Darford agrees to enforcement of HSBC indebtedness and security if alternative transaction is not entered into by September 13, 2012

TSX Venture Exchange: "WUF.V"

VERNON, BC, Sept. 6, 2012 /CNW/ - Darford International Inc. ("Darford" or the "Company") provides the following corporate update.

Support Agreement

Darford has entered into a support agreement (the "Support Agreement") with Darford Holding Company, Inc. ("Holdco"), a company unrelated to Darford, whereby Holdco has agreed, among other things, to enter into a letter of intent (the "LOI") with HSBC Bank Canada ("HSBC") whereby Holdco proposes, by September 27, 2012, to acquire the indebtedness of Darford owing to HSBC (the "HSBC Indebtedness") and the indebtedness of the Guarantors (as defined below) owing to HSBC and all related security agreements and security documents including, among other things, a general security agreement over all the personal property of Darford (collectively, the "HSBC Security Documents").

HSBC has advised the Company that it is currently in breach of certain financial covenants under its credit facilities with HSBC consisting of a $1,200,000 operating line of credit, a $469,165 non-revolving demand loan, a $504,000 demand revolving loan and a $1,500,000 revolving demand loan facility (as announced on June 12, 2012). The HSBC Indebtedness is secured by, the HSBC Security Documents and is guaranteed by Darford Industries Ltd., Darford USA Inc., Darford USA Holdings Co., Ocean SW Inc. ("Ocean"), and John Phelps ("Phelps"), a director of Darford, (collectively, the "Guarantors"). As at August 29, 2012, the Company had $2,437,974.72 drawn under the HSBC Indebtedness. The breach puts the Company at risk of having the entire HSBC Indebtedness being demanded by HSBC. On May 29, 2012, the Company entered into a forbearance agreement with HSBC pursuant to which HSBC agreed to continue to make the HSBC credit facilities available to Darford and not enforce the security under the HSBC Security Documents  until July 31, 2012. Darford did not repay the HSBC Indebtedness by such date. As a result of the proposed assignment of HSBC Security Documents to Holdco, HSBC has agreed, pursuant to a supplemental forbearance agreement dated August 1st, 2012 (the "Forbearance Extension") to continue to forbear from enforcing the HSBC Security Documents until September 27, 2012.

Under the terms of the Support Agreement, if Darford has not by September 13, 2012: (a)(i) repaid the HSBC Indebtedness in full and obtained a full discharge of the HSBC Security Documents (including a discharge of the guarantees granted by Ocean and Phelps (the "Guarantees")) and the release to Ocean and Phelps of a $1.5 million cash collateral granted by Ocean and Phelps to HSBC (the "Cash Collateral"); or (ii) entered into a binding agreement on terms and conditions satisfactory to HSBC and Holdco, acting reasonably, with a party other than Holdco for the repayment of the HSBC Indebtedness and a full discharge of the HSBC Security Documents (including a discharge of the Guarantees and the release to Ocean and Phelps of the Cash Collateral) such repayment and discharge to occur on or before October 15, 2012; either (a)(i) or (a)(ii) being referred to as an "Alternative Transaction", and (b) paid the Holdco Costs, (as defined herein) will consummate the Assignment of the HSBC Security Documents (as defined herein) in accordance with the LOI and will commence enforcement proceedings whereby Holdco, or a Canadian subsidiary of Holdco ("Canco") will obtain title to all assets of Darford pursuant to a voluntary foreclosure under the Personal Property Security Act (British Columbia).

Conditions

The obligation of Holdco to complete the transactions contemplated in the Support Agreement is subject to the fulfillment of certain conditions (which may be waived by Holdco in its sole discretion), including, among others: (i) Holdco shall have completed and be satisfied with, in its sole discretion, its due diligence and review of the business of Darford, its assets and the business and assets of Darford's subsidiaries and the assets to be conveyed to Holdco pursuant to the Bomford Agreement (as defined below); (ii) Holdco shall have acquired the HSBC Indebtedness and HSBC Security Documents on terms acceptable to Holdco; (iii) Darford shall have obtained the consent of Southern Interior Innovation (VCC) Inc. and Dennis Hallam (both secured creditors of Darford) in a form acceptable to Holdco (collectively, the "Consents"), to the transactions contemplated by Support Agreement (which condition may be waived by Holdco in its sole discretion); and (iv) Bomford (as defined below) shall not have failed to duly perform or observe any term, covenant or obligation contained in the Bomford Agreement and the transactions contemplated under the Bomford Agreement shall be completed simultaneously with the transactions contemplated under the Support Agreement (collectively, the "Holdco Conditions").

The obligation of Darford to complete the transactions contemplated in the Support Agreement is subject to the fulfillment of certain conditions (which may be waived by Darford in its sole discretion), including, among others: (i) Holdco shall not have failed to duly perform or observe any term, covenant or obligation contained in the Support Agreement; and (ii) Holdco shall have consummated the Assignment of the HSBC Security Documents in accordance with the terms of the LOI (the "Darford Conditions").

Covenants

Under the terms of the Support Agreement, Darford has agreed to certain positive and negative covenants including, among others that: (i) it shall use commercially reasonable efforts to obtain the Consents; and (ii) should Darford not enter into an Alternative Transaction and pay the Holdco Costs on or before September 13, 2012, Darford will take such steps as Holdco may reasonably require to consummate the transactions contemplated by the Support Agreement and to enforce the HSBC Security Documents by way of a voluntary foreclosure and it will not oppose, object or otherwise frustrate Holdco from enforcing the HSBC Security Documents.

Under the terms of the Support Agreement, Holdco has agreed to certain positive and negative covenants including, among others: (i) it will enter into the LOI and, subject to satisfaction of the Holdco Conditions, Holdco will consummate the Assignment of the HSBC Security Documents; (ii) provided Holdco acquires all of the assets of Darford pursuant to voluntary foreclosure proceedings and all of the Bomford Assets (as defined below), Holdco will payout or discharge the guarantees granted by the Guarantors, and release to Ocean and Phelps the Cash Collateral; and (iii) Holdco will not oppose, object or otherwise delay or frustrate Darford from entering into an Alternative Transaction by September 13, 2012.  Provided that Darford is not in default under the Support Agreement, Holdco has agreed not to commence or cause to be commenced the voluntary foreclosure proceedings on or before September 27, 2012.  If Darford has entered into an Alternative Transaction and such Alternative Transaction is proceeding to completion, and provided that Darford is not in default under the Support Agreement, Holdco has agreed not to commence or cause to be commenced the voluntary foreclosure proceedings before the earlier of (i) October 16, 2012 and (ii) the date the Alternative Transaction is terminated.

Events of Default

Pursuant to the Support Agreement, should an Event of Default (as defined below) occur, or should Darford breach any term or condition of the Support Agreement, it shall pay to Holdco the sum of $500,000 which is a genuine pre-estimate of the damages, which Holdco will suffer or incur as a result of such breach or Event of Default and are not penalties.  The occurrence of any one or more of the following events shall constitute an Event of Default: (a) Darford fails to duly perform or observe any term, covenant or obligation contained in the Support Agreement or any other agreement entered into with Holdco; (b) any encumbrancer or creditor of Darford takes possession of, or take steps to realize or execute against any real or personal property of Darford and such encumbrancer or creditor remains unsatisfied for a period of 7 days unless Darford is taking steps to defend such claims; (c) Darford, without the prior written consent of Holdco: (i) passes a resolution or institutes proceedings for its bankruptcy, winding-up, liquidation or dissolution or consents to the institution or filing of any petition or proceeding with respect thereto; (ii) files a petition or commences a proceeding or action seeking reorganization, re-adjustment, rearrangement, restructuring, composition or similar relief under any Canadian or other applicable law or consent to the filing of any such petition or to the appointment of a receiver, receiver-manager, liquidator, trustee or similar officer of themselves or of any of their real or personal property; (iii) makes an assignment or files a proposal for the benefit of its creditors; or (iv) takes any action in furtherance if any of the aforesaid purposes.

Termination

The obligations of Holdco and Darford under the Support Agreement shall terminate upon the happening of either: (a) on or before the close of business in Vancouver, British Columbia on September 13, 2012: (i) Darford paying in full the HSBC Indebtedness, and obtaining full discharges of the HSBC Security Documents (for greater certainty, including a discharge of the Guarantees and the release to Ocean and Phelps of the Cash Collateral); and (ii) Darford paying to Holdco all of Holdco's costs incurred (including without limitation actual legal fees and accountant fees) in connection with all due diligence conducted by Holdco, the preparation, negotiation and execution of the Support Agreement and all agreements contemplated thereby (including the Bomford Agreement) (collectively, the "Holdco Costs"); or (b) if, on or before the close of business in Vancouver, British Columbia on September 13, 2012, Darford has entered into an Alternative Transaction: and (i) the completion of the Alternative Transaction occurs on or before the close of business in Vancouver, British Columbia on October 15, 2012, such that the HSBC Indebtedness is paid in full and full discharges of the HSBC Security Documents (for greater certainty, including a discharge of the Guarantees and the release to Ocean and Phelps of the Cash Collateral) are obtained; and (ii) on or before the close of business in Vancouver, British Columbia on September 13, 2012 Darford pays to Holdco all Holdco Costs.

For greater certainty, the Support Agreement, and the obligations of Darford thereunder, shall not terminate until the HSBC Indebtedness is paid in full and full discharges of the HSBC Security Documents have been obtained.

Holdco

Phelps assisted in forming Holdco and is the initial director pending anticipated future investment by third parties.  It is further anticipated that Phelps will invest the $450 thousand cash deposit that he has on deposit with HSBC (as described above) in Holdco in exchange for equity or other interest in Holdco.  Phelps is the CEO of USPet Nutrition, a party with material contracts with the Company.  Ocean is also affiliated with USPet Nutrition.  It is anticipated that Ocean will be repaid its deposit with HSBC, either upon consummation of the voluntary foreclosure or over time as agreed to by Ocean.

Bomford Agreement

Darcy Bomford ("Bomford"), a director, and President and Chief Executive Officer of the Company, owns approximately 72% of the issued and outstanding shares in Darford. Pursuant to a deed of indemnity (the "Deed of Indemnity") dated June 22, 2011, Bomford indemnified Phelps and Ocean on the terms set out therein against any losses incurred by Phelps and Ocean in connection with their Guarantees and certain of the HSBC Security Documents granted by Phelps and Ocean.  Concurrently with the transactions contemplated under the Support Agreement, pursuant to an agreement entered into between Holdco and Bomford (the "Bomford Agreement"), Bomford must transfer or cause to be transferred to Holdco free and clear of all encumbrances (other than those encumbrances explicitly assumed by Holdco) all of the following: (i) all assets owned by Bomford relating or connected to the business and operations conducted by Darford, (ii) all intellectual property held by Bomford related in any way to the pet industry (iii) all assets of Bomford's company Trademark Pet Products Inc. ("TPP") excluding certain real property located in Blaine, Washington (the "Blaine Property"), and (iv) all real property owned by Bomford, TPP or Bellwether Properties Inc.  ("Bellwether") other than the Blaine Property and Bomford's principal residence. In exchange, Holdco will discharge or cause to be discharged  the Deed of Indemnity, discharge Bomford's obligations under the guarantee of certain indebtedness owing by TPP to Darford, will employ Bomford on terms yet to be determined and will cause Canco to issue to Bomford either at Bomford's election: (a) a number of Class A common shares of Canco (the "Class A Shares") equal to 10% of the number of Class A Shares issued at the time of completion of the transactions contemplated in the Bomford Agreement; or (b) both: (i) options to acquire a number of Class A Shares equal to 10% of the number of Class A Shares issued at the time of completion of the transactions contemplated in the Bomford Agreement exercisable for a period of 20 years at an exercise price equal to the fair market value of the Class A Shares at the time such transactions are completed; and (ii) a number of Class B common shares of Canco (the "Class B Shares") having a nominal face amount of $300,000 and payable from 25% of (i) distributions or (ii) certain exit events after the return to holders of Class A Shares of 30% per annum internal rate of return (the foregoing to be set forth and governed by the articles of Canco).  Bomford's obligations under the Bomford Agreement will terminate upon termination of Darford's obligations under the Darford Agreement.

About Darford

Darford markets and manufactures treats and food for dogs under its own Darford® brand name in Canada and in the United States.  Darford also contract manufactures products for well known North American brands.

Neither the TSX Venture Exchange nor its Regulation Service provided (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this news release. The TSX Venture Exchange Inc. has neither approved nor disapproved the contents of this news release.


SOURCE: Darford International Inc.

For further information:

Darcy Bomford
Chief Executive Officer
Darford International Inc.
(250) 545-4430
darcy@darford.com

For more information please visit www.darford.com and www.ilovealldogs.org.

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Darford International Inc.

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