each of their respective members, managers, directors, officers, employees, consultants, contractors, agents or Affiliates (each such individual or entity to be referred to hereinafter as an "Indemnified Person"), from and against any loss, claim, damage or liability, joint or several, and any action in respect thereof, to which an Indemnified Person may be subject, insofar as such loss, claim, damage, liability or action relates to, arises out of or results from any Covered Event (as such term is defined below) or alleged Covered Event, and will reimburse such Indemnified Person on a current basis for all expenses (including without limitation reasonable fees and disbursements of not more than one counsel) incurred by such Indemnified Person in connection with investigating, defending or preparing to defend against any such loss, claim, damage, liability or action, as such expenses are incurred or paid. (c) The term "Covered Event" shall mean (i) any action taken, or services performed, by an Indemnified Person, related to or consistent with the terms of this Agreement, or (ii) any action taken, or omitted to be taken, by the Company or any of its managers, directors, officers, employees, agents or Affiliates, in connection with any matter in which an Indemnified Person has been involved pursuant to this Agreement; provided, that the term "Covered Event", with respect to an Indemnified Person, shall exclude any loss, claim, damage, liability or expense that is determined by the final judgment of a court of competent jurisdiction to have been caused primarily from the willful misfeasance or gross negligence of such Indemnified Person. 6. Non-Solicitation. (a) From the Closing Date until the second anniversary of the date of termination of this Agreement, neither party shall, without the prior written consent of the other party, directly or indirectly employ or engage the services of any employee or consultant of the other party or any of its Affiliates, or recruit, solicit or otherwise induce or influence any employee or consultant of the other party or any of its Affiliates to discontinue his or her relationship with such other party or any of its Affiliates. (b) In the event of a breach or a threatened breach of the covenant set forth in Section 6(a), the affected party shall, in addition to the remedies provided by law, have the right and remedy to have such covenant specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that a breach of such covenant will cause irreparable injury to the affected party, and that money damages will not provide an adequate remedy. -3- 7. Confidentiality. Except in the course of the performance of its duties hereunder, the Consultant agrees not to disclose any trade secrets, know-how or other proprietary or material non-public information not in the public domain learned as a result of this Agreement unless and until such information becomes publicly available other than through the actions of the Consultant. 8. Amendments, Etc. Any waiver of any term or condition of, or any consent or discharge under, this Agreement shall be effective only if in writing and signed by the party against whom it is sought to be enforced. Any amendment or supplementation of this Agreement shall be effective only if in writing and signed by both parties. 9. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors and assigns. No assignment shall be effective without the prior written consent of the non-assigning party. 10. Notices. All notices, requests, demands or other communications to or upon a party hereto shall be in writing and shall be deemed to have been given or made five (5) days after deposited in the mails, registered or certified with postage prepaid, addressed to the Company at 655 Montgomery Street, San Francisco, CA 94111, Attn: Robert Kassel, Chief Executive Officer (Telecopier No.: (415) 616-8110), and to the Consultant at 555 Madison Avenue, 30th Floor, New York, NY 10022, Attn: Gregory W. Cashman (Telecopier No.: (212) 750-5505), or to such other address or addresses as either party shall specify in writing to the other. No other method of giving notice is hereby precluded. 11. Captions. Captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement. 12. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall constitute an original, and all of which taken together shall constitute one and the same instrument. 13. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to its conflict of laws principles. 14. Entire Agreement. This Agreement represents the entire agreement and understanding of the parties hereto with respect to the subject matter and supersedes all prior agreements and understandings, whether oral or written, with respect to such subject matter. -4- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. - -------------------------------------------------------------------------------- Company: Consultant: U.S. HOME & GARDEN INC. GOLUB ASSOCIATES, LLC By: ___________________________ By: _________________________________ Name/Title: Gregory W. Cashman, Vice President - -------------------------------------------------------------------------------- EASY GARDENER, INC. By: ___________________________ Name/Title: - -------------------------------------------------------------------------------- -5- U.S. HOME & GARDEN INC. Non-Competition and Non-Solicitation Agreement NON-COMPETITION AND NON-SOLICITATION AGREEMENT dated as of November ___, 2001 between U.S. Home & Garden, Inc. a Delaware corporation ("USHG"), and ___________________ (the "Executive"). W I T N E S S E T H : WHEREAS, the Executive is employed as a senior executive of USHG and/or one or more of its Subsidiaries (collectively, the "Company") and is an important and valued employee of the Company; and WHEREAS, the Company requires certain senior and subordinated financing and it is a condition to the obtaining of such financing that the Executive enter into this Agreement, and the Executive is willing to do so because of the importance of such financing to the success of the Company and the Executive; NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, and intending to be legally bound hereby, USHG and the Executive hereby agree as follows: 1. Confidentiality; Noncompetition. (a) USHG and the Executive acknowledge that the services performed by the Executive for the Company are unique and extraordinary and, as a result of such employment, the Executive comes into possession of confidential information relating to the business practices of the Company. The term "confidential information" shall mean any and all information (verbal and written) relating to the Company or any of its affiliates, or any of their respective activities, other than such information which can be shown by the Executive to be in the public domain (such information not being deemed to be in the public domain merely because it is embraced by more general information which is in the public domain) other than as the result of breach of the provisions of this Section 1(a), including, but not limited to, information relating to: trade secrets, personnel lists, financial information, research projects, services used, pricing, customers, customer lists and prospects, product sourcing, marketing and selling and servicing. The Executive agrees that he will not, during or after the period of his employment by the Company, except as may be required in the course of the performance of his duties for the Company, directly or indirectly, use, communicate, disclose or disseminate to any person, firm or corporation any confidential information regarding the clients, customers or business practices of the Company acquired by the Executive, without the prior written consent of USHG; provided, however, that the Executive understands that the Executive will be prohibited from misappropriating any trade secret at any time during or after the termination of employment. -1- (b) The Executive hereby agrees that he shall not, during the period of his employment and for a period of two (2) years following such employment, directly or indirectly, within any county (or adjacent county) in any State within the United States or territory outside the United States in which the Company is engaged in business during the period of the Executive's employment or on the date of termination of the Executive's employment, engage, have an interest in or render any services to any business (whether as owner, manager, operator, licensor, licensee, lender, partner, stockholder, joint venturer, employee, consultant or otherwise) competitive with the Company's business activities. Notwithstanding the foregoing, nothing herein shall prevent the Executive from owning stock in a publicly traded corporation whose activities compete with those of the Company's, provided that such stock holdings are not greater than 5% of such corporation. The Executive agrees, during the term of his employment, to disclose to the Company all investments which the Executive has, directly or indirectly, in an entity which competes with the Company, or an entity which does business with the Company. (c) The Executive hereby agrees that he shall not, during the period of his employment and for a period of three (3) years following such employment, directly or indirectly, take any action which constitutes an interference with or a disruption of any of the Company's business activities including, without limitation, solicitation of the Company's customers, or persons listed on the personnel lists of the Company. At no time during the term of his employment, or thereafter shall the Executive directly or indirectly disparage the commercial, business or financial reputation of the Company. (d) For purposes of clarification, but not of limitation, the Executive hereby acknowledges and agrees that the provisions of subparagraphs 1(b) and (c) above shall serve as a prohibition against him, during the period referred to therein, directly or indirectly, hiring, offering to hire, enticing, soliciting or in any other manner persuading or attempting to persuade any officer, employee, agent, lessor, lessee, licensor, licensee or customer who has been previously contacted by either a representative of the Company, including the Executive (but only those suppliers existing during the time of the Executive's employment by the Company, or at the termination of his employment), to discontinue or alter his, her or its relationship with the Company. (e) Upon the termination of the Executive's employment for any reason whatsoever, all documents, records, notebooks, equipment, price lists, specifications, programs, customer and prospective customer lists and other materials which refer or relate to any aspect of the business of the Company which are in the possession of the Executive including all copies thereof, shall be promptly returned to the Company. (f) (i) The Executive agrees that all processes, technologies and inventions ("Inventions"), including new contributions, improvements, ideas and discoveries, whether patentable or not, conceived, developed, invented or made by him during his employment by the Company shall belong to the Company, provided that such Inventions grew out of the Executive's work with the Company are related in any manner to the business (commercial or experimental) of the Company or are conceived or made on the Company's time or with the use of the Company's facilities or materials. The Executive shall further: (a) promptly disclose such Inventions to the Company; (b) assign to the Company, without -2- additional compensation, all patent and other rights to such inventions for the United States and foreign countries; (c) sign all papers necessary to carry out the foregoing and (d) give testimony in support of his inventorship; (ii) If any Invention is described in a patent application or is disclosed to third parties, directly or indirectly, by the Executive within two years after the termination of his employment by the Company, it is to be presumed that the invention was conceived or made during the period of the Executive's employment by the Company; and (iii) The Executive agrees that he will not assert any rights to any Invention as having been made or acquired by him prior to the date of his employment, except for inventions, if any, disclosed to the Company in writing prior to the date of his employment. (g) The Company shall be the sole owner of all products and proceeds of the Executive's services while employed by the Company, including, but not limited to, all materials, ideas, concepts formats, suggestions, developments, arrangements, packages, programs and other intellectual properties that the Executive may acquire, obtain, develop or create in connection with and during the term of the Executive's employment, free and clear of any claims by the Executive (or anyone claiming under the Executive) of any kind or character whatsoever. The Executive shall, at the request of the Company, execute such assignments, certificates or other instruments as the Company may from time to time deem necessary or desirable to evidence, establish, maintain, perfect, protect, enforce or defend its right, or title and interest in or to any such properties. (h) The parties hereto hereby acknowledge and agree that (i) the Company would be irreparably injured in the event of a breach by the Executive of any of his obligations under this Section 1, (ii) monetary damages would not be an adequate remedy for any such breach, and (iii) the Company shall be entitled to injunctive relief, in addition to any other remedy which it may have, in the event of any such breach. (i) The parties hereto hereby acknowledge that, in addition to any other remedies the Company may have under Section 1(h) hereof, the Company shall have the right and remedy to require the Executive to account for and pay over to the Company all compensation, profits, monies, accruals, increments or other benefits (collectively, "Benefits") derived or received by the Executive as the result of any transactions constituting a breach of any of the provisions of this Section 1, and the Executive hereby agrees to account for any pay over such Benefits to the Company. (j) Each of the rights and remedies enumerated in Section 1(h) and 1(i) shall be independent of the other, and shall be severally enforceable, and all of such rights and remedies shall be in addition to, and not in lieu of, any other rights and remedies available to the Company under law or in equity. (k) It any provision contained in this Section 1 is hereafter construed to be invalid or unenforceable, the same shall not affect the remainder of the covenant or covenants, which shall be given full effect, without regard to the invalid portions. -3- (l) If any provision contained in this Section 1 is found to be unenforceable by reason of the extent, duration or scope thereof, or otherwise, then the court making such determination shall have the right to reduce such extent, duration, scope or other provision and in its reduced form any such restriction shall thereafter be enforceable as contemplated hereby. (m) It is the intent of the parties hereto that the covenants contained in this Section 1 shall be enforced to the fullest extent permissible under the laws and public policies of each jurisdiction in which enforcement is sought (the Executive hereby acknowledging that said restrictions are reasonable necessary for the protection of the Company). Accordingly, it is hereby agreed that if any of the provisions of this Section 1 shall be adjudicated to be invalid or unenforceable for any reason whatsoever, said provision shall be (only with respect to the operation thereof in the particular jurisdiction in which such adjudication is made) construed by limiting and reducing it so as to be enforceable to the extent permissible, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of said provision in any other jurisdiction. 2. General. This Agreement is further governed by the following provisions: (a) Notices. All notices relating to this Agreement shall be in writing and shall be either personally delivered, sent by telecopy (receipt confirmed) or mailed by certified mail, return receipt requested, to he delivered at such address as is indicated below, or at such other address or to the attention of such other person as the recipient has specified by prior written notice to the sending party. Notice shall be effective when so personally delivered, one business day after being sent by telecopy or five days after being mailed. To USHG: U.S. Home & Garden Inc. 655 Montgomery Street, Suite 830 San Francisco, CA 94111 Attention: To the Executive: _____________________ _____________________ _____________________ With, in either case, a copy in the same manner to: Blank Rome Tenzer Greenblatt LLP 405 Lexington Avenue New York, New York 10174 Attention: (b) Parties in Interest. This Agreement shall inure to the benefit of, and be binding upon, the parties hereto and their respective heirs, legal representatives, -4- successors and permitted assigns. The Subsidiaries of USHG shall be third party beneficiaries of this Agreement, as shall the parties providing certain senior and subordinated financing to the Company on or about the date of this Agreement. (c) Entire Agreement. This Agreement supersedes any and all other agreements, either oral or in writing, between the parties hereto with respect to the subject matter hereof. Any modification or termination of this Agreement will be effective only if it is in writing signed by the party to be charged, as well as by the financing parties referred to in Section 2(b) who are third party beneficiaries of this Agreement. (d) Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of New York. (e) Warranty. The Executive hereby warrants and represents as follows: (i) The execution and delivery of this Agreement and the discharge of the Executive's obligations hereunder will not breach or conflict with any other contract, agreement or understanding between the Executive and any other party or parties. (ii) The Executive has ideas, information and know-how relating to the type of business conducted by the Company, and the Executive's disclosure of such ideas, information and know-how to the Company will not conflict with or violate the rights of any third party or parties. (f) Severability; etc. Each term and provision of this Agreement shall be valid and be enforced to the fullest extent permitted by law. If any term, provision, obligation or agreement contained in this Agreement or the application thereof to any person or circumstance is held by a court of competent jurisdiction to be invalid or unenforceable to any extent, then the remainder of this Agreement, or the application of such term, provision, obligation or agreement to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected by such holding. To the maximum extent permitted by law, the Company's rights and remedies provided for in this Agreement shall be cumulative. If, for any reason, any court of competent jurisdiction finds any provision of this Agreement to be objectionable on its face or as applied in any circumstance, the parties agree that they shall jointly request that such court modify and/or apply such provision in a manner which makes it enforceable to the maximum extent permitted by law. (g) Execution in Counterparts. This Agreement may be executed by the parties in one or more counterparts, each of which shall be deemed to be an original but all of which taken together shall constitute one and the same agreement, and shall become effective when one or more counterparts has been signed by each of the parties hereto and delivered to each of the other parties hereto. -5- IN WITNESS WHEREOF, the parties hereto have executed and delivered this Non-Competition and Non-Solicitation Agreement as of the date first above written. - -------------------------------------------------------------------------------- U.S. HOME & GARDEN INC. Executive: By:____________________________ _______________________________ Name/Title: - -------------------------------------------------------------------------------- -6- -----END PRIVACY-ENHANCED MESSAGE-----