Document:

Exhibit 10.1

 

LOAN AND SECURITY
AGREEMENT

by and among

NATROL, INC.

and

PROLAB NUTRITION, INC.

as Borrowers

and

NATROL PRODUCTS, INC.,

NATROL ACQUISITION CORP.,

and

NATROL DIRECT, INC.

as Guarantors

WACHOVIA CAPITAL FINANCE
CORPORATION (WESTERN)

as Agent

and

THE LENDERS FROM TIME TO
TIME PARTY HERETO

as Lenders

Dated: August 25, 2006

TABLE OF CONTENTS

 

	
   

  	
   

  	
   

  	
  Page

  
	
   

  	
   

  	
   

  	
   

  
	
  SECTION 1.

  	
   

  	
  DEFINITIONS

  	
  1

  
	
   

  	
   

  	
   

  	
   

  
	
  SECTION 2.

  	
   

  	
  CREDIT FACILITIES

  	
  22

  
	
   

  	
   

  	
   

  	
   

  
	
  2.1

  	
  Loans.

  	
  22

  
	
  2.2

  	
  Letters of Credit

  	
  23

  
	
  2.3

  	
  Commitments

  	
  26

  
	
   

  	
   

  	
   

  
	
  SECTION 3.

  	
   

  	
  INTEREST AND FEES

  	
  26

  
	
  3.1

  	
  Interest

  	
  26

  
	
  3.2

  	
  Fees

  	
  28

  
	
  3.3

  	
  Changes in Laws and Increased Costs of Loans

  	
  28

  
	
   

  	
   

  	
   

  
	
  SECTION 4.

  	
   

  	
  CONDITIONS PRECEDENT

  	
  30

  
	
  4.1

  	
  Conditions Precedent to Initial Loans and Letters of
  Credit

  	
  30

  
	
  4.2

  	
  Conditions Precedent to All Loans and Letters of
  Credit

  	
  32

  
	
   

  	
   

  	
   

  	
   

  
	
  SECTION 5.

  	
   

  	
  GRANT AND PERFECTION OF SECURITY INTEREST

  	
  33

  
	
  5.1

  	
  Grant of Security Interest

  	
  33

  
	
  5.2

  	
  Perfection of Security Interests

  	
  34

  
	
   

  	
   

  	
   

  
	
  SECTION 6.

  	
   

  	
  COLLECTION AND ADMINISTRATION

  	
  38

  
	
  6.1

  	
  Borrowers’ Loan Accounts

  	
  38

  
	
  6.2

  	
  Statements

  	
  38

  
	
  6.3

  	
  Collection of Accounts

  	
  38

  
	
  6.4

  	
  Payments

  	
  39

  
	
  6.5

  	
  Taxes

  	
  40

  
	
  6.6

  	
  Authorization to Make Loans

  	
  42

  
	
  6.7

  	
  Use of Proceeds

  	
  43

  
	
  6.8

  	
  Appointment of Administrative Borrower as Agent for
  Requesting Loans and Receipts of Loans and Statements

  	
  43

  
	
  6.9

  	
  Pro Rata Treatment

  	
  44

  
	
  6.10

  	
  Sharing of Payments, Etc

  	
  44

  
	
  6.11

  	
  Settlement Procedures

  	
  45

  
	
  6.12

  	
  Obligations Several; Independent Nature of Lenders’
  Rights

  	
  47

  
	
   

  	
   

  	
   

  	
   

  
	
  SECTION 7.

  	
   

  	
  COLLATERAL REPORTING AND COVENANTS

  	
  47

  
	
  7.1

  	
  Collateral Reporting

  	
  47

  

 

 i
 

 

	
  7.2

  	
  Accounts Covenants

  	
  48

  
	
  7.3

  	
  Inventory Covenants

  	
  49

  
	
  7.4

  	
  Equipment Covenants

  	
  50

  
	
  7.5

  	
  Power of Attorney

  	
  50

  
	
  7.6

  	
  Right to Cure

  	
  51

  
	
  7.7

  	
  Access to Premises

  	
  52

  
	
   

  	
   

  	
   

  
	
  SECTION 8.

  	
   

  	
  REPRESENTATIONS AND WARRANTIES

  	
  52

  
	
  8.1

  	
  Corporate Existence, Power and Authority

  	
  52

  
	
  8.2

  	
  Name; State of Organization; Chief Executive Office;
  Collateral Locations

  	
  52

  
	
  8.3

  	
  Financial Statements; No Material Adverse Change

  	
  53

  
	
  8.4

  	
  Priority of Liens; Title to Properties

  	
  53

  
	
  8.5

  	
  Tax Returns

  	
  54

  
	
  8.6

  	
  Litigation

  	
  54

  
	
  8.7

  	
  Compliance with Other Agreements and Applicable Laws

  	
  54

  
	
  8.8

  	
  Environmental Compliance

  	
  54

  
	
  8.9

  	
  Employee Benefits

  	
  55

  
	
  8.10

  	
  Bank Accounts

  	
  56

  
	
  8.11

  	
  Intellectual Property

  	
  56

  
	
  8.12

  	
  Subsidiaries; Affiliates; Capitalization; Solvency

  	
  57

  
	
  8.13

  	
  Labor Disputes

  	
  57

  
	
  8.14

  	
  Restrictions on Subsidiaries

  	
  58

  
	
  8.15

  	
  Material Contracts

  	
  58

  
	
  8.16

  	
  Payable Practices

  	
  58

  
	
  8.17

  	
  Accuracy and Completeness of Information

  	
  58

  
	
  8.18

  	
  Survival of Warranties; Cumulative

  	
  58

  
	
   

  	
   

  	
   

  
	
  SECTION 9.

  	
   

  	
  AFFIRMATIVE AND NEGATIVE COVENANTS

  	
  59

  
	
  9.1

  	
  Maintenance of Existence

  	
  59

  
	
  9.2

  	
  New Collateral Locations

  	
  59

  
	
  9.3

  	
  Compliance with Laws, Regulations, Etc

  	
  59

  
	
  9.4

  	
  Payment of Taxes and Claims

  	
  60

  
	
  9.5

  	
  Insurance

  	
  61

  

 

 ii
 

 

	
  9.6

  	
  Financial Statements and Other Information

  	
  61

  
	
  9.7

  	
  Sale of Assets, Consolidation, Merger, Dissolution,
  Etc

  	
  63

  
	
  9.8

  	
  Encumbrances

  	
  65

  
	
  9.9

  	
  Indebtedness

  	
  67

  
	
  9.10

  	
  Loans, Investments, Etc

  	
  68

  
	
  9.11

  	
  Dividends and Redemptions

  	
  72

  
	
  9.12

  	
  Transactions with Affiliates

  	
  72

  
	
  9.13

  	
  Compliance with ERISA

  	
  73

  
	
  9.14

  	
  End of Fiscal Years; Fiscal Quarters

  	
  73

  
	
  9.15

  	
  Change in Business

  	
  73

  
	
  9.16

  	
  Limitation of Restrictions Affecting Subsidiaries

  	
  73

  
	
  9.17

  	
  EBITDA [need credit committee approval to replace
  cash flow covenant with EBITDA]

  	
  74

  
	
  9.18

  	
  License Agreements

  	
  74

  
	
  9.19

  	
  Foreign Assets Control Regulations, Etc

  	
  75

  
	
  9.20

  	
  Real Property

  	
  75

  
	
  9.21

  	
  Costs and Expenses

  	
  76

  
	
  9.22

  	
  Further Assurances

  	
  76

  
	
   

  	
   

  	
   

  
	
  SECTION 10.

  	
   

  	
  EVENTS OF DEFAULT AND REMEDIES

  	
  77

  
	
  10.1

  	
  Events of Default

  	
  77

  
	
  10.2

  	
  Remedies

  	
  79

  
	
   

  	
   

  	
   

  
	
  SECTION 11.

  	
   

  	
  JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS;
  GOVERNING LAW

  	
  82

  
	
  11.1

  	
  Governing Law; Choice of Forum; Service of Process;
  Jury Trial Waiver

  	
  82

  
	
  11.2

  	
  Waiver of Notices

  	
  84

  
	
  11.3

  	
  Amendments and Waivers

  	
  84

  
	
  11.4

  	
  Waiver of Counterclaims

  	
  86

  
	
  11.5

  	
  Indemnification

  	
  86

  
	
   

  	
   

  	
   

  
	
  SECTION 12.

  	
   

  	
  THE AGENT

  	
  87

  
	
  12.1

  	
  Appointment, Powers and Immunities

  	
  87

  
	
  12.2

  	
  Reliance by Agent

  	
  87

  

 

 iii
 

 

	
  12.3

  	
  Events of Default

  	
  87

  
	
  12.4

  	
  Wachovia in its Individual Capacity

  	
  88

  
	
  12.5

  	
  Indemnification

  	
  88

  
	
  12.6

  	
  Non-Reliance on Agent and Other Lenders

  	
  89

  
	
  12.7

  	
  Failure to Act

  	
  89

  
	
  12.8

  	
  Additional Loans

  	
  89

  
	
  12.9

  	
  Concerning the Collateral and the Related Financing
  Agreements

  	
  90

  
	
  12.10

  	
  Field Audit, Examination Reports and other
  Information; Disclaimer by Lenders

  	
  90

  
	
  12.11

  	
  Collateral Matters

  	
  90

  
	
  12.12

  	
  Agency for Perfection

  	
  92

  
	
  12.13

  	
  Successor Agent

  	
  92

  
	
  12.14

  	
  Other Agent Designations

  	
  93

  
	
   

  	
   

  	
   

  
	
  SECTION 13.

  	
   

  	
  TERM OF AGREEMENT; MISCELLANEOUS

  	
  93

  
	
  13.1

  	
  Term

  	
  93

  
	
  13.2

  	
  Interpretative Provisions

  	
  95

  
	
  13.3

  	
  Notices

  	
  96

  
	
  13.4

  	
  Partial Invalidity

  	
  97

  
	
  13.5

  	
  Confidentiality

  	
  97

  
	
  13.6

  	
  Successors

  	
  98

  
	
  13.7

  	
  Assignments; Participations

  	
  99

  
	
  13.8

  	
  Entire Agreement

  	
  101

  
	
  13.9

  	
  USA Patriot Act

  	
  101

  
	
  13.10

  	
  Counterparts, Etc

  	
  101

  
	
  13.11

  	
  Restrictions on Security from CFC Subsidiaries

  	
  101

  
	
   

  	
   

  	
   

  
	
  SECTION 14.

  	
   

  	
  JOINT AND SEVERAL LIABILITY; SURETYSHIP WAIVERS.

  	
  101

  
	
  14.1

  	
  Independent Obligations; Subrogation

  	
  101

  
	
  14.2

  	
  Authority to Modify Obligations and Security

  	
  102

  
	
  14.3

  	
  Waiver of Defenses

  	
  102

  
	
  14.4

  	
  Exercise of Agent’s and Lenders’ Rights

  	
  103

  
	
  14.5

  	
  Additional Waivers

  	
  103

  

 

 iv
 

 

	
  14.6

  	
  Additional Indebtedness

  	
  103

  
	
  14.7

  	
  Notices, Demands, Etc

  	
  104

  
	
  14.8

  	
  Subordination

  	
  104

  
	
  14.9

  	
  Revival

  	
  104

  
	
  14.10

  	
  Understanding of Waivers

  	
  105

  

 

 v

 

INDEX

TO

EXHIBITS AND SCHEDULES

	
  Exhibit A

  	
  Form of Assignment and Acceptance

  
	
   

  	
   

  
	
  Exhibit B

  	
  Form of Compliance Certificate

  
	
   

  	
   

  
	
  Schedule 1.39

  	
  Existing Lenders

  
	
   

  	
   

  
	
  Schedule 1.40

  	
  Existing Letters of Credit

  

 

LOAN
AND SECURITY AGREEMENT

This Loan and Security Agreement dated August 25, 2006
is entered into by and among Natrol, Inc., a Delaware corporation (“Natrol”)
and Prolab Nutrition, Inc., a Connecticut corporation (“Prolab”, and together
with Natrol, each individually a “Borrower” and collectively, “Borrowers” as
hereinafter further defined), Natrol Products, Inc., a Delaware corporation (“Natrol
Products”), Natrol Acquisition Corp., a Delaware corporation (“Natrol
Acquisition”) and Natrol Direct, Inc., a Delaware corporation (“Natrol Direct”
and together with Natrol Products and Natrol Acquisition, each individually a “Guarantor”
and collectively, “Guarantors” as hereinafter further defined), the parties
hereto from time to time as lenders, whether by execution of this Agreement or
an Assignment and Acceptance (each individually, a “Lender” and collectively, “Lenders”
as hereinafter further defined) and Wachovia Capital Finance Corporation
(Western) , a California corporation, in its capacity as agent for Lenders (in
such capacity, “Agent” as hereinafter further defined).

W I T N E S S E T H:

WHEREAS, Borrowers and Guarantors have requested that
Agent and Lenders enter into financing arrangements with Borrowers pursuant to
which Lenders may make loans and provide other financial accommodations to
Borrowers; and

WHEREAS, each Lender is willing to agree (severally
and not jointly) to make such loans and provide such financial accommodations
to Borrowers on a pro rata basis according to its Commitment (as defined below)
on the terms and conditions set forth herein and Agent is willing to act as
agent for Lenders on the terms and conditions set forth herein and the other
Financing Agreements;

NOW, THEREFORE, in consideration of the mutual
conditions and agreements set forth herein, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto agree as follows:

SECTION 1.         DEFINITIONS

For purposes of this Agreement, the following terms
shall have the respective meanings given to them below:

1.1           “Accounts” shall mean, as to each
Borrower and Guarantor, all present and future rights of such Borrower and
Guarantor to payment of a monetary obligation, whether or not earned by
performance, which is not evidenced by chattel paper or an instrument, (a) for
property that has been or is to be sold, leased, licensed, assigned, or
otherwise disposed of, (b) for services rendered or to be rendered, (c) for a
secondary obligation incurred or to be incurred, or (d) arising out of the use
of a credit or charge card or information contained on or for use with the
card.

1.2           “Adjusted Eurodollar Rate” shall
mean, with respect to each Interest Period for any Eurodollar Rate Loan
comprising part of the same borrowing (including conversions, extensions and
renewals), the rate per annum determined by dividing (a) the London Interbank 

 

Offered Rate for such Interest Period by (b) a
percentage equal to: (i) one (1) minus (ii) the Reserve Percentage.  For purposes hereof, “Reserve Percentage”
shall mean for any day, that percentage, (expressed as a decimal) which is in
effect from time to time under Regulation D of the Board of Governors of the
Federal Reserve System (or any successor), as such regulation may be amended
from time to time or any successor regulation, as the maximum reserve
requirement (including, without limitation, any basic, supplemental, emergency,
special, or marginal reserves) applicable with respect to Eurocurrency
liabilities as that term is defined in Regulation D (or against any other
category of liabilities that includes deposits by reference to which the
interest rate of Eurodollar Loans is determined), whether or not any Lender has
any Eurocurrency liabilities subject to such reserve requirement at that time.  Eurodollar Loans shall be deemed to
constitute Eurocurrency liabilities and as such shall be deemed subject to
reserve requirements without benefits of credits for proration, exceptions or
offsets that may be available from time to time to a Lender.  The Adjusted Eurodollar Rate shall be
adjusted automatically on and as of the effective date of any change in the
Reserve Percentage.

1.3           “Administrative Borrower” shall mean
Natrol, Inc., a Delaware corporation in its capacity as Administrative Borrower
on behalf of itself and the other Borrowers pursuant to Section 6.8 hereof and
it successors and assigns in such capacity.

1.4           “Affiliate” shall mean, with respect
to a specified Person, any other Person which directly or indirectly, through
one or more intermediaries, controls or is controlled by or is under common
control with such Person, and without limiting the generality of the foregoing,
includes (a) any Person which beneficially owns or holds ten (10%) percent or
more of any class of Voting Stock of such Person or other equity interests in
such Person, (b) any Person of which such Person beneficially owns or holds ten
(10%) percent or more of any class of Voting Stock or in which such Person
beneficially owns or holds ten (10%) percent or more of the equity interests
and (c) any director or executive officer of such Person.  For the purposes of this definition, the term
“control” (including with correlative meanings, the terms “controlled by” and “under
common control with”), as used with respect to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of Voting Stock, by agreement or otherwise.

1.5           “Agent” shall mean Wachovia Capital
Finance Corporation (Western), in its capacity as agent on behalf of Lenders
pursuant to the terms hereof and any replacement or successor agent hereunder.

1.6           “Agent Payment Account” shall mean
account no. 5000000030321 of Agent at Wachovia Bank, National Association, or
such other account of Agent as Agent may from time to time designate to
Administrative Borrower as the Agent Payment Account for purposes of this
Agreement and the other Financing Agreements.

1.7           “Assignment and Acceptance” shall mean
an Assignment and Acceptance substantially in the form of Exhibit A attached
hereto (with blanks appropriately completed) delivered to Agent in connection
with an assignment of a Lender’s interest hereunder in accordance with the
provisions of Section 13.7 hereof.

 2
 

 

1.8           “Blocked Accounts” shall have the
meaning set forth in Section 6.3 hereof.

1.9           “Borrowers” shall mean, collectively,
the following (together with their respective successors and assigns):  (a) Natrol, Inc., a Delaware corporation; (b)
Prolab Nutrition, Inc., a Connecticut corporation; and (c) any other Person
that at any time after the date hereof becomes a Borrower; each sometimes being
referred to herein individually as a “Borrower”.

1.10         “Borrowing Base” shall mean, at any
time, the amount equal to:

(a)           the amount equal to: (i) eighty-five
(85%) percent of the Eligible Accounts of Borrowers, plus (ii) the least of (A)
the Inventory Loan Limit, (B) the sum of (1) fifty (50%) percent multiplied by
the Value of the Eligible Inventory of Borrowers with a remaining shelf life of
eighteen (18) months or more, provided, that, so long as no
Default or Event of Default has occurred and is continuing, and subject to
Agent’s receipt of a current appraisal of the Inventory (in accordance with the
requirements regarding the form and substance of Inventory appraisals set forth
in clause (d) of Section 7.3), such percentage advance rate will be increased
to sixty-five (65%) percent at the election of Administrative Borrower upon
written notice to Agent, plus (2) thirty-five (35%) percent multiplied
by the Value of the Eligible Inventory of Borrowers with a remaining shelf life
of less than eighteen months (but not less than twelve (12) months) and (C)
eighty-five (85%) percent of the Net Recovery Percentage multiplied by the
Value of such Inventory, minus

(b)           Reserves.

Notwithstanding the foregoing, the portion of the
Borrowing Base set forth in clause (a)(ii) above shall not exceed seventy (70%)
percent of the total Borrowing Base.  For
purposes only of applying the Inventory Loan Limit, Agent may treat the then
undrawn amounts of outstanding Letters of Credit for the purpose of purchasing
Eligible Inventory as Revolving Loans to the extent Agent is in effect basing
the issuance of the Letter of Credit on the Value of the Eligible Inventory
being purchased with such Letter of Credit. 
In determining the actual amounts of such Letter of Credit to be so
treated for purposes of the sublimit, the outstanding Revolving Loans and
Reserves shall be attributed first to any components of the lending formulas
set forth above that are not subject to such sublimit, before being attributed
to the components of the lending formulas subject to such sublimit.  The amounts of Eligible Inventory of any
Borrower shall, at Agent’s option, be determined based on the lesser of the
amount of Inventory set forth in the general ledger of such Borrower or the
perpetual inventory record maintained by such Borrower.

1.11         “Business Day” shall mean any day other
than a Saturday, Sunday, or other day on which commercial banks are authorized
or required to close under the laws of the State of California or the State of
North Carolina, and a day on which Agent is open for the transaction of
business, except that if a determination of a Business Day shall relate to any
Eurodollar Rate Loans, the term Business Day shall also exclude any day on
which banks are closed for dealings in dollar deposits in the London interbank
market or other applicable Eurodollar Rate market.

1.12         “Capital Expenditures” shall mean, for
any period, any expenditure of money under a Capital Lease or for the lease,
purchase or other acquisition of any capital asset, for the 

 3
 

 

lease of any other asset, whether payable currently or
in the future, or for the purchase or construction of assets, or for
improvements or additions thereto, which are capitalized on a Person’s balance
sheet.

1.13         “Capital Lease” shall mean, as applied
to any Person, any lease of (or any agreement conveying the right to use) any
property (whether real, personal or mixed) by such Person as lessee that, in
accordance with GAAP, is required to be reflected as a liability on the balance
sheet of such Person.

1.14         “Capital Stock” shall mean, with
respect to any Person, any and all shares, interests, participations or other
equivalents (however designated) of such Person’s capital stock or partnership,
limited liability company or other equity interests at any time outstanding,
and any and all rights, warrants or options exchangeable for or convertible
into such capital stock or other interests (but excluding any debt security
that is exchangeable for or convertible into such capital stock).

1.15         “Cash Equivalents” shall mean, at any
time, (a) any evidence of Indebtedness with a maturity date of ninety (90) days
or less issued or directly and fully guaranteed or insured by the United States
of America or any agency or instrumentality thereof; provided, that,
the full faith and credit of the United States of America is pledged in support
thereof; (b) certificates of deposit or bankers’ acceptances with a maturity of
ninety (90) days or less of any financial institution that is a member of the
Federal Reserve System having combined capital and surplus and undivided
profits of not less than $1,000,000,000 and deposit accounts with such
institutions; (c) commercial paper (including variable rate demand notes) with
a maturity of ninety (90) days or less issued by a corporation (except an
Affiliate of any Borrower or Guarantor) organized under the laws of any State
of the United States of America or the District of Columbia and rated at least
A-1 by Standard & Poor’s Ratings Service, a division of The McGraw-Hill
Companies, Inc. or at least P-1 by Moody’s Investors Service, Inc.; (d)
repurchase obligations with a term of not more than thirty (30) days for
underlying securities of the types described in clause (a) above entered into
with any financial institution having combined capital and surplus and
undivided profits of not less than $1,000,000,000; (e) repurchase agreements
and reverse repurchase agreements relating to marketable direct obligations
issued or unconditionally guaranteed by the United States of America or issued
by any governmental agency thereof and backed by the full faith and credit of
the United States of America, in each case maturing within ninety (90) days or
less from the date of acquisition; provided, that, the terms of
such agreements comply with the guidelines set forth in the Federal Financial
Agreements of Depository Institutions with Securities Dealers and Others, as
adopted by the Comptroller of the Currency on October 31, 1985; and (f)
investments in money market funds and mutual funds which invest substantially
all of their assets in securities of the types described in clauses (a) through
(e) above.

1.16         “Change of Control” shall mean (a) the
transfer (in one transaction or a series of transactions) of all or
substantially all of the assets of any Borrower or Guarantor to any Person or
group (as such term is used in Section 13(d)(3) of the Exchange Act), other
than as permitted in Section 9.7 hereof; (b) the liquidation or dissolution of
any Borrower or Guarantor or the adoption of a plan by the stockholders of any
Borrower or Guarantor relating to the dissolution or liquidation of such Borrower
or Guarantor, other than as permitted in Section 9.7 hereof; (c) 

 4
 

 

the acquisition by any Person or group (as such term
is used in Section 13(d)(3) of the Exchange Act) other than Mr. Elliott Balbert
and Mr. Wayne Bos, of beneficial ownership, directly or indirectly, of a
majority of the voting power of the total outstanding Voting Stock of any
Borrower or Guarantor or the Board of Directors of any Borrower or Guarantor;
(d) during any period of two (2) consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of any Borrower or
Guarantor (together with any new directors whose nomination for election by the
stockholders of such Borrower or Guarantor, as the case may be, was approved by
a vote of at least sixty-six and two-thirds (66 2/3%) percent of the directors
then still in office who were either directors at the beginning of such period
or whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of the Board of Directors of any
Borrower or Guarantor then still in office; or (e) the failure of Parent to own
directly or indirectly one hundred (100%) percent of the voting power of the
total outstanding Voting Stock of any other Borrower or Guarantor.

1.17         “Code” shall mean the Internal Revenue
Code of 1986, as the same now exists or may from time to time hereafter be
amended, modified, recodified or supplemented, together with all rules,
regulations and interpretations thereunder or related thereto.

1.18         “Collateral” shall have the meaning set
forth in Section 5 hereof.

1.19         “Collateral Access Agreement” shall
mean an agreement in writing, in form and substance satisfactory to Agent, from
any lessor of premises to any Borrower or Guarantor, or any other person to
whom any Collateral is consigned or who has custody, control or possession of
any such Collateral or is otherwise the owner or operator of any premises on
which any of such Collateral is located, in favor of Agent with respect to the
Collateral at such premises or otherwise in the custody, control or possession
of such lessor, consignee or other person.

1.20         “Commitment” shall mean, at any time,
as to each Lender, the principal amount set forth below such Lender’s signature
on the signatures pages hereto designated as the Commitment or on Schedule 1 to
the Assignment and Acceptance Agreement pursuant to which such Lender became a
Lender hereunder in accordance with the provisions of Section 13.7 hereof, as
the same may be adjusted from time to time in accordance with the terms hereof;
sometimes being collectively referred to herein as “Commitments”.

1.21         “Compliance Period” shall mean any
period commencing on any date on which the aggregate outstanding sum of the
Revolving Loans and Letter of Credit Obligations is greater than one-half of
the Borrowing Base, and ending, if such sum is less than or equal to one-half
of the Borrowing Base on each day of any subsequent sixty (60) day period, on
the last day of such sixty (60) day period.

1.22         “Credit Facility” shall mean the Loans
and Letters of Credit provided to or for the benefit of any Borrower pursuant
to Sections 2.1, 2.2 and 2.3 hereof.

1.23         “Default” shall mean an act, condition
or event which with notice or passage of time or both would constitute an Event
of Default.

1.24         “Defaulting Lender” shall have the
meaning set forth in Section 6.11 hereof.

 5
 

 

1.25         “Deposit Account Control Agreement”
shall mean an agreement in writing, in form and substance satisfactory to
Agent, by and among Agent, the Borrower or Guarantor with a deposit account at
any bank and the bank at which such deposit account is at any time maintained
which provides that such bank will comply with instructions originated by Agent
directing disposition of the funds in the deposit account without further
consent by such Borrower or Guarantor and has such other terms and conditions
as Agent may require.

1.26         “EBITDA” shall mean, as to any Person,
with respect to any period, an amount equal to: 
(a) the Net Income of such Person and its Subsidiaries for such period
on a consolidated basis determined in accordance with GAAP, plus (b)
depreciation, amortization and other non-cash charges (including, but not
limited to, imputed interest and deferred compensation) for such period (to the
extent deducted in the computation of Net Income), all in accordance with GAAP,
plus (c) Interest Expense for such period (to the extent deducted in the
computation of Net Income), plus (d) charges for Federal, State, local
and foreign income taxes for such period (to the extent deducted in the
computation of Net Income), plus (e) all extraordinary losses and
unusual losses related to the restructuring of the business of such Person and
costs associated with the financing transaction contemplated by this Agreement.

1.27         “Eligible Accounts” shall mean Accounts
created by a Borrower that in each case satisfy the criteria set forth below as
determined by Agent.  In general,
Accounts shall be Eligible Accounts if:

(a)           such Accounts arise from the actual
and bona fide sale and delivery of goods by such Borrower or rendition of
services by such Borrower in the ordinary course of its business which
transactions are completed in accordance with the terms and provisions
contained in any documents related thereto;

(b)           such Accounts are not unpaid more
than ninety (90) days after the date of the original invoice for them or more
than sixty (60) days after their original due date;

(c)           such Accounts comply with the terms
and conditions contained in Section 7.2(b) of this Agreement;

(d)           such Accounts do not arise from sales
on consignment, guaranteed sale, sale and return, sale on approval, or other
terms under which payment by the account debtor may be conditional or
contingent;

(e)           the chief executive office of the
account debtor with respect to such Accounts is located in the United States of
America or Canada (provided, that, at any time promptly upon
Agent’s request, such Borrower shall execute and deliver, or cause to be
executed and delivered, such other agreements, documents and instruments as may
be required by Agent to perfect the security interests of Agent in those
Accounts of an account debtor with its chief executive office or principal
place of business in Canada in accordance with the applicable laws of the
Province of Canada in which such chief executive office or principal place of
business is located and take or cause to be taken such other and further
actions as Agent may request to enable Agent as secured party with respect
thereto to collect such Accounts under the applicable Federal or Provincial
laws of Canada) or, at Agent’s option, if the chief executive office and 

 6
 

 

principal place of
business of the account debtor with respect to such Accounts is located other
than in the United States of America or Canada, then if either: (i) the account
debtor has delivered to such Borrower an irrevocable letter of credit issued or
confirmed by a bank satisfactory to Agent and payable only in the United States
of America and in U.S. dollars, sufficient to cover such Account, in form and
substance satisfactory to Agent and if required by Agent, the original of such
letter of credit has been delivered to Agent or Agent’s agent and the issuer
thereof, and such Borrower has complied with the terms of Section 5.2(f) hereof
with respect to the assignment of the proceeds of such letter of credit to
Agent or naming Agent as transferee beneficiary thereunder, as Agent may
specify, or (ii) such Account is subject to credit insurance payable to Agent
issued by an insurer and on terms and in an amount acceptable to Agent, or
(iii) such Account is otherwise acceptable in all respects to Agent (subject to
such lending formula with respect thereto as Agent may determine);

(f)            such Accounts do not consist of
progress billings (such that the obligation of the account debtors with respect
to such Accounts is conditioned upon such Borrower’s satisfactory completion of
any further performance under the agreement giving rise thereto), bill and hold
invoices or retainage invoices, except as to bill and hold invoices, if Agent
shall have received an agreement in writing from the account debtor, in form
and substance satisfactory to Agent, confirming the unconditional obligation of
the account debtor to take the goods related thereto and pay such invoice;

(g)           the account debtor with respect to
such Accounts has not asserted a counterclaim, defense or dispute and is not
owed or does not claim to be owed any amounts that may give rise to any right
of setoff or recoupment against such Accounts (but the portion of the Accounts
of such account debtor in excess of the amount at any time and from time to
time owed by such Borrower to such account debtor or claimed owed by such
account debtor may be deemed Eligible Accounts);

(h)           there are no facts, events or occurrences
which would impair the validity, enforceability or collectability of such
Accounts or reduce the amount payable or delay payment thereunder;

(i)            such Accounts are subject to the
first priority, valid and perfected security interest of Agent and any goods
giving rise thereto are not, and were not at the time of the sale thereof,
subject to any liens except those permitted in this Agreement that are subject
to an intercreditor agreement in form and substance satisfactory to Agent
between the holder of such security interest or lien and Agent;

(j)            neither the account debtor nor any
officer or employee of the account debtor with respect to such Accounts is an
officer, employee, agent or other Affiliate of any Borrower or Guarantor;

(k)           the account debtors with respect to
such Accounts are not any foreign government, the United States of America, any
State, political subdivision, department, agency or instrumentality thereof,
unless, if the account debtor is the United States of America, any State, political
subdivision, department, agency or instrumentality thereof, upon Agent’s
request, 

 7
 

 

the Federal Assignment of
Claims Act of 1940, as amended or any similar State or local law, if
applicable, has been complied with in a manner satisfactory to Agent;

(l)            there are no proceedings or actions
which are threatened or pending against the account debtors with respect to
such Accounts which might result in any material adverse change in any such
account debtor’s financial condition (including, without limitation, any
bankruptcy, dissolution, liquidation, reorganization or similar proceeding);

(m)          the aggregate amount of such Accounts
owing by a single account debtor (other than Walgreens and Wal-Mart) do not
constitute more than fifteen (15%) percent of the aggregate amount of all
otherwise Eligible Accounts and such Accounts owing by Walgreens and Wal-Mart
do not constitute more than thirty (30%) percent of the aggregate amount of all
otherwise Eligible Accounts (but the portion of the Accounts not in excess of
the applicable percentages may be deemed Eligible Accounts);

(n)           such Accounts are not owed by an
account debtor who has Accounts unpaid more than ninety (90) days after the
original invoice date for them or more than sixty (60) days after their
original due date which constitute more than fifty (50%) percent of the total
Accounts of such account debtor;

(o)           the account debtor is not located in
a state requiring the filing of a Notice of Business Activities Report or
similar report in order to permit such Borrower to seek judicial enforcement in
such State of payment of such Account, unless such Borrower has qualified to do
business in such state or has filed a Notice of Business Activities Report or
equivalent report for the then current year or such failure to file and
inability to seek judicial enforcement is capable of being remedied without any
material delay or material cost;

(p)           such Accounts are owed by account
debtors whose total indebtedness to such Borrower does not exceed the credit
limit with respect to such account debtors, if any, as determined by such
Borrower from time to time, to the extent such credit limit as to any account
debtor is established consistent with the current practices of such Borrower as
of the date hereof and such credit limit is acceptable to Agent (but the
portion of the Accounts not in excess of such credit limit may be deemed
Eligible Accounts);

(q)           such Accounts are owed by account
debtors deemed creditworthy at all times by Agent in good faith;

(r)            such Accounts do not arise from
credit card sales; and

(s)           such Accounts are not owed by
consumers.

The criteria for Eligible Accounts set forth above may
only be changed and any new criteria for Eligible Accounts may only be
established by Agent in good faith based on either: (i) an event, condition or
other circumstance arising after the date hereof, or (ii) an event, condition
or other circumstance existing on the date hereof to the extent Agent has no
written notice thereof from a Borrower prior to the date hereof, in either case
under clause (i) or (ii) which adversely affects or could reasonably be
expected to adversely affect the Accounts in the good 

 8
 

 

faith determination of Agent.  Any Accounts that are not Eligible Accounts
shall nevertheless be part of the Collateral.

1.28         “Eligible Inventory” shall mean, as to
each Borrower, Inventory of such Borrower consisting of finished goods held for
resale in the ordinary course of the business of such Borrower (including “semi-finished
goods” consisting of Inventory that is finished in all respects except for not
being packaged) and raw materials for such finished goods (including “trading
goods”), that in each case satisfy the criteria set forth below as determined
by Agent.  In general, Eligible Inventory
shall not include:  (a) work-in-process;
(b) components which are not part of finished goods; (c) spare parts for
equipment; (d) packaging and shipping materials; (e) supplies used or consumed
in such Borrower’s business; (f) Inventory at premises other than those owned
or leased and controlled by any Borrower (including Inventory with any third
party processor); (g) Inventory subject to a security interest or lien in favor
of any Person other than Agent except those permitted in this Agreement that
are subject to an intercreditor agreement in form and substance satisfactory to
Agent between the holder of such security interest or lien and Agent; (h) bill
and hold goods; (i) unserviceable, obsolete or slow moving Inventory, Inventory
in quarantine, discontinued Inventory, Inventory that has been blocked for use,
and Inventory of a particular product type that is excess of the amount of such
product type sold by Borrowers during the preceding 365 day period, to the
extent such particular product type has been available for sale by Borrowers
throughout such 365 day period; (j) with respect to any particular product
types that have not been available for sale by Borrowers throughout the
preceding 365 day period, any Inventory of such types that have a Value in
excess of $1,000,000 in the aggregate; (k) Inventory that is not subject to the
first priority, valid and perfected security interest of Agent; (l) returned,
damaged and/or defective Inventory; (m) Inventory purchased or sold on
consignment; (n) Inventory located outside the United States of America; (o)
samples; and (p) Inventory with a remaining shelf life of less than twelve (12)
months.  The criteria for Eligible
Inventory set forth above may only be changed and any new criteria for Eligible
Inventory may only be established by Agent in good faith based on either: (i)
an event, condition or other circumstance arising after the date hereof, or
(ii) an event, condition or other circumstance existing on the date hereof to
the extent Agent has no written notice thereof from a Borrower prior to the
date hereof, in either case under clause (i) or (ii) which adversely affects or
could reasonably be expected to adversely affect the Inventory in the good
faith determination of Agent.  Any
Inventory that is not Eligible Inventory shall nevertheless be part of the
Collateral.

1.29         “Eligible Transferee” shall mean (a)
any Lender; (b) the parent company of any Lender and/or any Affiliate of such
Lender which is at least fifty (50%) percent owned by such Lender or its parent
company; (c) any person (whether a corporation, partnership, trust or
otherwise) that is engaged in the business of making, purchasing, holding or
otherwise investing in bank loans and similar extensions of credit in the
ordinary course of its business and is administered or managed by a Lender or
with respect to any Lender that is a fund which invests in bank loans and
similar extensions of credit, any other fund that invests in bank loans and
similar extensions of credit and is managed by the same investment advisor as such
Lender or by an Affiliate of such investment advisor, and in each case is
approved by Agent; and (d) any other commercial bank, financial institution or “accredited
investor” (as defined in Regulation D under the Securities Act of 1933)
approved by Agent, provided, that, (i) neither any Borrower nor
any Guarantor or any Affiliate of any Borrower or Guarantor shall qualify as an
Eligible Transferee and (ii) no Person to whom any Indebtedness which is in any
way subordinated in right of 

 9
 

 

payment to any other Indebtedness of any Borrower or
Guarantor shall qualify as an Eligible Transferee, except as Agent may
otherwise specifically agree.

1.30         “Environmental Laws” shall mean all
foreign, Federal, State (except California’s Proposition 65) and local laws (including
common law), legislation, rules, codes, licenses, permits (including any
conditions imposed therein), authorizations, judicial or administrative
decisions, injunctions or agreements between any Borrower or Guarantor and any
Governmental Authority, (a) relating to pollution and the protection,
preservation or restoration of the environment (including air, water vapor,
surface water, ground water, drinking water, drinking water supply, surface
land, subsurface land, plant and animal life or any other natural resource), or
to human health or safety, (b)  relating
to the exposure to, or the use, storage, recycling, treatment, generation,
manufacture, processing, distribution, transportation, handling, labeling, production,
release or disposal, or threatened release, of Hazardous Materials, or (c)
relating to all laws with regard to recordkeeping, notification, disclosure and
reporting requirements respecting Hazardous Materials.  The term “Environmental Laws” includes (i)
the Federal Comprehensive Environmental Response, Compensation and Liability
Act of 1980, the Federal Superfund Amendments and Reauthorization Act, the
Federal Water Pollution Control Act of 1972, the Federal Clean Water Act, the
Federal Clean Air Act, the Federal Resource Conservation and Recovery Act of
1976 (including the Hazardous and Solid Waste Amendments thereto), the Federal
Solid Waste Disposal and the Federal Toxic Substances Control Act, the Federal
Insecticide, Fungicide and Rodenticide Act, and the Federal Safe Drinking Water
Act of 1974, (ii) applicable state counterparts to such laws and (iii) any
common law or equitable doctrine that may impose liability or obligations for
injuries or damages due to, or threatened as a result of, the presence of or
exposure to any Hazardous Materials.

1.31         “Equipment” shall mean, as to each
Borrower and Guarantor, all of such Borrower’s and Guarantor’s now owned and
hereafter acquired equipment, wherever located, including machinery, data
processing and computer equipment (whether owned or licensed and including
embedded software), vehicles, tools, furniture, trade fixtures, all
attachments, accessions and property now or hereafter affixed thereto or used
in connection therewith, and substitutions and replacements thereof, wherever
located.

1.32         “ERISA” shall mean the Employee
Retirement Income Security Act of 1974, together with all rules, regulations
and interpretations thereunder or related thereto.

1.33         “ERISA Affiliate” shall mean any person
required to be aggregated with any Borrower, any Guarantor or any of its or
their respective Subsidiaries under Sections 414(b), 414(c), 414(m) or 414(o)
of the Code.

1.34         “ERISA Event” shall mean (a) any “reportable
event”, as defined in Section 4043(c) of ERISA or the regulations issued
thereunder, with respect to a Pension Plan, other than events as to which the
requirement of notice has been waived in regulations by the Pension Benefit
Guaranty Corporation; (b) the adoption of any amendment to a Pension Plan that
would require the provision of security pursuant to Section 401(a)(29) of the
Code or Section 307 of ERISA; (c) a complete or partial withdrawal by any
Borrower, Guarantor or any ERISA Affiliate from a Multiemployer Plan or a
cessation of operations which is treated as such a withdrawal or notification
that a Multiemployer Plan is in reorganization; (d) the filing of a notice of
intent to 

 10
 

 

terminate, the treatment of a Pension Plan amendment
as a termination under Section 4041 or 4041A of ERISA, or the commencement of
proceedings by the Pension Benefit Guaranty Corporation to terminate a Pension
Plan; (e) an event or condition which might reasonably be expected to
constitute grounds under Section 4042 of ERISA for the termination of, or the
appointment of a trustee to administer, any Plan; (f) the imposition of any
liability under Title IV of ERISA, other than the Pension Benefit Guaranty
Corporation premiums due but not delinquent under Section 4007 of ERISA, upon
any Borrower, Guarantor or any ERISA Affiliate in excess of $100,000 and (g) any
other event or condition with respect to a Plan including any Pension Plan
subject to Title IV of ERISA maintained, or contributed to, by any ERISA
Affiliate that could reasonably be expected to result in liability of any
Borrower in excess of $250,000.

1.35         “Eurodollar Rate Loans” shall mean any
Loans or portion thereof on which interest is payable based on the Adjusted
Eurodollar Rate in accordance with the terms hereof.

1.36         “Event of Default” shall mean the
occurrence or existence of any event or condition described in Section 10.1
hereof.

1.37         “Excess Availability” shall mean the
amount, as determined by Agent, calculated at any date, equal to: (a) the
lesser of:  (i)  the Borrowing Base and (ii) the Revolving
Loan Limit (in each case under (i) or, to the extent provided in the last
sentence of the definition of “Reserves”, (ii) after giving effect to any
Reserves other than any Reserves in respect of Letter of Credit Obligations),
minus (b) the sum of:  (i) the amount of
all then outstanding and unpaid Obligations of Borrowers, plus (ii) the amount
of all Reserves then established in respect of Letter of Credit Obligations,
plus, solely for the purpose of the condition precedent set forth in Section
4.1(f), (iii) the aggregate amount of all then outstanding and unpaid trade
payables and other obligations of Borrowers which are outstanding more than
sixty (60) days past due as of the end of the immediately preceding month or at
Agent’s option, as of a more recent date based on such reports as Agent may from
time to time specify (other than trade payables or other obligations being
contested or disputed by Borrowers in good faith), plus, solely for the purpose
of the condition precedent set forth in Section 4.1(f), (iv) without
duplication, the amount of checks issued by Borrowers to pay trade payables and
other obligations which are more than sixty (60) days past due as of the end of
the immediately preceding month or at Agent’s option, as of a more recent date
based on such reports as Agent may from time to time specify (other than trade
payables or other obligations being contested or disputed by Borrowers in good
faith), but not yet sent.

1.38         “Exchange Act” shall mean the
Securities Exchange Act of 1934, together with all rules, regulations and
interpretations thereunder or related thereto.

1.39         “Existing Lenders” shall mean the
lenders to Borrowers listed on Schedule 1.39 hereto and their respective
predecessors, successors and assigns.

1.40         “Existing Letters of Credit” shall
mean, collectively, the letters of credit issued for the account of a Borrower
or Guarantor or for which such Borrower or Guarantor is otherwise liable listed
on Schedule 1.40 hereto, as the same now exist or may hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced.

 11

 

 

1.41         “Fee Letter” shall mean the letter
agreement, dated of even date herewith, by and among Borrowers, Guarantors and
Agent, setting forth certain fees payable by Borrowers to Agent for the benefit
of itself and Lenders, as the same now exists or may hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced.

1.42         “Financing Agreements” shall mean,
collectively, this Agreement and all notes, guarantees, security agreements,
deposit account control agreements, investment property control agreements,
intercreditor agreements and all other agreements, documents and instruments
now or at any time hereafter executed and/or delivered by any Borrower or
Guarantor in connection with this Agreement.

1.43         “Foreign Lender” shall mean any Lender
that is organized under the laws of a jurisdiction other than that in which a
Borrower is resident for tax purposes. 
For purposes of this definition, the United States of America, each
State thereof and the District of Columbia shall be deemed to constitute a
single jurisdiction.

1.44         “Funding Bank” shall have the meaning
given to such term in Section 3.3 hereof.

1.45         “GAAP” shall mean generally accepted
accounting principles in the United States of America as in effect from time to
time as set forth in the opinions and pronouncements of the Accounting
Principles Board and the American Institute of Certified Public Accountants and
the statements and pronouncements of the Financial Accounting Standards Board
which are applicable to the circumstances as of the date of determination
consistently applied, except that, for purposes of Sections 9.17 and 9.18
hereof, GAAP shall be determined on the basis of such principles in effect on
the date hereof and consistent with those used in the preparation of the most
recent audited financial statements delivered to Agent prior to the date
hereof.

1.46         “Governmental Authority” shall mean any
nation or government, any state, province, or other political subdivision
thereof, any central bank (or similar monetary or regulatory authority)
thereof, and any entity exercising executive, legislative, judicial, regulatory
or administrative functions of or pertaining to government.

1.47         “Guarantors” shall mean, collectively,
the following (together with their respective successors and assigns):  (a) Natrol Products, Inc., a Delaware
corporation; (b) Natrol Acquisition Corp., a Delaware corporation; (c) Natrol
Direct, Inc., a Delaware corporation and (d) any other Person that at any time
after the date hereof becomes party to a guarantee in favor of Agent or any
Lender or otherwise liable on or with respect to the Obligations or who is the
owner of any property which is security for the Obligations (other than
Borrowers); each sometimes being referred to herein individually as a “Guarantor”.

1.48         “Hazardous Materials” shall mean any
hazardous, toxic or dangerous substances, materials and wastes, including
hydrocarbons (including naturally occurring or man-made petroleum and
hydrocarbons), flammable explosives, asbestos, urea formaldehyde insulation,
radioactive materials, biological substances (excluding acidophilus),
polychlorinated biphenyls, pesticides, herbicides and any other kind and/or
type of pollutants or contaminants (including materials which include hazardous
constituents), sewage, sludge, industrial slag, solvents and/or any other
similar substances, materials, or wastes and including any other substances,
materials 

 12
 

 

or wastes that are or become regulated under any
Environmental Law (including any that are or become classified as hazardous or
toxic under any Environmental Law).

1.49         “Indebtedness” shall mean, with respect
to any Person, any liability, whether or not contingent, (a) in respect of
borrowed money (whether or not the recourse of the lender is to the whole of
the assets of such Person or only to a portion thereof) or evidenced by bonds,
notes, debentures or similar instruments; (b) representing the balance deferred
and unpaid of the purchase price of any property or services (other than an
account payable to a trade creditor (whether or not an Affiliate) incurred in
the ordinary course of business of such Person and payable in accordance with
customary trade practices and other than operating lease obligations incurred
in the ordinary course of business); (c) all obligations as lessee under leases
which have been, or should be, in accordance with GAAP recorded as Capital
Leases; (d) any contractual obligation, contingent or otherwise, of such Person
to pay or be liable for the payment of any indebtedness described in this
definition of another Person, including, without limitation, any such
indebtedness, directly or indirectly guaranteed, or any agreement to purchase,
repurchase, or otherwise acquire such indebtedness, obligation or liability or
any security therefor, or to provide funds for the payment or discharge
thereof, or to maintain solvency, assets, level of income, or other financial
condition; (e) all obligations with respect to redeemable stock and redemption
or repurchase obligations under any Capital Stock or other equity securities
issued by such Person; (f) all reimbursement obligations and other liabilities
of such Person with respect to surety bonds (whether bid, performance or
otherwise), letters of credit, banker’s acceptances, drafts or similar documents
or instruments issued for such Person’s account; (g) all indebtedness of such
Person in respect of indebtedness of another Person for borrowed money or
indebtedness of another Person otherwise described in this definition which is
secured by any consensual lien, security interest, collateral assignment,
conditional sale, mortgage, deed of trust, or other encumbrance on any asset of
such Person, whether or not such obligations, liabilities or indebtedness are
assumed by or are a personal liability of such Person, all as of such time; (h)
all obligations, liabilities and indebtedness of such Person (marked to market)
arising under swap agreements, cap agreements and collar agreements and other
agreements or arrangements designed to protect such person against fluctuations
in interest rates or currency or commodity values; (i) indebtedness of any
partnership or joint venture in which such Person is a general partner or a
joint venturer to the extent such Person is liable therefor as a result of such
Person’s ownership interest in such entity, except to the extent that the terms
of such indebtedness expressly provide that such Person is not liable therefor
or such Person has no liability therefor as a matter of law and (j) the
principal and interest portions of all rental obligations of such Person under
any synthetic lease or similar off-balance sheet financing where such
transaction is considered to be borrowed money for tax purposes but is
classified as an operating lease in accordance with GAAP.

1.50         “Information Certificate” shall mean
the Information Certificate dated August 25, 2006 of Borrowers and Guarantors,
previously provided to Agent, containing material information with respect to
Borrowers and Guarantors, their respective businesses and assets provided by or
on behalf of Borrowers and Guarantors to Agent in connection with the
preparation of this Agreement and the other Financing Agreements and the
financing arrangements provided for herein.

 13
 

 

1.51         “Intellectual Property” shall mean, as
to each Borrower and Guarantor, such Borrower’s and Guarantor’s now owned and
hereafter arising or acquired:  patents,
patent rights, patent applications, copyrights, works which are the subject
matter of copyrights, copyright applications, copyright registrations,
trademarks, servicemarks, trade names, trade styles, trademark and service mark
applications, and licenses and rights to use any of the foregoing and all
applications, registrations and recordings relating to any of the foregoing as
may be filed in the United States Copyright Office, the United States Patent
and Trademark Office or in any similar office or agency of the United States,
any State thereof, any political subdivision thereof or in any other country or
jurisdiction, together with all rights and privileges arising under applicable
law with respect to any Borrower’s or Guarantor’s use of any of the foregoing;
all extensions, renewals, reissues, divisions, continuations, and
continuations-in-part of any of the foregoing; all rights to sue for past,
present and future infringement of any of the foregoing; inventions, trade
secrets, formulae, processes, compounds, drawings, designs, blueprints,
surveys, reports, manuals, and operating standards; goodwill (including any
goodwill associated with any trademark or servicemark, or the license of any
trademark or servicemark); customer and other lists in whatever form
maintained; trade secret rights, copyright rights, rights in works of
authorship, domain names and domain name registration; software and contract
rights relating to computer software programs, in whatever form created or
maintained.

1.52         “Interest Expense” shall mean, for any
period, as to any Person and its Subsidiaries, all of the following as
determined in accordance with GAAP, total interest expense, whether paid or
accrued (including the interest component of Capital Leases for such period),
including, without limitation, all bank fees, commissions, discounts and other
fees and charges owed with respect to letters of credit, banker’s acceptances
or similar instruments, but excluding (a) amortization of discount and
amortization of deferred financing fees and closing costs paid in cash in
connection with the transactions contemplated hereby, (b) interest paid in
property other than cash and (c) any other interest expense not payable in
cash.

1.53         “Interest Period” shall mean for any
Eurodollar Rate Loan, a period of approximately one (1), two (2), or three (3)
months duration as any Borrower (or Administrative Borrower on behalf of such
Borrower) may elect, the exact duration to be determined in accordance with the
customary practice in the applicable Eurodollar Rate market; provided, that,
such Borrower (or Administrative Borrower on behalf of such Borrower) may not
elect an Interest Period which will end after the last day of the then-current
term of this Agreement.

1.54         “Interest Rate” shall mean,

(a)           Subject to clause (b) of this
definition below:

(i)            as to Prime Rate Loans, a rate equal
to the Prime Rate,

(ii)           as to Eurodollar Rate Loans, a rate
equal to two and one-quarter (2.25%) percent per annum in excess of the
Adjusted Eurodollar Rate (in each case, based on the London Interbank Offered
Rate applicable for the Interest Period selected by a Borrower, or by
Administrative Borrower on behalf of such Borrower, as in effect two (2)
Business Days prior to the commencement of the Interest Period, whether such
rate is higher or lower than any rate previously quoted to any Borrower or
Guarantor).

 14
 

 

(b)           Notwithstanding anything to the
contrary contained in clause (a) of this definition, the Interest Rate shall
mean the rate of two (2.0%) percent per annum in excess of the Prime Rate as to
Prime Rate Loans and the rate of four and one-quarter (4.25%) percent per annum
in excess of the Adjusted Eurodollar Rate as to Eurodollar Rate Loans, at Agent’s
option, upon its written notice to Borrowers, (i) either (A) for the period on
and after the date of termination or non-renewal hereof until such time as all
Obligations are indefeasibly paid and satisfied in full in immediately
available funds, or (B) for the period from and after the date of the
occurrence of any Event of Default, and for so long as such Event of Default is
continuing as determined by Agent and (ii) on the Revolving Loans to any Borrower
at any time outstanding in excess of the Borrowing Base of such Borrower or the
Revolving Loan Limit of such Borrower (whether or not such excess(es) arise or
are made with or without Agent’s or any Lender’s knowledge or consent and
whether made before or after an Event of Default).

1.55         “Inventory” shall mean, as to each
Borrower and Guarantor, all of such Borrower’s and Guarantor’s now owned and
hereafter existing or acquired goods, wherever located, which (a) are leased by
such Borrower or Guarantor as lessor; (b) are held by such Borrower or
Guarantor for sale or lease or to be furnished under a contract of service; (c)
are furnished by such Borrower or Guarantor under a contract of service; or (d)
consist of raw materials, work in process, finished goods or materials used or
consumed in its business.

1.56         “Inventory Loan Limit” shall mean, at
any time, the amount equal to $7,000,000.

1.57         “Investment Property Control Agreement”
shall mean an agreement in writing, in form and substance satisfactory to Agent,
by and among Agent, any Borrower or Guarantor (as the case may be) and any
securities intermediary, commodity intermediary or other person who has
custody, control or possession of any investment property of such Borrower or
Guarantor acknowledging that such securities intermediary, commodity
intermediary or other person has custody, control or possession of such
investment property on behalf of Agent, that it will comply with entitlement
orders originated by Agent with respect to such investment property, or other
instructions of Agent, and has such other terms and conditions as Agent may
require.

1.58         “Lenders” shall mean the financial
institutions who are signatories hereto as Lenders and other persons made a
party to this Agreement as a Lender in accordance with Section 13.7 hereof, and
their respective successors and assigns; each sometimes being referred to
herein individually as a “Lender”.

1.59         “Letter of Credit Documents” shall
mean, with respect to any Letter of Credit, such Letter of Credit, any
amendments thereto, any documents delivered in connection therewith, any
application therefor, and any agreements, instruments, guarantees or other
documents (whether general in application or applicable only to such Letter of
Credit) governing or providing for (a) the rights and obligations of the
parties concerned or at risk or (b) any collateral security for such
obligations.

1.60         “Letter of Credit Limit” shall mean
$1,000,000.

1.61         “Letter of Credit Obligations” shall
mean, at any time, the sum of (a) the aggregate undrawn amount of all Letters
of Credit outstanding at such time, plus (b) the 

 15
 

 

aggregate amount of all drawings under Letters of
Credit for which the issuer thereof has not at such time been reimbursed, plus
(c) without duplication, the aggregate amount of all payments made by each
Lender to the issuer with respect to such Lender’s participation in Letters of
Credit as provided in Section 2.2 for which Borrowers have not at such time
reimbursed the Lenders, whether by way of a Revolving Loan or otherwise.

1.62         “Letters of Credit” shall mean all
letters of credit (whether documentary or stand-by and whether for the purchase
of inventory, equipment or otherwise) issued by an issuer for the account of
any Borrower pursuant to this Agreement, and all amendments, renewals,
extensions or replacements thereof and including, but not limited to, the
Existing Letters of Credit. The issuer of the Letters of Credit shall be, and
all references to such issuer herein shall mean, Wachovia Bank, National Association
and its successors and assigns or such other bank as Lender may from time to
time designate.

1.63         “License Agreements” shall have the
meaning set forth in Section 8.11 hereof.

1.64         “Loans” shall mean, collectively, the
Revolving Loans.

1.65         “London Interbank Offered Rate” shall
mean, with respect to any Eurodollar Loan for the Interest Period applicable
thereto, the rate of interest per annum (rounded upwards, if necessary, to the
nearest 1/100 of 1%) appearing on Telerate Page 3750 (or any successor page) as
the London interbank offered rate for deposits in U.S. Dollars at approximately
11:00 A.M. (London time) two (2) Business Days prior to the first day of such
Interest Period for a term comparable to such Interest Period; provided, that,
if more than one rate is specified on Telerate Page 3750, the applicable rate
shall be the arithmetic mean of all such rates. 
If, for any reason, such rate is not available, the term “London
Interbank Offered Rate” shall mean, with respect to any Eurodollar Loan for the
Interest Period applicable thereto, the rate of interest per annum (rounded
upwards, if necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen
LIBO Page as the London interbank offered rate for deposits in Dollars at
approximately 11:00 A.M. (London time) two (2) 
Business Days prior to the first day of such Interest Period for a term
comparable to such Interest Period; provided, however, if more than one rate is
specified on Reuters Screen LIBO Page, the applicable rate shall be the arithmetic
mean of all such rates.

1.66         “Material Adverse Effect” shall mean a
material adverse effect on (a) the financial condition, business, performance
or operations of Borrowers; (b) the legality, validity or enforceability of
this Agreement or any of the other Financing Agreements; (c) the legality,
validity, enforceability, perfection or priority of the security interests and
liens of Agent upon the Collateral; (d) the Collateral or its value; (e) the
ability of any Borrower to repay the Obligations or of any Borrower to perform
its obligations under this Agreement or any of the other Financing Agreements
as and when to be performed; or (f) the ability of Agent or any Lender to
enforce the Obligations or realize upon the Collateral or otherwise with respect
to the rights and remedies of Agent and Lenders under this Agreement or any of
the other Financing Agreements.

1.67         “Material Contract” shall mean (a) any
contract or other agreement (other than the Financing Agreements and other than
purchase orders from any customer of any Borrower or Guarantor and other than
any contract or other agreement between any Borrower or Guarantor and any of
its suppliers to the extent such Borrower or Guarantor has alternative sources
of 

 16
 

 

supply for the product provided by such supplier to
such Borrower or Guarantor), written or oral, of any Borrower or Guarantor
involving monetary liability of or to any Person in an amount in excess of
$250,000 in any fiscal year and (b) any other contract or other agreement
(other than the Financing Agreements), whether written or oral, to which any
Borrower or Guarantor is a party as to which the breach, nonperformance,
cancellation or failure to renew by any party thereto would have a Material
Adverse Effect.

1.68         “Multiemployer Plan” shall mean a “multi-employer
plan” as defined in Section 4001(a)(3) of ERISA which is or was at any time
during the current year or the immediately preceding six (6) years contributed
to by any Borrower, Guarantor or any ERISA Affiliate or with respect to which
any Borrower, Guarantor or any ERISA Affiliate may incur any liability.

1.69         “Natrol R/E” shall mean Natrol Real
Estate, Inc., a California corporation.

1.70         “Natrol R/E II” shall mean Natrol Real
Estate II, Inc., a California corporation.

1.71         “Net Income” shall mean, with respect
to any Person, for any period, the aggregate of the net income (loss) of such
Person and its Subsidiaries, on a consolidated basis, for such period
(excluding to the extent included therein any extraordinary or one-time gains
and any extraordinary or one-time non-cash losses) after deducting all charges
which should be deducted before arriving at the net income (loss) for such
period and after deducting the Provision for Taxes for such period, all as
determined in accordance with GAAP, provided, that, (a) the net
income of any Person that is not a wholly-owned Subsidiary or that is accounted
for by the equity method of accounting shall be included only to the extent of
the amount of dividends or distributions paid or payable to such Person or a
wholly-owned Subsidiary of such Person; (b) the effect of any change in
accounting principles adopted by such Person or its Subsidiaries after the date
hereof shall be excluded; and (c) the net income (if positive) of any
wholly-owned Subsidiary to the extent that the declaration or payment of
dividends or similar distributions by such wholly-owned Subsidiary to such
Person or to any other wholly-owned Subsidiary of such Person is not at the
time permitted by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule of government regulation
applicable to such wholly-owned Subsidiary shall be excluded.  For the purpose of this definition, net
income excludes any gain or loss, together with any related Provision for Taxes
for such gain or loss realized upon the sale or other disposition of any assets
that are not sold in the ordinary course of business (including, without
limitation, dispositions pursuant to sale and leaseback transactions), or of
any Capital Stock of such Person or a Subsidiary of such Person and any net
income realized as a result of changes in accounting principles or the
application thereof to such Person.

1.72         “Net Recovery Percentage” shall mean
the fraction, expressed as a percentage, (a) the numerator of which is the
amount equal to the amount of the recovery in respect of the Inventory at such
time on a “net orderly liquidation value” basis as set forth in the most recent
acceptable appraisal of Inventory received by Agent on or before the date
hereof or hereafter in accordance with Section 7.3, net of operating expenses,
liquidation expenses and commissions, and (b) the denominator of which is the
applicable original cost of the aggregate amount of the Inventory subject to
such appraisal.

 17
 

 

1.73         “Obligations” shall mean any and all
Loans, Letter of Credit Obligations and all other obligations, liabilities and
indebtedness of every kind, nature and description owing by any or all of
Borrowers to Agent or any Lender and/or any of their Affiliates, including
principal, interest, charges, fees, costs and expenses, however evidenced,
whether as principal, surety, endorser, guarantor or otherwise, arising under
this Agreement or any of the other Financing Agreements or on account of any
Letter of Credit and all other Letter of Credit Obligations, whether now
existing or hereafter arising, whether arising before, during or after the
initial or any renewal term of this Agreement or after the commencement of any
case with respect to such Borrower under the United States Bankruptcy Code or
any similar statute (including the payment of interest and other amounts which
would accrue and become due but for the commencement of such case, whether or
not such amounts are allowed or allowable in whole or in part in such case),
whether direct or indirect, absolute or contingent, joint or several, due or
not due, primary or secondary, liquidated or unliquidated, or secured or
unsecured.

1.74         “Other Taxes” shall have the meaning
given to such term in Section 6.5 hereof.

1.75         “Parent” shall mean Natrol, Inc., a
Delaware corporation, and its successors and assigns.

1.76         “Participant” shall mean any financial
institution that acquires and holds a participation in the interest of any
Lender in any of the Loans and Letters of Credit in conformity with the
provisions of Section 13.7 of this Agreement governing participations.

1.77         “Person” or “person” shall mean any
individual, sole proprietorship, partnership, corporation (including any
corporation which elects subchapter S status under the Code), limited liability
company, limited liability partnership, business trust, unincorporated
association, joint stock corporation, trust, joint venture or other entity or
any government or any agency or instrumentality or political subdivision
thereof.

1.78         “Pension Plan” shall mean a pension
plan (as defined in Section 3(2) of ERISA) subject to Title IV of ERISA which
any Borrower or Guarantor sponsors, maintains, or to which any Borrower,
Guarantor or ERISA Affiliate makes, is making, or is obligated to make
contributions, other than a Multiemployer Plan.

1.79         “Plan” shall mean an employee benefit
plan (as defined in Section 3(3) of ERISA) which any Borrower or Guarantor
sponsors, maintains, or to which it makes, is making, or is obligated to make
contributions, or in the case of a Multiemployer Plan has made contributions at
any time during the immediately preceding six (6) plan years or with respect to
which any Borrower or Guarantor may incur liability.

1.80         “Prime Rate” shall mean the rate from
time to time publicly announced by Wachovia Bank, National Association, or its
successors, as its prime rate, whether or not such announced rate is the best
rate available at such bank.

1.81         “Prime Rate Loans” shall mean any Loans
or portion thereof on which interest is payable based on the Prime Rate in
accordance with the terms thereof.

 18
 

 

1.82         “Pro Rata Share” shall mean as to any
Lender, the fraction (expressed as a percentage) the numerator of which is such
Lender’s Commitment and the denominator of which is the aggregate amount of all
of the Commitments of Lenders, as adjusted from time to time in accordance with
the provisions of Section 13.7 hereof; provided,
that, if the Commitments have been terminated, the numerator shall be
the unpaid amount of such Lender’s Loans and its interest in the Letters of
Credit and the denominator shall be the aggregate amount of all unpaid Loans
and Letters of Credit.

1.83         “Provision for Taxes” shall mean, with
respect to any Person, for any period, an amount equal to all taxes imposed on
or measured by net income, whether Federal, State or local, and whether foreign
or domestic, that are paid or payable by such Person and its Subsidiaries in
respect of such period on a consolidated basis in accordance with GAAP.

1.84         “Qualified Cash Collateral” shall mean
cash and/or Cash Equivalents maintained by Borrowers in a deposit account,
investment account, securities account or similar account with Wachovia Bank,
National Association or its Affiliates that is subject to the perfected
first-priority security interest of Agent pursuant to a Deposit Account Control
Agreement or Investment Property Control Agreement, excluding any such deposit
account on which any Borrower draws checks in the ordinary course of business.

1.85         “Real Property” shall mean all now
owned and hereafter acquired real property of each Borrower and Guarantor,
including leasehold interests, together with all buildings, structures, and
other improvements located thereon and all licenses, easements and
appurtenances relating thereto, wherever located.

1.86         “Receivables” shall mean all of the
following now owned or hereafter arising or acquired property of each Borrower
and Guarantor: (a) all Accounts; (b) all interest, fees, late charges,
penalties, collection fees and other amounts due or to become due or otherwise
payable in connection with any Account; (c) all payment intangibles of such
Borrower or Guarantor; (d)  letters of
credit, indemnities, guarantees, security or other deposits and proceeds
thereof issued payable to any Borrower or Guarantor or otherwise in favor of or
delivered to any Borrower or Guarantor in connection with any Account; or (e)
all other accounts, contract rights, chattel paper, instruments, notes, general
intangibles and other forms of obligations owing to any Borrower or Guarantor,
whether from the sale and lease of goods or other property, licensing of any
property (including Intellectual Property or other general intangibles),
rendition of services or from loans or advances by any Borrower or Guarantor or
to or for the benefit of any third person (including loans or advances to any
Affiliates or Subsidiaries of any Borrower or Guarantor) or otherwise
associated with any Accounts, Inventory or general intangibles of any Borrower
or Guarantor (including, without limitation, choses in action, causes of
action, tax refunds, tax refund claims, any funds which may become payable to
any Borrower or Guarantor in connection with the termination of any Plan or other
employee benefit plan and any other amounts payable to any Borrower or
Guarantor from any Plan or other employee benefit plan, rights and claims
against carriers and shippers, rights to indemnification, business interruption
insurance and proceeds thereof, casualty or any similar types of insurance and
any proceeds thereof and proceeds of insurance covering the lives of employees
on which any Borrower or Guarantor is a beneficiary).

 19
 

 

1.87         “Records” shall mean, as to each
Borrower and Guarantor, all of such Borrower’s and Guarantor’s present and
future books of account of every kind or nature, purchase and sale agreements,
invoices, ledger cards, bills of lading and other shipping evidence,
statements, correspondence, memoranda, credit files and other data relating to
the Collateral or any account debtor, together with the tapes, disks, diskettes
and other data and software storage media and devices, file cabinets or
containers in or on which the foregoing are stored (including any rights of any
Borrower or Guarantor with respect to the foregoing maintained with or by any
other person).

1.88         “Reference Bank” shall mean Wachovia
Bank, National Association, or such other bank as Agent may from time to time
designate.

1.89         “Renewal Date” shall have the meaning
set forth in Section 13.1 hereof.

1.90         “Register” shall have the meaning set
forth in Section 13.7 hereof.

1.91         “Required Lenders” shall mean, at any
time, those Lenders whose Pro Rata Shares aggregate sixty-six and two-thirds
(66 2/3%) percent or more of the aggregate of the Commitments of all Lenders,
or if the Commitments shall have been terminated, Lenders to whom at least
sixty-six and two-thirds (66 2/3%) percent of the then outstanding Obligations
are owing.

1.92         “Reserves” shall mean as of any date of
determination, such amounts as Agent may from time to time establish and revise
in good faith reducing the amount of Revolving Loans and Letters of Credit
which would otherwise be available to any Borrower under the lending formula(s)
provided for herein:  (a) to reflect
events, conditions, contingencies or risks which, as determined by Agent in
good faith, adversely affect, or would have a reasonable likelihood of
adversely affecting, either (i) the Collateral or any other property which is
security for the Obligations, its value or the amount that might be received by
Agent from the sale or other disposition or realization upon such Collateral,
or (ii) the assets, business or prospects of any Borrower or Guarantor or (iii)
the security interests and other rights of Agent or any Lender in the
Collateral (including the enforceability, perfection and priority thereof) or
(b) to reflect Agent’s good faith belief that any collateral report or
financial information furnished by or on behalf of any Borrower or Guarantor to
Agent is or may have been incomplete, inaccurate or misleading in any material
respect or (c) to reflect outstanding Letters of Credit as provided in Section
2.2 hereof or (d) in respect of any state of facts which Agent determines in
good faith constitutes a Default or an Event of Default.  Without limiting the generality of the
foregoing, Reserves may, at Agent’s option, be established to reflect: (e) the
greater of (i) the reserves and liabilities shown on Borrowers’ general ledger
with respect to Accounts, and (ii) dilution with respect to the Accounts (based
on the ratio of the aggregate amount of non-cash reductions in Accounts for any
period to the aggregate dollar amount of the sales of such Borrower for such
period) as calculated by Agent for any period is or is reasonably anticipated
to be greater than five (5%) percent; (f) variances on cost tests and test
counts on Inventory; (g) royalties owing by Borrowers for any third party
licenses with respect to Inventory; (h) returns, discounts, claims, credits and
allowances of any nature that are not paid pursuant to the reduction of
Accounts; (i) sales, excise or similar taxes included in the amount of any
Accounts reported to Agent; (j) a change in the turnover, age or mix of the
categories of Inventory that adversely affects the 

 20
 

 

aggregate value of all Inventory; (k) amounts due or
to become due to owners and lessors of premises where any Collateral is
located, other than for those locations where Agent has received a Collateral
Access Agreement that Agent has accepted in writing.  The amount of any Reserve established by
Agent shall have a reasonable relationship to the event, condition or other
matter which is the basis for such reserve as determined by Agent in good
faith.  To the extent that any Reserve is
in respect of amounts that may be payable to third parties Agent may, at its
option, deduct such Reserve from the Revolving Loan Limit, at any time that
such limit is less than the amount of the Borrowing Base.

1.93         “Revolving Loan Limit” shall mean, at
any time, the amount equal to the $10,000,000.

1.94         “Revolving Loans” shall mean the loans
now or hereafter made by or on behalf of any Lender or by Agent for the account
of any Lender on a revolving basis pursuant to the Credit Facility (involving
advances, repayments and readvances) as set forth in Section 2.1 hereof.

1.95         “Solvent” shall mean, at any time with
respect to any Person, that at such time such Person (a) is able to pay its
debts as they mature and has (and has a reasonable basis to believe it will
continue to have) sufficient capital (and not unreasonably small capital) to
carry on its business consistent with its practices as of the date hereof, and
(b) the assets and properties of such Person at a fair valuation (and including
as assets for this purpose at a fair valuation all rights of subrogation,
contribution or indemnification arising pursuant to any guarantees given by
such Person) are greater than the Indebtedness of such Person, and including
subordinated and contingent liabilities computed at the amount which, such
person has a reasonable basis to believe, represents an amount which can
reasonably be expected to become an actual or matured liability (and including
as to contingent liabilities arising pursuant to any guarantee the face amount
of such liability as reduced to reflect the probability of it becoming a
matured liability).

1.96         “Special Agent Advances” shall have the
meaning set forth in Section 12.11 hereof.

1.97         “Subsidiary” or “subsidiary” shall
mean, with respect to any Person, any corporation, limited liability company,
limited liability partnership or other limited or general partnership, trust,
association or other business entity of which an aggregate of at least a
majority of the outstanding Capital Stock or other interests entitled to vote
in the election of the board of directors of such corporation (irrespective of
whether, at the time, Capital 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), managers, trustees or other controlling persons, or an
equivalent controlling interest therein, of such Person is, at the time,
directly or indirectly, owned by such Person and/or one or more subsidiaries of
such Person.

1.98         “Target” shall have the meaning set
forth in Section 9.10(k) hereof.

1.99         “UCC” shall mean the Uniform Commercial
Code as in effect in the State of California, and any successor statute, as in
effect from time to time (except that terms used herein which are defined in
the Uniform Commercial Code as in effect in the State of California 

 21
 

 

on the date hereof shall continue to have the same
meaning notwithstanding any replacement or amendment of such statute except as
Agent may otherwise determine).

1.100       “Value” shall mean, as determined by
Agent in good faith, with respect to Inventory, the lower of (a) cost computed
on a first-in first-out basis in accordance with GAAP or (b) market value, provided,
that, for purposes of the calculation of the Borrowing Base, (i) the
Value of the Inventory shall not include: 
(A) the portion of the value of Inventory equal to the profit earned by
any Affiliate on the sale thereof to any Borrower or (B)  write-ups or write-downs in value with
respect to currency exchange rates and (ii) notwithstanding anything to the
contrary contained herein, the cost of the Inventory shall be computed in the
same manner and consistent with the most recent appraisal of the Inventory
received and accepted by Agent prior to the date hereof, if any.

1.101       “Voting Stock” shall mean with respect to
any Person, (a) one (1) or more classes of Capital Stock of such Person having
general voting powers to elect at least a majority of the board of directors,
managers or trustees of such Person, irrespective of whether at the time
Capital Stock of any other class or classes have or might have voting power by
reason of the happening of any contingency, and (b) any Capital Stock of such
Person convertible or exchangeable without restriction at the option of the
holder thereof into Capital Stock of such Person described in clause (a) of
this definition.

1.102       “Wachovia” shall mean Wachovia Capital
Finance Corporation (Western), a California corporation, in its individual
capacity, and its successors and assigns.

SECTION 2.         CREDIT FACILITIES

2.1           Loans.

(a)           Subject to and upon the terms and
conditions contained herein, each Lender severally (and not jointly) agrees to
make its Pro Rata Share of Revolving Loans to Borrowers from time to time in
amounts requested by Borrowers (or Administrative Borrower on behalf of
Borrowers) up to the aggregate amount outstanding for all Lenders at any time
equal to the lesser of: (i) the Borrowing Base at such time or (ii) the
Revolving Loan Limit at such time.

(b)           Except in Agent’s discretion, with
the consent of all Lenders, or as otherwise provided herein, (i) the aggregate
principal amount of the Revolving Loans and Letter of Credit Obligations
outstanding at any time to Borrowers shall not exceed the lesser of the Revolving
Loan Limit or the Borrowing Base, and (ii) the aggregate principal amount of
the Revolving Loans and Letter of Credit Obligations outstanding based on the
Eligible Inventory of Borrowers shall not exceed the Inventory Loan Limit.

(c)           In the event that (i) except as
otherwise provided herein, the aggregate principal amount of the Revolving
Loans and Letter of Credit Obligations outstanding exceed the Borrowing Base or
the Revolving Loan Limit, or (ii) the aggregate principal amount of Revolving
Loans and Letter of Credit Obligations based on the Eligible Inventory of
Borrowers exceed the Inventory Loan Limit, such event shall not limit, waive or
otherwise affect any rights of Agent or Lenders in such circumstances or on any
future occasions and Borrowers shall, upon 

 22
 

 

demand by Agent, which
may be made at any time or from time to time, immediately repay to Agent the
entire amount of any such excess(es) for which payment is demanded.

2.2           Letters of Credit.

(a)           Subject to and upon the terms and
conditions contained herein and in the Letter of Credit Documents, at the
request of a Borrower (or Administrative Borrower on behalf of such Borrower),
Agent agrees to provide or arrange for the account of such Borrower one or more
Letters of Credit, for the ratable risk of each Lender according to its Pro
Rata Share, containing terms and conditions acceptable to Agent and the issuer
thereof.

(b)           The Borrower requesting such Letter
of Credit (or Administrative Borrower on behalf of such Borrower) shall give
Agent three (3) Business Days’ (or such lesser number of Business Days as is
reasonably practical for Agent and the issuer of such Letter of Credit) prior
written notice of such Borrower’s request for the issuance of a Letter of
Credit.  Such notice shall be irrevocable
and shall specify the original face amount of the Letter of Credit requested,
the effective date (which date shall be a Business Day and in no event shall be
a date less than ten (10) days prior to the end of the then current term of
this Agreement) of issuance of such requested Letter of Credit, whether such
Letter of Credit may be drawn in a single or in partial draws, the date on
which such requested Letter of Credit is to expire (which date shall be a
Business Day and shall not be more than one year from the date of issuance),
the purpose for which such Letter of Credit is to be issued, and the
beneficiary of the requested Letter of Credit. 
The Borrower requesting the Letter of Credit (or Administrative Borrower
on behalf of such Borrower) shall attach to such notice the proposed terms of
the Letter of Credit.  The renewal or
extension of any Letter of Credit shall, for purposes hereof, be treated in all
respects the same as the issuance of a new Letter of Credit hereunder.

(c)           In addition to being subject to the
satisfaction of the applicable conditions precedent contained in Section 4
hereof and the other terms and conditions contained herein, no Letter of Credit
shall be available unless each of the following conditions precedent have been
satisfied in a manner satisfactory to Agent: 
(i) the Borrower requesting such Letter of Credit (or Administrative
Borrower on behalf of such Borrower) shall have delivered to the proposed
issuer of such Letter of Credit at such times and in such manner as such proposed
issuer may require, an application, in form and substance satisfactory to such
proposed issuer and Agent, for the issuance of the Letter of Credit and such
other Letter of Credit Documents as may be required pursuant to the terms
thereof, and the form and terms of the proposed Letter of Credit shall be
satisfactory to Agent and such proposed issuer; (ii) as of the date of
issuance, no order of any court, arbitrator or other Governmental Authority
shall purport by its terms to enjoin or restrain money center banks generally
from issuing letters of credit of the type and in the amount of the proposed
Letter of Credit, and no law, rule or regulation applicable to money center
banks generally and no request or directive (whether or not having the force of
law) from any Governmental Authority with jurisdiction over money center banks
generally shall prohibit, or request that the proposed issuer of such Letter of
Credit refrain from, the issuance of letters of credit generally or the
issuance of such Letters of Credit; (iii) after giving effect to the issuance
of such Letter of Credit, the Letter of Credit Obligations shall not exceed the
Letter of Credit Limit; and (iv) the Excess Availability, prior to giving
effect to any Reserves with respect to such Letter of Credit, on the date of
the proposed issuance of any Letter of Credit, shall be equal 

 23
 

 

to or greater than: (A)
if the proposed Letter of Credit is for the purpose of purchasing Eligible
Inventory and the documents of title with respect thereto are consigned to the
issuer, the sum of (1) the percentage equal to one hundred (100%) percent minus
the then applicable percentage with respect to Eligible Inventory set forth in
the definition of the term Borrowing Base multiplied by the Value of such Eligible
Inventory, plus (2) freight, taxes, duty and other amounts which Agent
estimates must be paid in connection with such Inventory upon arrival and for
delivery to one of such Borrower’s locations for Eligible Inventory within the
United States of America and (B) if the proposed Letter of Credit is for any
other purpose or the documents of title are not consigned to the issuer in
connection with a Letter of Credit for the purpose of purchasing Inventory, an
amount equal to one hundred (100%) percent of the Letter of Credit Obligations
with respect thereto.  Effective on the
issuance of each Letter of Credit, a Reserve shall be established in the
applicable amount set forth in Section 2.2(c)(iv)(A) or Section 2.2(c)(iv)(B).

(d)           Except in Agent’s discretion, with
the consent of all Lenders, the amount of all outstanding Letter of Credit
Obligations shall not at any time exceed the Letter of Credit Limit.

(e)           Each Borrower shall reimburse
immediately the issuer of a Letter of Credit for any draw under any Letter of
Credit issued for the account of such Borrower by such issuer and pay such
issuer the amount of all other charges and fees payable to issuer in connection
with any Letter of Credit issued for the account of such Borrower immediately
when due, irrespective of any claim, setoff, defense or other right which such
Borrower may have at any time against the issuer or any other Person.  Each drawing under any Letter of Credit or
other amount payable in connection therewith when due shall constitute a
request by the Borrowers to Agent for a Prime Rate Loan in the amount of such
drawing or other amount then due and shall be made by Agent on behalf of
Lenders as a Revolving Loan (or Special Agent Advance, as the case may be). The
date of such Loan shall be the date of the drawing or as to other amounts, the
due date therefor.  Any payments made by
or on behalf of Agent or any Lender to an issuer and/or related parties in
connection with any Letter of Credit shall constitute additional Revolving
Loans to Borrowers pursuant to this Section 2 (or Special Agent Advances as the
case may be).

(f)            Borrowers and Guarantors shall
indemnify and hold Agent and Lenders harmless from and against any and all
losses, claims, damages, liabilities, costs and expenses which Agent or any
Lender may suffer or incur in connection with any Letter of Credit and any
documents, drafts or acceptances relating thereto, including any losses,
claims, damages, liabilities, costs and expenses due to any action taken by any
issuer or correspondent with respect to any Letter of Credit, except for such
losses, claims, damages, liabilities, costs or expenses that are a direct
result of the gross negligence or willful misconduct of Agent or any Lender as
determined pursuant to a final non-appealable order of a court of competent
jurisdiction.  Each Borrower and
Guarantor assumes all risks with respect to the acts or omissions of the drawer
under or beneficiary of any Letter of Credit and for such purposes the drawer
or beneficiary shall be deemed such Borrower’s agent.  Each Borrower and Guarantor assumes all risks
for, and agrees to pay, all foreign, Federal, State and local taxes, duties and
levies relating to any goods subject to any Letter of Credit or any documents,
drafts or acceptances thereunder.  Each
Borrower and Guarantor hereby releases and holds Agent and Lenders harmless
from and against 

 24
 

 

any acts, waivers,
errors, delays or omissions with respect to or relating to any Letter of
Credit, except for the gross negligence or willful misconduct of Agent or any
Lender as determined pursuant to a final, non-appealable order of a court of
competent jurisdiction.  The provisions
of this Section 2.2(f) shall survive the payment of Obligations and the
termination of this Agreement.

(g)           In connection with Inventory
purchased pursuant to any Letter of Credit, Borrowers and Guarantors shall, at
Agent’s request, instruct all suppliers, carriers, forwarders, customs brokers,
warehouses or others receiving or holding cash, checks, Inventory, documents or
instruments in which Agent holds a security interest that upon Agent’s request,
such items are to be delivered to Agent and/or subject to Agent’s order, and if
they shall come into such Borrower’s or Guarantor’s possession, to deliver
them, upon Agent’s request, to Agent in their original form.  Except as otherwise provided herein, Agent
shall not exercise such right to request such items so long as no Default or
Event of Default shall exist or have occurred and be continuing.  Except as Agent may otherwise specify,
Borrowers shall designate Agent or the issuer of the Letter of Credit related
thereto, as the consignee on all bills of lading and other negotiable and
non-negotiable documents.

(h)           Each Borrower and Guarantor hereby
irrevocably authorizes and directs any issuer of a Letter of Credit to name
such Borrower or Guarantor as the account party therein and to deliver to Agent
all instruments, documents and other writings and property received by 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 the Letter of Credit Documents with respect
thereto.  Nothing contained herein shall
be deemed or construed to grant any Borrower or Guarantor any right or
authority to pledge the credit of Agent or any Lender in any manner.  Agent and Lenders shall have no liability of
any kind with respect to any Letter of Credit provided by an issuer unless
Agent has duly executed and delivered to such issuer the application or a
guarantee or indemnification in writing with respect to such Letter of
Credit.  Borrowers and Guarantors shall
be bound by any reasonable interpretation made in good faith by Agent, or any
other issuer or correspondent under or in connection with any Letter of Credit
or any documents, drafts or acceptances thereunder, notwithstanding that such
interpretation may be inconsistent with any instructions of any Borrower or
Guarantor.

(i)            Immediately upon the issuance or
amendment of any Letter of Credit, each Lender shall be deemed to have
irrevocably and unconditionally purchased and received, without recourse or
warranty, an undivided interest and participation to the extent of such Lender’s
Pro Rata Share of the liability with respect to such Letter of Credit and the
obligations of Borrowers with respect thereto (including all Letter of Credit
Obligations with respect thereto).  Each
Lender shall absolutely, unconditionally and irrevocably assume, as primary
obligor and not as surety, and be obligated to pay to the issuer of any such
Letter of Credit therefor and discharge when due, its Pro Rata Share of all of
such obligations arising under such Letter of Credit.  Without limiting the scope and nature of each
Lender’s participation in any Letter of Credit, to the extent that the issuer
has not been reimbursed or otherwise paid as required hereunder or under any
such Letter of Credit, each such Lender shall pay to the issuer its Pro Rata
Share of such unreimbursed drawing or other amounts then due to issuer in
connection therewith.

 25

 

(j)            The obligations of Borrowers to pay
each Letter of Credit Obligations and the obligations of Lenders to make
payments to Agent for the account of any issuer with respect to Letters of
Credit shall be absolute, unconditional and irrevocable and shall be performed
strictly in accordance with the terms of this Agreement under any and all
circumstances, whatsoever, notwithstanding the occurrence or continuance of any
Default, Event of Default, the failure to satisfy any other condition set forth
in Section 4 or any other event or circumstance.  If such amount is not made available by a
Lender when due, Agent shall be entitled to recover such amount on demand from
such Lender with interest thereon, for each day from the date such amount was
due until the date such amount is paid to Agent at the interest rate then
payable by any Borrower in respect of Loans that are Prime Rate Loans.  Any such reimbursement shall not relieve or
otherwise impair the obligation of Borrowers to reimburse the issuer under any
Letter of Credit or make any other payment in connection therewith.

(k)           Any rights, remedies, duties or
obligations granted or undertaken by any Borrower to any issuer or
correspondent in any application for any Letter of Credit, or any other
agreement in favor of any issuer or correspondent relating to any Letter of
Credit, shall be deemed to have been granted or undertaken by such Borrower to
Agent.  Any duties or obligations
undertaken by Agent to any issuer or correspondent in any application for any
Letter of Credit, or any other agreement by Agent in favor of any issuer or
correspondent relating to any Letter of Credit, shall be deemed to have been
undertaken by Borrowers to Agent and to apply in all respects to Borrowers.

2.3           Commitments.  The aggregate amount of each Lender’s Pro
Rata Share of the Loans and Letter of Credit Obligations shall not exceed the
amount of such Lender’s Commitment, as the same may from time to time be
amended in accordance with the provisions hereof.

SECTION 3.         INTEREST
AND FEES

3.1           Interest.

(a)           Borrowers shall pay to Agent, for the
benefit of Lenders, interest on the outstanding principal amount of the Loans
at the Interest Rate.  All interest
accruing hereunder on and after the date of any Event of Default or termination
hereof shall be payable on demand.

(b)           Borrowers (or Administrative Borrower
on behalf of Borrowers) may from time to time request Eurodollar Rate Loans or
may request that Prime Rate Loans be converted to Eurodollar Rate Loans or that
any existing Eurodollar Rate Loans continue for an additional Interest
Period.  Such request from Borrowers (or
Administrative Borrower on behalf of Borrowers) shall specify the amount of the
Eurodollar Rate Loans or the amount of the Prime Rate Loans to be converted to
Eurodollar Rate Loans or the amount of the Eurodollar Rate Loans to be
continued (subject to the limits set forth below) and the Interest Period to be
applicable to such Eurodollar Rate Loans. 
Subject to the terms and conditions contained herein, three (3) Business
Days after receipt by Agent of such a request from Borrowers (or Administrative
Borrower on behalf of Borrowers), such Eurodollar Rate Loans shall be made or
Prime Rate Loans shall be converted to Eurodollar Rate Loans or such Eurodollar
Rate Loans shall continue, as the case may be, provided, that,
(i) no Default or Event of Default shall exist or have occurred 

 26
 

 

and be continuing, (ii)
no party hereto shall have sent any notice of termination of this Agreement,
(iii) Borrowers (or Administrative Borrower on behalf of Borrowers) shall have
complied with such customary procedures as are established by Agent and
specified by Agent to Administrative Borrower from time to time for requests by
Borrowers for Eurodollar Rate Loans, (iv) no more than four (4) Interest
Periods may be in effect at any one time, (v) the aggregate amount of the
Eurodollar Rate Loans must be in an amount not less than $2,000,000 or an
integral multiple of $1,000,000 in excess thereof, (vi) the maximum amount of
the Eurodollar Rate Loans in the aggregate at any time requested by Borrowers
shall not exceed the lowest principal amount of the Revolving Loans which it is
anticipated will be outstanding during the applicable Interest Period, in each
case as determined by Borrowers after consultation with Agent acting in good
faith (but with no obligation of Agent or Lenders to make such Loans except as
otherwise provided herein), and (vii) Agent and each Lender shall have
determined that the Interest Period or Adjusted Eurodollar Rate is available to
Agent and such Lender and can be readily determined as of the date of the
request for such Eurodollar Rate Loan by Borrowers.  Any request by or on behalf of a Borrower for
Eurodollar Rate Loans or to convert Prime Rate Loans to Eurodollar Rate Loans
or to continue any existing Eurodollar Rate Loans shall be irrevocable.  Notwithstanding anything to the contrary
contained herein, Agent and Lenders shall not be required to purchase United
States Dollar deposits in the London interbank market or other applicable
Eurodollar Rate market to fund any Eurodollar Rate Loans, but the provisions
hereof shall be deemed to apply as if Agent and Lenders had purchased such
deposits to fund the Eurodollar Rate Loans.

(c)           Any Eurodollar Rate Loans shall
automatically convert to Prime Rate Loans upon the last day of the applicable
Interest Period, unless Agent has received and approved a request to continue
such Eurodollar Rate Loan at least three (3) Business Days prior to such last
day in accordance with the terms hereof. 
Any Eurodollar Rate Loans shall, at Agent’s option, upon notice by Agent
to Parent, be subsequently converted to Prime Rate Loans in the event that this
Agreement shall terminate or not be renewed. 
Borrowers shall pay to Agent, for the benefit of Lenders, upon demand by
Agent (or Agent may, at its option, charge any loan account of any Borrower)
any amounts required to compensate any Lender or Participant for any loss
(including loss of anticipated profits), cost or expense incurred by such
person, as a result of the conversion of Eurodollar Rate Loans to Prime Rate
Loans pursuant to any of the foregoing.

(d)           Interest shall be payable by
Borrowers to Agent, for the account of Lenders, monthly in arrears not later
than the first day of each calendar month and shall be calculated on the basis
of a three hundred sixty (360) day year and actual days elapsed.  The interest rate on non-contingent
Obligations (other than Eurodollar Rate Loans) shall increase or decrease by an
amount equal to each increase or decrease in the Prime Rate effective on the
first day of the month after any change in such Prime Rate is announced based
on the Prime Rate in effect on the last day of the month in which any such
change occurs.  In no event shall charges
constituting interest payable by Borrowers to Agent and Lenders exceed the
maximum amount or the rate permitted under any applicable law or regulation,
and if any such part or provision of this Agreement is in contravention of any
such law or regulation, such part or provision shall be deemed amended to
conform thereto.

 27
 

 

3.2           Fees.

(a)           Borrowers shall pay to Agent, for the
account of Lenders, monthly an unused line fee at a rate equal to three-eighths
of one (0.375%) percent per annum calculated upon the amount by which the Revolving
Loan Limit exceeds the average daily principal balance of the outstanding
Revolving Loans and Letters of Credit during the immediately preceding month
(or part thereof) while this Agreement is in effect and for so long thereafter
as any of the Obligations are outstanding, which fee shall be payable on the
first day of each month in arrears.

(b)           Borrowers shall pay to Agent, for the
account of Lenders, a fee at a rate equal to two and one-quarter (2.25%)
percent per annum on the average daily maximum amount available to be drawn
under all of such Letters of Credit for the immediately preceding month (or
part thereof), payable in arrears as of the first day of each succeeding month,
computed for each day from the date of issuance to the date of expiration;
except that Borrowers shall pay, at Agent’s option, without notice, such fee at
a rate two (2%) percent greater than the otherwise applicable rate on such
average daily maximum amount for:  (i)
the period from and after the date of termination or non-renewal hereof until
Lenders have received full and final payment of all Obligations
(notwithstanding entry of a judgment against any Borrower or Guarantor) and
(ii) the period from and after the date of the occurrence of an Event of
Default for so long as such Event of Default is continuing as determined by
Agent.  Such letter of credit fees shall
be calculated on the basis of a three hundred sixty (360) day year and actual
days elapsed and the obligation of Borrowers to pay such fee shall survive the
termination or non-renewal of this Agreement.  
In addition to the letter of credit fees provided above, Borrowers shall
pay to the issuer of any Letter of Credit for its own account (without sharing
with Lenders) the letter of credit fronting and negotiation fees agreed to by
Borrowers and such issuer from time to time and the customary charges from time
to time of such issuer with respect to the issuance, amendment, transfer,
administration, cancellation and conversion of, and drawings under, such
Letters of Credit.

(c)           Borrowers shall pay to Agent the
other fees and amounts set forth in the Fee Letter in the amounts and at the
times specified therein.  To the extent
payment in full of the applicable fee is received by Agent from Borrowers on or
about the date hereof, Agent shall pay to each Lender its share of such fees in
accordance with the terms of the arrangements of Agent with such Lender.

3.3           Changes in Laws and
Increased Costs of Loans.

(a)           If after the date hereof, either (i)
any change in, or in the interpretation of, any law or regulation is
introduced, including, without limitation, with respect to reserve
requirements, applicable to any Lender or any banking or financial institution
from whom any Lender borrows funds or obtains credit (a “Funding Bank”), or
(ii) a Funding Bank or any Lender complies with any future guideline or request
from any central bank or other Governmental Authority or (iii) a Funding Bank
or any Lender determines that the adoption of any applicable law, rule or
regulation 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 has or would have the effect described below, or a
Funding Bank or any Lender complies with any 

 28
 

 

request or directive
regarding capital adequacy (whether or not having the force of law) of any such
authority, central bank or comparable agency, and in the case of any event set forth
in this clause (iii), such adoption, change or compliance has or would have the
direct or indirect effect of reducing the rate of return on any Lender’s
capital as a consequence of its obligations hereunder to a level below that
which such Lender could have achieved but for such adoption, change or
compliance (taking into consideration the Funding Bank’s or Lender’s policies
with respect to capital adequacy) by an amount deemed by such Lender to be
material, and the result of any of the foregoing events described in clauses
(i), (ii) or (iii) is or results in an increase in the cost to any Lender of
funding or maintaining the Loans, the Letters of Credit or its Commitment, then
Borrowers and Guarantors shall from time to time upon demand by Agent pay to
Agent additional amounts sufficient to indemnify such Lender against such
increased cost on an after-tax basis (after taking into account applicable
deductions and credits in respect of the amount indemnified).  A certificate as to the amount of such increased
cost shall be submitted to Administrative Borrower by Agent or the applicable
Lender and shall be conclusive, absent manifest error.  Notwithstanding the generality of the
foregoing, this Section 3.3(a) shall not apply to tax matters covered by Section
6.5.

(b)           If prior to the first day of any
Interest Period, (i) Agent shall have determined in good faith (which
determination shall be conclusive and binding upon Borrowers and Guarantors)
that, by reason of circumstances affecting the relevant market, adequate and
reasonable means do not exist for ascertaining the Adjusted Eurodollar Rate for
such Interest Period, (ii) Agent has received notice from the Required Lenders
that the Adjusted Eurodollar Rate determined or to be determined for such
Interest Period will not adequately and fairly reflect the cost to Lenders of
making or maintaining Eurodollar Rate Loans during such Interest Period, or
(iii) Dollar deposits in the principal amounts of the Eurodollar Rate Loans to
which such Interest Period is to be applicable are not generally available in
the London interbank market, Agent shall give telecopy or telephonic notice
thereof to Administrative Borrower as soon as practicable thereafter, and will
also give prompt written notice to Administrative Borrower when such conditions
no longer exist.  If such notice is given
(A) any Eurodollar Rate Loans requested to be made on the first day of such
Interest Period shall be made as Prime Rate Loans, (B) any Loans that were to
have been converted on the first day of such Interest Period to or continued as
Eurodollar Rate Loans shall be converted to or continued as Prime Rate Loans
and (C) each outstanding Eurodollar Rate Loan shall be converted, on the last
day of the then-current Interest Period thereof, to Prime Rate Loans.  Until such notice has been withdrawn by
Agent, no further Eurodollar Rate Loans shall be made or continued as such, nor
shall any Borrower (or Administrative Borrower on behalf of any Borrower) have
the right to convert Prime Rate Loans to Eurodollar Rate Loans.

(c)           Notwithstanding any other provision
herein, if the adoption of or any change in any law, treaty, rule or regulation
or final, non-appealable determination of an arbitrator or a court or other
Governmental Authority or in the interpretation or application thereof
occurring after the date hereof shall make it unlawful for Agent or any Lender
to make or maintain Eurodollar Rate Loans as contemplated by this Agreement,
(i) Agent or such Lender shall promptly give written notice of such
circumstances to Administrative Borrower (which notice shall be withdrawn
whenever such circumstances no longer exist), (ii) the commitment of such
Lender hereunder to make Eurodollar Rate Loans, continue Eurodollar Rate Loans
as such and convert Prime Rate Loans to Eurodollar Rate Loans shall forthwith
be canceled and, until 

 29
 

 

such time as it shall no
longer be unlawful for such Lender to make or maintain Eurodollar Rate Loans,
such Lender shall then have a commitment only to make a Prime Rate Loan when a
Eurodollar Rate Loan is requested and (iii) such Lender’s Loans then
outstanding as Eurodollar Rate Loans, if any, shall be converted automatically
to Prime Rate Loans on the respective last days of the then current Interest
Periods with respect to such Loans or within such earlier period as required by
law.  If any such conversion of a
Eurodollar Rate Loan occurs on a day which is not the last day of the then
current Interest Period with respect thereto, Borrowers and Guarantors shall
pay to such Lender such amounts, if any, as may be required pursuant to Section
3.3(d) below.

(d)           Borrowers and Guarantors shall
indemnify Agent and each Lender and to hold Agent and each Lender harmless from
any loss or expense which Agent or such Lender may sustain or incur as a
consequence of (i) default by Borrowers in making a borrowing of, conversion
into or extension of Eurodollar Rate Loans after Borrowers (or Administrative
Borrower on behalf of Borrowers) have given a notice requesting the same in
accordance with the provisions of this Loan Agreement, (ii) default by
Borrowers in making any prepayment of a Eurodollar Rate Loan after any Borrower
has given a notice thereof in accordance with the provisions of this Agreement,
and (iii) the making of a prepayment of Eurodollar Rate Loans on a day which is
not the last day of an Interest Period with respect thereto.  With respect to Eurodollar Rate Loans, such
indemnification may include an amount equal to the excess, if any, of (A) the
amount of interest which would have accrued on the amount so prepaid, or not so
borrowed, converted or extended, for the period from the date of such
prepayment or of such failure to borrow, convert or extend to the last day of
the applicable Interest Period (or, in the case of a failure to borrow, convert
or extend, the Interest Period that would have commenced on the date of such
failure) in each case at the applicable rate of interest for such Eurodollar
Rate Loans provided for herein over (B) the amount of interest (as determined
by such Agent or such Lender) which would have accrued to Agent or such Lender
on such amount by placing such amount on deposit for a comparable period with
leading banks in the interbank Eurodollar market.  This covenant shall survive the termination
or non-renewal of this Agreement and the payment of the Obligations.

SECTION 4.         CONDITIONS
PRECEDENT

4.1           Conditions Precedent to Initial Loans
and Letters of Credit.  The obligation of
Lenders to make the initial Loans or of Agent and Lenders to provide for the
initial Letters of Credit hereunder is subject to the satisfaction of, or
waiver of, immediately prior to or concurrently with the making of such Loan or
the issuance of such Letter of Credit of each of the following conditions
precedent:

(a)           Agent shall have received, in form
and substance satisfactory to Agent, all releases, terminations and such other
documents as Agent may request to evidence and effectuate the termination by
the Existing Lenders of their respective financing arrangements with Borrowers
and Guarantors and the termination and release by it or them, as the case may
be, of any interest in and to any assets and properties of each Borrower and
Guarantor, duly authorized, executed and delivered by it or each of them,
including, but not limited to, UCC termination statements for all UCC financing
statements previously filed by it or any of them or their predecessors, as
secured party and any Borrower or Guarantor, as debtor;

 30
 

 

(b)           all requisite corporate action and
proceedings in connection with this Agreement and the other Financing
Agreements shall be satisfactory in form and substance to Agent, and Agent
shall have received all information and copies of all documents, including
records of requisite corporate action and proceedings which Agent may have
requested in connection therewith, such documents where requested by Agent or
its counsel to be certified by appropriate corporate officers or Governmental
Authority (and including a copy of the certificate of incorporation of each
Borrower and Guarantor certified by the Secretary of State (or equivalent
Governmental Authority) which shall set forth the same complete corporate name
of such Borrower or Guarantor as is set forth herein and such document as shall
set forth the organizational identification number of each Borrower or
Guarantor, if one is issued in its jurisdiction of incorporation);

(c)           no material adverse change shall have
occurred in the assets, business or prospects of Borrowers since the date of
Agent’s latest field examination (not including for this purpose the field
review referred to in clause (d) below) and no change or event shall have
occurred which would impair the ability of any Borrower or Guarantor to perform
its obligations hereunder or under any of the other Financing Agreements to
which it is a party or of Agent or any Lender to enforce the Obligations or
realize upon the Collateral;

(d)           Agent shall have completed a field
review of the Records and such other information with respect to the Collateral
as Agent may require to determine the amount of Loans available to Borrowers
(including, without limitation, current perpetual inventory records and/or
roll-forwards of Accounts and Inventory through the date of closing and test
counts of the Inventory in a manner satisfactory to Agent, together with such
supporting documentation as may be necessary or appropriate, and other
documents and information that will enable Agent to accurately identify and
verify the Collateral), the results of which in each case shall be satisfactory
to Agent, not more than three (3) Business Days prior to the date hereof or
such earlier date as Agent may agree;

 

(e)           Agent shall have received, in form
and substance satisfactory to Agent, all consents, waivers, acknowledgments and
other agreements from third persons which Agent may deem necessary or desirable
in order to permit, protect and perfect its security interests in and liens
upon the Collateral or to effectuate the provisions or purposes of this
Agreement and the other Financing Agreements, including, without limitation,
Collateral Access Agreements;

(f)            the Excess Availability as
determined by Agent, as of the date hereof, shall be not less than $2,000,000
after giving effect to the initial Loans made or to be made and Letters of
Credit issued or to be issued in connection with the initial transactions
hereunder;

(g)           Agent shall have received, in form
and substance satisfactory to Agent, Deposit Account Control Agreements or
Investment Property Control Agreement (as applicable) by and among Agent, each
Borrower and Guarantor, as the case may be and each bank, securities
intermediary or commodity intermediary where such Borrower or Guarantor has an
account, in each case, duly authorized, executed and delivered by such Person
and Borrower or Guarantor, as the case may be (or Agent shall be the customer
with respect to such account as Agent may specify);

 31
 

 

(h)           Agent shall have received evidence,
in form and substance satisfactory to Agent, that Agent has a valid perfected
first priority security interest in all of the Collateral;

(i)            Agent shall have received and
reviewed lien and judgment search results for the jurisdiction of organization
of each Borrower and Guarantor, the jurisdiction of the chief executive office
of each Borrower and Guarantor and all jurisdictions in which assets of
Borrowers and Guarantors are located, which search results shall be in form and
substance satisfactory to Agent;

(j)            Agent shall have received a written
appraisal of the Inventory of Borrowers conducted by an independent appraisal
firm acceptable to Agent, and in form, scope and methodology satisfactory to
Agent, the results of which shall be satisfactory to Agent;

(k)           Agent shall have received originals
of the shares of the stock certificates representing all of the issued and
outstanding shares of the Capital Stock of each Borrower and Guarantor (other
than Parent) and owned by any Borrower or Guarantor, in each case together with
stock powers duly executed in blank with respect thereto;

(l)            Agent shall have received evidence
of insurance and loss payee endorsements required hereunder and under the other
Financing Agreements, in form and substance satisfactory to Agent, and
certificates of insurance policies and/or endorsements naming Agent as loss
payee;

(m)          Agent shall have received, in form and
substance satisfactory to Agent, such opinion letters of counsel to Borrowers
and Guarantors with respect to the Financing Agreements and such other matters
as Agent may request; and

(n)           the other Financing Agreements and
all instruments and documents hereunder and thereunder shall have been duly
executed and delivered to Agent, in form and substance satisfactory to Agent.

4.2           Conditions Precedent to All Loans and
Letters of Credit.  The obligation of
Lenders to make the Loans, including the initial Loans, or of the Agent and
Lenders to provide for any Letter of Credit, including the initial Letters of
Credit, is subject to the further satisfaction of, or waiver of, immediately
prior to or concurrently with the making of each such Loan or the issuance of
such Letter of Credit of each of the following conditions precedent:

(a)           all representations and warranties
contained herein and in the other Financing Agreements shall be true and
correct in all material respects with the same effect as though such
representations and warranties had been made on and as of the date of the
making of each such Loan or providing each such Letter of Credit and after
giving effect thereto, except to the extent that such representations and
warranties expressly relate solely to an earlier date (in which case such
representations and warranties shall have been true and accurate on and as of
such earlier date);

(b)           no law, regulation, order, judgment
or decree of any Governmental Authority shall exist, and no action, suit,
investigation, litigation or proceeding shall be pending or threatened in any
court or before any arbitrator or Governmental Authority, which purports to 

 32
 

 

enjoin, prohibit,
restrain or otherwise affect (i) the making of the Loans or providing the
Letters of Credit, or (ii) the consummation of the transactions contemplated
pursuant to the terms hereof or the other Financing Agreements; and

(c)           no Default or Event of Default shall
exist or have occurred and be continuing on and as of the date of the making of
such Loan or providing each such Letter of Credit and after giving effect
thereto.

SECTION 5.         GRANT
AND PERFECTION OF SECURITY INTEREST

5.1           Grant of Security Interest.  To secure payment and performance of all
Obligations, each Borrower and Guarantor hereby grants to Agent, for itself and
the benefit of Lenders, a continuing security interest in, a lien upon, and a
right of set off against, and hereby assigns to Agent, for itself and the
benefit of Lenders, as security, all personal property and trade fixtures, and
interests in personal property and trade fixtures, of each Borrower and
Guarantor, whether now owned or hereafter acquired or existing, and wherever
located (together with all other collateral security for the Obligations at any
time granted to or held or acquired by Agent or any Lender, collectively, the “Collateral”),
including:

(a)           all Accounts;

(b)           all general intangibles, including,
without limitation, all Intellectual Property;

(c)           all goods, including, without
limitation, Inventory and Equipment;

(d)           all trade fixtures;

(e)           all chattel paper, including, without
limitation, all tangible and electronic chattel paper;

(f)            all instruments, including, without
limitation, all promissory notes;

(g)           all documents;

(h)           all deposit accounts;

(i)            all letters of credit, banker’s
acceptances and similar instruments and including all letter-of-credit rights;

(j)            all supporting obligations and all
present and future liens, security interests, rights, remedies, title and
interest in, to and in respect of Receivables and other Collateral, including
(i) rights and remedies under or relating to guaranties, contracts of
suretyship, letters of credit and credit and other insurance related to the
Collateral, (ii) rights of stoppage in transit, replevin, repossession,
reclamation and other rights and remedies of an unpaid vendor, lienor or
secured party, (iii) goods described in invoices, documents, contracts or
instruments with respect to, or otherwise representing or evidencing,
Receivables or other 

 33
 

 

Collateral, including
returned, repossessed and reclaimed goods, and (iv) deposits by and property of
account debtors or other persons securing the obligations of account debtors;

(k)           all (i) investment property
(including securities, whether certificated or uncertificated, securities
accounts, security entitlements, commodity contracts or commodity accounts) and
(ii) monies, credit balances, deposits and other property of any Borrower or
Guarantor now or hereafter held or received by or in transit to Agent, any
Lender or its Affiliates or at any other depository or other institution from
or for the account of any Borrower or Guarantor, whether for safekeeping,
pledge, custody, transmission, collection or otherwise;

(l)            all commercial tort claims,
including, without limitation, those identified in the Information Certificate;

(m)          to the extent not otherwise described
above, all Receivables;

(n)           all Records; and

(o)           all products and proceeds of the
foregoing, in any form, including insurance proceeds and all claims against
third parties for loss or damage to or destruction of or other involuntary
conversion of any kind or nature of any or all of the other Collateral.

5.2           Perfection of
Security Interests.

(a)           Each Borrower and Guarantor
irrevocably and unconditionally authorizes Agent (or its agent) to file at any
time and from time to time such financing statements with respect to the
Collateral naming Agent or its designee as the secured party and such Borrower
or Guarantor as debtor, as Agent may require, and including any other
information with respect to such Borrower or Guarantor or otherwise required by
part 5 of Article 9 of the Uniform Commercial Code of such jurisdiction as
Agent may determine, together with any amendment and continuations with respect
thereto, which authorization shall apply to all financing statements filed on,
prior to or after the date hereof.  Each
Borrower and Guarantor hereby ratifies and approves all financing statements
naming Agent or its designee as secured party and such Borrower or Guarantor,
as the case may be, as debtor with respect to the Collateral (and any
amendments with respect to such financing statements) filed by or on behalf of
Agent prior to the date hereof and ratifies and confirms the authorization of
Agent to file such financing statements (and amendments, if any).  Each Borrower and Guarantor hereby authorizes
Agent to adopt on behalf of such Borrower and Guarantor any symbol required for
authenticating any electronic filing.  In
the event that the description of the collateral in any financing statement
naming Agent or its designee as the secured party and any Borrower or Guarantor
as debtor includes assets and properties of such Borrower or Guarantor that do
not at any time constitute Collateral, whether hereunder, under any of the
other Financing Agreements or otherwise, the filing of such financing statement
shall nonetheless be deemed authorized by such Borrower or Guarantor to the
extent of the Collateral included in such description and it shall not render the
financing statement ineffective as to any of the Collateral or otherwise affect
the financing statement as it applies to any of the Collateral.  In no event shall any Borrower or Guarantor
at any time file, or permit or cause to be filed, any correction statement or
termination statement with respect to any 

 34
 

 

financing statement (or
amendment or continuation with respect thereto) naming Agent or its designee as
secured party and such Borrower or Guarantor as debtor.

(b)           Each Borrower and Guarantor does not
have any chattel paper (whether tangible or electronic) or instruments as of
the date hereof, except as set forth in the Information Certificate.  In the event that any Borrower or Guarantor
shall be entitled to or shall receive any chattel paper or instrument after the
date hereof, Borrowers and Guarantors shall promptly notify Agent thereof in
writing.  Promptly upon the receipt
thereof by or on behalf of any Borrower or Guarantor (including by any agent or
representative), such Borrower or Guarantor shall deliver, or cause to be
delivered to Agent, all tangible chattel paper and instruments that such
Borrower or Guarantor has or may at any time acquire, accompanied by such
instruments of transfer or assignment duly executed in blank as Agent may from
time to time specify, in each case except as Agent may otherwise agree.  At Agent’s option, each Borrower and
Guarantor shall, or Agent may at any time on behalf of any Borrower or
Guarantor, cause the original of any such instrument or chattel paper to be conspicuously
marked in a form and manner acceptable to Agent with the following legend
referring to chattel paper or instruments as applicable: “This [chattel
paper][instrument] is subject to the security interest of Wachovia Capital
Finance Corporation (Western), as Agent and any sale, transfer, assignment or
encumbrance of this [chattel paper][instrument] violates the rights of such
secured party.”

(c)           In the event that any Borrower or
Guarantor shall at any time hold or acquire an interest in any electronic
chattel paper or any “transferable record” (as such term is defined in Section
201 of the Federal Electronic Signatures in Global and National Commerce Act or
in Section 16 of the Uniform Electronic Transactions Act as in effect in any
relevant jurisdiction), such Borrower or Guarantor shall promptly notify Agent
thereof in writing.  Promptly upon Agent’s
request, such Borrower or Guarantor shall take, or cause to be taken, such
actions as Agent may request to give Agent control of such electronic chattel
paper under Section 9-105 of the UCC and control of such transferable record
under Section 201 of the Federal Electronic Signatures in Global and National
Commerce Act or, as the case may be, Section 16 of the Uniform Electronic
Transactions Act, as in effect in such jurisdiction.

(d)           Each Borrower and Guarantor does not
have any deposit accounts as of the date hereof, except as set forth in the
Information Certificate.  Borrowers and
Guarantors shall not, directly or indirectly, after the date hereof open,
establish or maintain any deposit account unless each of the following
conditions is satisfied:  (i) Agent shall
have received not less than five (5) Business Days prior written notice of the
intention of any Borrower or Guarantor to open or establish such account which
notice shall specify in reasonable detail and specificity acceptable to Agent
the name of the account, the owner of the account, the name and address of the
bank at which such account is to be opened or established, the individual at such
bank with whom such Borrower or Guarantor is dealing and the purpose of the
account, (ii) the bank where such account is opened or maintained shall be
acceptable to Agent, and (iii) on or before the opening of such deposit
account, such Borrower or Guarantor shall as Agent may specify either (A)
deliver to Agent a Deposit Account Control Agreement with respect to such
deposit account duly authorized, executed and delivered by such Borrower or
Guarantor and the bank at which such deposit account is opened and maintained
or (B) arrange for Agent to become the customer of the bank with respect to the
deposit account on terms and conditions acceptable to Agent. The terms of this
subsection (d) shall not apply to deposit accounts 

 35
 

 

specifically and
exclusively used for payroll, payroll taxes and other employee wage and benefit
payments to or for the benefit of any Borrower’s or Guarantor’s salaried
employees.

(e)           No Borrower or Guarantor owns or
holds, directly or indirectly, beneficially or as record owner or both, any
investment property, as of the date hereof, or have any investment account,
securities account, commodity account or other similar account with any bank or
other financial institution or other securities intermediary or commodity
intermediary as of the date hereof, in each case except as set forth in the
Information Certificate.

(i)            In the event that any Borrower or
Guarantor shall be entitled to or shall at any time after the date hereof hold
or acquire any certificated securities, such Borrower or Guarantor shall
promptly endorse, assign and deliver the same to Agent, accompanied by such
instruments of transfer or assignment duly executed in blank as Agent may from
time to time specify.  If any securities,
now or hereafter acquired by any Borrower or Guarantor are uncertificated and
are issued to such Borrower or Guarantor or its nominee directly by the issuer
thereof, such Borrower or Guarantor shall immediately notify Agent thereof and
shall as Agent may specify, either (A) cause the issuer to agree to comply with
instructions from Agent as to such securities, without further consent of any
Borrower or Guarantor or such nominee, or (B) arrange for Agent to become the
registered owner of the securities.

(ii)           Borrowers and Guarantors shall not,
directly or indirectly, after the date hereof open, establish or maintain any
investment account, securities account, commodity account or any other similar
account (other than a deposit account) with any securities intermediary or
commodity intermediary unless each of the following conditions is satisfied:
(A) Agent shall have received not less than five (5) Business Days prior
written notice of the intention of such Borrower or Guarantor to open or
establish such account which notice shall specify in reasonable detail and
specificity acceptable to Agent the name of the account, the owner of the
account, the name and address of the securities intermediary or commodity
intermediary at which such account is to be opened or established, the
individual at such intermediary with whom such Borrower or Guarantor is dealing
and the purpose of the account, (B) the securities intermediary or commodity
intermediary (as the case may be) where such account is opened or maintained
shall be acceptable to Agent, and (C) on or before the opening of such
investment account, securities account or other similar account with a
securities intermediary or commodity intermediary, such Borrower or Guarantor
shall as Agent may specify either (i) execute and deliver, and cause to be executed
and delivered to Agent, an Investment Property Control Agreement with respect
thereto duly authorized, executed and delivered by such Borrower or Guarantor
and such securities intermediary or commodity intermediary or (ii) arrange for
Agent to become the entitlement holder with respect to such investment property
on terms and conditions acceptable to Agent.

(f)            Borrowers and Guarantors are not the
beneficiary or otherwise entitled to any right to payment under any letter of
credit, banker’s acceptance or similar instrument as of the date hereof, except
as set forth in the Information Certificate. 
In the event that any Borrower or Guarantor shall be entitled to or
shall receive any right to payment under any letter of credit, banker’s
acceptance or any similar instrument, whether as beneficiary thereof or
otherwise after the date hereof, such Borrower or Guarantor shall promptly
notify Agent thereof in writing.  Such
Borrower or Guarantor shall immediately, as Agent may specify, either (i)
deliver, or cause 

 36
 

 

to be delivered to Agent,
with respect to any such letter of credit, banker’s acceptance or similar
instrument, the written agreement of the issuer and any other nominated person
obligated to make any payment in respect thereof (including any confirming or
negotiating bank), in form and substance satisfactory to Agent, consenting to
the assignment of the proceeds of the letter of credit to Agent by such
Borrower or Guarantor and agreeing to make all payments thereon directly to
Agent or as Agent may otherwise direct or (ii) cause Agent to become, at
Borrowers’ expense, the transferee beneficiary of the letter of credit, banker’s
acceptance or similar instrument (as the case may be).

(g)           Borrowers and Guarantors do not have
any commercial tort claims as of the date hereof, except as set forth in the
Information Certificate.  In the event
that any Borrower or Guarantor shall at any time after the date hereof have any
commercial tort claims, such Borrower or Guarantor shall promptly notify Agent
thereof in writing, which notice shall (i) set forth in reasonable detail the
basis for and nature of such commercial tort claim and (ii) include the express
grant by such Borrower or Guarantor to Agent of a security interest in such
commercial tort claim (and the proceeds thereof).  In the event that such notice does not
include such grant of a security interest, the sending thereof by such Borrower
or Guarantor to Agent shall be deemed to constitute such grant to Agent. Upon the
sending of such notice, any commercial tort claim described therein shall
constitute part of the Collateral and shall be deemed included therein.  Without limiting the authorization of Agent
provided in Section 5.2(a) hereof or otherwise arising by the execution by such
Borrower or Guarantor of this Agreement or any of the other Financing
Agreements, Agent is hereby irrevocably authorized from time to time and at any
time to file such financing statements naming Agent or its designee as secured
party and such Borrower or Guarantor as debtor, or any amendments to any
financing statements, covering any such commercial tort claim as Collateral. In
addition, each Borrower and Guarantor shall promptly upon Agent’s request,
execute and deliver, or cause to be executed and delivered, to Agent such other
agreements, documents and instruments as Agent may require in connection with
such commercial tort claim.

(h)           Borrowers and Guarantors do not have
any goods, documents of title or other Collateral in the custody, control or
possession of a third party as of the date hereof, except as set forth in the
Information Certificate and except for goods located in the United States in
transit to a location of a Borrower or Guarantor permitted herein in the
ordinary course of business of such Borrower or Guarantor in the possession of
the carrier transporting such goods.  In
the event that any goods, documents of title or other Collateral are at any
time after the date hereof in the custody, control or possession of any other
person not referred to in the Information Certificate or such carriers,
Borrowers and Guarantors shall promptly notify Agent thereof in writing.  Promptly upon Agent’s request, Borrowers and
Guarantors shall deliver to Agent a Collateral Access Agreement duly
authorized, executed and delivered by such person and the Borrower or Guarantor
that is the owner of such Collateral.

(i)            Borrowers and Guarantors shall take
any other actions reasonably requested by Agent from time to time to cause the
attachment, perfection and first priority of, and the ability of Agent to
enforce, the security interest of Agent in any and all of the Collateral,
including, without limitation, (i) executing, delivering and, where
appropriate, filing financing statements and amendments relating thereto under
the UCC or other applicable law, to the extent, if any, that any Borrower’s or
Guarantor’s signature thereon is required therefor, (ii) causing

 37

 

Agent’s name to be noted
as secured party on any certificate of title for a titled good if such notation
is a condition to attachment, perfection or priority of, or ability of Agent to
enforce, the security interest of Agent in such Collateral, (iii) complying
with any provision of any statute, regulation or treaty of the United States as
to any Collateral if compliance with such provision is a condition to
attachment, perfection or priority of, or ability of Agent to enforce, the
security interest of Agent in such Collateral, (iv) obtaining the consents and
approvals of any Governmental Authority or third party, including, without
limitation, any consent of any licensor, lessor or other person obligated on
Collateral, and taking all actions required by any earlier versions of the UCC
or by other law, as applicable in any relevant jurisdiction.

SECTION 6.         COLLECTION
AND ADMINISTRATION

 

6.1           Borrowers’ Loan Accounts.  Agent shall maintain one or more loan
account(s) on its books in which shall be recorded (a) all Loans, Letters of
Credit and other Obligations and the Collateral, (b) all payments made by or on
behalf of any Borrower or Guarantor and (c) all other appropriate debits and
credits as provided in this Agreement, including fees, charges, costs, expenses
and interest.  All entries in the loan
account(s) shall be made in accordance with Agent’s customary practices as in
effect from time to time.

6.2           Statements.  Agent shall render to Administrative Borrower
each month a statement setting forth the balance in the Borrowers’ loan
account(s) maintained by Agent for Borrowers pursuant to the provisions of this
Agreement, including principal, interest, fees, costs and expenses.  Each such statement shall be subject to
subsequent adjustment by Agent but shall, absent manifest errors or omissions,
be considered correct and deemed accepted by Borrowers and Guarantors and
conclusively binding upon Borrowers and Guarantors as an account stated except
to the extent that Agent receives a written notice from Administrative Borrower
of any specific exceptions of Administrative Borrower thereto within sixty (60)
days after the date such statement has been received by Parent.  Until such time as Agent shall have rendered
to Administrative Borrower a written statement as provided above, the balance
in any Borrower’s loan account(s) shall be presumptive evidence of the amounts
due and owing to Agent and Lenders by Borrowers and Guarantors.

6.3           Collection of
Accounts.

(a)           Borrowers shall establish and
maintain, at their expense, blocked accounts (“Blocked Accounts”), as Agent may
specify, with such banks as are acceptable to Agent into which Borrowers shall
promptly deposit all payments on Receivables and all payments constituting
proceeds of Inventory or other Collateral in the identical form in which such
payments are made, whether by cash, check or other manner.  Borrowers shall deliver, or cause to be
delivered to Agent a Deposit Account Control Agreement duly authorized,
executed and delivered by each bank where a Blocked Account is maintained as
provided in Section 5.2 hereof or at any time and from time to time Agent may
become the bank’s customer with respect to any of the Blocked Accounts and
promptly upon Agent’s request, Borrowers shall execute and deliver such
agreements and documents as Agent may require in connection therewith. Each
Borrower and Guarantor agrees that all payments made to such Blocked Accounts
or other funds received and collected by Agent or any Lender, whether in
respect of the Receivables, as proceeds of Inventory or other Collateral or
otherwise shall be treated as payments to Agent and

 38
 

 

Lenders in respect of the
Obligations and therefore shall constitute the property of Agent and Lenders to
the extent of the then outstanding Obligations.

(b)           For purposes of calculating the
amount of the Loans available to each Borrower, such payments will be applied
(conditional upon final collection) to the Obligations on the Business Day of
receipt by Agent of immediately available funds in the Agent Payment Account
provided such payments and notice thereof are received in accordance with Agent’s
usual and customary practices as in effect from time to time and within
sufficient time to credit such Borrower’s loan account on such day, and if not,
then on the next Business Day.  For the
purposes of calculating interest on the Obligations, such payments or other
funds received will be applied (conditional upon final collection) to the
Obligations one (1) Business Day following the date of receipt of immediately
available funds by Agent in the Agent Payment Account provided such payments or
other funds and notice thereof are received in accordance with Agent’s usual
and customary practices as in effect from time to time and within sufficient
time to credit such Borrower’s loan account on such day, and if not, then on
the next Business Day.  In the event that
at any time or from time to time there are no Revolving Loans outstanding,
Agent shall be entitled to an administrative fee in an amount calculated based
on the Interest Rate for Prime Rate Loans (on a per annum basis) multiplied by
the amount of the funds received in the Blocked Account for such day as
calculated by Agent in accordance with its customary practice. The economic
benefit of the timing in the application of payments (and the administrative
charge with respect thereto, if applicable) shall be for the sole benefit of
Agent.

(c)           Each Borrower and Guarantor and their
respective employees, agents and Subsidiaries shall, acting as trustee for
Agent, receive, as the property of Agent, any monies, checks, notes, drafts or
any other payment relating to and/or proceeds of Accounts or other Collateral
which come into their possession or under their control and immediately upon
receipt thereof, shall deposit or cause the same to be deposited in the Blocked
Accounts, or remit the same or cause the same to be remitted, in kind, to
Agent.  In no event shall the same be
commingled with any Borrower’s or Guarantor’s own funds except in such Blocked
Accounts.  Borrowers agree to reimburse
Agent on demand for any amounts owed or paid to any bank or other financial
institution at which a Blocked Account or any other deposit account or
investment account is established or any other bank, financial institution or
other person involved in the transfer of funds to or from the Blocked Accounts
arising out of Agent’s payments to or indemnification of such bank, financial
institution or other person.  The
obligations of Borrowers to reimburse Agent for such amounts pursuant to this
Section 6.3 shall survive the termination of this Agreement.

6.4           Payments.

(a)           All Obligations shall be payable to
the Agent Payment Account as provided in Section 6.3 or such other place as
Agent may designate from time to time. 
Subject to the other terms and conditions contained herein, Agent shall
apply payments received or collected from any Borrower or Guarantor or for the
account of any Borrower or Guarantor (including the monetary proceeds of
collections or of realization upon any Collateral) as follows: first, to pay
any fees, indemnities or expense reimbursements then due to Agent and Lenders
from any Borrower or Guarantor; second, to pay interest due in respect of any
Loans (and including any Special Agent Advances) or Letter of Credit
Obligations then due and payable; 

 39
 

 

third, to pay or prepay
principal in respect of Special Agent Advances; fourth, to pay principal due in
respect of the Loans; fifth, to pay or prepay any other Obligations then due
and payable, in such order and manner as Agent determines and at any time an
Event of Default exists or has occurred and is continuing, to provide cash
collateral for any Letter of Credit Obligations.  Notwithstanding anything to the contrary
contained in this Agreement, (i) unless so directed by Administrative Borrower,
or unless a Default or an Event of Default shall exist or have occurred and be
continuing, Agent shall not apply any payments which it receives to any
Eurodollar Rate Loans, except (A) on the expiration date of the Interest Period
applicable to any such Eurodollar Rate Loans or (B) in the event that there are
no outstanding Prime Rate Loans and (ii) to the extent any Borrower uses any
proceeds of the Loans or Letters of Credit to acquire rights in or the use of
any Collateral or to repay any Indebtedness used to acquire rights in or the
use of any Collateral, payments in respect of the Obligations shall be deemed
applied first to the Obligations arising from Loans and Letters of Credit that
were not used for such purposes and second to the Obligations arising from
Loans and Letters of Credit the proceeds of which were used to acquire rights
in or the use of any Collateral in the chronological order in which such
Borrower acquired such rights in or the use of such Collateral.

(b)           At Agent’s option, all principal,
interest, fees, costs, expenses and other charges provided for in this
Agreement or the other Financing Agreements may be charged directly to the loan
account(s) of any Borrower maintained by Agent. 
If after receipt of any payment of, or proceeds of Collateral applied to
the payment of, any of the Obligations, Agent or any Lender is required to
surrender or return such payment or proceeds to any Person for any reason, then
the Obligations intended to be satisfied by such payment or proceeds shall be
reinstated and continue and this Agreement shall continue in full force and
effect as if such payment or proceeds had not been received by Agent or such
Lender.  Borrowers and Guarantors shall
be liable to pay to Agent, and do hereby indemnify and hold Agent and Lenders
harmless for the amount of any payments or proceeds surrendered or
returned.  This Section 6.4(b) shall
remain effective notwithstanding any contrary action which may be taken by
Agent or any Lender in reliance upon such payment or proceeds.  This Section 6.4 shall survive the payment of
the Obligations and the termination of this Agreement.

6.5           Taxes.

(a)           Any and all payments by or on account
of any of the Obligations shall be made free and clear of and without deduction
or withholding for or on account of, any setoff, counterclaim, defense, duties,
taxes, levies, imposts, fees, deductions, charges, withholdings, liabilities,
restrictions or conditions of any kind, excluding (i) in the case of each
Lender and Agent (A) taxes measured by its net income, and franchise taxes
imposed on it, by the jurisdiction (or any political subdivision thereof) under
the laws of which such Lender or Agent (as the case may be) is organized or the
jurisdiction in which its applicable leading office is located and (B) any
United States withholding taxes payable with respect to payments under the
Financing Agreements under laws (including any statute, treaty or regulation)
in effect on the date hereof (or, in the case of an Eligible Transferee, the
date of the Assignment and Acceptance) applicable to such Lender or Agent, as
the case may be, but not excluding any United States withholding taxes payable
as a result of any change in such laws occurring after the date hereof (or the
date of such Assignment and Acceptance), (ii) taxes measured by its net income,
and franchise taxes imposed on it as a result of a present or former connection
between such Lender 

 40
 

 

or Agent and the
jurisdiction of the Governmental Authority imposing such tax or any taxing
authority thereof or therein and (iii) taxes resulting from its gross
negligence or willful misconduct (all such non-excluded taxes, levies, imposts,
fees, deductions, charges, withholdings and liabilities being hereinafter
referred to as “Taxes”).

(b)           If any Taxes shall be required by law
to be deducted from or in respect of any sum payable in respect of the
Obligations to any Lender or Agent (i) the sum payable shall be increased as
may be necessary so that after making all required deductions (including deductions
applicable to additional sums payable under this Section 6.5), such Lender or
Agent (as the case may be) receives an amount equal to the sum it would have
received had no such deductions been made, (ii) the relevant Borrower or
Guarantor shall make such deductions, (iii) the relevant Borrower or Guarantor
shall pay the full amount deducted to the relevant taxing authority or other
authority in accordance with applicable law and (iv) the relevant Borrower or
Guarantor shall deliver to Agent evidence of such payment.

(c)           In addition, each Borrower and
Guarantor agrees to pay any present or future stamp or documentary taxes or any
other excise or property taxes, charges or similar levies of the United States
or any political subdivision thereof or any applicable foreign jurisdiction,
and all liabilities with respect thereto, in each case arising from any payment
made hereunder or under any of the other Financing Agreements or from the
execution, delivery or registration of, or otherwise with respect to, this
Agreement or any of the other Financing Agreements (collectively, “Other Taxes”).

(d)           Each Borrower and Guarantor shall
indemnify each Lender and Agent for the full amount of Taxes and Other Taxes
(including any Taxes and Other Taxes imposed by any jurisdiction on amounts
payable under this Section 6.5) paid by such Lender or Agent (as the case may
be) and any liability (including for penalties, interest and expenses) arising
therefrom or with respect thereto, whether or not such Taxes or Other Taxes were
correctly or legally asserted.  This
indemnification shall be made within thirty (30) days from the date such Lender
or Agent (as the case may be) makes written demand therefor.  A certificate as to the amount of such
payment or liability delivered to Administrative Borrower by a Lender (with a
copy to Agent) or by Agent on its own behalf or on behalf of a Lender, shall be
conclusive absent manifest error.

(e)           As soon as practicable after any
payment of Taxes or Other Taxes by any Borrower or Guarantor, such Borrower or
Guarantor shall furnish to Agent, at its address referred to herein, the
original or a certified copy of a receipt evidencing payment thereof.

(f)            Without prejudice to the survival of
any other agreements of any Borrower or Guarantor hereunder or under any of the
other Financing Agreements, the agreements and obligations of such Borrower or
Guarantor contained in this Section 6.5 shall survive the termination of this
Agreement and the payment in full of the Obligations.

(g)           Any Foreign Lender that is entitled
to an exemption from or reduction of withholding tax under the law of the
jurisdiction in which the applicable Borrower is resident for tax purposes, or
any treaty to which such jurisdiction is a party, with respect to payments
hereunder or under any of the other Financing Agreements shall deliver to
Administrative 

 41
 

 

Borrower (with a copy to
Agent), at the time or times prescribed by applicable law or reasonably
requested by Administrative Borrower or Agent (in such number of copies as is reasonably
requested by the recipient), whichever of the following is applicable (but only
if such Foreign Lender is legally entitled to do so):  (i) duly completed copies of Internal Revenue
Service Form W-8BEN claiming exemption from, or a reduction to, withholding tax
under an income tax treaty, or any successor form, (ii)  duly completed copies of Internal Revenue
Service Form 8-8ECI claiming exemption from withholding because the income is
effectively connection with a U.S. trade or business or any successor form,
(iii) in the case of a Foreign Lender claiming the benefits of the exemption
for portfolio interest under Sections 871(h) or 881(c) of the Code, (A) a
certificate of the Lender to the effect that such Lender is not a “bank” within
the meaning of Section 881(c)(3)(A) of the Code, a “10 percent shareholder” of
a Borrower within the meaning of Section 881(c)(3)(B) of the Code or a “controlled
foreign corporation” described and Section 881(c)(3)(C) of the Code and (B)
duly completed copies of Internal Revenue Service Form W-8BEN claiming
exemption from withholding under the portfolio interest exemption or any
successor form or (iv) any other applicable form, certificate or document
prescribed by applicable law as a basis for claiming exemption from or a
reduction in United States withholding tax duly completed together with such
supplementary documentation as may be prescribed by applicable law to permit a
Borrower to determine the withholding or deduction required to be made.  Unless Administrative Borrower and Agent have
received forms or other documents satisfactory to them indicating that payments
hereunder or under any of the other Financing Agreements to or for a Foreign
Lender are not subject to United States withholding tax or are subject to such
tax at a rate reduced by an applicable tax treaty, Borrowers or Agent shall
withhold amounts required to be withheld by applicable requirements of law from
such payments at the applicable statutory rate.

(h)           If any Lender determines, in its sole
discretion, that it has received a refund of any taxes with respect to which
any Borrower has paid additional amounts pursuant to this Section 6.5, it shall
pay to such Borrower an amount equal to such refund (but only to the extent of
additional amounts paid by such Borrower under this Section 6.5 with respect to
the taxes giving rise to such refund), net of all out-of-pocket expenses of
such Lender and without interest (other than any interest paid by the relevant
Governmental Authority with respect to such refund), provided that such
Borrower, upon the request of such Lender, agrees to repay the amount paid over
to the Borrower to such Lender in the event such Lender is required to repay
such refund to such Governmental Authority.

(i)            Any Lender claiming any additional
amounts payable pursuant to this Section 6.5 shall use its reasonable efforts
(consistent with its internal policy and legal and regulatory restrictions) to
change the jurisdiction of its applicable lending office if the making of such
a change would avoid the need for, or reduce the amount of, any such additional
amounts that would be payable or may thereafter accrue and would not, in the
sole determination of such Lender, be otherwise disadvantageous to such Lender.

6.6           Authorization to Make Loans.  Agent and Lenders are authorized to make the
Loans based upon telephonic or other instructions received from anyone
purporting to be an officer of Administrative Borrower or any Borrower or other
authorized person or, at the discretion of Agent, if such Loans are necessary
to satisfy any Obligations.  All requests
for Loans or Letters of Credit hereunder shall specify the date on which the
requested advance is to 

 42
 

 

be made (which day shall be a Business Day) and the
amount of the requested Loan.  Requests
received after 11:00 a.m. California time on any day shall be deemed to have
been made as of the opening of business on the immediately following Business
Day.  All Loans and Letters of Credit
under this Agreement shall be conclusively presumed to have been made to, and
at the request of and for the benefit of, any Borrower or Guarantor when
deposited to the credit of any Borrower or Guarantor or otherwise disbursed or
established in accordance with the instructions of any Borrower or Guarantor or
in accordance with the terms and conditions of this Agreement.

6.7           Use of Proceeds.  Borrowers shall use the initial proceeds of
the Loans and Letters of Credit hereunder only for: (a) payments to each of the
persons listed in the disbursement direction letter furnished by Borrowers to
Agent on or about the date hereof and (b) costs, expenses and fees in
connection with the preparation, negotiation, execution and delivery of this
Agreement and the other Financing Agreements. 
All other Loans made or Letters of Credit provided to or for the benefit
of any Borrower pursuant to the provisions hereof shall be used by such
Borrower only for general operating, working capital and other proper corporate
purposes of such Borrower not otherwise prohibited by the terms hereof.  None of the proceeds will be used, directly
or indirectly, for the purpose of purchasing or carrying any margin security or
for the purposes of reducing or retiring any indebtedness which was originally
incurred to purchase or carry any margin security or for any other purpose
which might cause any of the Loans to be considered a “purpose credit” within
the meaning of Regulation U of the Board of Governors of the Federal Reserve
System, as amended.

6.8           Appointment of
Administrative Borrower as Agent for Requesting Loans and Receipts of Loans and
Statements.

(a)           Each Borrower hereby irrevocably
appoints and constitutes Administrative Borrower as its agent and
attorney-in-fact to request and receive Loans and Letters of Credit pursuant to
this Agreement and the other Financing Agreements from Agent or any Lender in
the name or on behalf of such Borrower. 
Agent and Lenders may disburse the Loans to such bank account of
Administrative Borrower or a Borrower or otherwise make such Loans to a
Borrower and provide such Letters of Credit to a Borrower as Administrative
Borrower may designate or direct, without notice to any other Borrower or
Guarantor.  Notwithstanding anything to
the contrary contained herein, Agent may at any time and from time to time
require that Loans to or for the account of any Borrower be disbursed directly
to an operating account of such Borrower.

(b)           Administrative Borrower hereby
accepts the appointment by Borrowers to act as the agent and attorney-in-fact
of Borrowers pursuant to this Section 6.8. Administrative Borrower shall ensure
that the disbursement of any Loans to each Borrower requested by or paid to or
for the account of Parent, or the issuance of any Letter of Credit for a
Borrower hereunder, shall be paid to or for the account of such Borrower.

(c)           Each Borrower and other Guarantor
hereby irrevocably appoints and constitutes Administrative Borrower as its
agent to receive statements on account and all other notices from Agent and
Lenders with respect to the Obligations or otherwise under or in connection
with this Agreement and the other Financing Agreements.

 43
 

 

(d)           Any notice, election, representation,
warranty, agreement or undertaking by or on behalf of any other Borrower or any
Guarantor by Administrative Borrower shall be deemed for all purposes to have
been made by such Borrower or Guarantor, as the case may be, and shall be
binding upon and enforceable against such Borrower or Guarantor to the same
extent as if made directly by such Borrower or Guarantor.

(e)           No purported termination of the
appointment of Administrative Borrower as agent as aforesaid shall be
effective, except after ten (10) days’ prior written notice to Agent.

6.9           Pro Rata Treatment.  Except to the extent otherwise provided in
this Agreement or as otherwise agreed by Lenders: (a) the making and conversion
of Loans shall be made among the Lenders based on their respective Pro Rata
Shares as to the Loans and (b) each payment on account of any Obligations to or
for the account of one or more of Lenders in respect of any Obligations due on
a particular day shall be allocated among the Lenders entitled to such payments
based on their respective Pro Rata Shares and shall be distributed accordingly.

6.10         Sharing of
Payments, Etc.

(a)           Each Borrower and Guarantor agrees
that, in addition to (and without limitation of) any right of setoff, banker’s
lien or counterclaim Agent or any Lender may otherwise have, each Lender shall
be entitled, at its option (but subject, as among Agent and Lenders, to the
provisions of Section 12.3(b) hereof), to offset balances held by it for the
account of such Borrower or Guarantor at any of its offices, in dollars or in
any other currency, against any principal of or interest on any Loans owed to
such Lender or any other amount payable to such Lender hereunder, that is not
paid when due (regardless of whether such balances are then due to such
Borrower or Guarantor), in which case it shall promptly notify Administrative
Borrower and Agent thereof; provided, that, such Lender’s failure
to give such notice shall not affect the validity thereof.

(b)           If any Lender (including Agent) shall
obtain from any Borrower or Guarantor payment of any principal of or interest
on any Loan owing to it or payment of any other amount under this Agreement or
any of the other Financing Agreements through the exercise of any right of
setoff, banker’s lien or counterclaim or similar right or otherwise (other than
from Agent as provided herein), and, as a result of such payment, such Lender
shall have received more than its Pro Rata Share of the principal of the Loans
or more than its share of such other amounts then due hereunder or thereunder
by any Borrower or Guarantor to such Lender than the percentage thereof
received by any other Lender, it shall promptly pay to Agent, for the benefit
of Lenders, the amount of such excess and simultaneously purchase from such
other Lenders a participation in the Loans or such other amounts, respectively,
owing to such other Lenders (or such interest due thereon, as the case may be)
in such amounts, and make such other adjustments from time to time as shall be
equitable, to the end that all Lenders shall share the benefit of such excess
payment (net of any expenses that may be incurred by such Lender in obtaining
or preserving such excess payment) in accordance with their respective Pro Rata
Shares or as otherwise agreed by Lenders. 
To such end all Lenders shall make appropriate adjustments among
themselves (by the resale of participation sold or otherwise) if such payment
is rescinded or must otherwise be restored.

 44
 

 

(c)           Each Borrower and Guarantor agrees
that any Lender purchasing a participation (or direct interest) as provided in
this Section may exercise, in a manner consistent with this Section, all rights
of setoff, banker’s lien, counterclaim or similar rights with respect to such
participation as fully as if such Lender were a direct holder of Loans or other
amounts (as the case may be) owing to such Lender in the amount of such
participation.

(d)           Nothing contained herein shall
require any Lender to exercise any right of setoff, banker’s lien,
counterclaims or similar rights or shall affect the right of any Lender to
exercise, and retain the benefits of exercising, any such right with respect to
any other Indebtedness or obligation of any Borrower or Guarantor.  If, under any applicable bankruptcy,
insolvency or other similar law, any Lender receives a secured claim in lieu of
a setoff to which this Section applies, such Lender shall, to the extent
practicable, assign such rights to Agent for the benefit of Lenders and, in any
event, exercise its rights in respect of such secured claim in a manner
consistent with the rights of Lenders entitled under this Section to share in
the benefits of any recovery on such secured claim.

6.11         Settlement
Procedures.

(a)           In order to administer the Credit
Facility in an efficient manner and to minimize the transfer of funds between
Agent and Lenders, Agent may, at its option, subject to the terms of this
Section, make available, on behalf of Lenders, the full amount of the Loans
requested or charged to any Borrower’s loan account(s) or otherwise to be
advanced by Lenders pursuant to the terms hereof, without requirement of prior
notice to Lenders of the proposed Loans.

(b)           With respect to all Loans made by
Agent on behalf of Lenders as provided in this Section, the amount of each
Lender’s Pro Rata Share of the outstanding Loans shall be computed weekly, and
shall be adjusted upward or downward on the basis of the amount of the
outstanding Loans as of 5:00 p.m. California time on the Business Day
immediately preceding the date of each settlement computation; provided,
that, Agent retains the absolute right at any time or from time to time
to make the above described adjustments at intervals more frequent than weekly,
but in no event more than twice in any week. 
Agent shall deliver to each of the Lenders after the end of each week,
or at such lesser period or periods as Agent shall determine, a summary statement
of the amount of outstanding Loans for such period (such week or lesser period
or periods being hereinafter referred to as a “Settlement Period”).  If the summary statement is sent by Agent and
received by a Lender prior to 12:00 p.m. California time, then such Lender
shall make the settlement transfer described in this Section by no later than
3:00 p.m. California time on the same Business Day and if received by a Lender
after 12:00 p.m. California time, then such Lender shall make the settlement
transfer by not later than 3:00 p.m. California time on the next Business Day
following the date of receipt.  If, as of
the end of any Settlement Period, the amount of a Lender’s Pro Rata Share of
the outstanding Loans is more than such Lender’s Pro Rata Share of the
outstanding Loans as of the end of the previous Settlement Period, then such
Lender shall forthwith (but in no event later than the time set forth in the
preceding sentence) transfer to Agent by wire transfer in immediately available
funds the amount of the increase. 
Alternatively, if the amount of a Lender’s Pro Rata Share of the
outstanding Loans in any Settlement Period is less than the amount of such
Lender’s Pro Rata Share of the outstanding Loans for the previous Settlement
Period, Agent shall forthwith transfer 

 45
 

 

to such Lender by wire
transfer in immediately available funds the amount of the decrease.  The obligation of each of the Lenders to
transfer such funds and effect such settlement shall be irrevocable and
unconditional and without recourse to or warranty by Agent.  Agent and each Lender agrees to mark its
books and records at the end of each Settlement Period to show at all times the
dollar amount of its Pro Rata Share of the outstanding Loans and Letters of
Credit.  Each Lender shall only be
entitled to receive interest on its Pro Rata Share of the Loans to the extent
such Loans have been funded by such Lender. 
Because the Agent on behalf of Lenders may be advancing and/or may be
repaid Loans prior to the time when Lenders will actually advance and/or be
repaid such Loans, interest with respect to Loans shall be allocated by Agent
in accordance with the amount of Loans actually advanced by and repaid to each
Lender and the Agent and shall accrue from and including the date such Loans
are so advanced to but excluding the date such Loans are either repaid by
Borrowers or actually settled with the applicable Lender as described in this
Section.

(c)           To the extent that Agent has made any
such amounts available and the settlement described above shall not yet have
occurred, upon repayment of any Loans by a Borrower, Agent may apply such
amounts repaid directly to any amounts made available by Agent pursuant to this
Section.  In lieu of weekly or more
frequent settlements, Agent may, at its option, at any time require each Lender
to provide Agent with immediately available funds representing its Pro Rata
Share of each Loan, prior to Agent’s disbursement of such Loan to
Borrower.  In such event, all Loans under
this Agreement shall be made by the Lenders simultaneously and proportionately
to their Pro Rata Shares.  No Lender
shall be responsible for any default by any other Lender in the other Lender’s
obligation to make a Loan requested hereunder nor shall the Commitment of any
Lender be increased or decreased as a result of the default by any other Lender
in the other Lender’s obligation to make a Loan hereunder.

(d)           If Agent is not funding a particular
Loan to Borrowers pursuant to Sections 6.11(a) and 6.11(b) above on any day,
but is requiring each Lender to provide Agent with immediately available funds
on the date of such Loan as provided in Section 6.11(c) above, Agent may assume
that each Lender will make available to Agent such Lender’s Pro Rata Share of
the Loan requested or otherwise made on such day and Agent may, in its discretion,
but shall not be obligated to, cause a corresponding amount to be made
available to or for the benefit of such Borrower on such day.  If Agent makes such corresponding amount
available to a Borrower and such corresponding amount is not in fact made available
to Agent by such Lender, Agent shall be entitled to recover such corresponding
amount on demand from such Lender together with interest thereon for each day
from the date such payment was due until the date such amount is paid to Agent
at the Federal Funds Rate for each day during such period (as published by the
Federal Reserve Bank of New York or at Agent’s option based on the arithmetic
mean determined by Agent of the rates for the last transaction in overnight
Federal funds arranged prior to 9:00 a.m. (New York City time) on that day by
each of the three leading brokers of Federal funds transactions in New York
City selected by Agent) and if such amounts are not paid within three (3) days
of Agent’s demand, at the highest Interest Rate provided for in Section 3.1
hereof applicable to Prime Rate Loans. 
During the period in which such Lender has not paid such corresponding
amount to Agent, notwithstanding anything to the contrary contained in this
Agreement or any of the other Financing Agreements, the amount so advanced by
Agent to or for the benefit of any Borrower shall, for all purposes hereof, be
a Loan made by Agent for its own account. 
Upon any such failure by a Lender to pay Agent, Agent shall promptly
thereafter 

 46
 

 

notify Administrative Borrower
of such failure and Borrowers shall pay such corresponding amount to Agent for
its own account within five (5) Business Days of Administrative Borrower’s
receipt of such notice.  A Lender who
fails to pay Agent its Pro Rata Share of any Loans made available by the Agent
on such Lender’s behalf, or any Lender who fails to pay any other amount owing
by it to Agent, is a “Defaulting Lender”. 
Agent shall not be obligated to transfer to a Defaulting Lender any
payments received by Agent for the Defaulting Lender’s benefit, nor shall a
Defaulting Lender be entitled to the sharing of any payments hereunder
(including any principal, interest or fees). 
Amounts payable to a Defaulting Lender shall instead be paid to or
retained by Agent.  Agent may hold and,
in its discretion, relend to a Borrower the amount of all such payments
received or retained by it for the account of such Defaulting Lender.  For purposes of voting or consenting to
matters with respect to this Agreement and the other Financing Agreements and
determining Pro Rata Shares, such Defaulting Lender shall be deemed not to be a
“Lender” and such Lender’s Commitment shall be deemed to be zero (0).  This Section shall remain effective with
respect to a Defaulting Lender until such default is cured.  The operation of this Section shall not be
construed to increase or otherwise affect the Commitment of any Lender, or
relieve or excuse the performance by any Borrower or Guarantor of their duties
and obligations hereunder.

(e)           Nothing in this Section or elsewhere
in this Agreement or the other Financing Agreements shall be deemed to require
Agent to advance funds on behalf of any Lender or to relieve any Lender from
its obligation to fulfill its Commitment hereunder or to prejudice any rights
that any Borrower may have against any Lender as a result of any default by any
Lender hereunder in fulfilling its Commitment.

6.12         Obligations Several; Independent
Nature of Lenders’ Rights.  The
obligation of each Lender hereunder is several, and no Lender shall be
responsible for the obligation or commitment of any other Lender
hereunder.  Nothing contained in this
Agreement or any of the other Financing Agreements and no action taken by the
Lenders pursuant hereto or thereto shall be deemed to constitute the Lenders to
be a partnership, an association, a joint venture or any other kind of
entity.  The amounts payable at any time
hereunder to each Lender shall be a separate and independent debt, and subject
to Section 12.3 hereof, each Lender shall be entitled to protect and enforce
its rights arising out of this Agreement and it shall not be necessary for any
other Lender to be joined as an additional party in any proceeding for such
purpose.

SECTION 7.         COLLATERAL
REPORTING AND COVENANTS

 

7.1           Collateral
Reporting.

(a)           Borrowers shall provide Agent with
the following documents in a form reasonably satisfactory to Agent:

(i)            on a regular basis as required by
Agent, schedules of sales made, credits issued and cash received;

(ii)           as soon as possible after the end of
each week (but in any event within two (2) Business Days after the end thereof)
during a Compliance Period or if a Default or Event of Default has occurred and
is continuing, and, at all other times, as soon as possible after 

 47
 

 

the end of each month
(but in any event within ten (10) Business Days after the end thereof), a
certificate of the Borrowing Base; additionally, if a requested Revolving Loan
or Letter of Credit would result in the commencement of a Compliance Period,
Borrowers shall provide Agent with a certificate of the Borrowing Base;

(iii)          as soon as possible after the end of
each month (but in any event within ten (10) Business Days after the end
thereof), on a monthly basis or more frequently as Agent may request (if such
request is made at a time when a Default or Event of Default has occurred and
is continuing or at any other time where such request is made by Agent in good
faith), (A) perpetual inventory reports, (B) inventory reports by location and
category (and including the amounts of Inventory and the value thereof at any
leased locations and at premises of warehouses, processors or other third
parties), (C) agings of accounts receivable (together with a reconciliation to
the previous month’s aging and general ledger) and (D) agings of accounts
payable (and including information indicating the amounts owing to owners and
lessors of leased premises, warehouses, processors and other third parties from
time to time in possession of any Collateral);

(iv)          upon Agent’s request (if such request
is made during its periodic field examinations or at a time when a Default or
Event of Default has occurred and is continuing or at any other time where such
request is made by Agent in good faith), (A) copies of customer statements,
purchase orders, sales invoices, credit memos, remittance advices and reports,
and copies of deposit slips and bank statements, (B) copies of shipping and
delivery documents, and (C) copies of purchase orders, invoices and delivery
documents for Inventory and Equipment acquired by any Borrower or Guarantor;

(v)           such other reports as to the
Collateral as Agent shall reasonably request from time to time.

(b)           If any Borrower’s or Guarantor’s
records or reports of the Collateral are prepared or maintained by an
accounting service, contractor, shipper or other agent, such Borrower and
Guarantor hereby irrevocably authorizes such service, contractor, shipper or
agent to deliver such records, reports, and related documents to Agent and to
follow Agent’s instructions with respect to further services at any time that
an Event of Default exists or has occurred and is continuing.

7.2           Accounts
Covenants.

(a)           Borrowers shall notify Agent promptly
of: (i) any material delay in any Borrower’s performance of any of its material
obligations to any account debtor or the assertion of any material claims,
offsets, defenses or counterclaims by any account debtor, or any material
disputes with account debtors, or any settlement, adjustment or compromise
thereof, (ii) all material adverse information known to any Borrower or
Guarantor relating to the financial condition of any account debtor and (iii)
any event or circumstance which, to the best of any Borrower’s or Guarantor’s
knowledge, would cause Agent to consider any then existing Accounts as no
longer constituting Eligible Accounts. 
No credit, discount, allowance or extension or agreement for any of the
foregoing shall be granted to any account debtor without Agent’s consent,
except in the ordinary course of a Borrower’s or Guarantor’s business in 

 48
 

 

accordance with practices
and policies previously disclosed in writing to Agent and except as set forth
in the schedules delivered to Agent pursuant to Section 7.1(a) above.  So long as no Event of Default exists or has
occurred and is continuing, Borrowers and Guarantors shall settle, adjust or
compromise any claim, offset, counterclaim or dispute with any account
debtor.  At any time that an Event of
Default exists or has occurred and is continuing, Agent shall, at its option,
have the exclusive right to settle, adjust or compromise any claim, offset,
counterclaim or dispute with account debtors or grant any credits, discounts or
allowances.

(b)           With respect to each Account: (i) the
amounts shown on any invoice delivered to Agent or schedule thereof delivered
to Agent shall be true and complete at the time of such delivery, (ii) no
payments shall be made thereon except payments immediately delivered to Agent
pursuant to the terms of this Agreement, (iii) no credit, discount, allowance
or extension or agreement for any of the foregoing shall be granted to any
account debtor except as reported to Agent in accordance with this Agreement
and except for credits, discounts, allowances or extensions made or given in
the ordinary course of each Borrower’s business in accordance with practices
and policies previously disclosed to Agent, (iv) there shall be no setoffs,
deductions, contras, defenses, counterclaims or disputes existing or asserted
with respect thereto except as reported to Agent in accordance with the terms
of this Agreement, (v) none of the transactions giving rise thereto will
violate any applicable foreign, Federal, State or local laws or regulations,
all documentation relating thereto will be legally sufficient under such laws
and regulations and all such documentation will be legally enforceable in
accordance with its terms.

(c)           Agent shall have the right at any
time or times, in Agent’s name or in the name of a nominee of Agent, to verify
the validity, amount or any other matter relating to any Receivables or other
Collateral, by mail, telephone, facsimile transmission or otherwise.

7.3           Inventory Covenants.  With respect to the Inventory: (a) each
Borrower and Guarantor shall at all times maintain inventory records reasonably
satisfactory to Agent, keeping correct and accurate records itemizing and
describing the kind, type, quality and quantity of Inventory, such Borrower’s
or Guarantor’s cost therefor and daily withdrawals therefrom and additions
thereto; (b) if required by their certified public accountants, Borrowers and
Guarantors shall conduct a physical count of the Inventory at least once each
year but at any time or times as Agent may request on or after an Event of
Default, and promptly following such physical inventory shall supply Agent with
a report in the form and with such specificity as may be reasonably
satisfactory to Agent concerning such physical count; (c) Borrowers and
Guarantors shall not remove any Inventory from the locations set forth or
permitted herein, without the prior written consent of Agent, except for sales
of Inventory in the ordinary course of its business and except to move
Inventory directly from one location set forth or permitted herein to another
such location and except for Inventory shipped from the manufacturer thereof to
such Borrower or Guarantor which is in transit to the locations set forth or
permitted herein; (d) upon Agent’s request, Borrowers shall, at their expense,
if Borrower have elected to increase the percentage advance rate against
Eligible Inventory as set forth in clause (a)(ii)(B) of the definition of “Borrowing
Base”, no more than two (2) times in any twelve (12) month period during a
Compliance Period, and when no Compliance Period exists, no more than one (1)
time in any twelve (12) month period, but at any time or times as Agent may
request on or after an Event of Default, deliver or cause to be delivered to
Agent written appraisals as to the Inventory in form, scope and methodology
acceptable to Agent and by an appraiser acceptable to Agent, addressed 

 49
 

 

to Agent and Lenders and upon which Agent and Lenders
are expressly permitted to rely; (e) Borrowers and Guarantors shall produce,
use, store and maintain the Inventory with all reasonable care and caution and
in accordance with applicable standards of any insurance and in conformity with
applicable laws (including the requirements of the Federal Fair Labor Standards
Act of 1938, as amended and all rules, regulations and orders related thereto);
(f) none of the Inventory or other Collateral constitutes farm products or the
proceeds thereof; (g) each Borrower and Guarantor assumes all responsibility
and liability arising from or relating to the production, use, sale or other
disposition of the Inventory; (h) Borrowers and Guarantors shall not sell Inventory
to any customer on approval, or any other basis which entitles the customer to
return or may obligate any Borrower or Guarantor to repurchase such Inventory;
(i) Borrowers and Guarantors shall keep the Inventory in good and marketable
condition; and (j) Borrowers and Guarantors shall not, without prior written
notice to Agent or the specific identification of such Inventory in a report
with respect thereto provided by Administrative Borrower to Agent pursuant to
Section 7.1(a) hereof, acquire or accept any Inventory on consignment or
approval.

7.4           Equipment Covenants.  With respect to the Equipment:  (a) Borrowers and Guarantors shall, at their
expense, at any time or times as Agent may request on or after an Event of
Default, deliver or cause to be delivered to Agent written appraisals as to the
Equipment in form, scope and methodology acceptable to Agent and by an
appraiser acceptable to Agent, addressed to Agent and upon which Agent is
expressly permitted to rely; (b) Borrowers and Guarantors shall keep the
Equipment in good order, repair, running and marketable condition (ordinary
wear and tear excepted); (c) Borrowers and Guarantors shall use the Equipment
with all reasonable care and caution and in accordance with applicable
standards of any insurance and in conformity with all applicable laws; (d) the
Equipment is and shall be used in the business of Borrowers and Guarantors and
not for personal, family, household or farming use; (e) Borrowers and
Guarantors shall not remove any Equipment from the locations set forth or
permitted herein, except to the extent necessary to have any Equipment repaired
or maintained in the ordinary course of its business or to move Equipment
directly from one location set forth or permitted herein to another such location
and except for the movement of motor vehicles used by or for the benefit of
such Borrower or Guarantor in the ordinary course of business; (f) the
Equipment is now and shall remain personal property and Borrowers and
Guarantors shall not permit any of the Equipment to be or become a part of or
affixed to real property; and (g) each Borrower and Guarantor assumes all
responsibility and liability arising from the use of the Equipment.

7.5           Power of Attorney.  Each Borrower and Guarantor hereby
irrevocably designates and appoints Agent (and all persons designated by Agent)
as such Borrower’s and Guarantor’s true and lawful attorney-in-fact, and
authorizes Agent, in such Borrower’s, Guarantor’s or Agent’s name, to: (a) at
any time an Event of Default exists or has occurred and is continuing (i)
demand payment on Receivables or other Collateral, (ii) enforce payment of
Receivables by legal proceedings or otherwise, (iii) exercise all of such
Borrower’s or Guarantor’s rights and remedies to collect any Receivable or
other Collateral, (iv) sell or assign any Receivable upon such terms, for such
amount and at such time or times as the Agent deems advisable, (v) settle,
adjust, compromise, extend or renew an Account, (vi) discharge and release any
Receivable, (vii) prepare, file and sign such Borrower’s or Guarantor’s name on
any proof of claim in bankruptcy or other similar document against an account
debtor or other obligor in respect of any Receivables or other Collateral,
(viii) notify the post office authorities to change the address for delivery of
remittances from account debtors or other obligors in respect of Receivables or
other 

 50
 

 

proceeds of Collateral to an address designated by
Agent, and open and dispose of all mail addressed to such Borrower or Guarantor
and handle and store all mail relating to the Collateral; and (ix) do all acts
and things which are necessary, in Agent’s determination, to fulfill such
Borrower’s or Guarantor’s obligations under this Agreement and the other
Financing Agreements and (b) at any time to (i) take control in any manner of
any item of payment in respect of Receivables or constituting Collateral or
otherwise received in or for deposit in the Blocked Accounts or otherwise
received by Agent or any Lender, (ii) have access to any lockbox or postal box
into which remittances from account debtors or other obligors in respect of
Receivables or other proceeds of Collateral are sent or received, (iii) endorse
such Borrower’s or Guarantor’s name upon any items of payment in respect of Receivables
or constituting Collateral or otherwise received by Agent and any Lender and
deposit the same in Agent’s account for application to the Obligations, (iv)
endorse such Borrower’s or Guarantor’s name upon any chattel paper, document,
instrument, invoice, or similar document or agreement relating to any
Receivable or any goods pertaining thereto or any other Collateral, including
any warehouse or other receipts, or bills of lading and other negotiable or
non-negotiable documents, (v) clear Inventory the purchase of which was
financed with a Letter of Credit through U.S. Customs or foreign export control
authorities in such Borrower’s or Guarantor’s name, Agent’s name or the name of
Agent’s designee, and to sign and deliver to customs officials powers of
attorney in such Borrower’s or Guarantor’s name for such purpose, and to
complete in such Borrower’s or Guarantor’s or Agent’s name, any order, sale or
transaction, obtain the necessary documents in connection therewith and collect
the proceeds thereof, and (vi) use such Borrower’s or Guarantor’s name on any
verification of Receivables and notices thereof to account debtors or any
secondary obligors or other obligors in respect thereof.  Each Borrower and Guarantor hereby releases
Agent and Lenders and their respective officers, employees and designees from
any liabilities arising from any act or acts under this power of attorney and
in furtherance thereof, whether of omission or commission, except as a result
of Agent’s or any Lender’s own gross negligence or willful misconduct as
determined pursuant to a final non-appealable order of a court of competent
jurisdiction.

7.6           Right to Cure.  Agent may, at its option, upon notice to
Administrative Borrower, (a) cure any default by any Borrower or Guarantor under
any material agreement with a third party that affects the Collateral, its
value or the ability of Agent to collect, sell or otherwise dispose of the
Collateral or the rights and remedies of Agent or any Lender therein or the
ability of any Borrower or Guarantor to perform its obligations hereunder or
under any of the other Financing Agreements, (b) pay or bond on appeal any
judgment entered against any Borrower or Guarantor, (c) discharge taxes, liens,
security interests or other encumbrances at any time levied on or existing with
respect to the Collateral and (d) pay any amount, incur any expense or perform
any act which, in Agent’s judgment, is necessary or appropriate to preserve,
protect, insure or maintain the Collateral and the rights of Agent and Lenders
with respect thereto.  Agent may add any
amounts so expended to the Obligations and charge any Borrower’s account
therefor, such amounts to be repayable by Borrowers on demand.  Agent and Lenders shall be under no
obligation to effect such cure, payment or bonding and shall not, by doing so,
be deemed to have assumed any obligation or liability of any Borrower or
Guarantor.  Any payment made or other
action taken by Agent or any Lender under this Section shall be without
prejudice to any right to assert an Event of Default hereunder and to proceed
accordingly.

 51

 

7.7           Access to Premises.  From time to time as requested by Agent, at
the cost and expense of Borrowers, (a) Agent or its designee shall have
complete access to all of each Borrower’s and Guarantor’s premises during
normal business hours and after reasonable notice to Administrative Borrower,
or at any time and without notice to Administrative Borrower if an Event of
Default exists or has occurred and is continuing, for the purposes of
inspecting, verifying and auditing the Collateral and all of each Borrower’s
and Guarantor’s books and records, including the Records, and (b) each Borrower
and Guarantor shall promptly furnish to Agent such copies of such books and
records or extracts therefrom as Agent may reasonably request, and Agent or any
Lender or Agent’s designee may use during normal business hours such of any
Borrower’s and Guarantor’s personnel, equipment, supplies and premises as may
be reasonably necessary for the foregoing and if an Event of Default exists or
has occurred and is continuing for the collection of Receivables and
realization of other Collateral.

SECTION 8.         REPRESENTATIONS
AND WARRANTIES

 

Each Borrower and Guarantor hereby represents and
warrants to Agent and Lenders the following (which shall survive the execution
and delivery of this Agreement):

8.1           Corporate Existence, Power and
Authority.  Each Borrower and
Guarantor is a corporation duly organized and in good standing under the laws
of its jurisdiction of organization and is duly qualified as a foreign
corporation and in good standing in all states or other jurisdictions where the
nature and extent of the business transacted by it or the ownership of assets
makes such qualification necessary, except for those jurisdictions in which the
failure to so qualify would not have a material adverse effect on such Borrower’s
or Guarantor’s financial condition, results of operation or business or the
rights of Agent in or to any of the Collateral. 
The execution, delivery and performance of this Agreement, the other
Financing Agreements and the transactions contemplated hereunder and thereunder
(a) are all within each Borrower’s and Guarantor’s corporate powers, (b) have
been duly authorized, (c) are not in contravention of law or the terms of any
Borrower’s or Guarantor’s certificate of incorporation, by laws, or other
organizational documentation, or any indenture, agreement or undertaking to
which any Borrower or Guarantor is a party or by which any Borrower or
Guarantor or its property are bound and (d) will not result in the creation or
imposition of, or require or give rise to any obligation to grant, any lien,
security interest, charge or other encumbrance upon any property of any
Borrower or Guarantor.  This Agreement
and the other Financing Agreements to which any Borrower or Guarantor is a
party constitute legal, valid and binding obligations of such Borrower and
Guarantor enforceable in accordance with their respective terms.

8.2           Name; State of
Organization; Chief Executive Office; Collateral Locations.  As of the date hereof:

(a)           The exact legal name of each Borrower
and Guarantor is as set forth on the signature page of this Agreement and in
the Information Certificate.  No Borrower
or Guarantor has, during the five years prior to the date of this Agreement,
been known by or used any other corporate or fictitious name or been a party to
any merger or consolidation, or acquired all or substantially all of the assets
of any Person, or acquired any of its property or assets out of the ordinary
course of business, except as set forth in the Information Certificate.

 52
 

 

(b)           Each Borrower and Guarantor is an
organization of the type and organized in the jurisdiction set forth in the
Information Certificate.  The Information
Certificate accurately sets forth the organizational identification number of
each Borrower and Guarantor or accurately states that such Borrower or
Guarantor has none and accurately sets forth the federal employer
identification number of each Borrower and Guarantor.

(c)           The chief executive office and
mailing address of each Borrower and Guarantor and each Borrower’s and
Guarantor’s Records concerning Accounts are located only at the address
identified as such in the Information Certificate and its only other places of
business and the only other locations of Collateral, if any, are the addresses
set forth in to the Information Certificate, subject to the rights of any
Borrower or Guarantor to establish new locations in accordance with Section 9.2
below.  The Information Certificate
correctly identifies any of such locations which are not owned by a Borrower or
Guarantor and sets forth the owners and/or operators thereof.

8.3           Financial Statements; No Material
Adverse Change.  All financial
statements relating to any Borrower or Guarantor which have been or may
hereafter be delivered by any Borrower or Guarantor to Agent and Lenders have
been prepared in accordance with GAAP (except as to any interim financial
statements, to the extent such statements are subject to normal year-end
adjustments and do not include any notes) and fairly present in all material
respects the financial condition and the results of operation of such Borrower
and Guarantor as at the dates and for the periods set forth therein.  Except as disclosed in any interim financial
statements furnished by Borrowers and Guarantors to Agent prior to the date of
this Agreement, there has been no act, condition or event which has had or is
reasonably likely to have a Material Adverse Effect since the date of the most
recent audited financial statements of any Borrower or Guarantor furnished by
any Borrower or Guarantor to Agent prior to the date of this Agreement.  The projections for the fiscal year ending
2006 that have been delivered to Agent (as set forth in the Acquisition Memorandum
dated June 1, 2006) or any projections hereafter delivered to Agent have been
prepared in light of the past operations of the businesses of Borrowers and
Guarantors and are based upon estimates and assumptions stated therein, all of
which Borrowers and Guarantors have determined to be reasonable and fair in
light of the then current conditions and current facts and reflect the good
faith and reasonable estimates of Borrowers and Guarantors of the future
financial performance of Parent and its Subsidiaries and of the other
information projected therein for the periods set forth therein (it being
understood that actual results may differ from those set forth in such
projected financial statements).

8.4           Priority of Liens; Title to
Properties.  The security interests
and liens granted to Agent under this Agreement and the other Financing
Agreements constitute valid and perfected first priority liens and security
interests in and upon the Collateral subject only to the liens indicated on the
Information Certificate and the other liens permitted under Section 9.8
hereof.  Each Borrower and Guarantor has
good and marketable fee simple title to or valid leasehold interests in all of
its Real Property and good, valid and merchantable title to all of its other
properties and assets subject to no liens, mortgages, pledges, security
interests, encumbrances or charges of any kind, except those granted to Agent
and such others as are specifically listed on the Information Certificate or
permitted under Section 9.8 hereof.

 53
 

 

8.5           Tax Returns.  Each Borrower and Guarantor has filed, or
caused to be filed, in a timely manner all tax returns, reports and
declarations which are required to be filed by it, excluding those for taxes
(other than payroll withholding taxes) that do not involve a potential
liability of more than $25,000.  All
information in such tax returns, reports and declarations is complete and
accurate in all material respects.  Each
Borrower and Guarantor has paid or caused to be paid all taxes due and payable
or claimed due and payable in any assessment received by it, except taxes the
validity of which are being contested in good faith by appropriate proceedings
diligently pursued and available to such Borrower or Guarantor and with respect
to which adequate reserves have been set aside on its books, and except taxes
(other than payroll withholding taxes) that do not involve a potential
liability of more than $25,000.  Adequate
provision has been made for the payment of all accrued and unpaid Federal,
State, county, local, foreign and other taxes whether or not yet due and
payable and whether or not disputed.

8.6           Litigation.  Except as set forth on the Information
Certificate, (a) there is no investigation by any Governmental Authority
pending, or to the best of any Borrower’s or Guarantor’s knowledge threatened,
against or affecting any Borrower or Guarantor, its or their assets or business
and (b) there is no action, suit, proceeding or claim by any Person pending, or
to the best of any Borrower’s or Guarantor’s knowledge threatened, against any
Borrower or Guarantor or its or their assets or goodwill, or against or
affecting any transactions contemplated by this Agreement, in each case, which
if adversely determined against such Borrower or Guarantor has or could
reasonably be expected to have a Material Adverse Effect.

8.7           Compliance with
Other Agreements and Applicable Laws.

(a)           Borrowers and Guarantors are not in
default in any respect under, or in violation in any respect of the terms of,
any material agreement, contract, instrument, lease or other commitment to
which it is a party or by which it or any of its assets are bound.  Borrowers and Guarantors are in compliance in
all material respects with the requirements of all applicable laws, rules,
regulations and orders of any Governmental Authority relating to their
respective businesses (other than ERISA which will be governed by Section 8.9),
including, without limitation, those set forth in or promulgated pursuant to
the Occupational Safety and Health Act of 1970, as amended, the Fair Labor Standards
Act of 1938, as amended, the Code, as amended, and the rules and regulations
thereunder, and all Environmental Laws.

(b)           Borrowers and Guarantors have
obtained all material permits, licenses, approvals, consents, certificates,
orders or authorizations of any Governmental Authority required for the lawful
conduct of its business (the “Permits”). 
All of the Permits are valid and subsisting and in full force and
effect.  There are no actions, claims or
proceedings pending or to the best of any Borrower’s or Guarantor’s knowledge,
threatened that seek the revocation, cancellation, suspension or modification
of any of the Permits.

8.8           Environmental
Compliance.

(a)           Except as set forth on the
Information Certificate, Borrowers, Guarantors and any Subsidiary of any
Borrower or Guarantor have not generated, used, stored, treated, transported,
manufactured, handled, produced or disposed of any Hazardous Materials, on or
off its premises (whether or not owned by it) in any manner which at any time
violates in any 

 54
 

 

material respect any
applicable Environmental Law or Permit, and the operations of Borrowers,
Guarantors and any Subsidiary of any Borrower or Guarantor complies in all
material respects with all Environmental Laws and all Permits.

(b)           Except as set forth on the
Information Certificate, there has been no investigation by any Governmental
Authority or any proceeding, complaint, order, directive, claim, citation or
notice by any Governmental Authority or any other person nor is any pending or
to the best of any Borrower’s or Guarantor’s knowledge threatened, with respect
to any non compliance with or violation of the requirements of any
Environmental Law by any Borrower or Guarantor and any Subsidiary of any
Borrower or Guarantor or the release, spill or discharge, threatened or actual,
of any Hazardous Material or the generation, use, storage, treatment,
transportation, manufacture, handling, production or disposal of any Hazardous
Materials or any other environmental, health or safety matter, which adversely
affects or could reasonably be expected to adversely affect in any material
respect any Borrower or Guarantor or its or their business, operations or
assets or any properties at which such Borrower or Guarantor has transported,
stored or disposed of any Hazardous Materials.

(c)           Except as set forth on the
Information Certificate, Borrowers, Guarantors and their Subsidiaries have no
material liability (contingent or otherwise) in connection with a release,
spill or discharge, threatened or actual, of any Hazardous Materials or the
generation, use, storage, treatment, transportation, manufacture, handling,
production or disposal of any Hazardous Materials.

(d)           Borrowers, Guarantors and their
Subsidiaries have all Permits required to be obtained or filed in connection
with the operations of Borrowers and Guarantors under any Environmental Law and
all of such licenses, certificates, approvals or similar authorizations and
other Permits are valid and in full force and effect.

8.9           Employee Benefits.

(a)           Each Plan is in compliance in all
material respects with the applicable provisions of ERISA, the Code and other
Federal or State law.  Each Plan which is
intended to qualify under Section 401(a) of the Code has received a favorable
determination letter from the Internal Revenue Service and to the best of any
Borrower’s or Guarantor’s knowledge, nothing has occurred which would
reasonably be expected to cause the loss of such qualification.  Each Borrower and its ERISA Affiliates have
made all required contributions to any Plan subject to Section 412 of the Code,
and no application for a funding waiver or an extension of any amortization
period pursuant to Section 412 of the Code has been made with respect to any
Plan.

(b)           There are no pending, or to the best
of any Borrower’s or Guarantor’s knowledge, threatened claims, actions or
lawsuits, or action by any Governmental Authority, with respect to any Plan
(other than routine claims for benefits).

(c)           (i) No ERISA Event has occurred or is
reasonably expected to occur; (ii) based on the latest valuation of each
Pension Plan and on the actuarial methods and assumptions employed for such
valuation (determined in accordance with the assumptions used for funding such
Pension Plan pursuant to Section 412 of the Code) the aggregate current value
of 

 55
 

 

accumulated benefit
liabilities of such Pension Plan under Section 4001(a)(16) of ERISA does not
exceed the aggregate current value of the assets of such Pension Plan; (iii)
each Borrower and Guarantor, and their ERISA Affiliates, have not incurred and
do not reasonably expect to incur, any liability under Title IV of ERISA with
respect to any Pension Plan (other than premiums due and not delinquent under
Section 4007 of ERISA); (iv) each Borrower and Guarantor, and their ERISA Affiliates,
have not incurred and do not reasonably expect to incur, any liability (and no
event has occurred which, with the giving of notice under Section 4219 of
ERISA, would result in such liability) under Section 4201 or 4243 of ERISA with
respect to a Multiemployer Plan; and (v) each Borrower and Guarantor, and their
ERISA Affiliates, have not engaged in a transaction that would be subject to
Section 4069 or 4212(c) of ERISA.

8.10         Bank Accounts.  All of the deposit accounts, investment
accounts or other accounts in the name of or used by any Borrower or Guarantor
maintained at any bank or other financial institution are set forth on the
Information Certificate, subject to the right of each Borrower and Guarantor to
establish new accounts in accordance with Section 5.2 hereof.

8.11         Intellectual Property.  Each Borrower and Guarantor owns or licenses
or otherwise has the right to use all Intellectual Property necessary for the
operation of its business as presently conducted or proposed to be conducted.  As of the date hereof, Borrowers and
Guarantors do not have any Intellectual Property registered, or subject to
pending applications, in the United States Patent and Trademark Office or any
similar office or agency in the United States, any State thereof, any political
subdivision thereof or in any other country, other than those described in the
Information Certificate (as updated or amended from time to time in writing)
and have not granted any licenses with respect thereto other than as set forth
in the Information Certificate (as updated or amended from time to time in
writing), except for licenses that have not involved Inventory with an
aggregate Value of $100,000 or more at any one time.  No event has occurred which permits or would
permit after notice or passage of time or both, the revocation, suspension or
termination of such rights.  To the best
of any Borrower’s and Guarantor’s knowledge, no slogan or other advertising
device, product, process, method, substance or other Intellectual Property or
goods bearing or using any Intellectual Property presently contemplated to be
sold by or employed by any Borrower or Guarantor infringes any patent,
trademark, servicemark, tradename, copyright, license or other Intellectual
Property owned by any other Person presently and no claim or litigation is
pending or threatened against or affecting any Borrower or Guarantor contesting
its right to sell or use any such Intellectual Property.  Except for licenses that have not involved
Inventory with an aggregate Value of $100,000 or more at any one time, the
Information Certificate (as updated or amended from time to time in writing)
sets forth all of the agreements or other arrangements of each Borrower and
Guarantor pursuant to which such Borrower or Guarantor has a license or other
right to use any trademarks, logos, designs, representations or other
Intellectual Property owned by another person as in effect on the date hereof
and the dates of the expiration of such agreements or other arrangements of
such Borrower or Guarantor as in effect on the date hereof (collectively,
together with such agreements or other arrangements as may be entered into by
any Borrower or Guarantor after the date hereof, collectively, the “License
Agreements” and individually, a “License Agreement”).  No trademark, servicemark, copyright or other
Intellectual Property at any time used by any Borrower or Guarantor which is
owned by another person, or owned by such Borrower or Guarantor subject to any
security interest, lien, collateral assignment, pledge or other encumbrance in
favor of any person other than Agent, is affixed to any Eligible Inventory, 

 56
 

 

except (a) to the extent permitted under the term of
the license agreements listed on the Information Certificate (as updated or
amended from time to time in writing) or (b) to the extent the sale of
Inventory to which such Intellectual Property is affixed is permitted to be
sold by such Borrower or Guarantor under applicable law (including the United
States Copyright Act of 1976).

8.12         Subsidiaries;
Affiliates; Capitalization; Solvency.

(a)           As of the date hereof, each Borrower
and Guarantor does not have any direct or indirect Subsidiaries or Affiliates
and is not engaged in any joint venture or partnership except as set forth in
the Information Certificate.

(b)           Each Borrower and Guarantor is the
record and beneficial owner of all of the issued and outstanding shares of
Capital Stock of each of the Subsidiaries listed on the Information Certificate
as being owned by such Borrower or Guarantor and there are no proxies,
irrevocable or otherwise, with respect to such shares and no equity securities
of any of the Subsidiaries are or may become required to be issued by reason of
any options, warrants, rights to subscribe to, calls or commitments of any kind
or nature and there are no contracts, commitments, understandings or
arrangements by which any Subsidiary is or may become bound to issue additional
shares of it Capital Stock or securities convertible into or exchangeable for
such shares.

(c)           The issued and outstanding shares of
Capital Stock of each Borrower and Guarantor are directly and beneficially
owned and held by the persons indicated in the Information Certificate, and in
each case all of such shares have been duly authorized and are fully paid and
non-assessable, free and clear of all claims, liens, pledges and encumbrances
of any kind, except as disclosed in writing to Agent prior to the date hereof.

(d)           Each Borrower is, and the Borrowers
and Guarantors taken as a whole are, Solvent and will continue to be Solvent
after the creation of the Obligations, the security interests of Agent and the
other transaction contemplated hereunder.

8.13         Labor Disputes.

(a)           Set forth on the Information
Certificate is a list (including dates of termination) of all collective
bargaining or similar agreements between or applicable to each Borrower and
Guarantor and any union, labor organization or other bargaining agent in
respect of the employees of any Borrower or Guarantor on the date hereof.

(b)           There is (i) no significant unfair
labor practice complaint pending against any Borrower or Guarantor or, to the
best of any Borrower’s or Guarantor’s knowledge, threatened against it, before
the National Labor Relations Board, and no significant grievance or significant
arbitration proceeding arising out of or under any collective bargaining
agreement is pending on the date hereof against any Borrower or Guarantor or,
to best of any Borrower’s or Guarantor’s knowledge, threatened against it, and
(ii) no significant strike, labor dispute, slowdown or stoppage is pending
against any Borrower or Guarantor or, to the best of any Borrower’s or
Guarantor’s knowledge, threatened against any Borrower or Guarantor.

 57
 

 

8.14         Restrictions on Subsidiaries.  Except for restrictions contained in this
Agreement or any other agreement with respect to Indebtedness of any Borrower
or Guarantor permitted hereunder as in effect on the date hereof, and except
for restrictions contained in any mortgage loan documents of Natrol R/E or
Natrol R/E II as expressly permitted hereunder, there are no contractual or
consensual restrictions on any Borrower or Guarantor or any of its Subsidiaries
which prohibit or otherwise restrict (a) the transfer of cash or other assets
(i) between any Borrower or Guarantor and any of its or their Subsidiaries or
(ii) between any Subsidiaries of any Borrower or Guarantor or (b) the ability
of any Borrower or Guarantor or any of its or their Subsidiaries to incur
Indebtedness or grant security interests to Agent or any Lender in the
Collateral.

8.15         Material Contracts.  The Information Certificate sets forth all
Material Contracts to which any Borrower or Guarantor is a party or is bound as
of the date hereof.  Borrowers and
Guarantors have delivered true, correct and complete copies of such Material
Contracts to Agent on or before the date hereof.  Except as otherwise disclosed to Agent in
writing, Borrowers and Guarantors are not in breach or in default in any
material respect of or under any Material Contract and have not received any
notice of the intention of any other party thereto to terminate any Material
Contract.

8.16         Payable Practices.  Each Borrower and Guarantor have not made any
material change in the historical accounts payable practices from those in
effect immediately prior to the date hereof.

8.17         Accuracy and Completeness of
Information.  All information
furnished by or on behalf of any Borrower or Guarantor in writing to Agent or
any Lender in connection with this Agreement or any of the other Financing Agreements
or any transaction contemplated hereby or thereby, including all information on
the Information Certificate is true and correct in all material respects on the
date as of which such information is dated or certified and does not omit any
material fact necessary in order to make such information not misleading.  No event or circumstance has occurred which
has had or could reasonably be expected to have a Material Adverse Affect,
which has not been fully and accurately disclosed to Agent in writing prior to
the date hereof.

8.18         Survival of Warranties; Cumulative.  All representations and warranties contained
in this Agreement or any of the other Financing Agreements shall survive the
execution and delivery of this Agreement and shall be deemed to have been made
again to Agent and Lenders on the date of each additional borrowing or other
credit accommodation hereunder, except to the extent such representations and
warranties expressly relate solely to an earlier date, and shall be
conclusively presumed to have been relied on by Agent and Lenders regardless of
any investigation made or information possessed by Agent or any Lender.  The representations and warranties set forth
herein shall be cumulative and in addition to any other representations or
warranties which any Borrower or Guarantor shall now or hereafter give, or
cause to be given, to Agent or any Lender.

 58
 

 

SECTION 9.         AFFIRMATIVE
AND NEGATIVE COVENANTS

 

9.1           Maintenance of
Existence.

(a)           Each Borrower and Guarantor shall at
all times preserve, renew and keep in full force and effect its corporate
existence and rights and franchises with respect thereto and maintain in full
force and effect all material licenses, trademarks, tradenames, approvals,
authorizations, leases, contracts and permits necessary to carry on the
business as presently or proposed to be conducted, except as to any Guarantor
as permitted in Section 9.7 hereto. 
Borrowers shall notify Agent promptly upon the commencement of any
proceeding by a Governmental Authority to revoke, cancel, terminate or suspend
a material permit or license of any Borrower.

(b)           No Borrower or Guarantor shall change
its name unless each of the following conditions is satisfied: (i) Agent shall
have received not less than thirty (30) days prior written notice from
Administrative Borrower of such proposed change in its corporate name, which
notice shall accurately set forth the new name; and (ii) Agent shall have
received a copy of the amendment to the Certificate of Incorporation of such
Borrower or Guarantor providing for the name change certified by the Secretary
of State of the jurisdiction of incorporation or organization of such Borrower
or Guarantor as soon as it is available.

(c)           No Borrower or Guarantor shall change
its chief executive office or its mailing address or organizational
identification number (or if it does not have one, shall not acquire one)
unless Agent shall have received not less than thirty (30) days’ prior written
notice from Administrative Borrower of such proposed change, which notice shall
set forth such information with respect thereto as Agent may require and Agent
shall have received such agreements as Agent may reasonably require in
connection therewith.  No Borrower or
Guarantor shall change its type of organization, jurisdiction of organization
or other legal structure.

9.2           New Collateral Locations.  Each Borrower and Guarantor may only open any
new location within the continental United States provided such Borrower or
Guarantor (a) gives Agent thirty (30) days prior written notice of the intended
opening of any such new location and (b) executes and delivers, or causes to be
executed and delivered, to Agent such agreements, documents, and instruments as
Agent may deem reasonably necessary or desirable to protect its interests in
the Collateral at such location.

9.3           Compliance with
Laws, Regulations, Etc.

(a)           Each Borrower and Guarantor shall,
and shall cause any Subsidiary to, at all times, comply in all material
respects with all laws, rules, regulations, licenses, approvals, orders and
other Permits applicable to it and duly observe all requirements of any
foreign, Federal, State or local Governmental Authority, except where the
failure to comply therewith or observe such requirements could not reasonably
be expected to result in a Material Adverse Effect.

(b)           Borrowers and Guarantors shall give
written notice to Agent immediately upon any Borrower’s or Guarantor’s receipt
of any notice of, or any Borrower’s or Guarantor’s 

 59
 

 

otherwise obtaining
knowledge of, (i) the occurrence of any event involving the release, spill or
discharge, threatened or actual, of any Hazardous Material or (ii) any
investigation, proceeding, complaint, order, directive, claims, citation or
notice with respect to: (A) any non-compliance with or violation of any
Environmental Law by any Borrower or Guarantor or (B) the release, spill or
discharge, threatened or actual, of any Hazardous Material other than in the
ordinary course of business and other than as permitted under any applicable
Environmental Law. Copies of all environmental surveys, audits, assessments,
feasibility studies and results of remedial investigations shall be promptly
furnished, or caused to be furnished, by such Borrower or Guarantor to
Agent.  Each Borrower and Guarantor shall
take prompt action to respond to any material non-compliance with any of the
Environmental Laws and shall regularly report to Agent on such response.

(c)           Without limiting the generality of
the foregoing, whenever Agent reasonably determines that there is non-compliance,
or any condition which requires any action by or on behalf of any Borrower or
Guarantor in order to avoid any non compliance, with any Environmental Law
involving a potential liability which could reasonably be expected to exceed
$250,000, Borrowers shall, at Agent’s request and Borrowers’ expense: (i) cause
an independent environmental engineer reasonably acceptable to Agent to conduct
such tests of the site where non-compliance or alleged non compliance with such
Environmental Laws has occurred as to such non-compliance and prepare and
deliver to Agent a report as to such non-compliance setting forth the results
of such tests, a proposed plan for responding to any environmental problems
described therein, and an estimate of the costs thereof and (ii) provide to
Agent a supplemental report of such engineer whenever the scope of such
non-compliance, or such Borrower’s or Guarantor’s response thereto or the
estimated costs thereof, shall change in any material respect.

(d)           Each Borrower and Guarantor shall
indemnify and hold harmless Agent and Lenders and their respective directors,
officers, employees, agents, invitees, representatives, successors and assigns,
from and against any and all losses, claims, damages, liabilities, costs, and
expenses (including reasonable attorneys’ fees and expenses) directly or
indirectly arising out of or attributable to the use, generation, manufacture,
reproduction, storage, release, threatened release, spill, discharge, disposal
or presence of a Hazardous Material, including the costs of any required or
necessary repair, cleanup or other remedial work with respect to any property
of any Borrower or Guarantor and the preparation and implementation of any
closure, remedial or other required plans. 
All representations, warranties, covenants and indemnifications in this
Section 9.3 shall survive the payment of the Obligations and the termination of
this Agreement.

9.4           Payment of Taxes and Claims.  Each Borrower and Guarantor shall, and shall
cause any Subsidiary to, duly pay and discharge all taxes, assessments,
contributions and governmental charges upon or against it or its properties or
assets, except for taxes (other than payroll withholding taxes) that do not
involve a potential liability which could reasonably be expected to exceed
$25,000, and except for taxes the validity of which are being contested in good
faith by appropriate proceedings diligently pursued and available to such
Borrower, Guarantor or Subsidiary, as the case may be, and with respect to
which adequate reserves have been set aside on its books to the extent required
by GAAP.

 60
 

 

9.5           Insurance.  Each Borrower and Guarantor shall, and shall
cause any Subsidiary to, at all times, maintain with financially sound and
reputable insurers insurance with respect to the Collateral against loss or
damage and all other insurance of the kinds and in the amounts customarily
insured against or carried by corporations of established reputation engaged in
the same or similar businesses and similarly situated.  Said policies of insurance shall be
reasonably satisfactory to Agent as to form, amount and insurer.  Borrowers and Guarantors shall furnish
certificates, policies or endorsements to Agent as Agent shall reasonably
require as proof of such insurance, and, if any Borrower or Guarantor fails to
do so, Agent is authorized, but not required, to obtain such insurance at the
expense of Borrowers.  All policies shall
provide for at least thirty (30) days prior written notice to Agent of any
cancellation or reduction of coverage and that Agent may act as attorney for
each Borrower and Guarantor in obtaining, and at any time an Event of Default
exists or has occurred and is continuing, adjusting, settling, amending and
canceling such insurance.  Borrowers and
Guarantors shall cause Agent to be named as a loss payee and an additional
insured (but without any liability for any premiums) under such insurance
policies and Borrowers and Guarantors shall obtain non-contributory lender’s
loss payable endorsements to all insurance policies in form and substance
satisfactory to Agent.  Such lender’s
loss payable endorsements shall specify that the proceeds of such insurance
shall be payable to Agent as its interests may appear and further specify that
Agent and Lenders shall be paid regardless of any act or omission by any
Borrower, Guarantor or any of its or their Affiliates. Without limiting any
other rights of Agent or Lenders, any insurance proceeds received by Agent at
any time may be applied to payment of the Obligations, whether or not then due,
in any order and in such manner as Agent may determine.  Upon application of such proceeds to the
Revolving Loans, Revolving Loans may be available subject and pursuant to the
terms hereof to be used for the costs of repair or replacement of the
Collateral lost or damages resulting in the payment of such insurance proceeds.

9.6           Financial
Statements and Other Information.

(a)           Each Borrower and Guarantor shall,
and shall cause any Subsidiary to, keep proper books and records in which true
and complete entries shall be made of the business of such Borrower, Guarantor
and its Subsidiaries in accordance with GAAP. 
Borrowers and Guarantors shall promptly furnish to Agent and Lenders all
such financial and other information as Agent shall reasonably request relating
to the Collateral and the assets, business and operations of Borrowers and
Guarantors, and Borrower shall notify the auditors and accountants of Borrowers
and Guarantors that Agent is authorized to obtain such information directly
from them.  Without limiting the
foregoing, Borrowers shall furnish or cause to be furnished to Agent, the
following:

(i)            within fifteen (15) days after the
end of each fiscal month, monthly unaudited consolidated financial statements
(including in each case balance sheets, statements of income and loss,
statements of cash flow, and statements of shareholders’ equity), together with
the general ledger and trial balance of each Borrower, all in reasonable
detail, fairly presenting in all material respects the financial position and
the results of the operations of Parent and its Subsidiaries as of the end of
and through such fiscal month, certified to be correct by the chief financial
officer of Parent, subject to normal year-end adjustments and accompanied by a
compliance certificate substantially in the form of Exhibit B hereto, along
with a schedule in a form reasonably satisfactory to Agent of the calculations
used in determining, as of the end of 

 61
 

 

such month, whether
Borrowers and Guarantors were in compliance with the covenants set forth in
Section 9.17 of this Agreement for such month, and

(ii)           within ninety (90) days after the end
of each fiscal year, audited consolidated financial statements of Parent and
its Subsidiaries (including in each case balance sheets, statements of income
and loss, statements of cash flow, and statements of shareholders’ equity), and
the accompanying notes thereto, all in reasonable detail, fairly presenting in
all material respects the financial position and the results of the operations
of Parent and its Subsidiaries as of the end of and for such fiscal year,
together with the unqualified opinion of independent certified public
accountants with respect to the audited consolidated financial statements,
which accountants shall be an independent accounting firm selected by
Administrative Borrower and acceptable to Agent, that such audited consolidated
financial statements have been prepared in accordance with GAAP, and present
fairly in all material respects the results of operations and financial
condition of Parent and its Subsidiaries as of the end of and for the fiscal
year then ended, and

(iii)          at such time as available, but in no
event later than fifteen (15) days prior to the end of each fiscal year
(commencing with the fiscal year of Borrowers ending December 31, 2006),
projected consolidated financial statements (including in each case, forecasted
balance sheets and statements of income and loss, statements of cash flow, and
statements of shareholders’ equity) of Parent and its Subsidiaries for the next
fiscal year, all in reasonable detail, and in a format consistent with the
projections delivered by Borrowers to Agent prior to the date hereof, together
with such supporting information as Agent may reasonably request.  Such projected financial statements shall be
prepared on a monthly basis for the next succeeding year. Such projections
shall represent the reasonable estimate by Borrowers and Guarantors of the
future financial performance of Parent and its Subsidiaries for the periods set
forth therein and shall have been prepared on the basis of the assumptions set
forth therein which Borrowers and Guarantors believe are fair and reasonable as
of the date of preparation in light of current and reasonably foreseeable
business conditions (it being understood that actual results may differ from
those set forth in such projected financial statements).  Each year Borrowers shall provide to Agent a
semi-annual update with respect to such projections or at any time a Default or
Event of Default exists or has occurred and is continuing, more frequently as
Agent may require.

(b)           Borrowers and Guarantors shall
promptly notify Agent in writing of the details of (i) any loss, damage,
investigation, action, suit, proceeding or claim relating to Collateral having
a value of more than $100,000 or which if adversely determined would reasonably
be expected to result in any material adverse change in any Borrower’s or
Guarantor’s business, properties, assets, goodwill or condition, financial or
otherwise, (ii) any Material Contract being terminated or amended or any new
Material Contract entered into (in which event Borrowers and Guarantors shall
provide Agent with a copy of such Material Contract), (iii) any order, judgment
or decree in excess of $250,000 shall have been entered against any Borrower or
Guarantor any of its or their properties or assets, (iv) any notification of a
material violation of laws or regulations received by any Borrower or
Guarantor, (v) any ERISA Event, and (vi) the occurrence of any Default or Event
of Default.

 62

 

(c)           Promptly after the sending or filing
thereof, Borrowers shall send to Agent or make available to Agent through
www.natrol.com (i) all reports which Parent or any of its Subsidiaries sends to
its security holders generally, (ii) all reports and registration statements
which Parent or any of its Subsidiaries files with the Securities Exchange
Commission, any national or foreign securities exchange or the National
Association of Securities Dealers, Inc., (iii) all press releases and (iv) all
other statements concerning material changes or developments in the business of
a Borrower or Guarantor made available by any Borrower or Guarantor to the
public.

(d)           Borrowers and Guarantors shall
furnish or cause to be furnished to Agent such budgets, forecasts, projections
and other information respecting the Collateral and the business of Borrowers
and Guarantors, as Agent may, from time to time, reasonably request.  Agent is hereby authorized to deliver a copy
of any financial statement or any other information relating to the business of
Borrowers and Guarantors to any court or other Governmental Authority or to any
Lender or Participant or prospective Lender or Participant or any Affiliate of
any Lender or Participant. Each Borrower and Guarantor hereby irrevocably
authorizes and directs all accountants or auditors to deliver to Agent, at
Borrowers’ expense, copies of the financial statements of any Borrower and
Guarantor and any reports or management letters prepared by such accountants or
auditors on behalf of any Borrower or Guarantor and to disclose to Agent and
Lenders such information as they may have regarding the business of any
Borrower and Guarantor.  Any documents,
schedules, invoices or other papers delivered to Agent or any Lender may be
destroyed or otherwise disposed of by Agent or such Lender one (1) year after
the same are delivered to Agent or such Lender, except as otherwise designated
by Administrative Borrower to Agent or such Lender in writing.  All such information shall be subject to
Section 13.5.

9.7           Sale of Assets, Consolidation,
Merger, Dissolution, Etc.  Each
Borrower and Guarantor shall not, and shall not permit any Subsidiary to,
directly or indirectly,

(a)           except as expressly permitted in
Section 9.10(k), merge into or with or consolidate with any other Person or
permit any other Person to merge into or with or consolidate with it except
that any wholly-owned Subsidiary of Parent (other than any Borrower) may merge
with and into or consolidate with any other wholly-owned Subsidiary of Parent
(other than any Borrower), provided, that, each of the following
conditions is satisfied as determined by Agent in good faith:  (i) Agent shall have received not less than
ten (10) Business Days’ prior written notice of the intention of such
Subsidiaries to so merge or consolidate, which notice shall set forth in
reasonable detail satisfactory to Agent, the persons that are merging or
consolidating, which person will be the surviving entity, the locations of the
assets of the persons that are merging or consolidating, and the material
agreements and documents relating to such merger or consolidation, (ii) Agent
shall have received such other information with respect to such merger or
consolidation as Agent may reasonably request, (iii) as of the effective date
of the merger or consolidation and after giving effect thereto, no Default or
Event of Default shall exist or have occurred, (iv) Agent shall have received,
true, correct and complete copies of all agreements, documents and instruments
relating to such merger or consolidation, including, but not limited to, the
certificate or certificates of merger to be filed with each appropriate
Secretary of State (with a copy as filed promptly after such filing), (v) the
surviving corporation shall expressly confirm, ratify and assume the
Obligations and the Financing Agreements to which it is a party 

 63
 

 

in writing, in form and
substance satisfactory to Agent, and Borrowers and Guarantors shall execute and
deliver such other agreements, documents and instruments as Agent may request
in connection therewith;

(b)           sell, issue, assign, lease, license,
transfer, abandon or otherwise dispose of any Capital Stock or Indebtedness to
any other Person or any of its assets to any other Person, except for

(i)            sales of Inventory in the ordinary
course of business,

(ii)           the sale or other disposition of
Equipment (including worn-out or obsolete Equipment or Equipment no longer used
or useful in the business of any Borrower or Guarantor) so long as such sales
or other dispositions do not involve Equipment having an aggregate fair market
value in excess of $100,000 for all such Equipment disposed of in any fiscal
year of Borrowers or as Agent may otherwise agree,

(iii)          the issuance and sale by any Borrower
or Guarantor of Capital Stock of such Borrower or Guarantor after the date
hereof; provided, that, (A) Agent shall have received not less
than ten (10) Business Days’ prior written notice of such issuance and sale by
such Borrower or Guarantor, which notice shall specify the parties to whom such
shares are to be sold, the terms of such sale, the total amount which it is
anticipated will be realized from the issuance and sale of such stock and the
net cash proceeds which it is anticipated will be received by such Borrower or
Guarantor from such sale, (B) such Borrower or Guarantor shall not be required
to pay any cash dividends or repurchase or redeem such Capital Stock or make
any other payments in respect thereof, except as otherwise permitted in Section
9.11 hereof, (C) the terms of such Capital Stock, and the terms and conditions
of the purchase and sale thereof, shall not include any terms that include any
limitation on the right of any Borrower to request or receive Loans or Letters
of Credit or the right of any Borrower and Guarantor to amend or modify any of
the terms and conditions of this Agreement or any of the other Financing
Agreements or otherwise in any way relate to or affect the arrangements of
Borrowers and Guarantors with Agent and Lenders or are more restrictive or burdensome
to any Borrower or Guarantor than the terms of any Capital Stock in effect on
the date hereof, and (D) except as Agent may otherwise agree in writing, all of
the proceeds of the sale and issuance of such Capital Stock shall be paid to
Agent for application to the Obligations in such order and manner as Agent may
determine,

(iv)          the issuance of Capital Stock of any
Borrower or Guarantor consisting of common stock pursuant to an employee stock
option or grant or similar equity plan or 401(k) plans of such Borrower or
Guarantor for the benefit of its employees, directors and consultants, provided,
that, in no event shall such Borrower or Guarantor be required to issue,
or shall such Borrower or Guarantor issue, Capital Stock pursuant to such stock
plans or 401(k) plans which would result in a Change of Control or other Event
of Default, and

(v)           dispositions of Inventory whose value
has been written down to zero in accordance with GAAP and whose original cost
value does not exceed $250,000 in the aggregate for all such dispositions
during any fiscal year,

 64
 

 

(c)           wind up, liquidate or dissolve except
that any Guarantor may wind up, liquidate and dissolve, provided, that,
each of the following conditions is satisfied, (i) the winding up, liquidation
and dissolution of such Guarantor shall not violate any law or any order or
decree of any court or other Governmental Authority in any material respect and
shall not conflict with or result in the breach of, or constitute a default
under, any indenture, mortgage, deed of trust, or any other agreement or
instrument to which any Borrower or Guarantor is a party or may be bound, (ii)
such winding up, liquidation or dissolution shall be done in accordance with
the requirements of all applicable laws and regulations, (iii) effective upon
such winding up, liquidation or dissolution, all of the assets and properties
of such Guarantor shall be duly and validly transferred and assigned to a
Borrower or another Guarantor, free and clear of any liens, restrictions or
encumbrances other than the security interest and liens of Agent (and Agent
shall have received such evidence thereof as Agent may require) and other liens
expressly permitted hereunder and Agent shall have received such deeds,
assignments or other agreements as Agent may request to evidence and confirm
the transfer of such assets of such Guarantor to a Borrower or another
Guarantor, (iv) Agent shall have received all documents and agreements that any
Borrower or Guarantor has filed with any Governmental Authority or as are
otherwise required to effectuate such winding up, liquidation or dissolution,
(v) no Borrower or Guarantor shall assume any Indebtedness, obligations or
liabilities as a result of such winding up, liquidation or dissolution, or
otherwise become liable in respect of any obligations or liabilities of the
entity that is winding up, liquidating or dissolving, unless such Indebtedness
is otherwise expressly permitted hereunder, (vi) Agent shall have received not
less than ten (10) Business Days prior written notice of the intention of such
Guarantor to wind up, liquidate or dissolve, and (vii) as of the date of such
winding up, liquidation or dissolution and after giving effect thereto, no
Default or Event of Default shall exist or have occurred; or

(d)           agree to do any of the foregoing.

9.8           Encumbrances.  Each Borrower and Guarantor shall not, and
shall not permit any Subsidiary to, create, incur, assume or suffer to exist
any security interest, mortgage, pledge, lien, charge or other encumbrance of
any nature whatsoever on any of its assets or properties, including the
Collateral, or file or permit the filing of, or permit to remain in effect, any
financing statement or other similar notice of any security interest or lien
with respect to any such assets or properties, except:

(a)           the security interests and liens of
Agent for itself and the benefit of Lenders;

(b)           liens securing the payment of taxes,
assessments or other governmental charges or levies either not yet overdue or
the validity of which are being contested in good faith by appropriate
proceedings diligently pursued and available to such Borrower, or Guarantor or
Subsidiary, as the case may be and with respect to which adequate reserves have
been set aside on its books;

(c)           non-consensual statutory liens (other
than liens securing the payment of taxes) arising in the ordinary course of
such Borrower’s, Guarantor’s or Subsidiary’s business to the extent: (i) such
liens secure Indebtedness which is not overdue or which is being contested in
good faith by appropriate proceedings diligently pursued and with respect to
which adequate 

 65
 

 

reserves have been
established to the extent required by GAAP or (ii) such liens secure
Indebtedness relating to claims or liabilities which are fully insured and
being defended at the sole cost and expense and at the sole risk of the insurer
or being contested in good faith by appropriate proceedings diligently pursued
and available to such Borrower, Guarantor or such Subsidiary, in each case
prior to the commencement of foreclosure or other similar proceedings and with
respect to which adequate reserves have been set aside on its books;

(d)           zoning restrictions, easements,
licenses, covenants and other restrictions affecting the use of Real Property
which do not interfere in any material respect with the use of such Real
Property or ordinary conduct of the business of such Borrower, Guarantor or
such Subsidiary as presently conducted thereon or materially impair the value
of the Real Property which may be subject thereto;

(e)           purchase money security interests in
Equipment (including Capital Leases) and purchase money mortgages on Real
Property to secure Indebtedness permitted under Section 9.9(b) hereof;

(f)            pledges and deposits of cash by any
Borrower or Guarantor after the date hereof in the ordinary course of business
in connection with workers’ compensation, unemployment insurance and other
types of social security benefits consistent with the current practices of such
Borrower or Guarantor as of the date hereof;

(g)           pledges and deposits of cash by any
Borrower or Guarantor after the date hereof to secure the performance of
tenders, bids, leases, trade contracts (other than for the repayment of
Indebtedness), statutory obligations and other similar obligations in each case
in the ordinary course of business consistent with the current practices of
such Borrower or Guarantor as of the date hereof; provided, that,
in connection with any performance bonds issued by a surety or other person,
the issuer of such bond shall have waived in writing any rights in or to, or
other interest in, any of the Collateral in an agreement, in form and substance
satisfactory to Agent;

(h)           liens arising from (i) operating
leases and the precautionary UCC financing statement filings in respect thereof
and (ii) equipment or other materials which are not owned by any Borrower or
Guarantor located on the premises of such Borrower or Guarantor (but not in
connection with, or as part of, the financing thereof) from time to time in the
ordinary course of business and consistent with current practices of such
Borrower or Guarantor and the precautionary UCC financing statement filings in
respect thereof;

(i)            judgments and other similar liens
arising in connection with court proceedings that do not constitute an Event of
Default, provided, that, (i) such liens are being contested in
good faith and by appropriate proceedings diligently pursued, (ii) adequate
reserves or other appropriate provision, if any, as are required by GAAP have
been made therefor, (iii) a stay of enforcement of any such liens is in effect
and (iv) Agent may establish a Reserve with respect thereto;

(j)            the security interests and liens set
forth on the Information Certificate including security interests and liens on
the same assets in connection with any refinancings; and

 66
 

 

(k)           mortgages, deeds of trust and deeds
to secure debt existing against Real Property of a Target at the time of its
acquisition pursuant to Section 9.10(k) (excluding any such mortgages or deeds
granted in contemplation of such acquisition).

9.9           Indebtedness.  Each Borrower and Guarantor shall not, and
shall not permit any Subsidiary to, incur, create, assume, become or be liable
in any manner with respect to, or permit to exist, any Indebtedness, or
guarantee, assume, endorse, or otherwise become responsible for (directly or
indirectly), the Indebtedness, performance, obligations or dividends of any
other Person, except:

(a)           the Obligations;

(b)           purchase money Indebtedness
(including Capital Leases) arising after the date hereof to the extent secured
by purchase money security interests in Equipment (including Capital Leases)
and purchase money mortgages on Real Property not to exceed $150,000 in the
aggregate at any time outstanding so long as such security interests and mortgages
do not apply to any property of such Borrower, Guarantor or Subsidiary other
than the Equipment or Real Property so acquired, and the Indebtedness secured
thereby does not exceed the cost of the Equipment or Real Property so acquired,
as the case may be;

(c)           guarantees by any Borrower or
Guarantor (i) of the Obligations of the other Borrowers or Guarantors in favor
of Agent for the benefit of Lenders, (ii) of Indebtedness of the Borrowers or
Guarantors permitted hereunder or (iii) of the residential lease of Mr. Wayne
Bos;

(d)           the Indebtedness of any Borrower or
Guarantor to any other Borrower or Guarantor arising after the date hereof
pursuant to loans by any Borrower or Guarantor permitted under Section 9.10(g)
hereof;

(e)           unsecured Indebtedness of any
Borrower or Guarantor arising after the date hereof to any third person (but
not to any other Borrower or Guarantor), provided, that, each of
the following conditions is satisfied as determined by Agent: (i) such
Indebtedness shall be on terms and conditions acceptable to Agent and shall be
subject and subordinate in right of payment to the right of Agent and Lenders
to receive the prior indefeasible payment and satisfaction in full payment of
all of the Obligations pursuant to the terms of an intercreditor agreement
between Agent and such third party, in form and substance satisfactory to
Agent, (ii) Agent shall have received not less than ten (10) days prior written
notice of the intention of such Borrower or Guarantor to incur such
Indebtedness, which notice shall set forth in reasonable detail satisfactory to
Agent the amount of such Indebtedness, the person or persons to whom such
Indebtedness will be owed, the interest rate, the schedule of repayments and
maturity date with respect thereto and such other information as Agent may
request with respect thereto, (iii) Agent shall have received true, correct and
complete copies of all agreements, documents and instruments evidencing or
otherwise related to such Indebtedness, (iv) except as Agent may otherwise
agree in writing, all of the proceeds of the loans or other accommodations
giving rise to such Indebtedness shall be paid to Agent for application to the
Obligations in such order and manner as Agent may determine or at Agent’s
option, to be held as cash collateral for the Obligations, (v) in no event
shall the aggregate principal amount of such Indebtedness incurred 

 67
 

 

during the term of this
Agreement exceed $150,000, (vi) as of the date of incurring such Indebtedness
and after giving effect thereto, no Default or Event of Default shall exist or
have occurred, (vii) such Borrower and Guarantor shall not, directly or
indirectly, (A) amend, modify, alter or change the terms of such Indebtedness
or any agreement, document or instrument related thereto, except, that,
such Borrower or Guarantor may, after prior written notice to Agent, amend,
modify, alter or change the terms thereof so as to extend the maturity thereof,
or defer the timing of any payments in respect thereof, or to forgive or cancel
any portion of such Indebtedness (other than pursuant to payments thereof), or
to reduce the interest rate or any fees in connection therewith, or (B) redeem,
retire, defease, purchase or otherwise acquire such Indebtedness (except
pursuant to regularly scheduled payments permitted herein), or set aside or
otherwise deposit or invest any sums for such purpose, and (viii) Borrowers and
Guarantors shall furnish to Agent all notices or demands in connection with
such Indebtedness either received by any Borrower or Guarantor or on its behalf
promptly after the receipt thereof, or sent by any Borrower or Guarantor or on
its behalf concurrently with the sending thereof, as the case may be;

(f)            the Indebtedness described in the
Information Certificate and any refinancings thereof; provided, that,
(i) except as a result of a refinancing of such Indebtedness, Borrowers and
Guarantors may only make regularly scheduled payments of principal and interest
in respect of such Indebtedness in accordance with the terms of the agreement
or instrument evidencing or giving rise to such Indebtedness as in effect on
the date hereof, (ii) except as a result of a refinancing of such Indebtedness,
Borrowers and Guarantors shall not, directly or indirectly, (A) amend, modify,
alter or change the terms of such Indebtedness or any agreement, document or
instrument related thereto as in effect on the date hereof except, that,
Borrowers and Guarantors may, after prior written notice to Agent, amend,
modify, alter or change the terms thereof so as to extend the maturity thereof,
or defer the timing of any payments in respect thereof, or to forgive or cancel
any portion of such Indebtedness (other than pursuant to payments thereof), or
to reduce the interest rate or any fees in connection therewith, or (B) redeem,
retire, defease, purchase or otherwise acquire such Indebtedness, or set aside
or otherwise deposit or invest any sums for such purpose, and (iii) Borrowers
and Guarantors shall furnish to Agent all notices or demands in connection with
such Indebtedness either received by any Borrower or Guarantor or on its
behalf, promptly after the receipt thereof, or sent by any Borrower or
Guarantor or on its behalf, concurrently with the sending thereof, as the case
may be; and

(g)           Indebtedness of a Target at the time
of its acquisition pursuant to Section 9.10(k) (and not incurred by such Target
in contemplation of such acquisition) and secured by a mortgage, deed of trust
or deed to secure debt permitted under Section 9.8(k).

9.10         Loans, Investments, Etc.  Each Borrower and Guarantor shall not, and
shall not permit any Subsidiary to, directly or indirectly, make any loans or
advance money or property to any person, or invest in (by capital contribution,
dividend or otherwise) or purchase or repurchase the Capital Stock or
Indebtedness or all or a substantial part of the assets or property of any
person, or form or acquire any Subsidiaries, or agree to do any of the
foregoing, except:

(a)           the endorsement of instruments for
collection or deposit in the ordinary course of business;

 68
 

 

(b)           investments in cash or Cash
Equivalents, provided, that, the terms and conditions of Section
5.2 hereof shall have been satisfied with respect to the deposit account,
investment account or other account in which such cash or Cash Equivalents are
held;

(c)           the existing equity investments of
each Borrower and Guarantor as of the date hereof in its Subsidiaries, provided,
that, no Borrower or Guarantor shall have any further obligations or
liabilities to make any capital contributions or other additional investments
or other payments to or in or for the benefit of any of such Subsidiaries;

(d)           loans and advances by any Borrower or
Guarantor to employees of such Borrower or Guarantor not to exceed the
principal amount of $25,000 in the aggregate at any time outstanding for: (i)
reasonably and necessary work-related travel or other ordinary business
expenses to be incurred by such employee in connection with their work for such
Borrower or Guarantor and (ii) reasonable and necessary relocation expenses of
such employees (including home mortgage financing for relocated employees);

(e)           stock or obligations issued to any
Borrower or Guarantor by any Person (or the representative of such Person) in
respect of Indebtedness of such Person owing to such Borrower or Guarantor in
connection with the insolvency, bankruptcy, receivership or reorganization of
such Person or a composition or readjustment of the debts of such Person; provided,
that, the original of any such stock or instrument evidencing such
obligations shall be promptly delivered to Agent, upon Agent’s request,
together with such stock power, assignment or endorsement by such Borrower or
Guarantor as Agent may request;

(f)            obligations of account debtors to
any Borrower or Guarantor arising from Accounts which are past due evidenced by
a promissory note made by such account debtor payable to such Borrower or
Guarantor; provided, that, promptly upon the receipt of the
original of any such promissory note by such Borrower or Guarantor, such
promissory note shall be endorsed to the order of Agent by such Borrower or
Guarantor and promptly delivered to Agent as so endorsed;

(g)           loans by a Borrower or Guarantor to
another Borrower after the date hereof, provided, that,

(i)            as to all of such loans, (A) within
thirty (30) days after the end of each fiscal month, Borrowers shall provide to
Agent a report in form and substance satisfactory to Agent of the outstanding
amount of such loans as of the last day of the immediately preceding month and
indicating any loans made and payments received during the immediately
preceding month, (B) the Indebtedness arising pursuant to any such loan shall
not be evidenced by a promissory note or other instrument, unless the single
original of such note or other instrument is promptly delivered to Agent upon
its request to hold as part of the Collateral, with such endorsement and/or
assignment by the payee of such note or other instrument as Agent may require,
(C) as of the date of any such loan and after giving effect thereto, the
Borrower or Guarantor making such loan shall be Solvent, and (D) as of the date
of any such loan and after giving effect thereto, no Default or Event of
Default shall exist or have occurred and be continuing, and

 69
 

 

(ii)           as to loans by a Guarantor to a
Borrower, (A) the Indebtedness arising pursuant to such loan shall be subject
to, and subordinate in right of payment to, the right of Agent and Lenders to
receive the prior final payment and satisfaction in full of all of the
Obligations on terms and conditions acceptable to Agent, (B) promptly upon
Agent’s request, Agent shall have received a subordination agreement, in form
and substance satisfactory to Agent, providing for the terms of the
subordination in right of payment of such Indebtedness of such Borrower to the
prior final payment and satisfaction in full of all of the Obligations, duly
authorized, executed and delivered by such Guarantor and such Borrower, and (C)
such Borrower shall not, directly or indirectly make, or be required to make,
any payments in respect of such Indebtedness prior to the end of the then
current term of this Agreement;

(h)           the loans and advances described in
the Information Certificate; provided, that, as to such loans and
advances, Borrowers and Guarantors shall not, directly or indirectly, amend,
modify, alter or change the terms of such loans and advances or any agreement,
document or instrument related thereto and Borrowers and Guarantors shall
furnish to Agent all notices or demands in connection with such loans and
advances either received by any Borrower or Guarantor or on its behalf,
promptly after the receipt thereof, or sent by any Borrower or Guarantor or on
its behalf, concurrently with the sending thereof, as the case may be;

(i)            Parent may maintain its existing
investments in its Subsidiaries, and so long as no Default or Event of Default
has occurred and is continuing, Parent and its Subsidiaries may make cash
investments in Natrol (UK) Limited, provided, that, the aggregate
sum of such investments made after the date of this Agreement shall not exceed
$400,000;

(j)            so long as no Default or Event of
Default has occurred and is continuing, Parent may purchase certain assets
(known as Project IT) upon the terms and conditions set forth in the letter of
intent described in Schedule 9.10(j) hereto, a copy of which has previously
been provided to Agent, provided, that, the subject purchase
agreement and related documents shall be reasonably satisfactory to Agent; and

(k)           acquisitions of all of the issued and
outstanding capital stock of another Person, or all or a substantial part of
the assets of another Person or of a division of another Person (each, a “Target”),
including by way of a merger of any Subsidiary of Parent that is not a
Borrower, subject to the satisfaction in full of all of the following
conditions precedent:

(i)            the subject Target shall be in the
same or similar type of business as Borrowers;

(ii)           the aggregate sum of the purchase
price for the subject Target and any related Targets plus any other
consideration payable in connection with the acquisition of the subject Target
and any related Targets, excluding any earn-outs and similar contingent
payments, and excluding any obligations or indebtedness of the Target that are
assumed (as permitted by Section 9.9 hereof) (the “Total Consideration”) shall
not exceed $500,000; and the Total Consideration payable in connection with all
Targets during the term of this Agreement (as it may be extended or renewed)
shall not exceed $1,000,000 in the aggregate;

 70
 

 

(iii)          the subject Target shall be acquired
in accordance with applicable laws free and clear of any security interest,
mortgage, pledge, lien, charge or other encumbrance except as permitted in
Section 9.8 hereof, and free and clear of any Indebtedness except as permitted
in Section 9.9 hereof;

(iv)          except as provided in Section 13.11,
the subject Target (as applicable) shall guaranty the Obligations, and the
assets and capital stock of the subject Target (as applicable) shall be pledged
to Agent, all pursuant to documents in form and substance reasonably
satisfactory to Agent;

(v)           no Default or Event of Default shall
have occurred and be continuing or would result from the acquisition of the
subject Target;

(vi)          Borrowers shall give prior written
notice to Agent of the acquisition of the subject Target as soon as reasonably
practicable, but in no event less than thirty (30) calendar days prior to the
closing thereof;

(vii)         Agent shall have received true, correct
and complete copies of the acquisition agreement(s) for the subject Target and
all exhibits, schedules, documents and other agreements relating thereto,
together with such financial and other information concerning the subject
Target as Agent may reasonably request; and

(viii)        Agent shall have received such further
agreements, documents and instruments, and such further acts shall have been
completed, with respect to the subject Target, as required by Section 9.22
hereof.

At Borrowers’ request, the subject Target may be added
as a Borrower hereunder, but only at the sole consent of Agent.  Regardless of whether the subject Target is
or becomes a Borrower hereunder, and regardless of whether the Accounts or
Inventory of the subject Target qualify under the definition of “Eligible
Accounts” or “Eligible Inventory”, the inclusion of such Accounts or Inventory
in Eligible Accounts or Eligible Inventory shall be subject to:

(ix)           the completion of a written appraisal
of the Inventory of the Target (in accordance with the requirements regarding
the form and substance of Inventory appraisals set forth in clause (d) of
Section 7.3) and a field examination and other examinations and due diligence
(as Agent may deem necessary) by Agent of the subject Target with results
reasonably satisfactory to Agent;

(x)            such additional eligibility
criteria, availability reserves and percentage advance rates as Agent shall
establish in its commercially reasonable discretion in light of the foregoing
examinations; and

(xi)           The chief executive office and
jurisdiction of organization of the subject Target shall be in the United
States, and in any event, only those Accounts generated and invoiced from the
United States may be deemed Eligible Accounts and only that Inventory located
in the United States may be deemed Eligible Inventory.

 71
 

 

9.11         Dividends and Redemptions.  Each Borrower and Guarantor shall not,
directly or indirectly, declare or pay any dividends on account of any shares
of class of any Capital Stock of such Borrower or Guarantor now or hereafter
outstanding, or set aside or otherwise deposit or invest any sums for such
purpose, or redeem, retire, defease, purchase or otherwise acquire any shares
of any class of Capital Stock (or set aside or otherwise deposit or invest any
sums for such purpose) for any consideration or apply or set apart any sum, or
make any other distribution (by reduction of capital or otherwise) in respect
of any such shares or agree to do any of the foregoing, except that:

(a)           any Borrower or Guarantor may declare
and pay such dividends or redeem, retire, defease, purchase or otherwise
acquire any shares of any class of Capital Stock for consideration in the form
of shares of common stock (so long as after giving effect thereto no Change of
Control or other Default or Event of Default shall exist or occur);

(b)           Borrowers and Guarantors may pay
dividends to the extent permitted in Section 9.12 below;

(c)           any Subsidiary of a Borrower or
Guarantor may pay dividends to a Borrower or Guarantor;

(d)           Borrowers and Guarantors may
repurchase Capital Stock consisting of common stock held by employees pursuant
to any employee stock ownership plan thereof upon the termination, retirement
or death of any such employee in accordance with the provisions of such plan, provided,
that, as to any such repurchase, each of the following conditions is
satisfied: (i) as of the date of the payment for such repurchase and after
giving effect thereto, no Default or Event of Default shall exist or have
occurred and be continuing, (ii) such repurchase shall be paid with funds
legally available therefor, (iii) such repurchase shall not violate any law or
regulation or the terms of any indenture, agreement or undertaking to which
such Borrower or Guarantor is a party or by which such Borrower or Guarantor or
its or their property are bound, and (iv) the aggregate amount of all payments
for such repurchases in any calendar year shall not exceed $150,000.

9.12         Transactions with Affiliates.  Except for transactions among Borrowers and
the real property leases from Natrol R/E and Natrol R/E II to Borrowers and the
guaranty of the residential lease of Mr. Wayne Bos, each Borrower and Guarantor
shall not, directly or indirectly:

(a)           purchase, acquire or lease any
property from, or sell, transfer or lease any property to, any officer,
director or other Affiliate of such Borrower or Guarantor, except in the
ordinary course of and pursuant to the reasonable requirements of such Borrower’s
or Guarantor’s business (as the case may be) and upon fair and reasonable terms
no less favorable to such Borrower or Guarantor than such Borrower or Guarantor
would obtain in a comparable arm’s length transaction with an unaffiliated
person; or

(b)           make any payments (whether by
dividend, loan or otherwise) of management, consulting or other fees for management
or similar services, or of any Indebtedness owing to any officer, employee,
shareholder, director or any other Affiliate of such Borrower or 

 72
 

 

Guarantor, except (i)
reasonable compensation to and reimbursement of expenses of officers, employees
and directors for services rendered to such Borrower or Guarantor in the
ordinary course of business, and (ii) payments by any such Borrower or
Guarantor to Parent for actual and necessary reasonable out-of-pocket legal and
accounting, insurance, marketing, payroll and similar types of services paid
for by Parent on behalf of such Borrower or Guarantor, in the ordinary course
of their respective businesses or as the same may be directly attributable to
such Borrower or Guarantor and for the payment of taxes by or on behalf of
Parent, provided, that, the aggregate amount of all such
payments, other than for taxes, in any fiscal year shall not exceed $50,000.

9.13         Compliance with ERISA.  Each Borrower and Guarantor shall, and shall
cause each of its ERISA Affiliates to: (a) maintain each Plan in compliance in
all material respects with the applicable provisions of ERISA, the Code and
other Federal and State law; (b) cause each Plan which is qualified under
Section 401(a) of the Code to maintain such qualification; (c) not terminate
any Pension Plan so as to incur any material liability to the Pension Benefit
Guaranty Corporation; (d) not allow or suffer to exist any non-exempt
prohibited transaction involving any Plan or any trust created thereunder which
would subject such Borrower, Guarantor or such ERISA Affiliate to a material
tax or other material liability on prohibited transactions imposed under
Section 4975 of the Code or ERISA; (e) make all required contributions to any
Pension Plan which it is obligated to pay under Section 302 of ERISA, Section
412 of the Code or the terms of such Pension Plan; (f) not allow or suffer to
exist any accumulated funding deficiency, whether or not waived, with respect
to any such Pension Plan; (g) not engage in a transaction that could be subject
to Section 4069 or 4212(c) of ERISA; or (h) not allow or suffer to exist any
occurrence of a reportable event or any other event or condition which presents
a material risk of termination by the Pension Benefit Guaranty Corporation of
any Pension Plan that is a single employer plan, which termination could result
in any material liability to the Pension Benefit Guaranty Corporation.

9.14         End of Fiscal Years; Fiscal Quarters.  Each Borrower and Guarantor shall, for
financial reporting purposes, cause its, and each of its Subsidiaries’ (a)
fiscal years to end on December 31 of each year and (b) fiscal quarters to end
on March 31, June 30, September 30, and December 31 of each year.

9.15         Change in Business.  Each Borrower and Guarantor shall not engage
in any business other than the business of such Borrower or Guarantor on the
date hereof and any business reasonably related, ancillary or complimentary to
the business in which such Borrower or Guarantor is engaged on the date hereof.

9.16         Limitation of Restrictions Affecting
Subsidiaries.  Each Borrower and
Guarantor shall not, directly, or indirectly, create or otherwise cause or
suffer to exist any encumbrance or restriction which prohibits or limits the
ability of any Subsidiary of such Borrower or Guarantor to (a) pay dividends or
make other distributions or pay any Indebtedness owed to such Borrower or
Guarantor or any Subsidiary of such Borrower or Guarantor; (b) make loans or
advances to such Borrower or Guarantor or any Subsidiary of such Borrower or
Guarantor, (c) transfer any of its properties or assets to such Borrower or
Guarantor or any Subsidiary of such Borrower or Guarantor; or (d) create,
incur, assume or suffer to exist any lien upon any of its property, assets or
revenues, whether now owned or hereafter acquired, other than encumbrances and
restrictions 

 73
 

 

arising under (i) applicable law, (ii) this Agreement,
(iii) customary provisions restricting subletting or assignment of any lease
governing a leasehold interest of such Borrower or Guarantor or any Subsidiary
of such Borrower or Guarantor, (iv) customary restrictions on dispositions of
real property interests found in reciprocal easement agreements of such
Borrower or Guarantor or any Subsidiary of such Borrower or Guarantor, (v) any
agreement relating to permitted Indebtedness incurred by a Subsidiary of such
Borrower or Guarantor prior to the date on which such Subsidiary was acquired
by such Borrower or such Guarantor and outstanding on such acquisition date,
and (vi) contractual obligations in existence on the date hereof and previously
disclosed to Agent in writing, and the extension or continuation of such
contractual obligations in existence on the date hereof; provided, that,
any such encumbrances or restrictions contained in such extension or
continuation are no less favorable to Agent and Lenders than those encumbrances
and restrictions under or pursuant to the contractual obligations so extended
or continued.

9.17         EBITDA.  During each period set forth below, Parent
and its Subsidiaries, on a consolidated basis, shall earn EBITDA of not less
than the amount set forth opposite such period, if such period ends during a
Compliance Period:

	
  Period

  	
   

  	
  Amount

  
	
   

  	
   

  	
   

  
	
  3 months ending 9/30/06

  	
   

  	
  $630,000

  
	
   

  	
   

  	
   

  
	
  6 months ending
  12/31/06

  	
   

  	
  $1,600,000 or if the acquisition described in
  Section 9.10(j) hereof does not occur, then $1,375,000

  

 

Based upon the projected financial statements
furnished by Borrowers to Agent pursuant to Section 9.6(a)(iii) hereof for
each fiscal year after 2006, Agent shall reasonably establish minimum EBITDA
levels for Parent and its Subsidiaries for specified periods during such fiscal
year (it being understood that such levels will be no less stringent than those
set forth above), and Parent and its Subsidiaries shall earn EBITDA during each
such period of not less than the applicable minimum EBITDA level so established
by Agent if such period ends during a Compliance Period.

9.18         License Agreements.

(a)           Each Borrower and Guarantor shall (i)
promptly and faithfully observe and perform all of the material terms,
covenants, conditions and provisions of the material License Agreements to
which it is a party to be observed and performed by it, at the times set forth
therein, if any, (ii) not do, permit, suffer or refrain from doing anything
that could reasonably be expected to result in a default under or breach of any
of the terms of any material License Agreement, (iii) not cancel, surrender,
modify, amend, waive or release any material License Agreement in any material
respect or any term, provision or right of the licensee thereunder in any
material respect, or consent to or permit to occur any of the foregoing;
except, that, subject to Section 9.18(b) below, such Borrower or Guarantor may
cancel, surrender or 

 74
 

 

release any material
License Agreement in the ordinary course of the business of such Borrower or
Guarantor; provided, that, such Borrower or Guarantor (as the
case may be) shall give Agent not less than thirty (30) days prior written
notice of its intention to so cancel, surrender and release any such material
License Agreement, (iv) give Agent prompt written notice of any material
License Agreement entered into by such Borrower or Guarantor after the date
hereof, together with a true, correct and complete copy thereof and such other
information with respect thereto as Agent may request, (v) give Agent prompt
written notice of any material breach of any obligation, or any default, by any
party under any material License Agreement, and deliver to Agent (promptly upon
the receipt thereof by such Borrower or Guarantor in the case of a notice to
such Borrower or Guarantor and concurrently with the sending thereof in the
case of a notice from such Borrower or Guarantor) a copy of each notice of
default and every other notice and other communication received or delivered by
such Borrower or Guarantor in connection with any material License Agreement
which relates to the right of such Borrower or Guarantor to continue to use the
property subject to such License Agreement, and (vi) furnish to Agent, promptly
upon the request of Agent, such information and evidence as Agent may
reasonably require from time to time concerning the observance, performance and
compliance by such Borrower or Guarantor or the other party or parties thereto
with the material terms, covenants or provisions of any material License
Agreement.

(b)           Each Borrower and Guarantor will
either exercise any option to renew or extend the term of each material License
Agreement to which it is a party in such manner as will cause the term of such
material License Agreement to be effectively renewed or extended for the period
provided by such option and give prompt written notice thereof to Agent or give
Agent prior written notice that such Borrower or Guarantor does not intend to
renew or extend the term of any such material License Agreement or that the
term thereof shall otherwise be expiring, not less than sixty (60) days prior
to the date of any such non-renewal or expiration.  In the event of the failure of such Borrower
or Guarantor to extend or renew any material License Agreement to which it is a
party, Agent shall have, and is hereby granted, to the extent such right may be
so granted, the irrevocable right and authority, at its option, to renew or
extend the term of such material License Agreement, whether in its own name and
behalf, or in the name and behalf of a designee or nominee of Agent or in the
name and behalf of such Borrower or Guarantor, as Agent shall determine at any time
that an Event of Default shall exist or have occurred and be continuing.  Agent may, but shall not be required to,
perform any or all of such obligations of such Borrower or Guarantor under any
of the License Agreements, including, but not limited to, the payment of any or
all sums due from such Borrower or Guarantor thereunder.  Any sums so paid by Agent shall constitute
part of the Obligations.

9.19         Foreign Assets Control Regulations,
Etc.  None of the requesting or
borrowing of the Loans or the requesting or issuance, extension or renewal of
any Letter of Credit or the use of the proceeds of any thereof will violate the
Trading With the Enemy Act (50 USC §1 et seq., as amended) (the “Trading With
the Enemy Act”) or any of the foreign assets control regulations of the United
States Treasury Department (31 C.F.R., Subtitle B, Chapter V, as amended) (the “Foreign
Assets Control Regulations”) or any enabling legislation or executive order
relating thereto (including, but not limited to (a) Executive order 13224 of
September 21, 2001 Blocking Property and Prohibiting Transactions With Persons
Who Commit, Threaten to Commit, or Support Terrorism (66 Fed. Reg. 49079
(2001)) (the “Executive Order”) and (b) the Uniting and Strengthening America
by Providing Appropriate Tools Required to Intercept and Obstruct 

 75
 

 

Terrorism Act of 2001 (Public Law 107-56).  None of Borrowers or any of their
Subsidiaries or other Affiliates is or will become a “blocked person” as
described in the Executive Order, the Trading with the Enemy Act or the Foreign
Assets Control Regulations or engages or will engage in any dealings or
transactions, or be otherwise associated, with any such “blocked person”.

9.20         Real Property.  Except as otherwise agreed by Agent in
writing, no Borrower or Guarantor shall hold fee title to any Real Property
unless such fee title is held by a Target at the time of its acquisition
pursuant to Section 9.10(k) (and not acquired in contemplation of such
acquisition).

9.21         Costs and Expenses.  Borrowers and Guarantors shall pay to Agent
on demand all costs, expenses, filing fees and taxes paid or payable in
connection with the preparation, negotiation, execution, delivery, recording,
syndication, administration, collection, liquidation, enforcement and defense of
the Obligations, Agent’s rights in the Collateral, this Agreement, the other
Financing Agreements and all other documents related hereto or thereto,
including any amendments, supplements or consents which may hereafter be
contemplated (whether or not executed) or entered into in respect hereof and
thereof, including:  (a) all costs and
expenses of filing or recording (including Uniform Commercial Code financing
statement filing taxes and fees, documentary taxes, intangibles taxes and
mortgage recording taxes and fees, if applicable); (b) costs and expenses and
fees for insurance premiums, environmental audits, title insurance premiums,
surveys, assessments, engineering reports and inspections, appraisal fees and
search fees, background checks, costs and expenses of remitting loan proceeds,
collecting checks and other items of payment, and establishing and maintaining
the Blocked Accounts, together with Agent’s customary charges and fees with
respect thereto; (c) charges, fees or expenses charged by any bank or issuer in
connection with any Letter of Credit; (d) costs and expenses of preserving and
protecting the Collateral; (e) costs and expenses paid or incurred in
connection with obtaining payment of the Obligations, enforcing the security
interests and liens of Agent, selling or otherwise realizing upon the
Collateral, and otherwise enforcing the provisions of this Agreement and the
other Financing Agreements or defending any claims made or threatened against
Agent or any Lender arising out of the transactions contemplated hereby and
thereby (including preparations for and consultations concerning any such
matters); (f) all out-of-pocket expenses and costs heretofore and from time to
time hereafter incurred by Agent during the course of periodic field examinations
of the Collateral and such Borrower’s or Guarantor’s operations, plus a per
diem charge at Agent’s then standard rate for Agent’s examiners in the field
and office (which rate as of the date hereof is $850 per person per day) provided,
that, Borrowers and Guarantors shall not be responsible for the expenses
and costs of more than two (2) such field examinations during any twelve (12)
month period except in a Compliance Period and unless a Default or Event of
Default has occurred and is continuing; and (g) the fees and disbursements of
counsel (including legal assistants) to Agent in connection with any of the
foregoing.  Notwithstanding the
foregoing, Agent will charge Borrowers or Guarantors with its costs or expenses
of syndication only if a Default or Event of Default has occurred and is
continuing (and in such case, only for such costs and expenses incurred after
the occurrence of such Default or Event of Default) or if this Agreement is
amended to increase the Revolving Loan Limit or to provide for an additional
credit facility (and in such case, only for such costs and expenses incurred
after or in connection with such increase or additional credit facility).

 76

 

 9.22        Further
Assurances.  At the request of Agent
at any time and from time to time, Borrowers and Guarantors shall, at their
expense, duly execute and deliver, or cause to be duly executed and delivered,
such further agreements, documents and instruments, and do or cause to be done
such further acts as may be necessary or proper to evidence, perfect, maintain
and enforce the security interests and the priority thereof in the Collateral
and to otherwise effectuate the provisions or purposes of this Agreement or any
of the other Financing Agreements.  Agent
may at any time and from time to time request a certificate from an officer of
any Borrower or Guarantor representing that all conditions precedent to the
making of Loans and providing Letters of Credit contained herein are
satisfied.  In the event of such request
by Agent, Agent and Lenders may, at Agent’s option, cease to make any further
Loans or provide any further Letters of Credit until Agent has received such
certificate and, in addition, Agent has determined that such conditions are
satisfied.

SECTION 10.       EVENTS
OF DEFAULT AND REMEDIES

 

10.1         Events of Default.  The occurrence or existence of any one or
more of the following events are referred to herein individually as an “Event
of Default”, and collectively as “Events of Default”:

(a)           (i) any Borrower fails to pay any of
the Obligations when due or (ii) any Borrower or Guarantor fails to perform any
of the covenants contained in Sections 7.1(a)(ii) and (iii), 9.3, 9.4,
9.6(a)(i), (ii) and (iii), 9.13, 9.14, 9.15, 9.16 and 9.18 of this Agreement
and such failure shall continue for seven (7) days in the cases of Sections
7.1(a)(ii) and (iii) and ten (10) days in the cases of the other sections set
forth above; provided, that, such seven (7) or ten (10) day
period (as applicable) shall not apply in the case of: (A) any failure to
observe any such covenant which is not capable of being cured at all or within
such seven (7) or ten (10) day period (as applicable) or which has been the
subject of a prior failure within a six (6) month period or (B) an intentional
breach by any Borrower or Guarantor of any such covenant or (iii) any Borrower
or Guarantor fails to perform any of the terms, covenants, conditions or
provisions contained in this Agreement or any of the other Financing Agreements
other than those described in Sections 10.1(a)(i) and 10.1(a)(ii) above;

(b)           any representation, warranty or
statement of fact made by any Borrower or Guarantor to Agent in this Agreement,
the other Financing Agreements or any other written agreement, schedule,
confirmatory assignment or otherwise shall when made or deemed made be false or
misleading in any material respect;

(c)           any Guarantor revokes or terminates
or purports to revoke or terminate or fails to perform any of the terms,
covenants, conditions or provisions of any guarantee, endorsement or other
agreement of such party in favor of Agent or any Lender;

(d)           any judgment for the payment of money
is rendered against any Borrower or Guarantor in excess of $500,000 in the
aggregate (to the extent not covered by insurance where the insurer has assumed
responsibility in writing for such judgment) and shall remain undischarged or
unvacated for a period in excess of thirty (30) days or execution either is
made thereon or shall not be effectively stayed at any time after the deadline
for filing a notice of appeal, or any judgment other than for the payment of
money, or injunction, attachment, 

 77
 

 

garnishment or execution
is rendered against any Borrower or Guarantor or any of the Collateral having a
value in excess of $250,000;

(e)           any Guarantor (being a natural person
or a general partner of an Guarantor which is a partnership) dies or any
Borrower or Guarantor, which is a partnership, limited liability company,
limited liability partnership or a corporation, dissolves or suspends or
discontinues doing business, except as otherwise expressly permitted in this
Agreement;

(f)            any Borrower or Guarantor makes an
assignment for the benefit of creditors, makes or sends notice of a bulk
transfer or calls a meeting of its creditors or principal creditors in
connection with a moratorium or adjustment of the Indebtedness due to them;

(g)           a case or proceeding under the
bankruptcy laws of the United States of America now or hereafter in effect or
under any insolvency, reorganization, receivership, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction now or hereafter
in effect (whether at law or in equity) is filed against any Borrower or
Guarantor or all or any part of its properties and such petition or application
is not dismissed within forty-five (45) days after the date of its filing or
any Borrower or Guarantor shall file any answer admitting or not contesting
such petition or application or indicates its consent to, acquiescence in or
approval of, any such action or proceeding or the relief requested is granted
sooner;

(h)           a case or proceeding under the
bankruptcy laws of the United States of America now or hereafter in effect or
under any insolvency, reorganization, receivership, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction now or hereafter
in effect (whether at a law or equity) is filed by any Borrower or Guarantor or
for all or any part of its property;

(i)            any default in respect of any
Indebtedness of any Borrower or Guarantor (other than Indebtedness owing to
Agent and Lenders hereunder), in any case in an amount in excess of $150,000
(including any such Indebtedness secured by Real Property), which default continues
for more than the applicable cure period, if any, with respect thereto or any
default by any Borrower or Guarantor under any Material Contract, which default
continues for more than the applicable cure period, if any, with respect
thereto and/or is not waived in writing by the other parties thereto, and which
default could reasonably be expected to result in a Material Adverse Effect;

(j)            any material provision hereof or of
any of the other Financing Agreements shall for any reason cease to be valid,
binding and enforceable with respect to any party hereto or thereto (other than
Agent) in accordance with its terms, or any such party shall challenge the
enforceability hereof or thereof, or shall assert in writing, or take any
action or fail to take any action based on the assertion that any provision
hereof or of any of the other Financing Agreements has ceased to be or is
otherwise not valid, binding or enforceable in accordance with its terms, or
any security interest provided for herein or in any of the other Financing
Agreements shall cease to be a valid and perfected first priority security
interest in any of the Collateral purported to be subject thereto (except as
otherwise permitted herein or therein);

 78
 

 

(k)           an ERISA Event shall occur which
results in or could reasonably be expected to result in liability of any
Borrower in an aggregate amount in excess of $250,000;

(l)            any Change of Control;

(m)          the indictment by any Governmental
Authority, or as Agent may reasonably and in good faith determine, the threatened
indictment by any Governmental Authority of any Borrower or Guarantor of which
any Borrower, Guarantor or Agent receives notice, in either case, as to which
there is a reasonable possibility of an adverse determination, in the good
faith determination of Agent, under any criminal statute, or commencement or
threatened commencement of criminal or civil proceedings against such Borrower
or Guarantor, pursuant to which statute or proceedings the penalties or
remedies sought or available include forfeiture of (i) any of the Collateral
having a value in excess of $50,000 or (ii) any other property of any Borrower
or Guarantor which is necessary or material to the conduct of its business; or

(n)           there shall be an event of default
under any of the other Financing Agreements.

10.2         Remedies.

(a)           At any time an Event of Default
exists or has occurred and is continuing, Agent and Lenders shall have all
rights and remedies provided in this Agreement, the other Financing Agreements,
the UCC and other applicable law, all of which rights and remedies may be
exercised without notice to or consent by any Borrower or Guarantor, except as
such notice or consent is expressly provided for hereunder or required by
applicable law.  All rights, remedies and
powers granted to Agent and Lenders hereunder, under any of the other Financing
Agreements, the UCC or other applicable law, are cumulative, not exclusive and
enforceable, in Agent’s discretion, alternatively, successively, or
concurrently on any one or more occasions, and shall include, without
limitation, the right to apply to a court of equity for an injunction to
restrain a breach or threatened breach by any Borrower or Guarantor of this
Agreement or any of the other Financing Agreements.  Subject to Section 12 hereof, Agent may, and
at the direction of the Required Lenders shall, at any time or times, proceed
directly against any Borrower or Guarantor to collect the Obligations without
prior recourse to the Collateral.

(b)           Without limiting the generality of
the foregoing, at any time an Event of Default exists or has occurred and is
continuing, Agent may, at its option and shall upon the direction of the
Required Lenders, (i) upon notice to Administrative Borrower, accelerate the
payment of all Obligations and demand immediate payment thereof to Agent for
itself and the benefit of Lenders (provided, that, upon the
occurrence of any Event of Default described in Sections 10.1(g) and 10.1(h),
all Obligations shall automatically become immediately due and payable), and
(ii) terminate the Commitments whereupon the obligation of each Lender to make
any Loan and an issuer to issue any Letter of Credit shall immediately
terminate (provided, that, upon the occurrence of any Event of Default
described in Sections 10.1(g) and 10.1(h), the Commitments and any other
obligation of the Agent or a Lender hereunder shall automatically terminate).

 79
 

 

(c)           Without limiting the foregoing, at
any time an Event of Default exists or has occurred and is continuing, Agent
may, in its discretion (i) with or without judicial process or the aid or
assistance of others, enter upon any premises on or in which any of the
Collateral may be located and take possession of the Collateral or complete
processing, manufacturing and repair of all or any portion of the Collateral,
(ii) require any Borrower or Guarantor, at Borrowers’ expense, to assemble and
make available to Agent any part or all of the Collateral at any place and time
designated by Agent, (iii) collect, foreclose, receive, appropriate, setoff and
realize upon any and all Collateral, (iv) remove any or all of the Collateral
from any premises on or in which the same may be located for the purpose of
effecting the sale, foreclosure or other disposition thereof or for any other
purpose, (v) sell, lease, transfer, assign, deliver or otherwise dispose of any
and all Collateral (including entering into contracts with respect thereto,
public or private sales at any exchange, broker’s board, at any office of Agent
or elsewhere) at such prices or terms as Agent may deem reasonable, for cash,
upon credit or for future delivery, with the Agent having the right to purchase
the whole or any part of the Collateral at any such public sale, all of the
foregoing being free from any right or equity of redemption of any Borrower or
Guarantor, which right or equity of redemption is hereby expressly waived and
released by Borrowers and Guarantors and/or (vi) terminate this Agreement.  If any of the Collateral is sold or leased by
Agent upon credit terms or for future delivery, the Obligations shall not be
reduced as a result thereof until payment therefor is finally collected by
Agent.  If notice of disposition of
Collateral is required by law, ten (10) days prior notice by Agent to Administrative
Borrower designating the time and place of any public sale or the time after
which any private sale or other intended disposition of Collateral is to be
made, shall be deemed to be reasonable notice thereof and Borrowers and
Guarantors waive any other notice.  In
the event Agent institutes an action to recover any Collateral or seeks
recovery of any Collateral by way of prejudgment remedy, each Borrower and
Guarantor waives the posting of any bond which might otherwise be required. At
any time an Event of Default exists or has occurred and is continuing, upon
Agent’s request, Borrowers will either, as Agent shall specify, furnish cash
collateral to the issuer to be used to secure and fund the reimbursement
obligations to the issuer in connection with any Letter of Credit Obligations or
furnish cash collateral to Agent for the Letter of Credit Obligations.  Such cash collateral shall be in the amount
equal to one hundred five (105%) percent of the amount of the Letter of Credit
Obligations plus the amount of any fees and expenses payable in connection
therewith through the end of the latest expiration date of the Letters of
Credit giving rise to such Letter of Credit Obligations.

(d)           At any time or times that an Event of
Default exists or has occurred and is continuing, Agent may, in its discretion,
enforce the rights of any Borrower or Guarantor against any account debtor,
secondary obligor or other obligor in respect of any of the Accounts or other
Receivables.  Without limiting the
generality of the foregoing, Agent may, in its discretion, at such time or
times (i) notify any or all account debtors, secondary obligors or other
obligors in respect thereof that the Receivables have been assigned to Agent
and that Agent has a security interest therein and Agent may direct any or all
account debtors, secondary obligors and other obligors to make payment of
Receivables directly to Agent, (ii) extend the time of payment of, compromise,
settle or adjust for cash, credit, return of merchandise or otherwise, and upon
any terms or conditions, any and all Receivables or other obligations included
in the Collateral and thereby discharge or release the account debtor or any
secondary obligors or other obligors in respect thereof without affecting any
of the Obligations,  (iii) demand,
collect or enforce payment of any Receivables or such other obligations, but
without any duty to do so, and Agent 

 80
 

 

and Lenders shall not be
liable for any failure to collect or enforce the payment thereof nor for the
negligence of its agents or attorneys with respect thereto and (iv) take
whatever other action Agent may deem necessary or desirable for the protection
of its interests and the interests of Lenders. 
At any time that an Event of Default exists or has occurred and is continuing,
at Agent’s request, all invoices and statements sent to any account debtor
shall state that the Accounts and such other obligations have been assigned to
Agent and are payable directly and only to Agent and Borrowers and Guarantors
shall deliver to Agent such originals of documents evidencing the sale and
delivery of goods or the performance of services giving rise to any Accounts as
Agent may require.  In the event any
account debtor returns Inventory when an Event of Default exists or has occurred
and is continuing, Borrowers shall, upon Agent’s request, hold the returned
Inventory in trust for Agent, segregate all returned Inventory from all of its
other property, dispose of the returned Inventory solely according to Agent’s
instructions, and not issue any credits, discounts or allowances with respect
thereto without Agent’s prior written consent.

(e)           To the extent that applicable law
imposes duties on Agent or any Lender to exercise remedies in a commercially
reasonable manner (which duties cannot be waived under such law), each Borrower
and Guarantor acknowledges and agrees that it is not commercially unreasonable
for Agent or any Lender (i) to fail to incur expenses reasonably deemed
significant by Agent or any Lender to prepare Collateral for disposition or
otherwise to complete raw material or work in process into finished goods or
other finished products for disposition, (ii) to fail to obtain third party
consents for access to Collateral to be disposed of, or to obtain or, if not
required by other law, to fail to obtain consents of any Governmental Authority
or other third party for the collection or disposition of Collateral to be
collected or disposed of, (iii) to fail to exercise collection remedies against
account debtors, secondary obligors or other persons obligated on Collateral or
to remove liens or encumbrances on or any adverse claims against Collateral,
(iv) to exercise collection remedies against account debtors and other persons
obligated on Collateral directly or through the use of collection agencies and
other collection specialists, (v) to advertise dispositions of Collateral
through publications or media of general circulation, whether or not the
Collateral is of a specialized nature, (vi) to contact other persons, whether
or not in the same business as any Borrower or Guarantor, for expressions of
interest in acquiring all or any portion of the Collateral, (vii) to hire one
or more professional auctioneers to assist in the disposition of Collateral,
whether or not the collateral is of a specialized nature, (viii) to dispose of
Collateral by utilizing Internet sites that provide for the auction of assets
of the types included in the Collateral or that have the reasonable capability
of doing so, or that match buyers and sellers of assets, (ix) to dispose of
assets in wholesale rather than retail markets, (x) to disclaim disposition
warranties, (xi) to purchase insurance or credit enhancements to insure Agent
or Lenders against risks of loss, collection or disposition of Collateral or to
provide to Agent or Lenders a guaranteed return from the collection or
disposition of Collateral, or (xii) to the extent deemed appropriate by Agent,
to obtain the services of other brokers, investment bankers, consultants and
other professionals to assist Agent in the collection or disposition of any of
the Collateral. Each Borrower and Guarantor acknowledges that the purpose of
this Section is to provide non-exhaustive indications of what actions or
omissions by Agent or any Lender would not be commercially unreasonable in the
exercise by Agent or any Lender of remedies against the Collateral and that
other actions or omissions by Agent or any Lender shall not be deemed
commercially unreasonable solely on account of not being indicated in this
Section. Without limitation of the foregoing, nothing contained in this Section
shall be construed to grant

 81
 

 

any rights to any
Borrower or Guarantor or to impose any duties on Agent or Lenders that would
not have been granted or imposed by this Agreement or by applicable law in the
absence of this Section.

(f)            For the purpose of enabling Agent to
exercise the rights and remedies hereunder, each Borrower and Guarantor hereby
grants to Agent, to the extent assignable, an irrevocable, non-exclusive
license (exercisable at any time an Event of Default shall exist or have
occurred and for so long as the same is continuing) without payment of royalty
or other compensation to any Borrower or Guarantor, to use, assign, license or
sublicense any of the trademarks, service-marks, trade names, business names,
trade styles, designs, logos and other source of business identifiers and other
Intellectual Property and general intangibles now owned or hereafter acquired
by any Borrower or Guarantor, wherever the same maybe located, including in
such license reasonable access to all media in which any of the licensed items
may be recorded or stored and to all computer programs used for the compilation
or printout thereof.

(g)           At any time an Event of Default
exists or has occurred and is continuing, Agent may apply the cash proceeds of
Collateral actually received by Agent from any sale, lease, foreclosure or
other disposition of the Collateral to payment of the Obligations, in whole or
in part and in accordance with the terms hereof, whether or not then due or may
hold such proceeds as cash collateral for the Obligations.  Borrowers and Guarantors shall remain liable
to Agent and Lenders for the payment of any deficiency with interest at the
highest rate provided for herein and all costs and expenses of collection or
enforcement, including attorneys’ fees and expenses.

(h)           Without limiting the foregoing, upon
the occurrence of a Default or an Event of Default, (i) Agent and Lenders may,
at Agent’s option, and upon the occurrence of an Event of Default at the
direction of the Required Lenders, Agent and Lenders shall, without notice, (A)
cease making Loans or arranging for Letters of Credit or reduce the lending
formulas or amounts of Loans and Letters of Credit available to Borrowers
and/or (B) terminate any provision of this Agreement providing for any future
Loans or Letters of Credit to be made by Agent and Lenders to Borrowers and
(ii) Agent may, at its option, establish such Reserves as Agent determines,
without limitation or restriction, notwithstanding anything to the contrary
contained herein.

SECTION 11.       JURY
TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW

 

11.1         Governing Law;
Choice of Forum; Service of Process; Jury Trial Waiver.

(a)           The validity, interpretation and
enforcement of this Agreement and the other Financing Agreements (except as
otherwise provided therein) and any dispute arising out of the relationship
between the parties hereto, whether in contract, tort, equity or otherwise,
shall be governed by the internal laws of the State of California but excluding
any principles of conflicts of law or other rule of law that would cause the
application of the law of any jurisdiction other than the laws of the State of
California.

 82
 

 

(b)           Borrowers, Guarantors, Agent and
Lenders irrevocably consent and submit to the non-exclusive jurisdiction of the
Superior Court of the State of California, County of Los Angeles and the United
States District Court for the Central District of California, whichever Agent
may elect, and waive any objection based on venue or forum non conveniens with
respect to any action instituted therein arising under this Agreement or any of
the other Financing Agreements or in any way connected with or related or
incidental to the dealings of the parties hereto in respect of this Agreement
or any of the other Financing Agreements or the transactions related hereto or
thereto, in each case whether now existing or hereafter arising, and whether in
contract, tort, equity or otherwise, and agree that any dispute with respect to
any such matters shall be heard only in the courts described above (except that
Agent and Lenders shall have the right to bring any action or proceeding
against any Borrower or Guarantor or its or their property in the courts of any
other jurisdiction which Agent deems necessary or appropriate in order to
realize on the Collateral or to otherwise enforce its rights against any
Borrower or Guarantor or its or their property).

(c)           Each Borrower and Guarantor hereby
waives personal service of any and all process upon it and consents that all
such service of process may be made by certified mail (return receipt
requested) directed to its address set forth herein, or, at Agent’s option, by
service upon any Borrower or Guarantor (or Administrative Borrower on behalf of
such Borrower or Guarantor) in any other manner provided under the rules of any
such courts.  Within the period provided
by applicable law after such service, such Borrower or Guarantor shall respond
to such process, failing which such Borrower or Guarantor shall be deemed in
default and judgment may be entered by Agent against such Borrower or Guarantor
for the amount of the claim and other relief requested.

(d)           BORROWERS, GUARANTORS, AGENT AND
LENDERS EACH HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION
OR CAUSE OF ACTION ARISING UNDER THIS AGREEMENT OR ANY OF THE OTHER FINANCING
AGREEMENTS OR IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE
DEALINGS OF THE PARTIES HERETO IN RESPECT OF THIS AGREEMENT OR ANY OF THE OTHER
FINANCING AGREEMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE
WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT,
EQUITY OR OTHERWISE.  BORROWERS,
GUARANTORS, AGENT AND LENDERS EACH HEREBY AGREES AND CONSENTS THAT ANY SUCH
CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL
WITHOUT A JURY AND THAT ANY BORROWER, ANY GUARANTOR, AGENT OR ANY LENDER MAY
FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY COURT AS
WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR
RIGHT TO TRIAL BY JURY.

(e)           If any action or proceeding is filed
in a court of the State of California by or against any party hereto in
connection with any of the transactions contemplated by this Agreement or any
other Financing Agreement, (i) the court shall, and is hereby directed to,
make a general reference pursuant to California Code of Civil Procedure
Section 638 to a referee or referees to hear and determine all of the
issues in such action or proceeding (whether of fact or of law) and to report a
statement of decision, provided that at the option of Agent, any such issues 

 83
 

 

pertaining to a ‘provisional
remedy’ as defined in California Code of Civil Procedure Section 1281.8
shall be heard and determined by the court, and (ii) Borrowers and
Guarantors shall be solely responsible to pay all fees and expenses of any
referee appointed in such action or proceeding.

(f)            Agent and Lenders shall not have any
liability to any Borrower or Guarantor (whether in tort, contract, equity or
otherwise) for losses suffered by such Borrower or Guarantor in connection
with, arising out of, or in any way related to the transactions or
relationships contemplated by this Agreement, or any act, omission or event
occurring in connection herewith, unless it is determined by a final and
non-appealable judgment or court order binding on Agent and such Lender, that
the losses were the result of acts or omissions constituting gross negligence
or willful misconduct or breach of this Agreement.  Each Borrower and Guarantor:  (i) certifies that neither Agent, any Lender
nor any representative, agent or attorney acting for or on behalf of Agent or
any Lender has represented, expressly or otherwise, that Agent and Lenders
would not, in the event of litigation, seek to enforce any of the waivers
provided for in this Agreement or any of the other Financing Agreements and
(ii) acknowledges that in entering into this Agreement and the other Financing
Agreements, Agent and Lenders are relying upon, among other things, the waivers
and certifications set forth in this Section 11.1 and elsewhere herein and
therein.

11.2         Waiver of Notices.  Each Borrower and Guarantor hereby expressly
waives demand, presentment, protest and notice of protest and notice of
dishonor with respect to any and all instruments and chattel paper, included in
or evidencing any of the Obligations or the Collateral, and any and all other
demands and notices of any kind or nature whatsoever with respect to the
Obligations, the Collateral and this Agreement, except such as are expressly
provided for herein.  No notice to or
demand on any Borrower or Guarantor which Agent or any Lender may elect to give
shall entitle such Borrower or Guarantor to any other or further notice or
demand in the same, similar or other circumstances.

11.3         Amendments and
Waivers.

(a)           Neither this Agreement nor any other
Financing Agreement nor any terms hereof or thereof may be amended, waived,
discharged or terminated unless such amendment, waiver, discharge or termination
is in writing signed by Agent and the Required Lenders or at Agent’s option, by
Agent with the authorization or consent of the Required Lenders, and as to
amendments to any of the Financing Agreements (other than with respect to any
provision of Section 12 hereof), by any Borrower and such amendment, waiver,
discharger or termination shall be effective and binding as to all Lenders only
in the specific instance and for the specific purpose for which given; except,
that, no such amendment, waiver, discharge or termination shall:

(i)            reduce the interest rate or any fees
or extend the time of payment of principal, interest or any fees or reduce the
principal amount of any Loan or Letters of Credit, in each case without the
consent of each Lender directly affected thereby,

 84
 

 

(ii)           increase the Commitment of any Lender
over the amount thereof then in effect or provided hereunder, in each case
without the consent of the Lender directly affected thereby,

(iii)          release any Collateral (except as
expressly required hereunder or under any of the other Financing Agreements or
applicable law and except as permitted under Section 12.11(b) hereof), without
the consent of Agent and all of Lenders,

(iv)          reduce any percentage specified in the
definition of Required Lenders, without the consent of Agent and all of
Lenders,

(v)           consent to the assignment or transfer
by any Borrower or Guarantor of any of their rights and obligations under this
Agreement, without the consent of Agent and all of Lenders,

(vi)          amend, modify or waive any terms of
this Section 11.3 hereof, without the consent of Agent and all of Lenders, or

(vii)         increase the advance rates constituting
part of the Borrowing Base or increase the Inventory Loan Limit or the Letter
of Credit Limit, without the consent of Agent and all of Lenders.

(b)           Agent and Lenders shall not, by any
act, delay, omission or otherwise be deemed to have expressly or impliedly
waived any of its or their rights, powers and/or remedies unless such waiver
shall be in writing and signed as provided herein.  Any such waiver shall be enforceable only to
the extent specifically set forth therein. 
A waiver by Agent or any Lender of any right, power and/or remedy on any
one occasion shall not be construed as a bar to or waiver of any such right,
power and/or remedy which Agent or any Lender would otherwise have on any
future occasion, whether similar in kind or otherwise.

(c)           Notwithstanding anything to the
contrary contained in Section 11.3(a) above, in connection with any amendment,
waiver, discharge or termination, in the event that any Lender whose consent
thereto is required shall fail to consent or fail to consent in a timely manner
(such Lender being referred to herein as a “Non-Consenting Lender”), but the
consent of any other Lenders to such amendment, waiver, discharge or
termination that is required are obtained, if any, then Wachovia shall have the
right, but not the obligation, at any time thereafter, and upon the exercise by
Wachovia of such right, such Non-Consenting Lender shall have the obligation,
to sell, assign and transfer to Wachovia or such Eligible Transferee as
Wachovia may specify, the Commitment of such Non-Consenting Lender and all
rights and interests of such Non-Consenting Lender pursuant thereto.  Wachovia shall provide the Non-Consenting
Lender with prior written notice of its intent to exercise its right under this
Section, which notice shall specify on date on which such purchase and sale
shall occur.  Such purchase and sale
shall be pursuant to the terms of an Assignment and Acceptance (whether or not
executed by the Non-Consenting Lender), except that on the date of such
purchase and sale, Wachovia, or such Eligible Transferee specified by Wachovia,
shall pay to the Non-Consenting Lender (except as Wachovia and such Non-Consenting
Lender may otherwise agree) the amount equal to: (i) the principal balance of
the Loans held by the Non-Consenting Lender outstanding 

 85
 

 

as of the close of
business on the business day immediately preceding the effective date of such
purchase and sale, plus (ii) amounts accrued and unpaid in respect of interest
and fees payable to the Non-Consenting Lender to the effective date of the
purchase (but in no event shall the Non-Consenting Lender be deemed entitled to
any early termination fee), minus (iii) the amount of the closing fee received
by the Non-Consenting Lender pursuant to the terms hereof or of any of the
other Financing Agreements multiplied by the fraction, the numerator of which
is the number of months remaining in the then current term of the Credit
Facility and the denominator of which is the number of months in the then
current term thereof.  Such purchase and
sale shall be effective on the date of the payment of such amount to the
Non-Consenting Lender and the Commitment of the Non-Consenting Lender shall
terminate on such date.

(d)           The consent of Agent shall be
required for any amendment, waiver or consent affecting the rights or duties of
Agent hereunder or under any of the other Financing Agreements, in addition to
the consent of the Lenders otherwise required by this Section and the exercise
by Agent of any of its rights hereunder with respect to Reserves or Eligible
Accounts or Eligible Inventory shall not be deemed an amendment to the advance
rates provided for in this Section 11.3. 
Notwithstanding anything to the contrary contained in Section 11.3(a)
above, (i) in the event that Agent shall agree that any items otherwise
required to be delivered to Agent as a condition of the initial Loans and
Letters of Credit hereunder may be delivered after the date hereof, Agent may,
in its discretion, agree to extend the date for delivery of such items or take
such other action as Agent may deem appropriate as a result of the failure to
receive such items as Agent may determine or may waive any Event of Default as
a result of the failure to receive such items, in each case without the consent
of any Lender and (ii) Agent may consent to any change in the type of
organization, jurisdiction of organization or other legal structure of any
Borrower, Guarantor or any of their Subsidiaries and amend the terms hereof or
of any of the other Financing Agreements as may be necessary or desirable to
reflect any such change, in each case without the approval of any Lender.

11.4         Waiver of Counterclaims.  Each Borrower and Guarantor waives all rights
to interpose any claims, deductions, setoffs or counterclaims of any nature
(other then compulsory counterclaims) in any action or proceeding with respect
to this Agreement, the Obligations, the Collateral or any matter arising
therefrom or relating hereto or thereto.

11.5         Indemnification.  Each Borrower and Guarantor shall, jointly
and severally, indemnify and hold Agent and each Lender, and their respective
officers, directors, agents, employees, advisors and counsel and their
respective Affiliates (each such person being an “Indemnitee”), harmless from
and against any and all losses, claims, damages, liabilities, costs or expenses
(including reasonable attorneys’ fees and expenses) imposed on, incurred by or
asserted against any of them in connection with any litigation, investigation,
claim or proceeding commenced or threatened related to the negotiation,
preparation, execution, delivery, enforcement, performance or administration of
this Agreement, any other Financing Agreements, or any undertaking or
proceeding related to any of the transactions contemplated hereby or any act,
omission, event or transaction related or attendant thereto, including amounts
paid in settlement, court costs, and the reasonable fees and expenses of
counsel except that Borrowers and Guarantors shall not have any obligation
under this Section 11.5 to indemnify an Indemnitee with respect to a matter
covered hereby resulting from the gross negligence or willful misconduct of or
breach of any Financing Agreement by such Indemnitee as determined pursuant to
a final, 

 86
 

 

non-appealable order of a court of competent
jurisdiction (but without limiting the obligations of Borrowers or Guarantors
as to any other Indemnitee).   To the
extent that the undertaking to indemnify, pay and hold harmless set forth in
this Section may be unenforceable because it violates any law or public policy,
Borrowers and Guarantors shall pay the maximum portion which it is permitted to
pay under applicable law to Agent and Lenders in satisfaction of indemnified
matters under this Section.  To the
extent permitted by applicable law, no Borrower or Guarantor shall assert, and
each Borrower and Guarantor hereby waives, any claim against any Indemnitee, on
any theory of liability, for special, indirect, consequential or punitive
damages (as opposed to direct or actual damages) arising out of, in connection
with, or as a result of, this Agreement, any of the other Financing Agreements
or any undertaking or transaction contemplated hereby.  No Indemnitee referred to above shall be
liable for any damages arising from the use by unintended recipients of any
information or other materials distributed by it through telecommunications,
electronic or other information transmission systems in connection with this
Agreement or any of the other Financing Agreements or the transaction
contemplated hereby or thereby.  All
amounts due under this Section shall be payable upon demand. The foregoing
indemnity shall survive the payment of the Obligations and the termination or
non-renewal of this Agreement.

SECTION 12.       THE
AGENT

 

12.1         Appointment, Powers and Immunities.  Each Lender irrevocably designates, appoints
and authorizes Wachovia to act as Agent hereunder and under the other Financing
Agreements with such powers as are specifically delegated to Agent by the terms
of this Agreement and of the other Financing Agreements, together with such
other powers as are reasonably incidental thereto.  Agent (a) shall have no duties or
responsibilities except those expressly set forth in this Agreement and in the
other Financing Agreements, and shall not by reason of this Agreement or any
other Financing Agreement be a trustee or fiduciary for any Lender; (b) shall
not be responsible to Lenders for any recitals, statements, representations or
warranties contained in this Agreement or in any of the other Financing
Agreements, or in any certificate or other document referred to or provided for
in, or received by any of them under, this Agreement or any other Financing
Agreement, or for the value, validity, effectiveness, genuineness,
enforceability or sufficiency of this Agreement or any other Financing
Agreement or any other document referred to or provided for herein or therein
or for any failure by any Borrower or any Guarantor or any other Person to
perform any of its obligations hereunder or thereunder; and (c) shall not be
responsible to Lenders for any action taken or omitted to be taken by it
hereunder or under any other Financing Agreement or under any other document or
instrument referred to or provided for herein or therein or in connection
herewith or therewith, except for its own gross negligence or willful
misconduct as determined by a final non-appealable judgment of a court of
competent jurisdiction.  Agent may employ
agents and attorneys in fact and shall not be responsible for the negligence or
misconduct of any such agents or attorneys in fact selected by it in good
faith.  Agent may deem and treat the
payee of any note as the holder thereof for all purposes hereof unless and
until the assignment thereof pursuant to an agreement (if and to the extent
permitted herein) in form and substance satisfactory to Agent shall have been
delivered to and acknowledged by Agent.

12.2         Reliance by Agent.  Agent shall be entitled to rely upon any
certification, notice or other communication (including any thereof by
telephone, telecopy, telex, telegram or cable) 

 87
 

 

believed by it to be genuine and correct and to have
been signed or sent by or on behalf of the proper Person or Persons, and upon
advice and statements of legal counsel, independent accountants and other
experts selected by Agent.  As to any
matters not expressly provided for by this Agreement or any other Financing
Agreement, Agent shall in all cases be fully protected in acting, or in
refraining from acting, hereunder or thereunder in accordance with instructions
given by the Required Lenders or all of Lenders as is required in such
circumstance, and such instructions of such Agents and any action taken or
failure to act pursuant thereto shall be binding on all Lenders.

12.3         Events of Default.

(a)           Agent shall not be deemed to have
knowledge or notice of the occurrence of a Default or an Event of Default or
other failure of a condition precedent to the Loans and Letters of Credit
hereunder, unless and until Agent has received written notice from a Lender, or
Borrower specifying such Event of Default or any unfulfilled condition
precedent, and stating that such notice is a “Notice of Default or Failure of
Condition”.  In the event that Agent
receives such a Notice of Default or Failure of Condition, Agent shall give
prompt notice thereof to the Lenders. 
Agent shall (subject to Section 12.7) take such action with respect to
any such Event of Default or failure of condition precedent as shall be
directed by the Required Lenders to the extent provided for herein; 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 or by reason of such Event of Default or failure
of condition precedent, as it shall deem advisable in the best interest of
Lenders.  Without limiting the foregoing,
and notwithstanding the existence or occurrence and continuance of an Event of
Default or any other failure to satisfy any of the conditions precedent set
forth in Section 4 of this Agreement to the contrary, unless and until
otherwise directed by the Required Lenders, Agent may, but shall have no obligation
to, continue to make Loans and issue or cause to be issued any Letter of Credit
for the ratable account and risk of Lenders from time to time if Agent believes
making such Loans or issuing or causing to be issued such Letter of Credit is
in the best interests of Lenders.

(b)           Except with the prior written consent
of Agent, no Lender may assert or exercise any enforcement right or remedy in
respect of the Loans, Letter of Credit Obligations or other Obligations, as
against any Borrower or Guarantor or any of the Collateral or other property of
any Borrower or Guarantor.

12.4         Wachovia in its Individual Capacity.  With respect to its Commitment and the Loans
made and Letters of Credit issued or caused to be issued by it (and any
successor acting as Agent), so long as Wachovia shall be a Lender hereunder, it
shall have the same rights and powers hereunder as any other Lender and may
exercise the same as though it were not acting as Agent, and the term “Lender”
or “Lenders” shall, unless the context otherwise indicates, include Wachovia in
its individual capacity as Lender hereunder. 
Wachovia (and any successor acting as Agent) and its Affiliates may
(without having to account therefor to any Lender) lend money to, make
investments in and generally engage in any kind of business with Borrowers (and
any of its Subsidiaries or Affiliates) as if it were not acting as Agent, and
Wachovia and its Affiliates may accept fees and other consideration from any
Borrower or Guarantor and any of its Subsidiaries and Affiliates for services
in connection with this Agreement or otherwise without having to account for
the same to Lenders.

 88

 

12.5         Indemnification.  Lenders agree to indemnify Agent (to the
extent not reimbursed by Borrowers hereunder and without limiting any
obligations of Borrowers hereunder) ratably, in accordance with their Pro Rata
Shares, for any and all claims of any kind and nature whatsoever that may be
imposed on, incurred by or asserted against Agent (including by any Lender)
arising out of or by reason of any investigation in or in any way relating to
or arising out of this Agreement or any other Financing Agreement or any other
documents contemplated by or referred to herein or therein or the transactions
contemplated hereby or thereby (including the costs and expenses that Agent is
obligated to pay hereunder) or the enforcement of any of the terms hereof or
thereof or of any such other documents, provided, that, no Lender
shall be liable for any of the foregoing to the extent it arises from the gross
negligence or willful misconduct of the party to be indemnified as determined
by a final non-appealable judgment of a court of competent jurisdiction.  The foregoing indemnity shall survive the
payment of the Obligations and the termination or non-renewal of this
Agreement.

12.6         Non-Reliance on Agent and Other
Lenders.  Each Lender agrees that it
has, independently and without reliance on Agent or other Lender, and based on
such documents and information as it has deemed appropriate, made its own
credit analysis of Borrowers and Guarantors and has made its own decision to
enter into this Agreement and that it will, independently and without reliance
upon Agent or any other Lender, and based on such documents and information as
it shall deem appropriate at the time, continue to make its own analysis and
decisions in taking or not taking action under this Agreement or any of the
other Financing Agreements.  Agent shall
not be required to keep itself informed as to the performance or observance by
any Borrower or Guarantor of any term or provision of this Agreement or any of
the other Financing Agreements or any other document referred to or provided
for herein or therein or to inspect the properties or books of any Borrower or
Guarantor.  Agent will use reasonable
efforts to provide Lenders with any information received by Agent from any Borrower
or Guarantor which is required to be provided to Lenders or deemed to be
requested by Lenders hereunder and with a copy of any Notice of Default or
Failure of Condition received by Agent from any Borrower or any Lender; provided,
that, Agent shall not be liable to any Lender for any failure to do so,
except to the extent that such failure is attributable to Agent’s own gross
negligence or willful misconduct as determined by a final non-appealable
judgment of a court of competent jurisdiction. 
Except for notices, reports and other documents expressly required to be
furnished to Lenders by Agent or deemed requested by Lenders hereunder, Agent
shall not have any duty or responsibility to provide any Lender with any other
credit or other information concerning the affairs, financial condition or
business of any Borrower or Guarantor that may come into the possession of
Agent.

12.7         Failure to Act.  Except for action expressly required of Agent
hereunder and under the other Financing Agreements, Agent shall in all cases be
fully justified in failing or refusing to act hereunder and thereunder unless
it shall receive further assurances to its satisfaction from Lenders of their
indemnification obligations under Section 12.5 hereof against any and all
liability and expense that may be incurred by it by reason of taking or
continuing to take any such action.

12.8         Additional Loans.  Agent shall not make any Revolving Loans or
provide any Letter of Credit to any Borrower on behalf of Lenders intentionally
and with actual knowledge that such Revolving Loans or Letter of Credit would
cause the aggregate amount of the total 

 89
 

 

outstanding Revolving Loans and Letters of Credit to
such Borrower to exceed the Borrowing Base of such Borrower, without the prior
consent of all Lenders, except, that, Agent may make such additional Revolving
Loans or provide such additional Letter of Credit on behalf of Lenders,
intentionally and with actual knowledge that such Revolving Loans or Letter of
Credit will cause the total outstanding Revolving Loans and Letters of Credit to
such Borrower to exceed the Borrowing Base of such Borrower, as Agent may deem
necessary or advisable in its discretion, provided, that: (a) the
total principal amount of the additional Revolving Loans or additional Letters
of Credit to any Borrower which Agent may make or provide after obtaining such
actual knowledge that the aggregate principal amount of the Revolving Loans
equal or exceed the Borrowing Bases of Borrowers, plus the amount of Special
Agent Advances made pursuant to Section 12.11(a)(ii) hereof then outstanding,
shall not exceed the aggregate amount equal to ten (10%) percent of the Maximum
Credit and shall not cause the total principal amount of the Loans and Letters
of Credit to exceed the Maximum Credit and (b) no such additional Revolving
Loan or Letter of Credit shall be outstanding more than ninety (90) days after
the date such additional Revolving Loan or Letter of Credit is made or issued
(as the case may be), except as the Required Lenders may otherwise agree.  Each Lender shall be obligated to pay Agent
the amount of its Pro Rata Share of any such additional Revolving Loans or
Letters of Credit.

12.9         Concerning the Collateral and the
Related Financing Agreements.  Each
Lender authorizes and directs Agent to enter into this Agreement and the other
Financing Agreements.  Each Lender agrees
that any action taken by Agent or Required Lenders in accordance with the terms
of this Agreement or the other Financing Agreements and the exercise by Agent or
Required Lenders of their respective powers set forth therein or herein,
together with such other powers that are reasonably incidental thereto, shall
be binding upon all of the Lenders.

12.10       Field Audit, Examination Reports and
other Information; Disclaimer by Lenders. 
By signing this Agreement, each Lender:

(a)           is deemed to have requested that
Agent furnish such Lender, promptly after it becomes available, a copy of each
field audit or examination report and report with respect to the Borrowing Base
prepared or received by Agent (each field audit or examination report and
report with respect to the Borrowing Base being referred to herein as a “Report”
and collectively, “Reports”), appraisals with respect to the Collateral and
financial statements with respect Parent and its Subsidiaries received by
Agent;

(b)           expressly agrees and acknowledges
that Agent (i) does not make any representation or warranty as to the accuracy
of any Report, appraisal or financial statement or (ii) shall not be liable for
any information contained in any Report, appraisal or financial statement;

(c)           expressly agrees and acknowledges
that the Reports are not comprehensive audits or examinations, that Agent or
any other party performing any audit or examination will inspect only specific
information regarding Borrowers and Guarantors and will rely significantly upon
Borrowers’ and Guarantors’ books and records, as well as on representations of
Borrowers’ and Guarantors’ personnel; and

 90
 

 

(d)           agrees to keep all Reports
confidential and strictly for its internal use in accordance with the terms of
Section 13.5 hereof, and not to distribute or use any Report in any other
manner.

12.11       Collateral Matters.

(a)           Agent may, at its option, from time
to time, at any time on or after an Event of Default and for so long as the
same is continuing or upon any other failure of a condition precedent to the
Loans and Letters of Credit hereunder, make such disbursements and advances (“Special
Agent Advances”) which Agent, in its sole discretion, (i) deems necessary or
desirable either to preserve or protect the Collateral or any portion thereof
or (ii) to enhance the likelihood or maximize the amount of repayment by
Borrowers and Guarantors of the Loans and other Obligations, provided, that,
(A) the aggregate principal amount of the Special Agent Advances pursuant to
this clause (ii) outstanding at any time, plus the then outstanding principal
amount of the additional Loans and Letters of Credit which Agent may make or
provide as set forth in Section 12.8 hereof, shall not exceed the amount equal
to ten (10%) percent of the Maximum Credit and (B) the aggregate principal
amount of the Special Agent Advances pursuant to this clause (ii) outstanding
at any time, plus the then outstanding principal amount of the Loans, shall not
exceed the Maximum Credit, except at Agent’s option, provided, that, to the
extent that the aggregate principal amount of Special Agent Advances plus the
then outstanding principal amount of the Loans exceed the Maximum Credit the
Special Agent Advances that are in excess of the Maximum Credit shall be for
the sole account and risk of Agent and notwithstanding anything to the contrary
set forth below, no Lender shall have any obligation to provide its share of
such Special Agent Advances in excess of the Maximum Credit, or (iii) to pay
any other amount chargeable to any Borrower or Guarantor pursuant to the terms
of this Agreement or any of the other Financing Agreements consisting of (A)
costs, fees and expenses and (B) payments to Issuing Bank in respect of any
Letter of Credit Obligations.  The
Special Agent Advances shall be repayable on demand and together with all
interest thereon shall constitute Obligations secured by the Collateral.  Special Agent Advances shall not constitute
Loans but shall otherwise constitute Obligations hereunder.  Interest on Special Agent Advances shall be
payable at the Interest Rate then applicable to Prime Rate Loans and shall be
payable on demand.  Without limitation of
its obligations pursuant to Section 6.11, each Lender agrees that it shall make
available to Agent, upon Agent’s demand, in immediately available funds, the
amount equal to such Lender’s Pro Rata Share of each such Special Agent
Advance.  If such funds are not made
available to Agent by such Lender, such Lender shall be deemed a Defaulting
Lender and Agent shall be entitled to recover such funds, on demand from such
Lender together with interest thereon for each day from the date such payment
was due until the date such amount is paid to Agent at the Federal Funds Rate
for each day during such period (as published by the Federal Reserve Bank of
New York or at Agent’s option based on the arithmetic mean determined by Agent
of the rates for the last transaction in overnight Federal funds arranged prior
to 9:00 a.m. (New York City time) on that day by each of the three leading
brokers of Federal funds transactions in New York City selected by Agent) and
if such amounts are not paid within three (3) days of Agent’s demand, at the
highest Interest Rate provided for in Section 3.1 hereof applicable to Prime
Rate Loans.

(b)           Lenders hereby irrevocably authorize
Agent, at its option and in its discretion to release any security interest in,
mortgage or lien upon, any of the Collateral (i) upon 

 91
 

 

termination of the
Commitments and payment and satisfaction of all of the Obligations and delivery
of cash collateral to the extent required under Section 13.1 below, or (ii)
constituting property being sold or disposed of if Administrative Borrower or
any Borrower or Guarantor certifies to Agent that the sale or disposition is
made in compliance with Section 9.7 hereof (and Agent may rely conclusively on
any such certificate, without further inquiry), or (iii) constituting property
in which any Borrower or Guarantor did not own an interest at the time the
security interest, mortgage or lien was granted or at any time thereafter, or
(iv) having a value in the aggregate in any twelve (12) month period of less
than $1,000,000, and to the extent Agent may release its security interest in
and lien upon any such Collateral pursuant to the sale or other disposition
thereof, such sale or other disposition shall be deemed consented to by
Lenders, or (v) if required or permitted under the terms of any of the other
Financing Agreements, including any intercreditor agreement, or (vi) approved,
authorized or ratified in writing by all of Lenders.  Except as provided above, Agent will not
release any security interest in, mortgage or lien upon, any of the Collateral
without the prior written authorization of all of Lenders. Upon request by
Agent at any time, Lenders will promptly confirm in writing Agent’s authority
to release particular types or items of Collateral pursuant to this Section.

(c)           Without any manner limiting Agent’s
authority to act without any specific or further authorization or consent by
the Required Lenders, each Lender agrees to confirm in writing, upon request by
Agent, the authority to release Collateral conferred upon Agent under this
Section.  Agent shall (and is hereby
irrevocably authorized by Lenders to) execute such documents as may be
necessary to evidence the release of the security interest, mortgage or liens
granted to Agent upon any Collateral to the extent set forth above; provided,
that, (i) Agent shall not be required to execute any such document on
terms which, in Agent’s opinion, would expose Agent to liability or create any
obligations or entail any consequence other than the release of such security
interest, mortgage or liens without recourse or warranty and (ii) such release
shall not in any manner discharge, affect or impair the Obligations or any
security interest, mortgage or lien upon (or obligations of any Borrower or
Guarantor in respect of) the Collateral retained by such Borrower or Guarantor.

(d)           Agent shall have no obligation
whatsoever to any Lender or any other Person to investigate, confirm or assure
that the Collateral exists or is owned by any Borrower or Guarantor or is cared
for, protected or insured or has been encumbered, or that any particular items
of Collateral meet the eligibility criteria applicable in respect of the Loans
or Letters of Credit hereunder, or whether any particular reserves are
appropriate, or that the liens and security interests granted to Agent pursuant
hereto or any of the Financing Agreements or otherwise have been properly or
sufficiently or lawfully created, perfected, protected or enforced or are
entitled to any particular priority, or to exercise at all or in any particular
manner or under any duty of care, disclosure or fidelity, or to continue
exercising, any of the rights, authorities and powers granted or available to
Agent in this Agreement or in any of the other Financing Agreements, it being
understood and agreed that in respect of the Collateral, or any act, omission
or event related thereto, subject to the other terms and conditions contained
herein, Agent may act in any manner it may deem appropriate, in its discretion,
given Agent’s own interest in the Collateral as a Lender and that Agent shall
have no duty or liability whatsoever to any other Lender.

12.12       Agency for Perfection.  Each Lender hereby appoints Agent and each
other Lender as agent and bailee for the purpose of perfecting the security
interests in and liens upon 

 92
 

 

the Collateral of Agent in assets which, in accordance
with Article 9 of the UCC can be perfected only by possession (or where the
security interest of a secured party with possession has priority over the
security interest of another secured party) and Agent and each Lender hereby
acknowledges that it holds possession of any such Collateral for the benefit of
Agent as secured party.  Should any
Lender obtain possession of any such Collateral, such Lender shall notify Agent
thereof, and, promptly upon Agent’s request therefor shall deliver such
Collateral to Agent or in accordance with Agent’s instructions.

12.13       Successor Agent.  Agent may resign as Agent upon thirty (30)
days’ notice to Lenders and Parent.  If
Agent resigns under this Agreement, the Required Lenders shall appoint from
among the Lenders a successor agent for Lenders.  If no successor agent is appointed prior to
the effective date of the resignation of Agent, Agent may appoint, after
consulting with Lenders and Parent, a successor agent from among Lenders.  Upon the acceptance by the Lender so selected
of its appointment as successor agent hereunder, such successor agent shall
succeed to all of the rights, powers and duties of the retiring Agent and the
term “Agent” as used herein and in the other Financing Agreements shall mean
such successor agent and the retiring Agent’s appointment, powers and duties as
Agent shall be terminated.  After any
retiring Agent’s resignation hereunder as Agent, the provisions of this Section
12 shall inure to its benefit as to any actions taken or omitted by it while it
was Agent under this Agreement.  If no
successor agent has accepted appointment as Agent by the date which is thirty
(30) days after the date of a retiring Agent’s notice of resignation, the
retiring Agent’s resignation shall nonetheless thereupon become effective and
Lenders shall perform all of the duties of Agent hereunder until such time, if
any, as the Required Lenders appoint a successor agent as provided for above.

12.14       Other Agent Designations.  Agent may at any time and from time to time determine
that a Lender may, in addition, be a “Co-Agent”, “Syndication Agent”, “Documentation
Agent” or similar designation hereunder and enter into an agreement with such
Lender to have it so identified for purposes of this Agreement.  Any such designation shall be effective upon
written notice by Agent to Administrative Borrower of any such
designation.  Any Lender that is so
designated as a Co-Agent, Syndication Agent, Documentation Agent or such
similar designation by Agent shall have no right, power, obligation, liability,
responsibility or duty under this Agreement or any of the other Financing
Agreements other than those applicable to all Lenders as such.  Without limiting the foregoing, the Lenders
so identified shall not have or be deemed to have any fiduciary relationship
with any Lender and no Lender shall be deemed to have relied, nor shall any
Lender rely, on a Lender so identified as a Co-Agent, Syndication Agent,
Documentation Agent or such similar designation in deciding to enter into this Agreement
or in taking or not taking action hereunder.

SECTION 13.       TERM
OF AGREEMENT; MISCELLANEOUS

 

13.1         Term.

(a)           This Agreement and the other
Financing Agreements shall become effective as of the date set forth on the
first page hereof and shall continue in full force and effect for a term ending
on the date three (3) years from the date hereof (the “Renewal Date”), and from
year to year thereafter, unless sooner terminated pursuant to the terms
hereof.  Agent may, at its option (or
shall at the direction of any Lender in writing received by Agent at least
ninety 

 93
 

 

(90) days prior to the
Renewal Date or the anniversary of any Renewal Date, as the case may be),
terminate this Agreement and the other Financing Agreements, or Administrative
Borrower or any Borrower may terminate this Agreement and the other Financing
Agreements, each case, effective on the Renewal Date or on the anniversary of
the Renewal Date in any year by giving to the other party at least sixty (60)
days prior written notice; provided, that, this Agreement and all
other Financing Agreements must be terminated simultaneously.  In addition, Borrowers may terminate this
Agreement at any time upon not less than five (5) days prior written notice to
Agent (which may be revoked) and Agent may, at its option, and shall at the
direction of Required Lenders, terminate this Agreement at any time on or after
an Event of Default.  Upon the Renewal
Date or any other effective date of termination of the Financing Agreements,
Borrowers shall pay to Agent all outstanding and unpaid Obligations and shall
furnish cash collateral to Agent (or at Agent’s option, a letter of credit
issued for the account of Borrowers and at Borrowers’ expense, in form and
substance satisfactory to Agent, by an issuer acceptable to Agent and payable
to Agent as beneficiary) in such amounts as Agent determines are reasonably
necessary to secure Agent and Lenders from loss, cost, damage or expense,
including attorneys’ fees and expenses, in connection with any contingent
Obligations, including issued and outstanding Letter of Credit Obligations and
checks or other payments provisionally credited to the Obligations and/or as to
which Agent or any Lender has not yet received final and indefeasible payment
and any continuing obligations of Agent or any Lender pursuant to any Deposit
Account Control Agreement.  The amount of
such cash collateral (or letter of credit, as Agent may determine) as to any
Letter of Credit Obligations shall be in the amount equal to one hundred five
(105%) percent of the amount of the Letter of Credit Obligations plus the
amount of any fees and expenses payable in connection therewith through the end
of the latest expiration date of the Letters of Credit giving rise to such
Letter of Credit Obligations.  Such payments
in respect of the Obligations and cash collateral shall be remitted by wire
transfer in Federal funds to the Agent Payment Account or such other bank
account of Agent, as Agent may, in its discretion, designate in writing to
Administrative Borrower for such purpose. 
Interest shall be due until and including the next Business Day, if the
amounts so paid by Borrowers to the Agent Payment Account or other bank account
designated by Agent are received in such bank account later than 12:00 noon,
California time.

(b)           No termination of the Commitments,
this Agreement or any of the other Financing Agreements shall relieve or
discharge any Borrower or Guarantor of its respective duties, obligations and
covenants under this Agreement or any of the other Financing Agreements until
all Obligations have been fully and finally discharged and paid, and Agent’s
continuing security interest in the Collateral and the rights and remedies of
Agent and Lenders hereunder, under the other Financing Agreements and
applicable law, shall remain in effect until all such Obligations have been
fully and finally discharged and paid. 
Accordingly, each Borrower and Guarantor waives any rights it may have
under the UCC to demand the filing of termination statements with respect to
the Collateral and Agent shall not be required to send such termination
statements to Borrowers or Guarantors, 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 and satisfied in full in immediately
available funds.

(c)           If for any reason this Agreement is
terminated prior to the Renewal Date, in view of the impracticality and extreme
difficulty of ascertaining actual damages and by mutual agreement of the parties
as to a reasonable calculation of Agent’s and each Lender’s lost profits 

 94
 

 

as a result thereof,
Borrowers agree to pay to Agent, for the benefit of Lenders, upon the effective
date of such termination, an early termination fee in the amount equal to

	
  Amount

  	
   

  	
  Period

  
	
   

  	
   

  	
   

  
	
  (i)

  	
  1.5% of the
  Revolving Loan Limit

  	
   

  	
  From the date hereof to and including the first
  anniversary of the date hereof

  
	
   

  	
   

  	
   

  	
   

  
	
  (ii)

  	
  1.0% of the
  Revolving Loan Limit

  	
   

  	
  From and after the first anniversary of the date
  hereof to and including the second anniversary of the date hereof

  
	
   

  	
   

  	
   

  	
   

  
	
  (iii)

  	
  0.5% of the
  Revolving Loan Limit

  	
   

  	
  From and after the second anniversary of the date
  hereof to but not including the third anniversary of the date hereof or if
  the term of this Agreement is extended, at any time prior to the end of the
  then current term.

  

 

Such early termination fee shall be presumed to be the
amount of damages sustained by Agent and Lenders as a result of such early
termination and Borrowers and Guarantors agree that it is reasonable under the
circumstances currently existing (including, but not limited to, the borrowings
that are reasonably expected by Borrowers hereunder and the interest, fees and
other charges that are reasonably expected to be received by Agent and Lenders
pursuant to the Credit Facility).  In
addition, Agent and Lenders shall be entitled to such early termination fee
upon the occurrence of any Event of Default described in Sections 10.1(g) and
10.1(h) hereof, even if Agent and Lenders do not exercise the right to terminate
this Agreement, but elect, at their option, to provide financing to any
Borrower or permit the use of cash collateral under the United States
Bankruptcy Code.  The early termination
fee provided for in this Section 13.1 shall be deemed included in the Obligations.  Such early termination fee will be waived if
the Obligations are refinanced by an Affiliate of Wachovia.

13.2         Interpretative
Provisions.

(a)           All terms used herein which are
defined in Article 1, Article 8 or Article 9 of the UCC shall have the meanings
given therein unless otherwise defined in this Agreement.

(b)           All references to the plural herein
shall also mean the singular and to the singular shall also mean the plural
unless the context otherwise requires.

(c)           All references to any Borrower,
Guarantor, Agent and Lenders pursuant to the definitions set forth in the
recitals hereto, or to any other person herein, shall include their respective
successors and assigns.

(d)           The words “hereof”, “herein”, “hereunder”,
“this Agreement” and words of similar import when used in this Agreement shall
refer to this Agreement as a whole and not any particular provision of this
Agreement and as this Agreement now exists or may hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced.

 95
 

 

(e)           The word “including” when used in
this Agreement shall mean “including, without limitation” and the word “will”
when used in this Agreement shall be construed to have the same meaning and
effect as the word “shall”.

(f)            An Event of Default shall exist or
continue or be continuing until such Event of Default is waived in accordance
with Section 11.3 or is cured in a manner satisfactory to Agent, if such Event
of Default is capable of being cured as determined by Agent.

(g)           All references to the term “good
faith” used herein when applicable to Agent or any Lender shall mean,
notwithstanding anything to the contrary contained herein or in the UCC,
honesty in fact in the conduct or transaction concerned.

(h)           Any accounting term used in this
Agreement shall have, unless otherwise specifically provided herein, the
meaning customarily given in accordance with GAAP, and all financial
computations hereunder shall be computed unless otherwise specifically provided
herein, in accordance with GAAP as consistently applied and using the same
method for inventory valuation as used in the preparation of the financial
statements of Parent most recently received by Agent prior to the date
hereof.  Notwithstanding anything to the
contrary contained in GAAP or any interpretations or other pronouncements by
the Financial Accounting Standards Board or otherwise, the term “unqualified
opinion” as used herein to refer to opinions or reports provided by accountants
shall mean an opinion or report that is unqualified and also does not include
any explanation, supplemental comment or other comment concerning the ability
of the applicable person to continue as a going concern or the scope of the
audit.

(i)            In the computation of periods of
time from a specified date to a later specified date, the word “from” means “from
and including”, the words “to” and “until” each mean “to but excluding” and the
word “through” means “to and including”.

(j)            Unless otherwise expressly provided
herein, (i) references herein to any agreement, document or instrument shall be
deemed to include all subsequent amendments, modifications, supplements,
extensions, renewals, restatements or replacements with respect thereto, but
only to the extent the same are not prohibited by the terms hereof or of any other
Financing Agreement, and (ii) references to any statute or regulation are to be
construed as including all statutory and regulatory provisions consolidating,
amending, replacing, recodifying, supplementing or interpreting the statute or
regulation.

(k)           The captions and headings of this
Agreement are for convenience of reference only and shall not affect the
interpretation of this Agreement.

(l)            This Agreement and other Financing
Agreements may use several different limitations, tests or measurements to regulate
the same or similar matters.  All such
limitations, tests and measurements are cumulative and shall each be performed
in accordance with their terms.

(m)          This Agreement and the other Financing
Agreements are the result of negotiations among and have been reviewed by
counsel to Agent and the other parties, and are the products of all
parties.  Accordingly, this Agreement and
the other Financing Agreements 

 96
 

 

shall not be construed
against Agent or Lenders merely because of Agent’s or any Lender’s involvement
in their preparation.

13.3         Notices.

(a)           All notices, requests and demands
hereunder shall be in writing and deemed to have been given or made:  if delivered in person, immediately upon
delivery; if by telex, telegram or facsimile transmission, immediately upon
sending and upon confirmation of receipt; if by nationally recognized overnight
courier service with instructions to deliver the next Business Day, one (1)
Business Day after sending; and if by certified mail, return receipt requested,
five (5) days after mailing.  Notices
delivered through electronic communications shall be effective to the extent
set forth in Section 13.3(b) below.  All
notices, requests and demands upon the parties are to be given to the following
addresses (or to such other address as any party may designate by notice in
accordance with this Section):

	
  If to any Borrower or
  Guarantor:

  	
   

  	
  Natrol, Inc.

  21411 Prairie Street

  Chatsworth, California 91311

  Attention: Chief Financial Officer

  Telephone No.: (818) 739-6000

  Telecopy No.:  (818) 739-6001

  
	
   

  	
   

  	
   

  
	
  If to Agent:

  	
   

  	
  Wachovia Capital Finance Corporation

  (Western)

  251 South Lake Avenue, Suite 900

  Pasadena, California 91101

  Attention: Portfolio Manager

  Telephone No.: (626) 304-4900

  Telecopy No.: (626) 304-4949

  

 

(b)           Notices and other communications to
Lenders hereunder may be delivered or furnished by electronic communication
(including e-mail and Internet or intranet websites) pursuant to procedures
approved by Agent or as otherwise determined by Agent, provided, that, the
foregoing shall not apply to notices to any Lender pursuant to Section 2 hereof
if such Lender, as applicable, has notified Agent that it is incapable of
receiving notices under such Section by electronic communication. Unless Agent
otherwise requires, (i) notices and other communications sent to an e-mail
address shall be deemed received upon the sender’s receipt of an
acknowledgement from the intended recipient (such as by the “return receipt
requested” function, as available, return e-mail or other written
acknowledgement), provided, that, if such notice or other communication is not
given during the normal business hours of the recipient, such notice shall be
deemed to have been sent at the opening of business on the next Business Day
for the recipient, and (ii) notices or communications posted to an Internet or
intranet website shall be deemed received upon the deemed receipt by the
intended recipient at its e-mail address as described in the foregoing clause
(i) of notification that such notice or communications is available and
identifying the website address therefor.

 97
 

 

13.4         Partial Invalidity.  If any provision of this Agreement is held to
be invalid or unenforceable, such invalidity or unenforceability shall not invalidate
this Agreement as a whole, but this Agreement shall be construed as though it
did not contain the particular provision held to be invalid or unenforceable
and the rights and obligations of the parties shall be construed and enforced
only to such extent as shall be permitted by applicable law.

13.5         Confidentiality.

(a)           Agent and each Lender shall use all
reasonable efforts to keep confidential, in accordance with its customary
procedures for handling confidential information and safe and sound lending
practices, any non-public information supplied to it by any Borrower or any
Guarantor pursuant to this Agreement, provided, that, nothing
contained herein shall limit the disclosure of any such information: (i) to the
extent required by statute, rule, regulation, subpoena or court order, (ii) to
bank examiners and other regulators, auditors and/or accountants,  in connection with any litigation to which
Agent or such Lender is a party, (iii) to any Lender or Participant (or
prospective Lender or Participant) or to any Affiliate of any Lender so long as
such Lender or Participant (or prospective Lender or Participant) or Affiliate
shall have agreed with Agent and the Borrowers to treat such information as
confidential in accordance with this Section 13.5, or (iv) to counsel for Agent
or any Lender or Participant (or prospective Lender or Participant).

(b)           In the event that Agent or any Lender
receives a request or demand to disclose any confidential information pursuant
to any subpoena or court order, Agent or such Lender, as the case may be,
agrees (i) to the extent permitted by applicable law or if permitted by
applicable law, to the extent Agent or such Lender determines in good faith
that it will not create any risk of liability to Agent or such Lender, Agent or
such Lender will promptly notify Administrative Borrower of such request so
that Administrative Borrower may seek a protective order or other appropriate
relief or remedy and (ii) if disclosure of such information is required,
disclose such information and, subject to reimbursement by Borrowers of Agent’s
or such Lender’s expenses, cooperate with Administrative Borrower in the
reasonable efforts to obtain an order or other reliable assurance that
confidential treatment will be accorded to such portion of the disclosed
information which Administrative Borrower so designates, to the extent
permitted by applicable law or if permitted by applicable law, to the extent
Agent or such Lender determines in good faith that it will not create any risk
of liability to Agent or such Lender.

(c)           In no event shall this Section 13.5
or any other provision of this Agreement, any of the other Financing Agreements
or applicable law be deemed: (i) to apply to or restrict disclosure of
information that has been or is made public by any Borrower, Guarantor or any
third party or otherwise becomes generally available to the public other than
as a result of a disclosure in violation hereof, (ii) to apply to or restrict
disclosure of information that was or becomes available to Agent or any Lender
(or any Affiliate of any Lender) on a non-confidential basis from a person
other than a Borrower or Guarantor, (iii) to require Agent or any Lender to
return any materials furnished by a Borrower or Guarantor to Agent or a Lender
or prevent Agent or a Lender from responding to routine informational requests
in accordance with the Code of Ethics for the Exchange of Credit Information
promulgated by The Robert Morris Associates or other applicable industry
standards relating to the exchange of credit information.  The obligations of Agent and Lenders under
this Section 13.5 shall supersede and replace the 

 98
 

 

obligations of Agent and
Lenders under any confidentiality letter signed prior to the date hereof or any
other arrangements concerning the confidentiality of information provided by
any Borrower or Guarantor to Agent or any Lender.  In addition, Agent and Lenders may disclose
information relating to the Credit Facility to Gold Sheets and other similar
bank trade publications, with such information to consist of deal terms and
other information customarily found in such publications.

13.6         Successors.  This Agreement, the other Financing
Agreements and any other document referred to herein or therein shall be
binding upon and inure to the benefit of and be enforceable by Agent, Lenders,
Borrowers, Guarantors and their respective successors and assigns, except that
Borrower may not assign its rights under this Agreement, the other Financing
Agreements and any other document referred to herein or therein without the
prior written consent of Agent and Lenders. 
Any such purported assignment without such express prior written consent
shall be void.  No Lender may assign its
rights and obligations under this Agreement without the prior written consent
of Agent, except as provided in Section 13.7 below. The terms and provisions of
this Agreement and the other Financing Agreements are for the purpose of
defining the relative rights and obligations of Borrowers, Guarantors, Agent
and Lenders with respect to the transactions contemplated hereby and there
shall be no third party beneficiaries of any of the terms and provisions of
this Agreement or any of the other Financing Agreements.

13.7         Assignments;
Participations.

(a)           Each Lender may, with the prior
written consent of Agent, assign all or, if less than all, a portion equal to
at least $5,000,000 in the aggregate for the assigning Lender, of such rights
and obligations under this Agreement to one or more Eligible Transferees (but
not including for this purpose any assignments in the form of a participation),
each of which assignees shall become a party to this Agreement as a Lender by
execution of an Assignment and Acceptance; provided, that, (i)
such transfer or assignment will not be effective until recorded by Agent on
the Register and (ii) Agent shall have received for its sole account payment of
a processing fee from the assigning Lender or the assignee in the amount of
$5,000.

(b)           Agent shall maintain a register of
the names and addresses of Lenders, their Commitments and the principal amount
of their Loans (the “Register”).  Agent
shall be deemed to be the agent of Borrowers solely for the purposes of
maintaining the Register.  Agent shall
also maintain a copy of each Assignment and Acceptance delivered to and
accepted by it and shall modify the Register to give effect to each Assignment
and Acceptance.  The entries in the
Register shall be conclusive and binding for all purposes, absent manifest
error, and any Borrowers, Guarantors, Agent and Lenders shall treat each Person
whose name is recorded in the Register as a Lender hereunder for all purposes
of this Agreement.  The Register shall be
available for inspection by Administrative Borrower and any Lender at any
reasonable time and from time to time upon reasonable prior notice.

(c)           Upon such execution, delivery,
acceptance and recording, from and after the effective date specified in each
Assignment and Acceptance,  the assignee
thereunder shall be a party hereto and to the other Financing Agreements and,
to the extent that rights and obligations hereunder have been assigned to it
pursuant to such Assignment and Acceptance, 

 99
 

 

have the rights and
obligations (including, without limitation, the obligation to participate in
Letter of Credit Obligations) of a Lender hereunder and thereunder and the
assigning Lender shall, to the extent that rights and obligations hereunder
have been assigned by it pursuant to such Assignment and Acceptance, relinquish
its rights and be released from its obligations under this Agreement.

(d)           By execution and delivery of an
Assignment and Acceptance, the assignor and assignee thereunder confirm to and
agree with each other and the other parties hereto as follows:  (i) other than as provided in such Assignment
and Acceptance, the assigning Lender makes no representation or warranty and
assumes no responsibility with respect to any statements, warranties or
representations made in or in connection with this Agreement or any of the
other Financing Agreements or the execution, legality, enforceability,
genuineness, sufficiency or value of this Agreement or any of the other
Financing Agreements furnished pursuant hereto, (ii) the assigning Lender makes
no representation or warranty and assumes no responsibility with respect to the
financial condition of any Borrower, Guarantor or any of their Subsidiaries or
the performance or observance by any Borrower or Guarantor of any of the
Obligations; (iii) such assignee confirms that it has received a copy of this
Agreement and the other Financing Agreements, together with such other
documents and information it has deemed appropriate to make its own credit
analysis and decision to enter into such Assignment and Acceptance, (iv) such
assignee will, independently and without reliance upon the assigning Lender,
Agent and based on such documents and information as it shall deem appropriate
at the time, continue to make its own credit decisions in taking or not taking
action under this Agreement and the other Financing Agreements, (v) such assignee
appoints and authorizes Agent to take such action as agent on its behalf and to
exercise such powers under this Agreement and the other Financing Agreements as
are delegated to Agent by the terms hereof and thereof, together with such
powers as are reasonably incidental thereto, and (vi) such assignee agrees that
it will perform in accordance with their terms all of the obligations which by
the terms of this Agreement and the other Financing Agreements are required to
be performed by it as a Lender.  Agent
and Lenders may furnish any information concerning any Borrower or Guarantor in
the possession of Agent or any Lender from time to time to assignees and
Participants.

(e)           Each Lender may sell participations
to one or more banks or other entities in or to all or a portion of its rights
and obligations under this Agreement and the other Financing Agreements
(including, without limitation, all or a portion of its Commitments and the
Loans owing to it and its participation in the Letter of Credit Obligations,
without the consent of Agent or the other Lenders); provided, that,
(i) such Lender’s obligations under this Agreement (including, without
limitation, its Commitment hereunder) and the other Financing Agreements shall
remain unchanged, (ii) such Lender shall remain solely responsible to the other
parties hereto for the performance of such obligations, and Borrowers,
Guarantors, the other Lenders and Agent shall continue to deal solely and
directly with such Lender in connection with such Lender’s rights and
obligations under this Agreement and the other Financing Agreements, and (iii)
the Participant shall not have any rights under this Agreement or any of the
other Financing Agreements (the Participant’s rights against such Lender in
respect of such participation to be those set forth in the agreement executed
by such Lender in favor of the Participant relating thereto) and all amounts
payable by any Borrower or Guarantor hereunder shall be determined as if such
Lender had not sold such participation.

 100
 

 

(f)            Nothing in this Agreement shall
prevent or prohibit any Lender from pledging its Loans hereunder to a Federal
Reserve Bank in support of borrowings made by such Lenders from such Federal
Reserve Bank; provided, that, no such pledge shall release such Lender
from any of its obligations hereunder or substitute any such pledgee for such
Lender as a party hereto.

(g)           Borrowers and Guarantors shall assist
Agent or any Lender permitted to sell assignments or participations under this
Section 13.7 in whatever manner reasonably necessary and in accordance with
industry practice in order to enable or effect any such assignment or
participation, including (but not limited to) the execution and delivery of any
and all agreements, notes and other documents and instruments as shall be
requested and the delivery of informational materials, appraisals or other
documents for, and the participation of relevant management in meetings and
conference calls with, potential Lenders or Participants.

13.8         Entire Agreement.  This Agreement, the other Financing
Agreements, any supplements hereto or thereto, and any instruments or documents
delivered or to be delivered in connection herewith or therewith represents the
entire agreement and understanding concerning the subject matter hereof and
thereof between the parties hereto, and supersede all other prior agreements,
understandings, negotiations and discussions, representations, warranties,
commitments, proposals, offers and contracts concerning the subject matter
hereof, whether oral or written.  In the
event of any inconsistency between the terms of this Agreement and any schedule
or exhibit hereto, the terms of this Agreement shall govern.

13.9         USA Patriot Act.  Each Lender subject to the USA PATRIOT Act
(Title III of Pub.L. 107-56 (signed into law October 26, 2001) (the “Act”)
hereby notifies Borrowers and Guarantors that pursuant to the requirements of
the Act, it is required to obtain, verify and record information that
identifies each person or corporation who opens an account and/or enters into a
business relationship with it, which information includes the name and address
of Borrowers and Guarantors and other information that will allow such Lender
to identify such person in accordance with the Act and any other applicable
law.  Borrowers and Guarantors are hereby
advised that any Loans or Letters of Credit hereunder are subject to
satisfactory results of such verification.

13.10       Counterparts, Etc.  This Agreement or any of the other Financing
Agreements may be executed in any number of counterparts, each of which shall
be an original, but all of which taken together shall constitute one and the
same agreement. Delivery of an executed counterpart of this Agreement or any of
the other Financing Agreements by telefacsimile or other electronic method of
transmission shall have the same force and effect as the delivery of an
original executed counterpart of this Agreement or any of such other Financing
Agreements.  Any party delivering an executed
counterpart of any such agreement by telefacsimile or other electronic method
of transmission shall also deliver an original executed counterpart, but the
failure to do so shall not affect the validity, enforceability or binding
effect of such agreement.

13.11       Restrictions on Security from CFC
Subsidiaries.  Notwithstanding any
provision of any Financing Agreement to the contrary:  (a) no more than 65% of the Voting Stock of
any Subsidiary that is a CFC shall be pledged or similarly hypothecated to
guarantee or support any Obligation of any of the Borrowers, (b) no Subsidiary
that is a CFC shall guarantee or support 

 101
 

 

any Obligations of any of the Borrowers, and (c) no
security or similar interest shall be granted in the assets of any Subsidiary
that is a CFC, which security or similar interest guarantees or supports any
Obligations of any of the Borrowers.  For
purposes of this Section 13.11, “CFC” means a “controlled foreign corporation”
within the meaning of Section 957 of the Code.

SECTION 14.       JOINT
AND SEVERAL LIABILITY; SURETYSHIP WAIVERS.  

 

14.1         Independent Obligations; Subrogation.  The Obligations of each Borrower hereunder
are joint and several.  To the maximum
extent permitted by law, each Borrower hereby waives any claim, right or remedy
which such Borrower now has or hereafter acquires against any other Borrower
that arises hereunder including, without limitation, any claim, remedy or right
of subrogation, reimbursement, exoneration, contribution, indemnification, or
participation in any claim, right or remedy of Agent or any Lender against any
Borrower or any Collateral which Agent or any Lender now has or hereafter
acquires, whether or not such claim, right or remedy arises in equity, under
contract, by statute, under common law or otherwise until the Obligations are
fully paid and finally discharged.  In
addition, each Borrower hereby waives any right to proceed against the other
Borrowers, now or hereafter, for contribution, indemnity, reimbursement, and
any other suretyship rights and claims, whether direct or indirect, liquidated
or contingent, whether arising under express or implied contract or by
operation of law, which any Borrower may now have or hereafter have as against
the other Borrowers with respect to the Obligations until the Obligations are
fully paid and finally discharged.  Each
Borrower also hereby waives any rights of recourse to or with respect to any
asset of the other Borrowers until the Obligations are fully paid and finally
discharged.

14.2         Authority to Modify Obligations and
Security.  Each Borrower authorizes
Agent and Lenders, without notice or demand and without affecting any Borrowers’
liability hereunder, from time to time, whether before or after any notice of
termination hereof or before or after any default in respect of the
Obligations, to: (a) renew, extend, accelerate, or otherwise change the time
for payment of, or otherwise change any other term or condition of, any
document or agreement evidencing or relating to any Obligations as such
Obligations relate to the other Borrowers, including, without limitation, to
increase or decrease the rate of interest thereon; (b) accept, substitute,
waive, defease, increase, release, exchange or otherwise alter any Collateral,
in whole or in part, securing the other Borrowers’ Obligations; (c) apply any
and all such Collateral and direct the order or manner of sale thereof as Agent
and Lenders, in their sole discretion, may determine; (d) deal with the other
Borrowers as Agent or any Lender may elect; (e) in Agent’s and Lenders’ sole
discretion, settle, release on terms satisfactory to them, or by operation of
law or otherwise, compound, compromise, collect or otherwise liquidate any of
the other Borrowers’ Obligations and/or any of the Collateral in any manner,
and bid and purchase any of the collateral at any sale thereof; (vi) apply any
and all payments or recoveries from the other Borrowers as Agent or Lenders, in
their sole discretion, may determine, whether or not such indebtedness relates
to the Obligations; all whether such Obligations are secured or unsecured or
guaranteed or not guaranteed by others; and (vii) apply any sums realized from
Collateral furnished by the other Borrowers upon any of its indebtedness or
obligations to Administrative Agent or Lenders as they in their sole
discretion, may determine, whether or not such indebtedness relates to the
Obligations; all without in any way diminishing, releasing or discharging the
liability of any Borrower hereunder.

 102
 

 

14.3         Waiver of Defenses.  Upon an Event of Default by any Borrower in
respect of any Obligations, Agent and Lenders may, at their option and without
notice to any Borrower, proceed directly against any Borrower to collect and
recover the full amount of the liability hereunder, or any portion thereof, and
each Borrower waives any right to require Agent or any Lender to: (a) proceed
against the other Borrowers or any other person whomsoever; (b) proceed against
or exhaust any Collateral given to or held by Agent or any Lender in connection
with the Obligations; (c) give notice of the terms, time and place of any
public or private sale of any of the Collateral except as otherwise provided
herein; or (d) pursue any other remedy in Agent’s or any Lender’s power
whatsoever.  A separate action or actions
may be brought and prosecuted against any Borrower whether or not action is
brought against the other Borrowers and whether the other Borrowers be joined
in any such action or actions; and each Borrower waives the benefit of any
statute of limitations affecting the liability hereunder or the enforcement
hereof, and agrees that any payment of any Obligations or other act which shall
toll any statute of limitations applicable thereto shall similarly operate to
toll such statute of limitations applicable to the liability hereunder.

14.4         Exercise of Agent’s and Lenders’
Rights.  Each Borrower hereby
authorizes and empowers Agent and Lenders in their sole discretion, without any
notice or demand to such Borrower whatsoever and without affecting the
liability of such Borrower hereunder, to exercise any right or remedy which
Agent or any Lender may have available to them against the other Borrowers.

14.5         Additional Waivers.  Each Borrower waives any defense arising by
reason of any disability or other defense of the other Borrowers or by reason
of the cessation from any cause whatsoever of the liability of the other
Borrowers or by reason of any act or omission of Agent or any Lender or others
which directly or indirectly results in or aids the discharge or release of the
other Borrowers or any Obligations or any Collateral by operation of law or
otherwise.  The Obligations shall be
enforceable against each Borrower without regard to the validity, regularity or
enforceability of any of the Obligations with respect to any of the other
Borrowers or any of the documents related thereto or any collateral security
documents securing any of the Obligations. 
No exercise by Agent or any Lender of, and no omission of Agent or any
Lender to exercise, any power or authority recognized herein and no impairment
or suspension of any right or remedy of Agent or any Lender against any
Borrower or any Collateral shall in any way suspend, discharge, release,
exonerate or otherwise affect any of the Obligations or any Collateral
furnished by the Borrowers or give to the Borrowers any right of recourse
against Agent or any Lender.  Each
Borrower specifically agrees that the failure of Agent or any Lender: (a) to
perfect any lien on or security interest in any property heretofore or
hereafter given any Borrower to secure payment of the Obligations, or to record
or file any document relating thereto or (b) to file or enforce a claim against
the estate (either in administration, bankruptcy or other proceeding) of any
Borrower shall not in any manner whatsoever terminate, diminish, exonerate or
otherwise affect the liability of any Borrower hereunder.

14.6         Additional Indebtedness .  Additional Obligations may be created from
time to time at the request of any Borrower and without further authorization
from or notice to any other Borrower even though the borrowing Borrower’s
financial condition may deteriorate since the date hereof.  Each Borrower waives the right, if any, to
require Agent or any Lender to disclose to such Borrower any information it may
now have or hereafter acquire concerning the other 

 103
 

 

Borrowers’ character, credit, Collateral, financial
condition or other matters.  Each
Borrower has established adequate means to obtain from the other Borrowers, on
a continuing basis, financial and other information pertaining to such Borrower’s
business and affairs, and assumes the responsibility for being and keeping
informed of the financial and other conditions of the other Borrowers and of
all circumstances bearing upon the risk of nonpayment of the Obligations which
diligent inquiry would reveal.  Neither
Agent nor any Lender need inquire into the powers of any Borrower or the
authority of any of their respective officers, directors, partners or agents
acting or purporting to act in their behalf, and any Obligations created in
reliance upon the purported exercise of such power or authority is hereby
guaranteed.  All Obligations of each
Borrower to Agent and Lenders heretofore, now or hereafter created shall be
deemed to have been granted at each Borrower’s special insistence and request and
in consideration of and in reliance upon this Agreement.

14.7         Notices, Demands, Etc.  Except as expressly provided by this
Agreement, neither Agent nor any Lender shall be under any obligation
whatsoever to make or give to any Borrower, and each Borrower hereby waives
diligence, all rights of setoff and counterclaim against Agent or any Lender,
all demands, presentments, protests, notices of protests, notices of protests,
notices of nonperformance, notices of dishonor, and all other notices of every
kind or nature, including notice of the existence, creation or incurring of any
new or additional Obligations.

14.8         Subordination.  Except as otherwise provided in this Section
14.8, any indebtedness of any Borrower now or hereafter owing to any other
Borrower is hereby subordinated to the Obligations, whether heretofore, now or
hereafter created, and whether before or after notice of termination hereof,
and, following the occurrence and during the continuation of an Event of
Default, no Borrower shall, without the prior consent of Required Lenders, pay
in whole or in part any of such indebtedness nor will any such Borrower accept
any payment of or on account of any such indebtedness at any time while such
Borrower remains liable hereunder.  At
the request of Agent, after the occurrence and during the continuance of an
Event of Default, each Borrower shall pay to Agent all or any part of such
subordinated indebtedness and any amount so paid to Agent at its request shall
be applied to payment of the Obligations.  Each payment on the indebtedness of any
Borrower to the other Borrowers received in violation of any of the provisions
hereof shall be deemed to have been received by any other Borrower as trustee
for Agent and Lenders and shall be paid over to Agent immediately on account of
the Obligations, but without otherwise affecting in any manner any such
Borrower’s liability under any of the provisions of this Agreement.  Each Borrower agrees to file all claims
against the other Borrowers in any bankruptcy or other proceeding in which the
filing of claims is required by law in respect of any indebtedness of the other
Borrowers to such Borrower, and Agent and Lenders shall be entitled to all of
any such Borrower’s rights thereunder. 
If for any reason any such Borrower fails to file such claim at least
thirty (30) days prior to the last date on which such claim should be filed,
Agent, as such Borrower’s attorney-in-fact, is hereby authorized to do so in
Borrowers’ name or, in Agent’s discretion, to assign such claim to, and cause a
proof of claim to be filed in the name of, Agent’s nominee.  In all such cases, whether in administration,
bankruptcy or otherwise, the person or persons authorized to pay such claim
shall pay to Agent the full amount payable on the claim in the proceeding, and
to the full extent necessary for that purpose any such Borrower hereby assigns
to Agent, for itself and the ratable benefit of Lenders, all such Borrower’s
rights to any payments or distributions to 

 104
 

 

which such Borrower otherwise would be entitled.  If the amount so paid is greater than any
such Borrower’s liability hereunder, Agent will pay the excess amount to the
person entitled thereto.

14.9         Revival.  If any payments of money or transfers of
property made to Agent or any Lender by any Borrower should for any reason
subsequently be declared to be, or in Agent’s counsel’s good faith opinion be
determined to be, fraudulent (within the meaning of any state or federal law
relating to fraudulent conveyances), preferential or otherwise voidable or
recoverable in whole or in part for any reason (hereinafter collectively called
“voidable transfers”) under the Bankruptcy Code or any other federal or state
law and Agent or any Lender is required to repay or restore, or in Agent’s
counsel’s good faith opinion may be so liable to repay or restore, any such
voidable transfer, or the amount or any portion thereof, then as to any such
voidable transfer or the amount repaid or restored and all reasonable costs and
expenses (including reasonable attorneys’ fees) of Agent or any Lender related
thereto, such Borrower’s liability hereunder shall automatically be revived,
reinstated and restored and shall exist as though such voidable transfer had
never been made to Agent or such Lender.

14.10       Understanding of Waivers .  Each Borrower warrants and agrees that the
waivers set forth in this Section 14 are made with full knowledge of their
significance and consequences.  If any of
such waivers are determined to be contrary to any applicable law or public
policy, such waivers shall be effective only to the maximum extent permitted by
law.

 105

 

IN WITNESS WHEREOF, Agent, Lenders, Borrowers and
Guarantors have caused these presents to be duly executed as of the day and
year first above written.

	
  AGENT

  	
   

  	
  BORROWERS

  
	
   

  	
   

  	
   

  
	
  WACHOVIA CAPITAL FINANCE 

  	
   

  	
  NATROL, INC. 

  
	
  CORPORATION (WESTERN), as Agent 

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/James E. Campbell

  	
   

  	
   

  	
  By:

  	
  /s/Dennis Jolicoeur

  	
   

  
	
  James E. Campbell

  	
   

  	
  Dennis R. Jolicoeur 

  
	
  Director

  	
   

  	
  Chief Financial Officer, Treasurer and 

  
	
   

  	
   

  	
  Executive Vice President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  LENDERS

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  WACHOVIA CAPITAL FINANCE 

  	
   

  	
  PROLAB NUTRITION, INC. 

  
	
  CORPORATION (WESTERN) 

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/James E. Campbell

  	
   

  	
   

  	
  By:

  	
  /s/Dennis Jolicoeur

  	
   

  
	
  James E. Campbell 

  	
   

  	
  Dennis R. Jolicoeur 

  
	
  Director 

  	
   

  	
  Chief Financial Officer, Treasurer and 

  
	
   

  	
   

  	
  Executive Vice President

  
	
  Commitment: 
  $10,000,000

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  GUARANTORS 

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  NATROL PRODUCTS, INC.

  	
   

  	
  NATROL ACQUISITION CORP. 

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/Dennis Jolicoeur

  	
   

  	
   

  	
  By:

  	
  /s/Dennis Jolicoeur

  	
   

  
	
  Dennis R. Jolicoeur 

  	
   

  	
  Dennis R. Jolicoeur 

  
	
  Chief Financial Officer, Treasurer and 

  	
   

  	
  Chief Financial Officer, Treasurer and 

  
	
  Executive Vice President

  	
   

  	
  Executive Vice President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  NATROL DIRECT, INC. 

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/Dennis Jolicoeur

  	
   

  	
   

  	
   

  
	
  Dennis R. Jolicoeur 

  	
   

  	
   

  
	
  Chief Financial Officer, Treasurer and 

  	
   

  	
   

  
	
  Executive Vice President

  	
   

  	
   

  
														

 

 S-1

 

EXHIBIT A

to

LOAN AND SECURITY AGREEMENT

ASSIGNMENT AND ACCEPTANCE
AGREEMENT

This ASSIGNMENT AND ACCEPTANCE AGREEMENT (this “Assignment
and Acceptance”) dated as of                           ,
200    is made between                                                 
(the “Assignor”) and                                         
(the “Assignee”).

W I T N E S S E T H:

WHEREAS, Wachovia Capital Finance Corporation
(Western), in its capacity as agent pursuant to the Loan Agreement (as
hereinafter defined) acting for and on behalf of the financial institutions
which are parties thereto as lenders (in such capacity, “Agent”), and the
financial institutions which are parties to the Loan Agreement as lenders
(individually, each a “Lender” and collectively, “Lenders”) have entered or are
about to enter into financing arrangements pursuant to which Agent and Lenders
may make loans and advances and provide other financial accommodations to
Natrol, Inc. and Prolab Nutrition, Inc. (collectively, “Borrowers”) as set
forth in the Loan and Security Agreement, dated August 25, 2006, by and among
Borrowers, certain of their affiliates, Agent and Lenders (as the same now
exists or may hereafter be amended, modified, supplemented, extended, renewed,
restated or replaced, the “Loan Agreement”), and the other agreements,
documents and instruments referred to therein or at any time executed and/or
delivered in connection therewith or related thereto (all of the foregoing,
together with the Loan Agreement, as the same now exist or may hereafter be
amended, modified, supplemented, extended, renewed, restated or replaced, being
collectively referred to herein as the “Financing Agreements”);

WHEREAS, as provided under the Loan Agreement,
Assignor committed to making Loans (the “Committed Loans”) to Borrowers in an
aggregate amount not to exceed $                      
(the “Commitment”);

WHEREAS, Assignor wishes to assign to Assignee [part
of the] [all] rights and obligations of Assignor under the Loan Agreement in
respect of its Commitment in an amount equal to $                            
(the “Assigned Commitment Amount”) on the terms and subject to the conditions
set forth herein and Assignee wishes to accept assignment of such rights and to
assume such obligations from Assignor on such terms and subject to such
conditions;

NOW, THEREFORE, in consideration of the foregoing and
the mutual agreements contained herein, the parties hereto agree as follows:

1.             Assignment and Acceptance.

(a)           Subject to the terms and conditions
of this Assignment and Acceptance, 
Assignor hereby sells, transfers and assigns to Assignee, and Assignee
hereby purchases, assumes and undertakes from Assignor, without recourse and
without representation or warranty (except as provided in this Assignment and
Acceptance) an interest in (i) the Commitment and 

 A-1
 

 

each of the Committed Loans of Assignor and (ii) all related rights,
benefits, obligations, liabilities and indemnities of the Assignor under and in
connection with the Loan Agreement and the other Financing Agreements, so that
after giving effect thereto, the Commitment of Assignee shall be as set forth
below and the Pro Rata Share of Assignee shall be               
(    %) percent.

(b)           With effect on and after the
Effective Date (as defined in Section 5 hereof), Assignee shall be a party to
the Loan Agreement and succeed to all of the rights and be obligated to perform
all of the obligations of a Lender under the Loan Agreement, including the
requirements concerning confidentiality and the payment of indemnification,
with a Commitment in an amount equal to the Assigned Commitment Amount.  Assignee agrees that it will perform in
accordance with their terms all of the obligations which by the terms of the
Loan Agreement are required to be performed by it as a Lender.  It is the intent of the parties hereto that
the Commitment of Assignor shall, as of the Effective Date, be reduced by an
amount equal to the Assigned Commitment Amount and Assignor shall relinquish
its rights and be released from its obligations under the Loan Agreement to the
extent such obligations have been assumed by Assignee; provided, that,
Assignor shall not relinquish its rights under Sections 2.2, 6.4, 6.9, 11.5 and
12.5 of the Loan Agreement to the extent such rights relate to the time prior
to the Effective Date.

(c)           After giving effect to the assignment
and assumption set forth herein, on the Effective Date Assignee’s Commitment
will be $                          .

(d)           After giving effect to the assignment
and assumption set forth herein, on the Effective Date Assignor’s Commitment
will be $                            
(as such amount may be further reduced by any other assignments by Assignor on
or after the date hereof).

2.             Payments.

(a)           As consideration for the sale,
assignment and transfer contemplated in Section 1 hereof, Assignee shall pay to
Assignor on the Effective Date in immediately available funds an amount equal
to $                        ,
representing Assignee’s Pro Rata Share of the principal amount of all Committed
Loans.

(b)           Assignee shall pay to Agent the
processing fee in the amount specified in Section 13.7(a) of the Loan
Agreement.

3.             Reallocation of Payments.  Any interest, fees and other payments accrued
to the Effective Date with respect to the Commitment, Committed Loans and
outstanding Letters of Credit shall be for the account of Assignor.  Any interest, fees and other payments accrued
on and after the Effective Date with respect to the Assigned Commitment Amount
shall be for the account of Assignee. 
Each of Assignor and Assignee agrees that it will hold in trust for the
other party any interest, fees and other amounts which it may receive to which
the other party is entitled pursuant to the preceding sentence and pay to the
other party any such amounts which it may receive promptly upon receipt.

4.             Independent Credit Decision.  Assignee acknowledges that it has received a
copy of the Loan Agreement and the Schedules and Exhibits thereto, together
with copies of the most recent financial statements of Natrol, Inc. and its Subsidiaries,
and such other documents and 

 A-2
 

 

information as it has deemed appropriate to make its
own credit and legal analysis and decision to enter into this Assignment and
Acceptance and agrees that it will, independently and without reliance upon
Assignor, Agent or any Lender and based on such documents and information as it
shall deem appropriate at the time, continue to make its own credit and legal
decisions in taking or not taking action under the Loan Agreement.

5.             Effective Date; Notices.

(a)           As between Assignor and Assignee, the
effective date for this Assignment and Acceptance shall be                               ,
200   (the “Effective Date”); provided, that, the
following conditions precedent have been satisfied on or before the Effective
Date:

(i)            this Assignment and Acceptance shall
be executed and delivered by Assignor and Assignee;

(ii)           the consent of Agent as required for
an effective assignment of the Assigned Commitment Amount by Assignor to
Assignee shall have been duly obtained and shall be in full force and effect as
of the Effective Date;

(iii)          written notice of such assignment,
together with payment instructions, addresses and related information with
respect to Assignee, shall have been given to Administrative Borrower and
Agent;

(iv)          Assignee shall pay to Assignor all
amounts due to Assignor under this Assignment and Acceptance; and

(v)           the processing fee referred to in
Section 2(b) hereof shall have been paid to Agent.

(b)           the execution of this Assignment and
Acceptance, Assignor shall deliver to Administrative Borrower and Agent for
acknowledgment by Agent, a Notice of Assignment in the form attached hereto as
Schedule 1.

6.             Agent. 
[INCLUDE ONLY IF ASSIGNOR IS AN AGENT]

(a)           Assignee hereby appoints and
authorizes Assignor in its capacity as Agent to take such action as agent on
its behalf to exercise such powers under the Loan Agreement as are delegated to
Agent by Lenders pursuant to the terms of the Loan Agreement.

(b)           Assignee shall assume no duties or
obligations held by Assignor in its capacity as Agent under the Loan
Agreement.]

7.             Withholding Tax. 
Assignee (a) represents and warrants to Assignor, Agent and Borrowers
that under applicable law and treaties no tax will be required to be withheld
by Assignee, Agent or Borrowers with respect to any payments to be made to
Assignee hereunder or under any of the Financing Agreements, (b) agrees to
furnish (if it is organized under the laws of any jurisdiction other than the
United States or any State thereof) to Agent and Borrowers prior to the time
that Agent or Borrowers are required to make any payment of principal, interest
or 

 A-3
 

 

fees hereunder, duplicate executed originals of either
U.S. Internal Revenue Service Form W-8BEN or W-8ECI, as applicable (wherein
Assignee claims entitlement to the benefits of a tax treaty that provides for a
complete exemption from U.S. federal income withholding tax on all payments
hereunder) and agrees to provide new such forms upon the expiration of any
previously delivered form or comparable statements in accordance with
applicable U.S. law and regulations and amendments thereto, duly executed and
completed by Assignee, and (c) agrees to comply with all applicable U.S. laws
and regulations with regard to such withholding tax exemption.

8.             Representations and Warranties.

(a)           Assignor represents and warrants that
(i) it is the legal and beneficial owner of the interest being assigned by it
hereunder and that such interest is free and clear of any security interest,
lien, encumbrance or other adverse claim, (ii) it is duly organized and
existing and it has the full power and authority to take, and has taken, all
action necessary to execute and deliver this Assignment and Acceptance and any
other documents required or permitted to be executed or delivered by it in
connection with this Assignment and Acceptance and to fulfill its obligations
hereunder, (iii) no notices to, or consents, authorizations or approvals of,
any Person are required (other than any already given or obtained) for its due
execution, delivery and performance of this Assignment and Acceptance, and
apart from any agreements or undertakings or filings required by the Loan
Agreement, no further action by, or notice to, or filing with, any Person is
required of it for such execution, delivery or performance, and (iv) this
Assignment and Acceptance has been duly executed and delivered by it and
constitutes the legal, valid and binding obligation of Assignor, enforceable
against Assignor in accordance with the terms hereof, subject, as to enforcement,
to bankruptcy, insolvency, moratorium, reorganization and other laws of general
application relating to or affecting creditors’ rights and to general equitable
principles.

(b)           Assignor makes no representation or
warranty and assumes no responsibility with respect to any statements,
warranties or representations made in or in connection with the Loan Agreement
or any of the other Financing Agreements or the execution, legality, validity,
enforceability, genuineness, sufficiency or value of the Loan Agreement or any
other instrument or document furnished pursuant thereto.  Assignor makes no representation or warranty
in connection with, and assumes no responsibility with respect to, the
solvency, financial condition or statements of Borrowers, Guarantors or any of
their respective Affiliates, or the performance or observance by Borrowers,
Guarantors or any other Person, of any of its respective obligations under the
Loan Agreement or any other instrument or document furnished in connection
therewith.

(c)           Assignee represents and warrants that
(i) it is duly organized and existing and it has full power and authority to
take, and has taken, all action necessary to execute and deliver this
Assignment and Acceptance and any other documents required or permitted to be
executed or delivered by it in connection with this Assignment and Acceptance,
and to fulfill its obligations hereunder, (ii) no notices to, or consents,
authorizations or approvals of, any Person are required (other than any already
given or obtained) for its due execution, delivery and performance of this
Assignment and Acceptance, and apart from any agreements or undertakings or
filings required by the Loan Agreement, no further action by, or notice to, or
filing with, any 

 A-4
 

 

Person is required of it for such execution, delivery
or performance; and (iii) this Assignment and Acceptance has been duly executed
and delivered by it and constitutes the legal, valid and binding obligation of
Assignee, enforceable against Assignee in accordance with the terms hereof,
subject, as to enforcement, to bankruptcy, insolvency, moratorium,
reorganization and other laws of general application relating to or affecting
creditors’ rights to general equitable principles.

9.             Further Assurances.  Assignor and Assignee each hereby agree to
execute and deliver such other instruments, and take such other action, as
either party may reasonably request in connection with the transactions
contemplated by this Assignment and Acceptance, including the delivery of any
notices or other documents or instruments to Borrowers or Agent, which may be
required in connection with the assignment and assumption contemplated hereby.

10.           Miscellaneous.

(a)           Any amendment or waiver of any
provision of this Assignment and Acceptance shall be in writing and signed by
the parties hereto.  No failure or delay
by either party hereto in exercising any right, power or privilege hereunder
shall operate as a waiver thereof and any waiver of any breach of the provisions
of this Assignment and Acceptance shall be without prejudice to any rights with
respect to any other for further breach thereof.

(b)           All payments made hereunder shall be
made without any set-off or counterclaim.

(c)           Assignor and Assignee shall each pay
its own costs and expenses incurred in connection with the negotiation,
preparation, execution and performance of this Assignment and Acceptance.

(d)           This Assignment and Acceptance may be
executed in any number of counterparts and all of such counterparts taken
together shall be deemed to constitute one and the same instrument.

(e)           THIS ASSIGNMENT AND ACCEPTANCE SHALL
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF
CALIFORNIA.  Assignor and Assignee each
irrevocably submits to the non-exclusive jurisdiction of any State or Federal
court sitting in Los Angeles County, California over any suit, action or
proceeding arising out of or relating to this Assignment and Acceptance and
irrevocably agrees that all claims in respect of such action or proceeding may
be heard and determined in such California State or Federal court.  Each party to this Assignment and Acceptance
hereby irrevocably waives, to the fullest extent it may effectively do so, the
defense of an inconvenient forum to the maintenance of such action or
proceeding.

(f)            ASSIGNOR AND ASSIGNEE EACH HEREBY
KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A
TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF,
UNDER, OR IN CONNECTION WITH THIS ASSIGNMENT AND ACCEPTANCE, THE LOAN
AGREEMENT, ANY OF THE OTHER FINANCING AGREEMENTS OR ANY 

 A-5
 

 

RELATED DOCUMENTS AND AGREEMENTS OR ANY COURSE OF
CONDUCT, COURSE OF DEALING, OR STATEMENTS (WHETHER ORAL OR WRITTEN).

IN WITNESS WHEREOF, Assignor and Assignee have caused
this Assignment and Acceptance to be executed and delivered by their duly
authorized officers as of the date first above written.

	
   

  	
  [ASSIGNOR]

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  [ASSIGNEE]

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
   

  
					

 

 A-6
 

 

 

SCHEDULE 1

NOTICE OF ASSIGNMENT AND
ACCEPTANCE

                            ,
20    

                                                  

                                                  

                                                    

Attn.:                                                    

Re:                                                    

Ladies and Gentlemen:

Wachovia Capital Finance Corporation (Western), in its
capacity as agent pursuant to the Loan Agreement (as hereinafter defined)
acting for and on behalf of the financial institutions which are parties
thereto as lenders (in such capacity, “Agent”), and the financial institutions
which are parties to the Loan Agreement as lenders (individually, each a “Lender”
and collectively, “Lenders”) have entered or are about to enter into financing
arrangements pursuant to which Agent and Lenders may make loans and advances
and provide other financial accommodations to Natrol, Inc. and Prolab
Nutrition, Inc. (collectively, “Borrowers”) as set forth in the Loan and
Security Agreement, dated August 25, 2006, by and among Borrowers, certain of
their affiliates, Agent and Lenders (as the same now exists or may hereafter be
amended, modified, supplemented, extended, renewed, restated or replaced, the “Loan
Agreement”), and the other agreements, documents and instruments referred to
therein or at any time executed and/or delivered in connection therewith or
related thereto (all of the foregoing, together with the Loan Agreement, as the
same now exist or may hereafter be amended, modified, supplemented, extended,
renewed, restated or replaced, being collectively referred to herein as the “Financing
Agreements”).  Capitalized terms not
otherwise defined herein shall have the respective meanings ascribed thereto in
the Loan Agreement.

1.             We hereby give you notice of, and request your consent
to, the assignment by                                                     
(the “Assignor”) to                                                       
(the “Assignee”) such that after giving effect to the assignment Assignee shall
have an interest equal to                 
(    %) percent of the total Commitments pursuant to the
Assignment and Acceptance Agreement attached hereto (the “Assignment and
Acceptance”).  We understand that the
Assignor’s Commitment shall be reduced by $                          ,
as the same may be further reduced by other assignments on or after the date
hereof.

2.             Assignee agrees that, upon receiving the consent of
Agent to such assignment, Assignee will be bound by the terms of the Loan Agreement
as fully and to the same extent as if the Assignee were the Lender originally
holding such interest under the Loan Agreement.

 A-7
 

 

3.             The following administrative details apply to Assignee:

(A)          Notice
address:

	
  Assignee name:

  	
   

  
	
  Address:

  	
   

  
	
  Attention:

  	
   

  
	
  Telephone:

  	
   

  
	
  Telecopier:

  	
   

  

 

(B)           Payment
instructions:

	
  Account No.:

  	
   

  
	
  At:

  	
   

  
	
  Reference:

  	
   

  
	
  Attention:

  	
   

  
	
   

  	
   

  

 

4.             You are entitled to rely upon the representations,
warranties and covenants of each of Assignor and Assignee contained in the
Assignment and Acceptance.

 A-8
 

 

IN WITNESS WHEREOF,
Assignor and Assignee have caused this Notice of Assignment and Acceptance to
be executed by their respective duly authorized officials, officers or agents
as of the date first above mentioned.

	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
  [NAME OF
  ASSIGNOR]

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  [NAME OF
  ASSIGNEE]

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  ACKNOWLEDGED AND
  ASSIGNMENT

  	
   

  
	
  CONSENTED TO:

  	
   

  
	
   

  	
   

  
	
  WACHOVIA CAPITAL
  FINANCE

  	
   

  
	
  CORPORATION
  (WESTERN), as Agent

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
   

  	
   

  
	
  Title:

  	
   

  	
   

  
							

 

 A-9

 

EXHIBIT B

TO

LOAN AND SECURITY AGREEMENT

Compliance Certificate

To:                              Wachovia
Capital Finance Corporation (Western), as Agent

251 South Lake Avenue, Suite 900

Pasadena, California 91101

Ladies and Gentlemen:

I hereby certify to you pursuant to Section 9.6 of the
Loan Agreement (as defined below) as follows:

1.             I am the duly appointed Chief Financial Officer of
Natrol, Inc., a Delaware corporation, and Prolab Nutrition, Inc., a Connecticut
corporation (collectively, “Borrowers”). 
Capitalized terms used herein without definition shall have the meanings
given to such terms in the Loan and Security Agreement, dated August 25, 2006,
by and among Wachovia Capital Finance Corporation (Western) as agent for the
financial institutions party thereto as lenders (in such capacity, “Agent”) and
the financial institutions party thereto as lenders (collectively, “Lenders”),
Borrowers and certain of their affiliates (as such Loan and Security Agreement
is amended, modified or supplemented, from time to time, the “Loan Agreement”).

2.             I have reviewed the terms of the Loan Agreement, and
have made, or have caused to be made under my supervision, a review in
reasonable detail of the transactions and the financial condition of Borrowers
and Guarantors, during the immediately preceding fiscal month.

3.             The review described in Section 2 above did not disclose
the existence during or at the end of such fiscal month, and I have no
knowledge of the existence and continuance on the date hereof, of any condition
or event which constitutes a Default or an Event of Default, except as set
forth on Schedule I attached hereto. 
Described on Schedule I attached hereto are the exceptions, if any, to
this Section 3 listing, in detail, the nature of the condition or event, the
period during which it has existed and the action which any Borrower or
Guarantor has taken, is taking, or proposes to take with respect to such
condition or event.

4.             I further certify that, based on the review described in
Section 2 above, no Borrower or Guarantor has not at any time during or at the
end of such fiscal month, except as specifically described on Schedule II
attached hereto or as permitted by the Loan Agreement, done any of the
following:

(a)           Changed its respective corporate
name, or transacted business under any trade name, style, or fictitious name,
other than those previously described to you and set forth in the Financing
Agreements.

(b)           Changed the location of its chief
executive office, changed its jurisdiction of incorporation, changed its type
of organization or changed the location of or disposed of 

 C-1
 

 

any of its properties or assets (other than pursuant
to the sale of Inventory in the ordinary course of its business or as otherwise
permitted by Section 9.7 of the Loan Agreement), or established any new asset
locations.

(c)           Materially changed the terms upon
which it sells goods (including sales on consignment) or provides services, nor
has any vendor or trade supplier to any Borrower or Guarantor during or at the
end of such period materially adversely changed the terms upon which it
supplies goods to any Borrower or Guarantor.

(d)           Permitted or suffered to exist any
security interest in or liens on any of its properties, whether real or
personal, other than as specifically permitted in the Financing Agreements.

(e)           Received any notice of, or obtained
knowledge of any of the following not previously disclosed to Agent:  (i) the occurrence of any event involving the
release, spill or discharge of any Hazardous Material in violation of
applicable Environmental Law in a material respect or (ii) any investigation,
proceeding, complaint, order, directive, claims, citation or notice with
respect to: (A) any non-compliance with or violation of any applicable
Environmental Law by any Borrower or Guarantor in any material respect or (B)
the release, spill or discharge of any Hazardous Material in violation of
applicable Environmental Law in a material respect or (C) the generation, use,
storage, treatment, transportation, manufacture, handling, production or
disposal of any Hazardous Materials in violation of applicable Environmental
Laws in a material respect or (D) any other environmental, health or safety
matter, which has a material adverse effect on any Borrower or Guarantor or its
business, operations or assets or any properties at which such Borrower or
Guarantor transported, stored or disposed of any Hazardous Materials.

(f)            Become aware of, obtained knowledge
of, or received notification of, any breach or violation of any material
covenant contained in any instrument or agreement in respect of Indebtedness
for money borrowed by any Borrower or Guarantor.

5.             Attached hereto as Schedule III are the calculations
used in determining, as of the end of such fiscal month whether Borrowers and
Guarantors are in compliance with the covenants set forth in Section 9.17 of
the Loan Agreement for such fiscal month.

The foregoing certifications are made and delivered
this day of                       ,
20    .

	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
  NATROL, INC.

  
	
   

  	
  PROLAB
  NUTRITION, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
   

  
				

 

 C-2Exhibit 10.2

 

GUARANTY

August
25, 2006

Wachovia Capital Finance Corporation (Western), as
Agent

251 South Lake Avenue, Suite 900

Pasadena, California 91101

Re:          Natrol, Inc., a Delaware corporation (“Natrol”), and Prolab
Nutrition, Inc., a Connecticut corporation (“Prolab” and together with
Natrol, and their respective permitted successors and assigns, collectively, “Borrowers”
and each a “Borrower”)

Ladies and Gentlemen:

Wachovia Capital Finance Corporation (Western), as
agent (in such capacity, “Agent”) for the Lenders (as defined below) and
Borrowers have entered into certain financing arrangements pursuant to which
the Lenders may make loans and advances and provide other financial
accommodations to Borrowers as set forth in the Loan and Security Agreement, of
even date herewith, by and between Agent, the lenders signatory thereto (the “Lenders”),
Borrowers, Natrol Products, Inc., a Delaware corporation (“NPI”), Natrol
Acquisition Corp., a Delaware corporation (“NAC”) and Natrol Direct,
Inc., a Delaware corporation (“NDI” and together with NPI and NAC, and
their respective permitted successors and assigns, collectively, “Guarantors”
and each a “Guarantor”) (as the same now exists or may hereafter be
amended, modified, supplemented, extended, renewed, restated or replaced, the “Loan
Agreement”), and other agreements, documents and instruments referred to
therein or at any time executed and/or delivered in connection therewith or
related thereto, including, but not limited to, this Guaranty (all of the
foregoing, together with the Loan Agreement, as the same now exist or may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced, being collectively referred to herein as the “Financing Agreements”).

Due to the close business and financial relationships
between Borrowers and each of the Guarantors, in consideration of the benefits
which will accrue to Guarantors and as an inducement for and in consideration
of the Lenders making loans and advances and providing other financial accommodations
to Borrowers pursuant to the Loan Agreement and the other Financing Agreements,
each of Guarantors hereby jointly and severally agrees in favor of Agent and
the Lender as follows:

1.             Guaranty.

(a)           Each
of Guarantors absolutely and unconditionally, jointly and severally, guarantees
and agrees to be liable for the full and indefeasible payment and performance
when due of the following (all of which are collectively referred to herein as
the “Guaranteed Obligations”): 
(i) all “Obligations” as defined in the Loan Agreement, whether now
existing or 

 

hereafter arising, whether arising before, during or
after the initial or any renewal term of the Loan Agreement or after the
commencement of any case with respect to any Borrower under the United States
Bankruptcy Code or any similar statute (including, without limitation, the
payment of interest and other amounts, which would accrue and become due but
for the commencement of such case, whether or not such amounts are allowed or
allowable in whole or in part in any such case and including loans, interest,
fees, charges and expenses related thereto and all other obligations of any
Borrower or its successors to Agent or any Lender arising after the
commencement of such case), and (ii) all expenses (including, without
limitation, attorneys’ fees and legal expenses) incurred by Agent or any Lender
in connection with the preparation, execution, delivery, recording,
administration, collection, liquidation, enforcement and defense of any
Borrower’s obligations, liabilities and indebtedness as aforesaid to Agent or
any Lender, the rights of Agent or any Lender in any collateral or under this
Guaranty and all other Financing Agreements or in any way involving claims by
or against Agent or any Lender directly or indirectly arising out of or related
to the relationships between any Borrower, any of Guarantors or any other
Obligor (as hereinafter defined) and Agent or any Lender, whether such expenses
are incurred before, during or after the initial or any renewal term of the
Loan Agreement and the other Financing Agreements or after the commencement of
any case with respect to any Borrower or any of Guarantors under the United
States Bankruptcy Code or any similar statute.

(b)           This
Guaranty is a guaranty of payment and not of collection.  Each of Guarantors agrees that Agent need not
attempt to collect any Guaranteed Obligations from any Borrower, any one of
Guarantors or any other Obligor or to realize upon any collateral, but may require
any one of Guarantors to make immediate payment of all of the Guaranteed
Obligations to Agent when due, whether by maturity, acceleration or otherwise,
or at any time thereafter.  Agent may
apply any amounts received in respect of the Guaranteed Obligations to any of
the Guaranteed Obligations, in whole or in part (including attorneys’ fees and
legal expenses incurred by Agent or any Lender with respect thereto or
otherwise chargeable to Borrowers or Guarantors) and in such order as Agent may
elect.

(c)           Payment
by Guarantors shall be made to Agent at the office of Agent from time to time
on demand as Guaranteed Obligations become due. 
Guarantors shall make all payments to Agent on the Guaranteed
Obligations free and clear of, and without deduction or withholding for or on
account of, any setoff, counterclaim, defense, duties, taxes, levies, imposts,
fees, deductions, withholding, restrictions or conditions of any kind.  One or more successive or concurrent actions
may be brought hereon against any of Guarantors either in the same action in which
any Borrower or any of the other Guarantors or any other Obligor is sued or in
separate actions.  In the event any claim
or action, or action on any judgment, based on this Guaranty is brought against
any of Guarantors, each of Guarantors agrees not to deduct, set-off, or seek
any counterclaim for or recoup any amounts which are or may be owed by Agent or
any Lender to any of Guarantors.

2.             Waivers
and Consents.

(a)           Notice
of acceptance of this Guaranty, the making of loans and advances and providing
other financial accommodations to Borrowers and presentment, demand, protest,
notice of protest, notice of nonpayment or default and all other notices to
which any Borrower or any of Guarantors are entitled are hereby waived by each
of Guarantors.  Each of Guarantors 

 2
 

 

also waives notice of and hereby consents to,
(i) any amendment, modification, supplement, extension, renewal, or
restatement of the Loan Agreement and any of the other Financing Agreements,
including, without limitation, extensions of time of payment of or increase or
decrease in the amount of any of the Guaranteed Obligations, the interest rate,
fees, other charges, or any collateral, and the guaranty made herein shall
apply to the Loan Agreement and the other Financing Agreements and the Guaranteed
Obligations as so amended, modified, supplemented, renewed, restated or
extended, increased or decreased, (ii) the taking, exchange, surrender and
releasing of collateral or guarantees now or at any time held by or available
to Agent or any Lender for the obligations of any Borrower or any other party
at any time liable on or in respect of the Guaranteed Obligations or who is the
owner of any property which is security for the Guaranteed Obligations
(individually, an “Obligor” and collectively, the “Obligors”),
including, without limitation, the surrender or release by Agent of any one of
Guarantors hereunder, (iii) the exercise of, or refraining from the
exercise of any rights against any Borrower, any of Guarantors or any other
Obligor or any collateral, (iv) the settlement, compromise or release of,
or the waiver of any default with respect to, any of the Guaranteed Obligations
and (v) any financing by Agent or any Lender of any Borrower under Section
364 of the United States Bankruptcy Code or consent to the use of cash
collateral by Agent or any Lender under Section 363 of the United States
Bankruptcy Code.  Each of Guarantors
agrees that the amount of the Guaranteed Obligations shall not be diminished
and the liability of Guarantors hereunder shall not be otherwise impaired or
affected by any of the foregoing.

(b)           No
invalidity, irregularity or unenforceability of all or any part of the
Guaranteed Obligations shall affect, impair or be a defense to this Guaranty,
nor shall any other circumstance which might otherwise constitute a defense
available to or legal or equitable discharge of any Borrower in respect of any
of the Guaranteed Obligations, or any one of Guarantors in respect of this
Guaranty, affect, impair or be a defense to this Guaranty.  Without limitation of the foregoing, the
liability of Guarantors hereunder shall not be discharged or impaired in any
respect by reason of any failure by Agent to perfect or continue perfection of
any lien or security interest in any collateral or any delay by Agent in
perfecting any such lien or security interest. 
As to interest, fees and expenses, whether arising before or after the
commencement of any case with respect to any Borrower under the United States
Bankruptcy Code or any similar statute, Guarantors shall be liable therefor,
even if any Borrower’s liability for such amounts does not, or ceases to, exist
by operation of law.  Each of Guarantors
acknowledges that neither Agent nor any Lender has made any representations to
any of Guarantors with respect to any Borrower, any other Obligor or otherwise
in connection with the execution and delivery by Guarantors of this Guaranty
and Guarantors are not in any respect relying upon Agent or any Lender or any
statements by Agent or any Lender in connection with this Guaranty.

(c)           Each
of Guarantors hereby irrevocably and unconditionally waives and relinquishes
all statutory, contractual, common law, equitable and all other claims against
any Borrower, any collateral for the Guaranteed Obligations or other assets of
any Borrower or any other Obligor, for subrogation, reimbursement, exoneration,
contribution, indemnification, setoff or other recourse in respect to sums paid
or payable to Agent or any Lender by each of Guarantors hereunder and each of
Guarantors hereby further irrevocably and unconditionally waives and
relinquishes any and all other benefits which Guarantors might otherwise
directly or indirectly receive or be entitled to receive by reason of any
amounts paid by or collected or due 

 3
 

 

from Guarantors, any Borrower or any other Obligor
upon the Guaranteed Obligations or realized from their property.

(d)           To
the extent permitted by law, each Guarantor hereby irrevocably and
unconditionally waives and relinquishes any right to revoke this Guaranty that
such Guarantor may now have or hereafter acquire.

(e)           Without
limiting the generality of any other waiver or other provision set forth in
this Guaranty, in accordance with Section 2856 of the California Civil Code,
each Guarantor hereby irrevocably and unconditionally waives all rights and
defenses arising out of an election of remedies by Agent, even though that
election of remedies, such as a nonjudicial foreclosure with respect to
security for a Guaranteed Obligation, has destroyed such Guarantor’s rights of
subrogation and reimbursement against any Borrower by operation of Section 580d
of the California Code of Civil Procedure or otherwise.

(f)            Without
limiting the generality of any other waiver or other provision set forth in
this Guaranty, in accordance with Section 2856 of the California Civil Code,
each Guarantor waives all rights and defenses that such Guarantor may have
because the Guaranteed Obligations are secured by real property.  This means, among other things: (i) Agent may
collect from any Guarantor without first foreclosing on any real or personal
property collateral pledged by any Borrower; and (ii) if Agent forecloses on
any real property collateral pledged by any Borrower: (A) the amount of the
Guaranteed Obligations may be reduced only by the price for which that
collateral is sold at the foreclosure sale, even if the collateral is worth
more than the sale price and (B) Agent may collect from any Guarantor even if
Agent, by foreclosing on the real property collateral, has destroyed any right
such Guarantor may have to collect from any Borrower.  This is an unconditional and irrevocable
waiver of any rights and defenses each Guarantor may have because the
Guaranteed Obligations are secured by real property.  These rights and defenses include, but are
not limited to, any rights or defenses based upon Sections 580a, 580b, 580d, or
726 of the California Code of Civil Procedure.

(g)           Without
limiting the generality of any other waiver or other provision set forth in
this Guaranty, each Guarantor hereby irrevocably and unconditionally waives and
relinquishes, to the maximum extent such waiver or relinquishment is permitted
by applicable law, any and all rights, claims and defenses arising directly or
indirectly under Sections 2787 through 2855, inclusive, of the California Civil
Code and Sections 580a, 580b, 580c, 580d and 726 of the California Code of
Civil Procedure or any similar laws of any other jurisdiction.

3.             Subordination.  Payment of all amounts now or hereafter owed
to Guarantors by any Borrower or any other Obligor is hereby subordinated in
right of payment to the indefeasible payment in full to Agent, for the benefit
of the Lenders, of the Guaranteed Obligations and all such amounts and any
security and guarantees therefor are hereby assigned to Agent, for the ratable
benefit of the Lenders, as security for the Guaranteed Obligations.

4.             Acceleration.  Notwithstanding anything to the contrary
contained herein or any of the terms of any of the other Financing Agreements,
the liability of Guarantors for the entire Guaranteed Obligations shall mature
and become immediately due and payable, even if the liability of any Borrower
or any other Obligor therefor does not, upon the occurrence of any act, 

 4
 

 

condition or event which constitutes an Event of
Default as such term is defined in the Loan Agreement.

5.             Account
Stated.  The books and records of
Agent showing the account between Agent, the Lenders and each Borrower shall be
admissible in evidence in any action or proceeding against or involving
Guarantors as prima facie proof of the items therein set forth, and the monthly
statements of Agent rendered to any Borrower, to the extent to which no written
objection is made within sixty (60) days from the date of sending thereof to
such Borrower, shall be deemed conclusively correct and constitute an account
stated between Agent, the Lenders and Borrowers and be binding on Guarantors.

6.             Termination.  This Guaranty is continuing, unlimited,
absolute and unconditional.  All
Guaranteed Obligations shall be conclusively presumed to have been created in
reliance on this Guaranty.  This Guaranty
may not be terminated and shall continue so long as the Loan Agreement shall be
in effect (whether during its original term or any renewal, substitution or
extension thereof) or any Guaranteed Obligations shall be outstanding.

7.             Reinstatement.  If after receipt of any payment of, or
proceeds of collateral applied to the payment of, any of the Guaranteed
Obligations, Agent or any Lender is required to surrender or return such
payment or proceeds to any Person for any reason, then the Guaranteed
Obligations intended to be satisfied by such payment or proceeds shall be
reinstated and continue and this Guaranty shall continue in full force and
effect as if such payment or proceeds had not been received by Agent or such
Lender.  Each of Guarantors shall be
liable to pay to Agent and the Lenders, and does indemnify and hold Agent and
the Lenders harmless for the amount of any payments or proceeds surrendered or
returned.  This Section 7 shall remain
effective notwithstanding any contrary action which may be taken by Agent or
any Lender in reliance upon such payment or proceeds.  This Section 7 shall survive the termination
of this Guaranty.

8.             Amendments
and Waivers.  Neither this Guaranty
nor any provision hereof shall be amended, modified, waived or discharged
orally or by course of conduct, but only by a written agreement signed by an
authorized officer of Agent.  Agent shall
not by any act, delay, omission or otherwise be deemed to have expressly or
impliedly waived any of its or any Lender’s rights, powers and/or remedies
unless such waiver shall be in writing and signed by an authorized officer of
Agent.  Any such waiver shall be
enforceable only to the extent specifically set forth therein.  A waiver by Agent of any right, power and/or
remedy on any one occasion shall not be construed as a bar to or waiver of any
such right, power and/or remedy which Agent or any Lender would otherwise have
on any future occasion, whether similar in kind or otherwise.

9.             Corporate
Existence, Power and Authority.  Each
of Guarantors is a corporation duly organized and in good standing under the
laws of its state or other jurisdiction of incorporation and is duly qualified
as a foreign corporation and in good standing in all states or other
jurisdictions where the nature and extent of the business transacted by it or
the ownership of assets makes such qualification necessary, except for those
jurisdictions in which the failure to so qualify would not have a material
adverse effect on the financial condition, results of operation or businesses
of any of Guarantors or the rights of Agent or any Lender hereunder or under
any of the other Financing Agreements. 
The execution, delivery and performance of this 

 5
 

 

Guaranty is within the corporate powers of each of
Guarantors, have been duly authorized and are not in contravention of law or
the terms of the certificates of incorporation, by-laws, or other
organizational documentation of each of Guarantors, or any indenture, agreement
or undertaking to which any of Guarantors is a party or by which any of
Guarantors or its property are bound. 
This Guaranty constitutes the legal, valid and binding obligation of each
of Guarantors enforceable in accordance with its terms.  Any one of Guarantors signing this Guaranty
shall be bound hereby whether or not any of the other Guarantors or any other
person signs this Guaranty at any time.

10.           Governing
Law; Choice of Forum; Service of Process; Jury Trial Waiver.

(a)           The
validity, interpretation and enforcement of this Guaranty and any dispute
arising out of the relationship between any of Guarantors, Agent and the
Lenders, whether in contract, tort, equity or otherwise, shall be governed by
the internal laws of the State of California (without giving effect to
principles of conflicts of law).

(b)           Each
of Guarantors hereby irrevocably consents and submits to the non-exclusive
jurisdiction of the Courts of the State of California and the United States
District Court for the Central District of California and waives any objection
based on venue or forum  non  conveniens with respect to any
action instituted therein arising under this Guaranty or any of the other
Financing Agreements or in any way connected with or related or incidental to
the dealings of any of Guarantors, Agent and the Lenders in respect of this
Guaranty or any of the other Financing Agreements or the transactions related
hereto or thereto, in each case whether now existing or hereafter arising and whether
in contract, tort, equity or otherwise, and agrees that any dispute arising out
of the relationship between any of Guarantors or any Borrower and Agent and the
Lenders or the conduct of any such persons in connection with this Guaranty,
the other Financing Agreements or otherwise shall be heard only in the courts
described above (except that Agent shall have the right to bring any action or
proceeding against any of Guarantors or its property in the courts of any other
jurisdiction which Agent deems necessary or appropriate in order to realize on
collateral at any time granted by any Borrower or any of Guarantors to Agent or
to otherwise enforce its or the Lenders’ rights against any of Guarantors or
its property).

(c)           Each
of Guarantors hereby waives personal service of any and all process upon it and
consents that all such service of process may be made by certified mail (return
receipt requested) directed to its address set forth on the signature pages
hereof, or, at Agent’s option, by service upon any of Guarantors in any other
manner provided under the rules of any such courts.  Within the period provided under law, any of
Guarantors so served shall respond to such process, failing which such
Guarantors shall be deemed in default and judgment may be entered by Agent
against Guarantors for the amount of the claim and other relief requested.

(d)           EACH
OF GUARANTORS HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND,
ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS GUARANTY OR ANY OF THE OTHER
FINANCING AGREEMENTS OR (ii) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL
TO THE DEALINGS OF ANY OF GUARANTORS AND AGENT IN RESPECT OF THIS GUARANTY OR
ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS RELATED HERETO OR
THERETO IN EACH CASE 

 6
 

 

WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER
IN CONTRACT, TORT, EQUITY OR OTHERWISE. 
EACH OF GUARANTORS HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM,
DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A
JURY AND THAT ANY OF GUARANTORS OR AGENT MAY FILE AN ORIGINAL COUNTERPART OF A
COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF
GUARANTORS AND AGENT TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.

(e)           If
any action or proceeding is filed in a court of the State of California by or
against any party hereto in connection with any of the transactions
contemplated by this Guaranty or any other Financing Agreement, (a) the
court shall, and is hereby directed to, make a general reference pursuant to California
Code of Civil Procedure Section 638 to a referee or referees to hear and
determine all of the issues in such action or proceeding (whether of fact or of
law) and to report a statement of decision, provided that at the option of
Agent, any such issues pertaining to a “provisional remedy” as defined in
California Code of Civil Procedure Section 1281.8 shall be heard and
determined by the court, and (b) each Guarantor shall be solely
responsible to pay all fees and expenses of any referee appointed in such
action or proceeding.

(f)            Neither
Agent nor the Lenders shall have any liability to Guarantors (whether in tort,
contract, equity or otherwise) for losses suffered by Guarantors in connection
with, arising out of, or in any way related to the transactions or
relationships contemplated by this Guaranty, or any act, omission or event
occurring in connection herewith, unless it is determined by a final and
non-appealable judgment or court order binding on Agent or such Lender that the
losses were the result of acts or omissions constituting gross negligence or
willful misconduct or breach of this Guaranty.

11.           Notices.  All notices, requests and demands hereunder
shall be in writing and (a) made to Agent at its address set forth above and to
each of Guarantors at its chief executive office set forth below, or to such
other address as either party may designate by written notice to the other in
accordance with this provision, and (b) deemed to have been given or made: if
delivered in person, immediately upon delivery; if by telex, telegram or
facsimile transmission, immediately upon sending and upon confirmation of
receipt; if by nationally recognized overnight courier service with
instructions to deliver the next business day, one (1) business day after sending;
and if by certified mail, return receipt requested, five (5) days after
mailing.

12.           Partial
Invalidity.  If any provision of this
Guaranty is held to be invalid or unenforceable, such invalidity or
unenforceability shall not invalidate this Guaranty as a whole, but this
Guaranty shall be construed as though it did not contain the particular
provision held to be invalid or unenforceable and the rights and obligations of
the parties shall be construed and enforced only to such extent as shall be
permitted by applicable law.

13.           Entire
Agreement.  This Guaranty represents
the entire agreement and understanding of the parties concerning the subject
matter hereof, and supersedes all other prior agreements, understandings,
negotiations and discussions, representations, warranties, commitments,
proposals, offers and contracts concerning the subject matter hereof, whether
oral or written.

 7
 

 

14.           Successors
and Assigns.  This Guaranty shall be
binding upon Guarantors and their respective successors and assigns and shall
inure to the benefit of Agent, each Lender and their respective successors,
endorsees, transferees and assigns.  The
liquidation, dissolution or termination of any of Guarantors shall not
terminate this Guaranty as to such entity or as to any of the other Guarantors.

15.           Construction.  All references to the term “Guarantors”
wherever used herein shall mean each and all of Guarantors and their respective
successors and assigns, individually and collectively, jointly and severally
(including, without limitation, any receiver, trustee or custodian for any of
Guarantors or any of their respective assets or any of Guarantors in its
capacity as debtor or debtor-in-possession under the United States Bankruptcy
Code).  All references to the term “Agent”
wherever used herein shall mean Agent and its successors and assigns and all
references to the term “Borrowers” wherever used herein shall mean each and all
of Borrowers and their respective successors and assigns, individually and
collectively, jointly and severally (including, without limitation, any
receiver, trustee or custodian for any of Borrowers or any of their respective
assets or any of Borrowers in its capacity as debtor or debtor-in-possession
under the United States Bankruptcy Code). 
All references to the term “Person” or “person” wherever used herein
shall mean any individual, sole proprietorship, partnership, corporation
(including, without limitation, any corporation which elects subchapter S
status under the Internal Revenue Code of 1986, as amended), limited liability
company, limited liability partnership, business trust, unincorporated
association, joint stock corporation, trust, joint venture or other entity or
any government or any agency or instrumentality of political subdivision thereof.  All references to the plural shall also mean
the singular and to the singular shall also mean the plural.

 8
 

 

IN
WITNESS WHEREOF, each of Guarantors has executed and delivered this Guaranty as
of the day and year first above written.

	
  

  	
  NATROL PRODUCTS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/Dennis Jolicoeur

  	
   

  
	
   

  	
  Dennis R. Jolicoeur 

  
	
   

  	
  Chief Financial Officer, Treasurer and 

  
	
   

  	
  Executive Vice President 

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Chief Executive Office 

  
	
   

  	
   

  
	
   

  	
  21411 Prairie Street 

  
	
   

  	
  Chatsworth, CA 91311

  
	
   

  	
   

  
	
   

  	
  NATROL ACQUISITION CORP.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/Dennis Jolicoeur

  	
   

  
	
   

  	
  Dennis R. Jolicoeur 

  
	
   

  	
  Chief Financial Officer, Treasurer and 

  
	
   

  	
  Executive Vice President 

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Chief Executive Office 

  
	
   

  	
   

  
	
   

  	
  21411 Prairie Street 

  
	
   

  	
  Chatsworth, CA 91311

  
	
   

  	
   

  
	
   

  	
  NATROL DIRECT, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/Dennis Jolicoeur

  	
   

  
	
   

  	
  Dennis R. Jolicoeur 

  
	
   

  	
  Chief Financial Officer, Treasurer and 

  
	
   

  	
  Executive Vice President 

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Chief Executive Office 

  
	
   

  	
   

  
	
   

  	
  21411 Prairie Street 

  
	
   

  	
  Chatsworth, CA 91311

  
					

 

 9

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00109-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00109-of-00352.parquet"}]]