**EXHIBIT 10.1**

 

 

FIRST AMENDMENT TO CREDIT AGREEMENT

 

                THIS FIRST AMENDMENT TO CREDIT AGREEMENT(this "Amendment") is entered into as of August 1, 2001, by andbetween NATROL, INC., a Delaware corporation ("Borrower"), and WELLSFARGO BANK, NATIONAL ASSOCIATION ("Bank").

 

RECITALS

 

                WHEREAS, Borrower is currently indebted toBank pursuant to the terms and conditions of that certain Credit Agreementbetween Borrower and Bank dated as of March 1, 2001, as amended from time totime ("Credit Agreement").

 

                WHEREAS, Bank and Borrower have agreed tocertain changes in the terms and conditions set forth in the Credit Agreementand have agreed to amend the Credit Agreement to reflect said changes.

 

                NOW, THEREFORE, for valuable consideration,the receipt and sufficiency of which are hereby acknowledged, the partieshereto agree that the Credit Agreement shall be amended as follows:

 

                1.             Section1.1(a) of the Credit Agreement is hereby amended (a) by deleting "March 1,2002" as the last day on which Bank will make advances under the Line ofCredit, and by substituting for said date "July 15, 2002," and (b) bydeleting "Ten Million Dollars ($10,000,000.00)" as the maximumprincipal amount available under the Line of Credit, and by substituting for saidamount "Five Million Dollars ($5,000,000.00)," with such changes tobe effective upon the execution and delivery to Bank of a promissory notesubstantially in the form of Exhibit A attached hereto (which promissorynote shall replace and be deemed the Line of Credit Note defined in and madepursuant to the Credit Agreement) and all other contracts, instruments anddocuments required by Bank to evidence such change.

 

                2.             Itis acknowledged that under Section 1.1(b) of the Credit Agreement, Borrower hasbeen required to comply with the Borrowing Base as defined therein. Section1.1(b) of the Credit Agreement is hereby amended by inserting the following atthe end thereof:

 

                "Notwithstanding the foregoing, Borrowershall not be required to comply with the foregoing provisions of this Section1.1(b) regarding the Borrowing Base until such time as Bank sends Borrower awritten notice that Bank is reinstating the Borrowing Base (the"Reinstatement Notice"). Bank, in its sole discretion, may send theReinstatement Notice to Borrower at any time. Commencing on the earlier of (i)the last day of the month following the month in which Borrower receives theReinstatement Notice, or (ii) the last day of the month in which Borrowerreceives the Reinstatement Notice, if Borrower receives the ReinstatementNotice prior to the 15th day of such month, the Borrowing Base shall bereinstated and Borrower shall at all times thereafter comply with the foregoingprovisions of this Section 1.1(b) regarding the Borrowing Base."

 

                3.             Section4.3(b) of the Credit Agreement is hereby deleted and replaced by the following:

 

                "(b)         Notlater than 25 days after and as of the end of each month, consolidated incomestatements of Borrower and Subsidiaries, prepared by Borrower;"

 

                4.             Section4.3(d) of the Credit Agreement is hereby amended by inserting the following atthe end thereof:

 

"provided,however, that the foregoing certificates, reports and information described inthis paragraph (d) shall only be required after Bank has sent the ReinstatementNotice to Borrower and the Borrowing Base has been reinstated in accordancewith Section 1.1(b);"

 

                5.             Sections4.9(i), (j), and (k) are hereby deleted in their entirety, and the followingsubstituted therefor:

 

                "(i)          Netprofit after taxes not less than $400,000.00 on a fiscal year-to-date basisdetermined as of June 30, 2001.

 

                (j)            Netprofit after taxes not less than $750,000.00 on a fiscal year-to-date basisdetermined as of September 30, 2001.

 

                (k)           Netprofit after taxes not less than $1,000,000.00 for the fiscal year endingDecember 31, 2001."

 

                6.             Inconsideration of the changes set forth herein and as a condition to theeffectiveness hereof, immediately upon signing this Amendment Borrower shallpay to Bank a non-refundable fee of $2,500.00.

 

                7.             Exceptas specifically provided herein, all terms and conditions of the CreditAgreement remain in full force and effect, without waiver or modification.Except as otherwise defined herein, all terms defined in the Credit Agreementshall have the same meaning when used in this Amendment. This Amendment and theCredit Agreement shall be read together, as one document.

 

                8.             Borrowerhereby remakes all representations and warranties contained in the CreditAgreement and reaffirms all covenants set forth therein, as same may bemodified hereby. Borrower further certifies that as of the date of thisAmendment there exists no Event of Default as defined in the Credit Agreement,as same may be modified hereby, nor any condition, act or event which with thegiving of notice or the passage of time or both would constitute any such Eventof Default.

                IN WITNESSWHEREOF, the parties hereto have caused this Amendment to be executed as of theday and year first written above.

 
|  

NATROL, INC. |   |   |   | WELLS FARGO  BANK,

  NATIONAL ASSOCIATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   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|                 |   |   |   |  
By:

/s/ Dennis  Jolicoeur

 

 

 

By:

/s/ Jan  Macy-Buescher

 
 

 

 

Jan  Macy-Buescher

 

 
Title: 

CFO

 

 

Vice  President

 

 
 

 

 

 

 
 

 

 

 

 
 

 

**EXHIBIT A**

 

**WELLS FARGO BANK**

 

***REVOLVING LINE OF  CREDIT NOTE***

 

**$5,000,000.00**

 

**Los Angeles, CA**

 

 

**August 1, 2001**

 

 

 

 

        FOR VALUE RECEIVED,the undersigned **Natrol, Inc**.("Borrower") promises to pay to the order of WELLS FARGO BANKNATIONAL ASSOCIATION ("Bank") at its office at **Los Angeles RCBO**, **333 South Grand Avenue 3rd Flr, Los Angeles, CA 90071**, or at such other place as theholder hereof may designate, in lawful money of the United States of Americaand in immediately available funds, the principal sum of **$5,000,000.00**, or so much thereof as may beadvanced and be outstanding, with interestthereon, to be computed on each advance from the date of its disbursement asset forth herein.

 

**DEFINITIONS:**

 

        Asused herein, the following terms shall have the meanings set forth after each,and any other term defined in this Note shall have the meaning set forth at theplace defined:

 

(a)           "Business Day" means anyday except a Saturday, Sunday or any other day on which commercial banks inCalifornia are authorized or required by law to close.

 

(b)           "FixedRate Term" means a period commencing on a Business Day and continuing for **1, 2 or 3 months**, as designated by Borrower, during which allor a portion of the outstanding principal balance of this Note bears interestdetermined in relation to LIBOR; provided however, that no Fixed Rate Term maybe selected for a principal amountless than **$500,000.00**; and providedfurther, that no Fixed Rate Term shall extend beyond the scheduled maturitydate hereof. If any Fixed Rate Term would end on a day which is not a businessDay, then such Fixed Rate Term shall be extended to the next succeedingBusiness Day.

 

(c)           " LIBOR" means the rate perannum (rounded upward, if necessary, to the nearest whole 1/8 of 1%)determined by dividing Base LIBOR by a percentage equal to 100% less any LIBORReserve Percentage.

 

(i)            "Base LIBOR" means therate per annum for United Sates dollar deposits quoted by Bank as the Inter–BankMarket Offered Rate, with the understanding that such rate is quoted by Bankfor the purpose of calculating effective rates of interest for loans makingreference thereto, on the first day of a Fixed Rate Term for delivery of funds on said date for a period of time approximately equal to thenumber of days in such Fixed Rate Term and in an amount approximately equal tothe principal amount to which such Fixed Rate Term applies. Borrowerunderstands and agrees that Bank may base its quotation of the Inter–BankMarket Offered Rate upon such offers or other market indicators of theInter-Bank Market as Bank in its discretion deems appropriate including, butnot limited to, the rate offered for U.S. dollar deposits on the London Inter–BankMarket.

 

(ii) "LIBOR Reserve Percentage" means the reserve percentageprescribed by the Board of Governors of the Federal Reserve System (or anysuccessor) for "Eurocurrency Liabilities" (as defined in Regulation Dof the Federal Reserve Board, as amended), adjusted by Bank for expectedchanges in such reserve percentage during the applicable Fixed Rate Term.

 

(d)           "Prime Rate" means at anytime the rate of interest most recently announced within Bank at its principaloffice as its Prime Rate, with the understanding that the Prime Rate is one ofBank's base rates and serves as the basis upon which effective rates ofinterest are calculated for those loans making reference thereto, and isevidenced by the recording thereof after its announcement in such internalpublication or publications as Bank may designate.

 
****
**INTEREST:**

 

(a)           Interest. The outstandingprincipal balance of this Note shall bear interest (computed on the basis of a350 day year, actual days elapsed) either (i) at a fluctuating rate per annum .**50000%**above the Prime Rate in effect fromtime to time, or (ii) at a fixed rate per annum determined by Bank to be **3.00000%** above LIBOR in effect on the firstday of the applicable Fixed Rate Term. When interest is determined in relationto the Prime Rate, each change in the rate of interest hereunder shall becomeeffective on the date each Prime Rate change is announced within Bank. Withrespect to each LIBOR selection option selected hereunder, Bank is herebyauthorized to note the date, principal amount, interest rate and Fixed RateTerm applicable thereto and any payments made thereon on Bank's books andrecords (either manually or by electronic entry) and/or on any, scheduleattached to this Note, which notations shall be prima facie evidence of theaccuracy of the information noted.

 

(b)           Selectionof Interest Rate Options. At any time any portion of this Note bearsinterest determined in relation to LIBOR, it may be continued by Borrower atthe end of the Fixed Rate Term applicable thereto so that all or a portionthereof bears interest determined in relation to the Prime Rate or to LIBOR fora new Fixed Rate, Term designated by Borrower. At any time any portion of thisNote bears interest determined in relation to the Prime Rate, Borrower mayconvert all or a portion thereof so that it bears interest determined inrelation to LIBOR for a Fixed Rate Term designated by Borrower.  At such time as Borrower requests an advancehereunder or wishes to select a LIBOR option for all or a portion of theoutstanding principal balance hereof, and at the end of each Fixed Rate Term,Borrower shall give Bank notice specifying: (i) the interest rate optionselected by Borrower; (ii) the principal amount subject thereto; and (iii) for eachLIBOR selection the length of the applicable Fixed Race Term. Any such noticemay be given by telephone (or such other electronic method as Bank may permit)so long as with respect to each LIBOR selection, (A) if requested by Bank,Borrower provides to Bank written confirmation thereof not later than three (3)Business Days after such notice is given, and (B) such notice is given to Bankprior to 10:00 a.m. on the first day of the Fixed Rate Term, or at a later timeduring any Business Day if Bank, at it's sole option but without obligation todo so, accepts Borrower's notice and quotes a fixed rate to Borrower. IfBorrower does not immediately accept a fixed rate when quoted by Bank, thequoted rate shall expire and any subsequent LIBOR request from Borrower shallbe subject to a redetermination by Bank of the applicable fixed rate. If nospecific designation of interest is made at the time any advance is requestedhereunder or at the end of any Fixed Rate Term, Borrower shall be deemed tohave made a Prime Rate interest selection for such advance or the principalamount to which such Fixed Rate Term applied.

 

(c)           Taxesand Regulatory Costs. Borrower shall pay to Bank immediately upon demand,in addition to any other amounts due or to become due hereunder, any and all(i) withholdings, interest equalization taxes, stamp taxes or other taxes(except income and franchise taxes) imposed by any domestic or foreigngovernmental authority and related in any manner to LIBOR, and (ii) future,supplemental, emergency or other changes in the LIBOR Reserve Percentage,assessment rates imposed by the Federal Deposit Insurance Corporation, orsimilar requirements or costs imposed by any domestic or foreign governmentalauthority or resulting from compliance by Bank with any request or directive(whether or not having the force of law) from any central bank or othergovernmental authority and related in any manner to LIBOR to the extent theyare not included in the calculation of LIBOR. In determining which of the foregoingare attributable to any LIBOR option available to Borrower hereunder, anyreasonable allocation made by Bank among its operations shall be conclusive andbinding upon Borrower.

 

(d)           Paymentof Interest. Interest accrued on this Note shall be payable on the **1st**day of each **month**, commencing **September 1, 2001**.

 

(e)           DefaultInterest. From and after the maturity date of this Note, or such earlierdate as all principal owing hereunder becomes due and payable by accelerationor otherwise, the outstanding principal balance of this Note shall bearinterest until paid in full at an increased rate per annum (computed on thebasis of a 360–day year, actual days elapsed) equal to 4% above the rateof interest from time to time applicable to this Note.

 
****
**BORROWING AN****D REPAYMENT:**

 

(a)           Borrowingand Repayment. Borrower may from time to time during the term of this Noteborrow, partially or wholly repay its outstanding borrowings, and reborrow,subject to all of the limitations, terms and conditions of this Note and of theCredit Agreement between Borrower and Bank defined below; provided however,that the total outstanding borrowings under this Note shall not at any timeexceed the principal amount stated above. The unpaid principal balance of thisobligation at any time shall be the total amounts advanced hereunder by theholder hereof less the amount of principal payments made hereon by or for anyBorrower, which balance may be endorsed hereon from time to time by the holder.The outstanding principal balance of this Note shall be due and payable in fullon **July 15, 2002**.

 

(b)           Advances.Advances hereunder, to the total amount of the principal sum availablehereunder, may be made by the holder at the oral or written request of (i) **Elliott Balbert or Dennis Jolicoeur**, any one actingalone, who are authorized to request advances and direct the disposition of anyadvances until written notice of the revocation of such authority is receivedby the holder at the office designated above, or (ii) any person, with respectto advances deposited to the credit of any deposit account of any Borrower,which advances, when so deposited, shall be conclusively presumed to have beenmade to or for the benefit of each Borrower regardless of the fact that personsother than those authorized to request advances may have authority to drawagainst such account. The holder shall have no obligation to determine whetherany person requesting an advance is or has been authorized by any Borrower.

 

(c)           Applicationof Payments. Each payment made on this Note shall be credited first, to anyinterest then due and second, to the outstanding principal balance hereof. Allpayments credited to principal shall be applied first, to the outstandingprincipal balance of this Note which bears interest determined in relation tothe Prime Rate, if any. and second, to the outstanding principal balance ofthis Note which bears interest determined in relation to LIBOR, with suchpayments applied to the oldest Fixed Rate Term first.

 

**PREPAYMENT:**

 

(a)           PrimeRate. Borrower may prepay principal on any portion of this Note which bearsinterest determined in relation to the Prime Rate at any time, in any amountand without penalty.

 

(b)           LIBOR.Borrower may prepay principal on any portion of this Note which bears interestdetermined in relation to LIBOR at any time and in the minimum amount of **$500,000.00**; provided however, that if the outstandingprincipal balance of such portion of this Note is less than said amount, theminimum prepayment amount shall be the entire outstanding principal balancethereof. In consideration of Bank providing this prepayment option to Borrower,or if any such portion of this Note shall become due and payable at any timeprior to the last day of the Fixed Rate Term applicable thereto by accelerationor otherwise, Borrower shall pay to Bank immediately upon demand a fee which isthe sum of the discounted monthly differences for each month from the month ofprepayment through the month in which such Fixed Rate Term matures, calculatedas follows or each such month:

 

(i)            Determinethe amount of interest which would have accrued each month on the amountprepaid at the interest rate applicable to such amount had it remainedoutstanding until the last day of the Fixed Rate Term applicable thereto.

 

(ii)           Subtractfrom the amount determined in (i) above the amount of interest which would haveaccrued for the same month on the amount prepaid for the remaining term of suchFixed Rate Term at LIBOR in effect or the date of prepayment for new loans madefor such term and in a principal amount equal to the amount prepaid.

 

(iii)          If the result obtained in (ii) for anymonth is greater than zero, discount that difference by LIBOR used in (ii)above.

 

Each Borrower acknowledges that prepayment ofsuch amount may result in Bank incurring additional costs, expenses and/orliabilities, and that it is difficult to ascertain the full extent of suchcosts, expenses and/or liabilities. Each Borrower, therefore, agrees to pay theabove–described prepayment fee and agrees that said amount represents areasonable estimate of the prepayment costs, expenses and/or liabilities ofBank. If Borrower fails to pay any prepayment fee when due, the amount of suchprepayment fee shall thereafter bear interest until paid at a rate per annum **2.000%** above the Prime Rate in effect from time to time(computed on the basis of a 360–day year, actual days elapsed). Eachchange in the rate of interest on any such past due prepayment fee shall becomeeffective on the date each Prime Rate change is announced within Bank.

 
****
**EVENTS OF DEFAULT:**

 

        ThisNote is made pursuant to and is subject to the terms and conditions of thatcertain Credit Agreement between Borrower and Bank dated as of **March 1, 2001**, as amended from time to time (the"Credit Agreement"). Any default in the payment or performance of anyobligation under this Note, or any defined event of default under the CreditAgreement, shall constitute an "Event of Default" under this Note.

 

**MISCELLANEOUS:**

 

(a)            Remedies.Upon the occurrence of any Event of Default, the holder of this Note, at theholder's option, may declare all sums of principal and interest outstandinghereunder to be immediately due and payable without presentment, demand, noticeof nonperformance, notice of protest, protest or notice of dishonor, all ofwhich are expressly waived by each Borrower, and the obligation, if any, of theholder to extend any further credit hereunder shall immediately cease andterminate. Each Borrower shall pay to the holder immediately upon demand the fullamount of all payments, advances, charges, costs and expenses, includingreasonable attorneys' fees (to include outside counsel fees and all allocatedcosts of the holder's in–house counsel), expended or incurred by theholder in connection with the enforcement of the holder's rights and/or thecollection of any amounts which become due to the holder under this Note andthe prosecutor or defense of any action in any way related to this Noteincluding without limitation, any action for declaratory relief, whetherincurred at the trial or appellate level, in an arbitration proceeding orotherwise, and including any of the foregoing incurred in connection with anybankruptcy proceeding (including without limitation, any adversary proceedingcontested matter or motion brought by Bank or any other person) relating to anyBorrower or any other person or entity.

 

(b)           ObligationsJoint and Several. Should more than one person or entity sign this Note asa Borrower, the obligations of each such Borrower shall be joint and several.

 

(c)           GoverningLaw. This Note shall be governed by and construed in accordance with thelaws of the State of California.

 

 

        INWITNESS WHEREOF, the undersigned has executed this Note as of the date firstwritten above.

 

**Natrol, Inc.**

 

 
**** 
**WELLS FARGO BANK**

 

***REVOLVING LINE OF  CREDIT NOTE***

 

**$5,000,000.00**

 

**Los Angeles, CA**

 

 

**August 1, 2001**

 

 

 

 

        FOR VALUE RECEIVED,the undersigned **Natrol, Inc**.("Borrower") promises to pay to the order of WELLS FARGO BANKNATIONAL ASSOCIATION ("Bank") at its office at **Los Angeles RCBO, 333 South Grand Avenue 3rd Flr, LosAngeles, CA 90071**,orat such other place as the holder hereof may designate, in lawful money of theUnited States of America and in immediately available funds, the principal sumof **$5,000,000.00**, or so muchthereof as may be advanced and be outstanding,with interest thereon, to be computed on each advance from the date ofits disbursement as set forth herein.

 

**DEFINITIONS:**

 

        Asused herein, the following terms shall have the meanings set forth after each,and any other term defined in this Note shall have the meaning set forth at theplace defined:

 

(a)           "Business Day" means anyday except a Saturday, Sunday or any other day on which commercial banks inCalifornia are authorized or required by law to close.

 

(b)           "FixedRate Term" means a period commencing on a Business Day and continuing for **1, 2 or 3 months**, as designated by Borrower, during which allor a portion of the outstanding principal balance of this Note bears interestdetermined in relation to LIBOR; provided however, that no Fixed Rate Term maybe selected for a principal amountless than **$500,000.00**; and providedfurther, that no Fixed Rate Term shall extend beyond the scheduled maturitydate hereof. If any Fixed Rate Term would end on a day which is not a businessDay, then such Fixed Rate Term shall be extended to the next succeedingBusiness Day.

 

(c)           " LIBOR" means the rate perannum (rounded upward, if necessary, to the nearest whole 1/8 of 1%) determinedby dividing Base LIBOR by a percentage equal to 100% less any LIBOR ReservePercentage.

 

(i)            "BaseLIBOR" means the rate per annum for United Sates dollar deposits quoted byBank as the Inter–Bank Market Offered Rate, with the understanding thatsuch rate is quoted by Bank for the purpose of calculating effective rates ofinterest for loans making reference thereto, on the first day of a Fixed RateTerm for delivery of funds onsaid date for a period of timeapproximately equal to the number of days in such Fixed Rate Term and in an amountapproximately equal to the principal amount to which such Fixed Rate Termapplies. Borrower understands and agrees that Bank may base its quotation ofthe Inter–Bank Market Offered Rate upon such offers or other marketindicators of the Inter-Bank Market as Bank in its discretion deems appropriateincluding, but not limited to, the rate offered for U.S. dollar deposits on theLondon Inter–Bank Market.

 

(ii)           "LIBORReserve Percentage" meansthe reserve percentage prescribed by the Board of Governors of the FederalReserve System (or any successor) for "Eurocurrency Liabilities" (asdefined in Regulation D of the Federal Reserve Board, as amended), adjusted byBank for expected changes in such reserve percentage during the applicableFixed Rate Term.

 

(d)           "Prime Rate" means at anytime the rate of interest most recently announced within Bank at its principaloffice as its Prime Rate, with the understanding that the Prime Rate is one ofBank's base rates and serves as the basis upon which effective rates ofinterest are calculated for those loans making reference thereto, and isevidenced by the recording thereof after its announcement in such internalpublication or publications as Bank may designate.

 
****
**INTEREST:**

 

(a)           Interest. The outstandingprincipal balance of this Note shall bear interest (computed on the basis of a350 day year, actual days elapsed) either (i) at a fluctuating rate per annum **.50000%** above the Prime Rate in effect fromtime to time, or (ii) at a fixed rate per annum determined by Bank to be **3.00000%** above LIBOR in effect on the firstday of the applicable Fixed Rate Term. When interest is determined in relationto the Prime Rate, each change in the rate of interest hereunder shall becomeeffective on the date each Prime Rate change is announced within Bank. Withrespect to each LIBOR selection option selected hereunder, Bank is herebyauthorized to note the date, principal amount, interest rate and Fixed RateTerm applicable thereto and any payments made thereon on Bank's books and records(either manually or by electronic entry) and/or on any, schedule attached tothis Note, which notations shall be prima facie evidence of the accuracy of theinformation noted.

 

(b)           Selectionof Interest Rate Options. At any time any portion of this Note bearsinterest determined in relation to LIBOR, it may be continued by Borrower atthe end of the Fixed Rate Term applicable thereto so that all or a portionthereof bears interest determined in relation to the Prime Rate or to LIBOR fora new Fixed Rate Term designated by Borrower. At any time any portion of thisNote bears interest determined in relation to the Prime Rate, Borrower mayconvert all or a portion thereof so that it bears interest determined inrelation to LIBOR for a Fixed Rate Term designated by Borrower.  At such time as Borrower requests an advancehereunder or wishes to select a LIBOR option for all or a portion of theoutstanding principal balance hereof, and at the end of each Fixed Rate Term, Borrowershall give Bank notice specifying: (i) the interest rate option selected byBorrower; (ii) the principal amount subject thereto; and (iii) for each LIBORselection the length of the applicable Fixed Race Term. Any such notice may begiven by telephone (or such other electronic method as Bank may permit) so longas with respect to each LIBOR selection, (A) if requested by Bank, Borrowerprovides to Bank written confirmation thereof not later than three (3) BusinessDays after such notice is given, and (B) such notice is given to Bank prior to10:00 a.m. on the first day of the Fixed Rate Term, or at a later time duringany Business Day if Bank, at it's sole option but without obligation to do so,accepts Borrower's notice and quotes a fixed rate to Borrower. If Borrower doesnot immediately accept a fixed rate when quoted by Bank, the quoted rate shallexpire and any subsequent LIBOR request from Borrower shall be subject to aredetermination by Bank of the applicable fixed rate. If no specificdesignation of interest is made at the time any advance is requested hereunderor at the end of any Fixed Rate Term, Borrower shall be deemed to have made aPrime Rate interest selection for such advance or the principal amount to whichsuch Fixed Rate Term applied.

 

(c)           Taxesand Regulatory Costs. Borrower shall pay to Bank immediately upon demand,in addition to any other amounts due or to become due hereunder, any and all(i) withholdings, interest equalization taxes, stamp taxes or other taxes(except income and franchise taxes) imposed by any domestic or foreigngovernmental authority and related in any manner to LIBOR, and (ii) future,supplemental, emergency or other changes in the LIBOR Reserve Percentage,assessment rates imposed by the Federal Deposit Insurance Corporation, orsimilar requirements or costs imposed by any domestic or foreign governmentalauthority or resulting from compliance by Bank with any request or directive(whether or not having the force of law) from any central bank or othergovernmental authority and related in any manner to LIBOR to the extent theyare not included in the calculation of LIBOR. In determining which of theforegoing are attributable to any LIBOR option available to Borrower hereunder,any reasonable allocation made by Bank among its operations shall be conclusiveand binding upon Borrower.

 

(d)           Paymentof Interest. Interest accrued on this Note shall be payable on the **1st** day of each **month**, commencing **September 1, 2001**.

 

(e)           DefaultInterest. From and after the maturity date of this Note, or such earlier dateas all principal owing hereunder becomes due and payable by acceleration orotherwise, the outstanding principal balance of this Note shall bear interestuntil paid in full at an increased rate per annum (computed on the basis of a360–day year, actual days elapsed) equal to 4% above the rate of interestfrom time to time applicable to this Note.

 
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**BORROWING AND REPAYMENT:**

 

(a)           Borrowingand Repayment. Borrower may from time to time during the term of this Noteborrow, partially or wholly repay its outstanding borrowings, and reborrow,subject to all of the limitations, terms and conditions of this Note and of theCredit Agreement between Borrower and Bank defined below; provided however,that the total outstanding borrowings under this Note shall not at any timeexceed the principal amount stated above. The unpaid principal balance of thisobligation at any time shall be the total amounts advanced hereunder by theholder hereof less the amount of principal payments made hereon by or for anyBorrower, which balance may be endorsed hereon from time to time by the holder.The outstanding principal balance of this Note shall be due and payable in fullon **July 15, 2002**.

 

(b)           Advances.Advances hereunder, to the total amount of the principal sum available hereunder,may be made by the holder at the oral or written request of (i) **Elliott Balbert or Dennis Jolicoeur**, any one actingalone, who are authorized to request advances and direct the disposition of anyadvances until written notice of the revocation of such authority is receivedby the holder at the office designated above, or (ii) any person, with respectto advances deposited to the credit of any deposit account of any Borrower,which advances, when so deposited, shall be conclusively presumed to have beenmade to or for the benefit of each Borrower regardless of the fact that personsother than those authorized to request advances may have authority to drawagainst such account. The holder shall have no obligation to determine whetherany person requesting an advance is or has been authorized by any Borrower.

 

(c)           Applicationof Payments. Each payment made on this Note shall be credited first, to anyinterest then due and second, to the outstanding principal balance hereof. Allpayments credited to principal shall be applied first, to the outstandingprincipal balance of this Note which bears interest determined in relation tothe Prime Rate, if any. and second, to the outstanding principal balance ofthis Note which bears interest determined in relation to LIBOR, with suchpayments applied to the oldest Fixed Rate Term first.

 

**PREPAYMENT:**

 

(a)           PrimeRate. Borrower may prepay principal on any portion of this Note which bearsinterest determined in relation to the Prime Rate at any time, in any amountand without penalty.

 

(b)           LIBOR.Borrower may prepay principal on any portion of this Note which bears interestdetermined in relation to LIBOR at any time and in the minimum amount of **$500,000.00**; provided however, that if the outstandingprincipal balance of such portion of this Note is less than said amount, theminimum prepayment amount shall be the entire outstanding principal balancethereof. In consideration of Bank providing this prepayment option to Borrower,or if any such portion of this Note shall become due and payable at any timeprior to the last day of the Fixed Rate Term applicable thereto by accelerationor otherwise, Borrower shall pay to Bank immediately upon demand a fee which isthe sum of the discounted monthly differences for each month from the month ofprepayment through the month in which such Fixed Rate Term matures, calculatedas follows or each such month:

 

(i)            Determinethe amount of interest which would have accrued each month on the amountprepaid at the interest rate applicable to such amount had it remainedoutstanding until the last day of the Fixed Rate Term applicable thereto.

 

(ii)           Subtractfrom the amount determined in (i) above the amount of interest which would haveaccrued for the same month on the amount prepaid for the remaining term of suchFixed Rate Term at LIBOR in effect or the date of prepayment for new loans madefor such term and in a principal amount equal to the amount prepaid.

 

(iii)          If the result obtained in (ii) for anymonth is greater than zero, discount that difference by LIBOR used in (ii)above.

 

Each Borrower acknowledges that prepayment ofsuch amount may result in Bank incurring additional costs, expenses and/orliabilities, and that it is difficult to ascertain the full extent of suchcosts, expenses and/or liabilities. Each Borrower. therefore, agrees to pay theabove–described prepayment fee and agrees that said amount represents areasonable estimate of the prepayment costs, expenses and/or liabilities ofBank. If Borrower fails to pay any prepayment fee when due, the amount of suchprepayment fee shall thereafter bear interest until paid at a rate per annum **2.000%** above the Prime Rate in effect from time to time(computed on the basis of a 360–day year, actual days elapsed). Eachchange in the rate of interest on any such past due prepayment fee shall becomeeffective on the date each Prime Rate change is announced within Bank.

 
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**EVENTS OF DEFAULT:**

 

        ThisNote is made pursuant to and is subject to the terms and conditions of thatcertain Credit Agreement between Borrower and Bank dated as of **March 1, 2001**, as amended from time to time (the"Credit Agreement"). Any default in the payment or performance of anyobligation under this Note, or any defined event of default under the CreditAgreement, shall constitute an "Event of Default" under this Note.

 

**MISCELLANEOUS:**

 

(a)           Remedies. Upon the occurrenceof any Event of Default, the holder of this Note, at the holder's option, maydeclare all sums of principal and interest outstanding hereunder to be immediatelydue and payable without presentment, demand, notice of nonperformance, noticeof protest, protest or notice of dishonor, all of which are expressly waived byeach Borrower, and the obligation, if any, of the holder to extend any furthercredit hereunder shall immediately cease and terminate. Each Borrower shall payto the holder immediately upon demand the full amount of all payments,advances, charges, costs and expenses, including reasonable attorneys' fees (toinclude outside counsel fees and all allocated costs of the holder's in–housecounsel), expended or incurred by the holder in connection with the enforcementof the holder's rights and/or the collection of any amounts which become due tothe holder under this Note and the prosecutor or defense of any action in anyway related to this Note including without limitation, any action fordeclaratory relief, whether incurred at the trial or appellate level, in anarbitration proceeding or otherwise, and including any of the foregoingincurred in connection with any bankruptcy proceeding (including withoutlimitation, any adversary proceeding contested matter or motion brought by Bankor any other person) relating to any Borrower or any other person or entity.

 

(b)           ObligationsJoint and Several. Should more than one person or entity sign this Note asa Borrower, the obligations of each such Borrower shall be joint and several.

 

(c)           GoverningLaw. This Note shall be governed by and construed in accordance with thelaws of the State of California.

 

 

        INWITNESS WHEREOF, the undersigned has executed this Note as of the date firstwritten above.

 

**Natrol, Inc.**

 

 

 

By: 

/s/  Dennis Jolicoeur

 

 

Title:  

CFO

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