Document:

EXHIBIT 10.2

 

July 1, 2004

 

CONSULTING AGREEMENT (“Agreement”) made effective as
of  July 1, 2004, between Datameg Corp., a
New York corporation (the “Company”), and James Murphy (“Consultant”).

 

WHEREAS, Consultant possesses knowledge and skills
that can be beneficial to Company; and

 

WHEREAS, the President of the Company (the “President”)
recognizes that the Consultant’s contribution to the growth and success of the
Company can be substantial

 

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

 

1. Employment. The Company shall employ Consultant and
Consultant shall serve the Company, on the terms and conditions set forth
herein, for the period commencing on the date hereof.  Thereafter, the term of this Agreement may be
extended and renewed on an annual basis for additional periods of ninety days
each upon written agreement of the parties made at least 30 days prior to the
expiration of the initial term or the then current renewal term, as the case
may be. The term of this Agreement, as it may from time to time be extended in
accordance with this Paragraph, may be referred to herein as the “Period of
Employment.”

 

2. Position and Duties. Consultant shall perform the
functions and duties as shall be reasonably prescribed from time to time by the
President provided that such functions and duties are consistent with and
attendant to Consultant’s position or other positions that he may hold from
time to time. Consultant shall devote all of his working time and efforts to
the business and affairs of the Company and the promotion of its interests and
perform all duties and services on behalf of the Company necessary to carry out
such functions.

 

3. Compensation and Related Matters.

 

(a) Consultant shall receive a stock grant in the
amount of 5,000,000 shares of  DataMEG
Corp. Common Stock, Restricted.

 

(b) Expenses. Consultant shall be entitled to receive
prompt reimbursement for all reasonable expenses incurred by him during any
Period of Employment (in accordance with the policies and procedures then in
effect and established by the Company for its senior consultant officers) in
performing services hereunder, provided that Consultant properly accounts
therefore in accordance with Company policy.

 

IN WITNESS WHEREOF, the parties have executed this
Agreement effective on the date and year written above.

 

 

	
   

  	
  Datameg Corp

  
	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
  James Murphy, Consultant

  	
  Andrew Benson, President

  
					

 

2EXHIBIT 10.3

 

August 9, 2004

 

EMPLOYMENT AGREEMENT (“Agreement”) made effective as
of August 9, 2004, between Datameg Corp., a New York corporation (the “Company”),
and Mark McGrath (“Consultant”).

 

WHEREAS, Consultant possesses knowledge and skills
that can be beneficial to Company; and

 

WHEREAS, the President of the Company (the “President”)
recognizes that the Consultant’s contribution to the growth and success of the
Company can be substantial

 

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

 

1. Employment. The Company shall employ Consultant and
Consultant shall serve the Company, on the terms and conditions set forth
herein, for the period commencing on the date hereof.  Thereafter, the term of this Agreement may be
extended and renewed on an annual basis for additional periods of one-year each
upon written agreement of the parties made at least 30 days prior to the
expiration of the initial term or the then current renewal term, as the case
may be. The term of this Agreement, as it may from time to time be extended in
accordance with this Paragraph, may be referred to herein as the “Period of
Employment.”

 

2. Position and Duties. Consultant shall perform the
functions and duties as shall be reasonably prescribed from time to time by the
President provided that such functions and duties are consistent with and
attendant to Consultant’s position or other positions that he may hold from
time to time. Consultant shall devote all of his working time and efforts to
the business and affairs of the Company and the promotion of its interests and
perform all duties and services on behalf of the Company necessary to carry out
such functions.

 

3. Compensation and Related Matters.

 

(a) Base Salary. Consultant shall receive a weekly
salary at the rate of $2403.85, the weekly equivalent of $125,000.00 per annum.

 

(b) Expenses. Consultant shall be entitled to receive
prompt reimbursement for all reasonable expenses incurred by him during any
Period of Employment (in accordance with the policies and procedures then in
effect and established by the Company for its senior consultant officers) in
performing services hereunder, provided that Consultant properly accounts
therefore in accordance with Company policy.

 

(c) Other Benefits. 
Consultant acknowledges that Company currently does not have a benefit
plan other than such benefits expressly contained in this Agreement.  At such time as Company may make such
benefits available, Company agrees to extend to

 

 

Consultant those Benefits generally made available to employees at a
similar level and cost as made available to employees generally.

 

IN WITNESS WHEREOF, the parties have executed this
Agreement effective on the date and year written above.

 

	
   

  	
  Datameg Corp..

  
	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
  Mark P. McGrath, Consultant

  	
  Andrew Benson, President

  
					

 

2Exhibit
10.1

 

 

COMMERCIAL GUARANTY

 

	
  Principal

  	
   

  	
  Loan Date

  	
   

  	
  Maturity

  	
   

  	
  Loan No

  	
   

  	
  Call / Coll

  	
   

  	
  Account

  	
   

  	
  Officer

  	
   

  	
  Initials

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  709818

  	
   

  	
  DA

  	
   

  	
   

  

 

References in the shaded
area are for Lender’s use only and do not limit the applicability of this
document to any particular loan or item.

Any item above containing
“***” has been omitted due to text length limitations.

 

	
  Borrower:

  	
  natrol, inc., a delaware
  corporation

  	
  Lender:

  	
  City
  National Bank, NA

  
	
   

  	
  21411
  PRAIRIE

  CHATSWORTH, CA 91311

  	
   

  	
   

  	
  San
  Fernando Valley Commercial Banking Services

  
	
   

  	
   

  	
   

  	
   

  	
  #048000

  
	
   

  	
   

  	
   

  	
   

  	
  15260
  Ventura Boulevard, Suite 1600

  
	
   

  	
   

  	
   

  	
   

  	
  Sherman
  Oaks, CA 91403

  

 

	
  Guarantor:

  	
  prolab nutrition, inc., a
  connecticut  CORPORATION

  	
   

  	
   

  	
   

  
	
   

  	
  21411
  PRAIRIE

  	
   

  	
   

  	
   

  
	
   

  	
  CHATSWORTH,
  CA 91311

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  

 

AMOUNT OF GUARANTY. The principal
amount of this Guaranty is Four Million Eight Hundred Fifty Thousand &
00/100 Dollars ($4,850,000.00).

 

CONTINUING GUARANTY. For good and
valuable consideration, PROLAB NUTRITION, INC., A CONNECTICUT CORPORATION
(“Guarantor”) absolutely and unconditionally guarantees and promises to pay to
City National Bank, NA (“Lender”) or its order, in legal tender of the United
States of America, the Indebtedness (as that term is defined below) of NATROL,
INC., A DELAWARE CORPORATION (“Borrower”) to Lender on the terms and conditions
set forth in this Guaranty. The obligations of Guarantor under this Guaranty
are continuing.

 

MAXIMUM
LIABILITY. The maximum
liability of Guarantor under this Guaranty shall not exceed at any one time the
sum of the principal amount of $4,850,000.00, plus all interest thereon, plus
all of Lender’s costs, expenses, and attorneys’ fees incurred in connection
with or relating to (A) the collection of the Indebtedness, (B) the collection
and sale of any collateral for the Indebtedness or this Guaranty, or (C) the
enforcement of this Guaranty. Attorneys’ fees include, without limitation,
attorneys’ fees whether or not there is a lawsuit, and if there is a lawsuit, any
fees and costs for trial and appeals.

 

The above limitation on
liability is not a restriction on the amount of the Indebtedness of Borrower to
Lender either in the aggregate or at any one time. If Lender presently holds
one or more guaranties, or hereafter receives additional guaranties from
Guarantor, Lender’s rights under all guaranties shall be cumulative. This
Guaranty shall not (unless specifically provided below to the contrary) affect or
invalidate any such other guaranties. Guarantor’s liability will be Guarantor’s
aggregate liability under the terms of this Guaranty and any such other
unterminated guaranties.

 

INDEBTEDNESS GUARANTEED.
The Indebtedness guaranteed by this Guaranty includes any and all of Borrower’s
indebtedness to Lender and is used in the most comprehensive sense and means
and includes any and all of Borrower’s liabilities, obligations and debts to
Lender, now existing or hereinafter incurred or created, including, without
limitation, all loans, advances, interest, costs, debts, overdraft
indebtedness, credit card indebtedness, lease obligations, other obligations,
and liabilities of Borrower, or any of them, and any present or future
judgments against Borrower, or any of them; and whether any such Indebtedness
is voluntarily or involuntarily incurred, due or not due, absolute or
contingent, liquidated or unliquidated, determined or undetermined; whether
Borrower may be liable individually or jointly with others, or primarily or
secondarily, or as guarantor or surety; whether recovery on the Indebtedness
may be or may become barred or unenforceable against Borrower for any reason
whatsoever; and whether the Indebtedness arises from transactions which may be
voidable on account of infancy, insanity, ultra vires, or otherwise.

 

DURATION
OF GUARANTY. This
Guaranty will take effect when received by Lender without the necessity of any
acceptance by Lender, or any notice to Guarantor or to Borrower, and will
continue in full force until all Indebtedness incurred or contracted before
receipt by Lender of any notice of revocation shall have been fully and finally
paid and satisfied and all of Guarantor’s other obligations under this Guaranty
shall have been performed in full. If Guarantor elects to revoke this Guaranty,
Guarantor may only do so in writing. Guarantor’s written notice of revocation
must be mailed to Lender, by certified mail, at Lender’s address listed above
or such other place as Lender may designate in writing. Written revocation of
this Guaranty will apply only to advances or new Indebtedness created after
actual receipt by Lender of Guarantor’s written revocation. For this purpose
and without limitation, the term “new Indebtedness” does not include
Indebtedness which at the time of notice of revocation is contingent,
unliquidated, undetermined or not due and which later becomes absolute,
liquidated, determined or due. This Guaranty will continue to bind Guarantor
for all Indebtedness incurred by Borrower or committed by Lender prior to
receipt of Guarantor’s written notice of revocation, including any extensions,
renewals, substitutions or modifications of the Indebtedness. All renewals,
extensions, substitutions, and modifications of the Indebtedness granted after
Guarantor’s revocation, are contemplated under this Guaranty and, specifically
will not be considered to be new
Indebtedness. This Guaranty shall bind Guarantor’s estate as to Indebtedness
created both before and after Guarantor’s death or incapacity, regardless of
Lender’s actual notice of Guarantor’s death. Subject to the foregoing,
Guarantor’s executor or administrator or other legal representative may
terminate this Guaranty in the same manner in which Guarantor might have
terminated it and with the same effect. Release of any other guarantor or
termination of any other guaranty of the Indebtedness shall not affect the
liability of Guarantor under this Guaranty. A revocation Lender receives from
any one or more Guarantors shall not affect the liability of any remaining
Guarantors under this Guaranty. It is anticipated that
fluctuations may occur in the aggregate amount of Indebtedness covered by this
Guaranty, and Guarantor specifically acknowledges and agrees that reductions in
the amount of Indebtedness, even to zero dollars ($0.00), prior to Guarantor’s
written revocation of this Guaranty shall not constitute a termination of this
Guaranty. This Guaranty is binding upon Guarantor and Guarantor’s heirs,
successors and assigns so long as any of the guaranteed Indebtedness remains
unpaid and even though the Indebtedness guaranteed may from time to time be
zero dollars ($0.00).

 

GUARANTOR’S
AUTHORIZATION TO LENDER.
Guarantor authorizes Lender, either before or after any revocation hereof,
without notice or demand and without lessening Guarantor’s liability under this
Guaranty, from time to time: (A) prior to revocation as set forth above, to
make one or more additional secured or unsecured loans to Borrower, to lease
equipment or other goods to Borrower, or otherwise to extend additional credit
to Borrower; (B) to alter, compromise, renew, extend, accelerate, or otherwise
change one or more times the time for payment or other terms of the
Indebtedness or any part of the Indebtedness, including increases and decreases
of the rate of interest on the Indebtedness; extensions may be repeated and may
be for longer than the original loan term; (C) to take and hold security for
the payment of this Guaranty or the Indebtedness, and exchange, enforce, waive,
subordinate, fail or decide not to perfect, and release any such security, with
or without the substitution of new collateral; (D) to release, substitute,
agree not to sue, or deal with any one or more of Borrower’s sureties,
endorsers, or other guarantors on any terms or in any manner Lender may choose;
(E) to determine how, when and what application of payments and credits shall
be made on the Indebtedness (F) to apply such security and direct the order or
manner of sale thereof, including

 

 

“*” See Page 4 additional language.

 

without limitation, any nonjudicial sale permitted by
the terms of the controlling security agreement or deed of trust, as Lender in
its discretion may determine; (G) to sell, transfer, assign or grant
participations in all or any part of the Indebtedness; and (H) to assign or
transfer this Guaranty in whole or in part.

 

GUARANTOR’S REPRESENTATIONS AND
WARRANTIES. Guarantor represents and warrants to Lender that
(A) no representations or agreements of any kind have been made to Guarantor
which would limit or qualify in any way the terms of this Guaranty; (B) this
Guaranty is executed at Borrower’s request and not at the request of Lender;
(C) Guarantor has full power, right and authority to enter into this Guaranty;
(D) the provisions of this Guaranty do not conflict with or result in a default
under any agreement or other instrument binding upon Guarantor and do not
result in a violation of any law, regulation, court decree or order applicable
to Guarantor; (E) Guarantor has not and will not, without the prior written
consent of Lender, sell, lease, assign, encumber, hypothecate, transfer, or
otherwise dispose of all or substantially all of Guarantor’s assets, or any
interest therein; (F) upon Lender’s request, Guarantor will provide to Lender
financial and credit information in form acceptable to Lender, and all such
financial information which currently has been, and all future financial information
which will be provided to Lender is and will be true and correct in all
material respects and fairly present Guarantor’s financial condition as of the
dates the financial information is provided; (G) no material adverse change has
occurred in Guarantor’s financial condition since the date of the most recent
financial statements provided to Lender and no event has occurred which may
materially adversely affect Guarantor’s financial condition; (H) no litigation,
claim, investigation, administrative proceeding or similar action (including
those for unpaid taxes) against Guarantor is pending or threatened; (I) Lender
has made no representation to Guarantor as to the creditworthiness of Borrower;
and (J) Guarantor has established adequate means of obtaining from Borrower on
a continuing basis information regarding Borrower’s financial condition.
Guarantor agrees to keep adequately informed from such means of any facts,
events, or circumstances which might in any way affect Guarantor’s risks under
this Guaranty, and Guarantor further agrees that, absent a request for
information, Lender shall have no obligation to disclose to Guarantor any
information or documents acquired by Lender in the course of its relationship
with Borrower.

 

GUARANTOR’S
WAIVERS. Except as
prohibited by applicable law, Guarantor waives any right to require Lender to
(A) make any presentment, protest, demand, or notice of any kind, including
notice of change of any terms of repayment of the Indebtedness, default by
Borrower or any other guarantor or surety, any action or nonaction taken by
Borrower, Lender, or any other guarantor or surety of Borrower, or the creation of new or additional
Indebtedness; (B) proceed against any person, including Borrower, before
proceeding against Guarantor; (C) proceed against any collateral for the
Indebtedness, including Borrower’s collateral, before proceeding against Guarantor;
(D) apply any payments or proceeds received against the Indebtedness in any
order; (E) give notice of the terms, time, and place of any sale of the
collateral pursuant to the Uniform Commercial Code or any other law governing
such sale; (F) disclose any information about the Indebtedness, the Borrower,
the collateral, or any other guarantor or surety, or about any action or nonaction
of Lender; or (G) pursue any remedy or course of action in Lender’s power
whatsoever.

 

Guarantor also waives any and
all rights or defenses arising by reason of (H) any disability or other defense
of Borrower, any other guarantor or surety or any other person; (I) the
cessation from any cause whatsoever, other than payment in full, of the
Indebtedness; (J) the application of proceeds of the Indebtedness by Borrower
for purposes other than the purposes understood and intended by Guarantor and
Lender; (K) any act of omission or commission by Lender which directly or
indirectly results in or contributes to the discharge of Borrower or any other
guarantor or surety, or the Indebtedness, or the loss or release of any
collateral by operation of law or otherwise; (L) any statute of limitations in
any action under this Guaranty or on the Indebtedness; or (M) any modification
or change in terms of the
Indebtedness, whatsoever, including without limitation, the renewal, extension,
acceleration, or other change in the time payment of the Indebtedness is due
and any change in the interest rate, and including any such modification or
change in terms after revocation of this Guaranty on Indebtedness incurred
prior to such revocation.

 

Guarantor waives all rights
and any defenses arising out of an election of remedies by Lender even though
that the election of remedies, such as a non-judicial foreclosure with respect
to security for a guaranteed obligation, has destroyed Guarantor’s rights of subrogation and reimbursement against Borrower by
operation of Section 580d of the California Code of Civil Procedure or
otherwise.

 

Guarantor waives all rights
and defenses that Guarantor may have because Borrower’s obligation is secured
by real property. This means among other things: (1) Lender may collect from Guarantor without first
foreclosing on any real or personal property collateral pledged by Borrower.
(2) If Lender forecloses on any real property collateral pledged by Borrower:
(a) the amount of Borrower’s obligation may be reduced only by the price for
which the collateral is sold at the foreclosure sale, even if the collateral is
worth more than the sale price. (b) Lender may collect from Guarantor even if
Lender, by forclosing on the real property collateral, has destroyed any right
Guarantor may have to collect from Borrower. This is an unconditional and
irrevocable waiver of any rights and defenses Guarantor may have because
Borrower’s obligation is secured by real property. These rights and defenses
include, but are not limited to, any rights and defenses based upon Section
580a, 580b, 580d, or 726 of the Code of Civil Procedure.

 

Guarantor understands and
agrees that the foregoing waivers are unconditional and irrevocable waivers of
substantive rights and defenses to which Guarantor might otherwise be entitled
under state and federal law. Guarantor acknowledges that Guarantor has provided
these waivers of rights and defenses with the intention that they be fully
relied upon by Lender. Guarantor further understands and agrees that this
Guaranty is a separate and independent contract between Guarantor and Lender,
given for full and ample consideration, and is enforceable on its own terms.
Until all Indebtedness is paid in full, Guarantor waives any right to enforce
any remedy Guarantor may have against the Borrower or any other guarantor,
surety, or other person, and further, Guarantor waives any right to participate
in any collateral for the Indebtedness now or hereafter held by Lender.

 

GUARANTOR’S
UNDERSTANDING WITH RESPECT TO WAIVERS. Guarantor warrants and agrees that each of the waivers set forth above
is made with Guarantor’s full knowledge of its significance and consequences
and that, under the circumstances, the waivers are reasonable and not contrary
to public policy or law. If any such waiver is determined to be contrary to any
applicable law or public policy, such waiver shall be effective only to the
extent permitted by law or public policy.

 

SUBORDINATION
OF BORROWER’S DEBTS TO GUARANTOR. Guarantor agrees that the Indebtedness of Borrower to Lender, whether
now existing or hereafter created, shall be superior to any claim that
Guarantor may now have or hereafter acquire against Borrower, whether or not
Borrower becomes insolvent. Guarantor hereby expressly subordinates any claim
Guarantor may have against Borrower, upon any account whatsoever, to any claim
that Lender may now or hereafter have against Borrower. In the event of
insolvency and consequent liquidation of the assets of Borrower, through
bankruptcy, by an assignment for the benefit of creditors, by voluntary
liquidation, or otherwise, the assets of Borrower applicable to the payment of
the claims of both Lender and Guarantor shall be paid to Lender and shall be
first applied by Lender to the Indebtedness of Borrower to Lender. Guarantor
does hereby assign to Lender all claims which it may have or acquire against
Borrower or against any assignee or trustee in bankruptcy of Borrower; provided
however, that such assignment shall be effective only for the purpose of
assuring to Lender full payment in legal tender of the Indebtedness. If Lender
so requests, any notes or credit agreements now or hereafter evidencing any
debts or obligations of Borrower to Guarantor shall be marked with a legend
that the same are subject to this Guaranty and shall be delivered to Lender.
Guarantor agrees, and Lender is hereby authorized, in the name of Guarantor,
from time to time to file financing statements and continuation statements and
to execute documents and to take such other actions as Lender deems necessary
or appropriate to perfect, preserve and enforce its rights under this Guaranty.

 

MISCELLANEOUS
PROVISIONS.  The following miscellaneous provisions are a
part of this Guaranty:

 

	
  INITIAL

  HERE

  	
   

  	
   

  
	
   

  	
   

  	
  /s/ [ILLEGIBLE]

  	
   

  
				

 

2

 

Amendments. This Guaranty, together with any Related
Documents, constitutes the entire understanding and agreement of the parties as
to the matters set forth in this Guaranty. No alteration of or amendment to
this Guaranty shall be effective unless given in writing and signed by the
party or parties sought to be charged or bound by the alteration or amendment.

 

Attorneys’ Fees; Expenses. Guarantor agrees to pay upon demand all of
Lender’s costs and expenses, including Lender’s attorneys’ fees and Lender’s
legal expenses, incurred in connection with the enforcement of this Guaranty.
Lender may hire or pay someone else to help enforce this Guaranty, and
Guarantor shall pay the costs and expenses of such enforcement. Costs and
expenses include Lender’s attorneys’ fees and legal expenses whether or not
there is a lawsuit, including attorneys’ fees and legal expenses for bankruptcy
proceedings (including efforts to modify or vacate any automatic stay or injunction),
appeals, and any anticipated post-judgment collection services. Guarantor also
shall pay all court costs and such additional fees as may be directed by the
court.

 

Caption
Headings. Caption
headings in this Guaranty are for convenience purposes only and are not to be
used to interpret or define the provisions of this Guaranty.

 

Governing Law. This Guaranty will be governed by, construed and enforced in accordance with federal
law and the laws of the State of California. This Guaranty has been accepted by
Lender in the State of California.

 

Choice
of Venue. If there is
a lawsuit, Guarantor agrees upon Lender’s request to submit to the jurisdiction
of the courts of LOS ANGELES County, State of California.

 

Integration. Guarantor further agrees that Guarantor
has read and fully understands the terms of this Guaranty; Guarantor has had
the opportunity to be advised by Guarantor’s attorney with respect to this
Guaranty; the Guaranty fully reflects Guarantor’s intentions and parol evidence
is not required to interpret the terms of this Guaranty. Guarantor hereby
indemnifies and holds Lender harmless from all losses, claims, damages, and
costs (including Lender’s attorneys’ fees) suffered or incurred by Lender as a
result of any breach by Guarantor of the warranties, representations and
agreements of this paragraph.

 

Interpretation. In all cases where there is more
than one Borrower or Guarantor, then all words used in this Guaranty in the
singular shall be deemed to have been used in the plural where the context and
construction so require; and where there is more than one Borrower named in
this Guaranty or when this Guaranty is executed by more than one Guarantor, the
words “Borrower” and “Guarantor” respectively shall mean all and any one or
more of them. The words “Guarantor,” “Borrower,” and “Lender” include the
heirs, successors, assigns, and transferees of each of them. If a court finds
that any provision of this Guaranty is not valid or should not be enforced,
that fact by itself will not mean that the rest of this Guaranty will not be
valid or enforced. Therefore, a court will enforce the rest of the provisions
of this Guaranty even if a provision of this Guaranty may be found to be
invalid or unenforceable. If any one or more of Borrower or Guarantor are corporations,
partnerships, limited liability companies, or similar entities, it is not
necessary for Lender to inquire into the powers of Borrower or Guarantor or of
the officers, directors, partners, managers, or other agents acting or
purporting to act on their behalf, and any indebtedness made or created in
reliance upon the professed exercise of such powers shall be guaranteed under
this Guaranty.

 

Notices. Any notice required to be given under this
Guaranty shall be given in writing, and, except for revocation notices by
Guarantor, shall be effective when actually delivered, when actually received
by telefacsimile (unless otherwise required by law), when deposited with a
nationally recognized overnight courier, or, if mailed, when deposited in the
United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of
this Guaranty. All revocation notices by Guarantor shall be in writing and
shall be effective upon delivery to Lender as provided in the section of this
Guaranty entitled “DURATION OF GUARANTY.” Any party may change its address for
notices under this Guaranty by giving formal written notice to the other
parties, specifying that the purpose of the notice is to change the party’s
address. For notice purposes, Guarantor agrees to keep Lender informed at all
times of Guarantor’s current address. Unless otherwise provided or required by
law, if there is more than one Guarantor, any notice given by Lender to any
Guarantor is deemed to be notice given to all Guarantors.

 

No
Waiver by Lender.
Lender shall not be deemed to have waived any rights under this Guaranty unless
such waiver is given in writing and signed by Lender. No delay
or omission on the part of Lender in exercising any right shall operate as a
waiver of such right or any other right. A waiver by Lender of a provision of
this Guaranty shall not prejudice or constitute a waiver of Lender’s right
otherwise to demand strict compliance with that provision or any other provision
of this Guaranty. No prior waiver by Lender, nor any course of dealing between
Lender and Guarantor, shall constitute a waiver of any of Lender’s rights or of
any of Guarantor’s obligations as to any future transactions. Whenever the
consent of Lender is required under this Guaranty, the granting of such consent
by Lender in any instance shall not constitute continuing consent to subsequent
instances where such consent is required and in all cases such consent may be
granted or withheld in the sole discretion of Lender.

 

Successors
and Assigns. Subject
to any limitations stated in this Guaranty on transfer of Guarantor’s interest,
this Guaranty shall be binding upon and inure to the benefit of the parties,
their successors and assigns.

 

DEFINITIONS.
The following capitalized words and terms shall have the following meanings
when used in this Guaranty. Unless specifically stated to the contrary, all
references to dollar amounts shall mean amounts in lawful money of the United
States of America. Words and terms used in the singular shall include the
plural, and the plural shall include the singular, as the context may require.
Words and terms not otherwise defined in this Guaranty shall have the meanings
attributed to such terms in the Uniform Commercial Code:

 

Borrower. The word “Borrower” means NATROL, INC., A
DELAWARE CORPORATION and includes all co-signers and co-makers signing the
Note.

 

Guarantor. The word “Guarantor” means
each and every person or entity signing this Guaranty, including without
limitation PROLAB NUTRITION, INC., A CONNECTICUT CORPORATION.

 

Guaranty. The word “Guaranty” means the guaranty from
Guarantor to Lender, including without limitation a guaranty of all or part of
the Note.

 

Indebtedness.  The
word “Indebtedness” means Borrower’s indebtedness to Lender as more
particularly described in this Guaranty. 

 

Lender.  The
word “Lender” means City National Bank, NA, its successors and assigns.

 

Note. The word “Note” means the promissory note
dated November 4, 2004, in the original principal amount of $3,000,000.00 from
Borrower to Lender, together with all renewals of, extensions of,
modifications of, refinancings of, consolidations of, and substitutions for the
promissory note or agreement.

 

Related Documents. The words “Related Documents” mean all
promissory notes, credit agreements, loan agreements, environmental agreements,
guaranties, security agreements, mortgages, deeds of trust, security deeds,
collateral mortgages, and all other instruments, agreements and documents,
whether now or hereafter existing, executed in connection with the
Indebtedness.

 

3

 

 

EACH UNDERSIGNED GUARANTOR ACKNOWLEDGES HAVING READ ALL THE
PROVISIONS OF THIS GUARANTY AND AGREES TO ITS TERMS. IN ADDITION, EACH
GUARANTOR UNDERSTANDS THAT THIS GUARANTY IS EFFECTIVE UPON GUARANTOR’S
EXECUTION AND DELIVERY OF THIS GUARANTY TO LENDER AND THAT THE GUARANTY WILL
CONTINUE UNTIL TERMINATED IN THE MANNER SET FORTH IN THE SECTION TITLED
“DURATION OF GUARANTY”. NO FORMAL ACCEPTANCE BY LENDER IS NECESSARY TO MAKE
THIS GUARANTY EFFECTIVE. THIS GUARANTY IS DATED NOVEMBER 4, 2004.

 

	
  GUARANTOR:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  PROLAB
  NUTRITION, INC., A CONNECTICUT CORPORATION

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ Elliott Balbert

  	
   

  	
   

  
	
  ELLIOTT BALBERT, President of PROLAB

  NUTRITION, INC., A CONNECTICUT CORPORATION

  
							

 

[ILLEGIBLE]

 

“*”  which would
have a material impact upon the operations or finances of Borrower or its
Subsidiary.

 

	
  INITIAL

  HERE

  	
   

  	
   

  
	
   

  	
   

  	
  /s/ [ILLEGIBLE]

  	
   

  
				

 

4

 

 

COMMERCIAL
GUARANTY

 

	
  Principal

  	
   

  	
  Loan
  Date

  	
   

  	
  Maturity

  	
   

  	
  Loan No

  	
   

  	
  Call /
  Coll

  	
   

  	
  Account

  	
   

  	
  Officer

  	
   

  	
  Initials

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  709818

  	
   

  	
  DA

  	
   

  	
   

  

 

References in the shaded area are for Lender’s use
only and do not limit the applicability of this document to any particular loan
or item.  Any item above containing “***”
has been omitted due to text length limitations.

 

 

	
  Borrower:

  	
  NATROL, INC., A DELAWARE
  CORPORATION

  	
  Lender:

  	
  City National Bank, NA

  
	
   

  	
  21411 PRAIRIE

  CHATSWORTH, CA 91311

  	
   

  	
  San
  Farnando Valley Commercial Banking Services

  
	
   

  	
   

  	
   

  	
  #048000

  
	
   

  	
   

  	
   

  	
  15260 Ventura Boulevard, Suite 1600

  
	
   

  	
   

  	
   

  	
  Sherman Oaka, CA 91403

  
	
   

  	
   

  	
   

  	
   

  
	
  Guarantor:

  	
  NATROL PRODUCTS, INC., A DELAWARE

  	
   

  	
   

  
	
   

  	
  CORPORATION

  	
   

  	
   

  
	
   

  	
  21411 PRAIRIE

  	
   

  	
   

  
	
   

  	
  CHATSWORTH, CA 91311

  	
   

  	
   

  

 

 

AMOUNT
OF GUARANTY.      The principal amount of
this Guaranty is Four Million Eight Hundred Fifty Thousand & 00/100 Dollars
($4,850,000.00).

 

CONTINUING
GUARANTY.   For good and valuable
consideration, NATROL PRODUCTS, INC., A DELAWARE CORPORATION (“Guarantor”)
absolutely and unconditionally guarantees and promises to pay to City National
Bank, NA (“Lender”) or its order, in legal tender of the United States of
America, the Indebtedness (as that term is defined below) of NATROL, INC., A
DELAWARE CORPORATION (“Borrower”) to Lender on the terms and conditions set
forth in this Guaranty. The obligations of Guarantor under this Guaranty are
continuing.

 

MAXIMUM
LIABILITY.  The maximum
liability of Guarantor under this Guaranty shall not exceed at any one time the
sum of the principal amount of $4,850,000.00, plus all interest thereon, plus all
of Lender’s costs, expenses, and attorneys’ fees incurred in connection with or
relating to (A) the collection of the Indebtedness, (B) the collection and sale
of any collateral for the Indebtedness or this Guaranty, or (C) the enforcement
of this Guaranty. Attorneys’ fees include, without limitation, attorneys’ fees
whether or not there is a lawsuit, and if there is a lawsuit, any fees and
costs for trial and appeals.

 

The above limitation on
liability is not a restriction on the amount of the Indebtedness of Borrower to
Lender either in the aggregate or at any one time. If Lender presently holds
one or more guaranties, or hereafter receives additional guaranties from
Guarantor, Lender’s rights under all guaranties shall be cumulative. This Guaranty
shall not (unless specifically provided below to the contrary) affect or
invalidate any such other guaranties. Guarantor’s liability will be Guarantor’s
aggregate liability under the terms of this Guaranty and any such other
unterminated guaranties.

 

INDEBTEDNESS
GUARANTEED.  The
Indebtedness guaranteed by this Guaranty includes any and all of Borrower’s
indebtedness to Lender and is used in the most comprehensive sense and means
and includes any and all of Borrower’s liabilities, obligations and debts to
Lender, now existing or hereinafter incurred or created, including, without
limitation, all loans, advances, interest, costs, debts, overdraft
indebtedness, credit card indebtedness, lease obligations, other obligations,
and liabilities of Borrower, or any of them, and any present or future
judgments against Borrower, or any of them; and whether any such Indebtedness
is voluntarily or involuntarily incurred, due or not due, absolute or
contingent, liquidated or unliquidated, determined or undetermined; whether
Borrower may be liable individually or jointly with others, or primarily or
secondarily, or as guarantor or surety; whether recovery on the Indebtedness
may be or may become barred or unenforceable against Borrower for any reason
whatsoever; and whether the Indebtedness arises from transactions which may be
voidable on account of infancy, insanity, ultra vires, or otherwise.

 

DURATION
OF GUARANTY.  This
Guaranty will take effect when received by Lender without the necessity of any
acceptance by Lender, or any notice to Guarantor or to Borrower, and will
continue in full force until all Indebtedness incurred or contracted before
receipt by Lender of any notice of revocation shall have been fully and finally
paid and satisfied and all of Guarantor’s other obligations under this Guaranty
shall have been performed in full. If Guarantor elects to revoke this Guaranty,
Guarantor may only do so in writing. Guarantor’s written notice of revocation
must be mailed to Lender, by certified mail, at Lender’s address listed above
or such other place as Lender may designate in writing. Written revocation of
this Guaranty will apply only to advances or new Indebtedness created after
actual receipt by Lender of Guarantor’s written revocation. For this purpose
and without limitation, the term “new Indebtedness” does not include
Indebtedness which at the time of notice of revocation is contingent,
unliquidated, undetermined or not due and which later becomes absolute,
liquidated, determined or due. This Guaranty will continue to bind Guarantor
for all Indebtedness incurred by Borrower or committed by Lender prior to
receipt of Guarantor’s written notice of revocation, including any extensions,
renewals, substitutions or modifications of the Indebtedness. All renewals, extensions,
substitutions, and modifications of the Indebtedness granted after Guarantor’s
revocation, are contemplated under this Guaranty and, specifically will not be
considered to be new Indebtedness. This Guaranty shall bind Guarantor’s estate
as to Indebtedness created both before and after Guarantor’s death or
incapacity, regardless of Lender’s actual notice of Guarantor’s death. Subject
to the foregoing, Guarantor’s executor or administrator or other legal
representative may terminate this Guaranty in the same manner in which
Guarantor might have terminated it and with the same effect. Release of any
other guarantor or termination of any other guaranty of the Indebtedness shall
not affect the liability of Guarantor under this Guaranty. A revocation Lender
receives from any one or more Guarantors shall not affect the liability of any
remaining Guarantors under this Guaranty. It is anticipated that
fluctuations may occur in the aggregate amount of Indebtedness covered by this
Guaranty, and Guarantor specifically acknowledges and agrees that reductions in
the amount of Indebtedness, even to zero dollars ($0.00), prior to Guarantor’s
written revocation of this Guaranty shall not constitute a termination of this
Guaranty. This Guaranty is binding upon Guarantor and Guarantor’s heirs,
successors and assigns so long as any of the guaranteed indebtedness remains
unpaid and even though the Indebtedness guaranteed may from time to time be
zero dollars ($0.00).

 

GUARANTOR’S
AUTHORIZATION TO LENDER.  Guarantor authorizes Lender, either before or
after any revocation hereof, without notice or demand
and without lessening Guarantor’s liability under this Guaranty, from time to
time: (A) prior to revocation as set forth above, to make one or
more additional secured or unsecured loans to Borrower, to lease equipment or
other goods to Borrower, or otherwise to extend additional credit to Borrower;
(B) to alter, compromise, renew, extend, accelerate, or otherwise change one or
more times the time for payment or other terms of the Indebtedness or any part
of the Indebtedness, including increases and decreases of the rate of interest
on the Indebtedness; extensions may be repeated and may be for longer than the
original loan term; (C) to take and hold security for the payment of this
Guaranty or the Indebtedness, and exchange, enforce, waive, subordinate, fail
or decide not to perfect, and release any such security, with or without the
substitution of new collateral; (D) to release, substitute, agree not to sue,
or deal with any one or more of Borrower’s sureties, endorsers, or other
guarantors on any terms or in any manner Lender may choose; (E) to determine
how, when and what application of payments and credits shall be made on the
Indebtedness (F) to apply such security and direct the order or manner of sale
thereof, including

 

 

 

Loan No:
00003

 

without limitation, any
nonjudicial sale permitted by the terms of the controlling security agreement
or deed of trust, as Lender in its discretion may determine; (G) to sell,
transfer, assign or grant participations in all or any part of the
Indebtedness; and (H) to assign or transfer this Guaranty in whole or in part.

 

GUARANTOR’S
REPRESENTATIONS AND WARRANTIES.  Guarantor represents and warrants to Lender
that (A) no representations or agreements of any kind have been made to
Guarantor which would limit or qualify in any way the terms of this Guaranty;
(B) this Guaranty is executed at Borrower’s request and not at the request of
Lender; (C) Guarantor has full power, right and authority to enter into this
Guaranty; (D) the provisions of this Guaranty do not conflict with or result in
a default under any agreement or other instrument binding upon Guarantor and do
not result in a violation of any law, regulation, court decree or order applicable
to Guarantor; (E) Guarantor has not and will not, without the prior written
consent of Lender, sell, lease, assign, encumber, hypothecate, transfer, or
otherwise dispose of all or substantially all of Guarantor’s assets, or any
interest therein; (F) upon Lender’s request, Guarantor will provide to Lender
financial and credit information in form acceptable to Lender, and all such
financial information which currently has been, and all future financial
information which will be provided to Lender is and will be true and correct in
all material respects and fairly present Guarantor’s financial condition as of
the dates the financial information is provided; (G) no material adverse change
has occurred in Guarantor’s financial condition since the date of the most
recent financial statements provided to Lender and no event has occurred which
may materially adversely affect Guarantor’s financial condition; (H) no
litigation, claim, investigation, administrative proceeding or similar action
(including those for unpaid taxes) against Guarantor is pending or threatened; (I)
Lender has made no representation to Guarantor as to the creditworthiness of
Borrower; and (J) Guarantor has established adequate means of obtaining from
Borrower on a continuing basis information regarding Borrower’s financial
condition. Guarantor agrees to keep adequately informed from such means of any
facts, events, or circumstances which might in any way affect Guarantor’s risks
under this Guaranty, and Guarantor further agrees that, absent a request for
information, Lender shall have no obligation to disclose to Guarantor any
information or documents acquired by Lender in the course of its relationship
with Borrower.

 

GUARANTOR’S
WAIVERS.  Except as
prohibited by applicable law, Guarantor waives any right to require Lender to
(A) make any presentment, protest, demand, or notice of any kind, including
notice of change of any terms of repayment of the Indebtedness, default by
Borrower or any other guarantor or surety, any action or nonaction taken by
Borrower, Lender, or any other guarantor or surety of Borrower, or the creation
of new or additional Indebtedness; (B) proceed against any person, including
Borrower, before proceeding against Guarantor; (C) proceed against any
collateral for the Indebtedness, including Borrower’s collateral, before
proceeding against Guarantor; (D) apply any payments or proceeds received
against the Indebtedness in any order; (E) give notice of the terms, time, and
place of any sale of the collateral pursuant to the Uniform Commercial Code or
any other law governing such sale; (F) disclose any information about the
Indebtedness, the Borrower, the collateral, or any other guarantor or surety,
or about any action or nonaction of Lender; or (G) pursue any remedy or course
of action in Lender’s power whatsoever.

 

Guarantor also waives any
and all rights or defenses arising by reason of (H) any disability or other
defense of Borrower, any other guarantor or surety or any other person; (I) the
cessation from any cause whatsoever, other than payment in full, of the
Indebtedness; (J) the application of proceeds of the Indebtedness by Borrower
for purposes other than the purposes understood and intended by Guarantor and
Lender; (K) any act of omission or commission by Lender which directly or
indirectly results in or contributes to the discharge of Borrower or any other
guarantor or surety, or the Indebtedness, or the loss or release of any
collateral by operation of law or otherwise; (L) any statute of limitations in
any action under this Guaranty or on the Indebtedness; or (M) any modification
or change in terms of the Indebtedness, whatsoever, including without
limitation, the renewal, extension, acceleration, or other change in the time
payment of the Indebtedness is due and any change in the interest rate, and
including any such modification or change in terms after revocation of this
Guaranty on Indebtedness incurred prior to such revocation.

 

Guarantor waives all
rights and any defenses arising out of an election of remedies by Lender even
though that the election of remedies, such as a non-judicial foreclosure with
respect to security for a guaranteed obligation, has destroyed Guarantor’s
rights of subrogation and reimbursement against Borrower by operation of
Section 580d of the California Code of Civil Procedure or otherwise.

 

Guarantor waives all
rights and defenses that Guarantor may have because Borrower’s obligation is
secured by real property. This means among other things: (1) Lender may collect
from Guarantor without first foreclosing on any real or personal property
collateral pledged by Borrower. (2) If Lender forecloses on any real property
collateral pledged by Borrower: (a) the amount of Borrower’s obligation may be
reduced only by the price for which the collateral is sold at the foreclosure
sale, even if the collateral is worth more than the sale price. (b) Lender may
collect from Guarantor even if Lender, by forclosing on the real property
collateral, has destroyed any right Guarantor may have to collect from
Borrower. This is an unconditional and irrevocable waiver of any rights and
defenses Guarantor may have because Borrower’s obligation is secured by real
property. These rights and defenses include, but are not limited to, any rights
and defenses based upon Section 580a, 580b, 580d, or 725 of the Code of Civil
Procedure.

 

Guarantor understands and
agrees that the foregoing waivers are unconditional and irrevocable waivers of
substantive rights and defenses to which Guarantor might otherwise be entitled
under state and federal law. Guarantor acknowledges that Guarantor has provided
these waivers of rights and defenses with the intention that they be fully
relied upon by Lender. Guarantor further understands and agrees that this
Guaranty is a separate and independent contract between Guarantor and Lender,
given for full and ample consideration, and is enforceable on its own terms.
Until all Indebtedness is paid in full, Guarantor waives any right to enforce
any remedy Guarantor may have against the Borrower or any other guarantor,
surety, or other person, and further, Guarantor waives any right to participate
in any collateral for the Indebtedness now or hereafter held by Lender.

 

GUARANTOR’S
UNDERSTANDING WITH RESPECT TO WAIVERS.  Guarantor warrants and agrees that each of the
waivers set forth above is made with Guarantor’s full knowledge of its
significance and consequences and that, under the circumstances, the waivers
are reasonable and not contrary to public policy or law. If any such waiver is
determined to be contrary to any applicable law or public policy, such waiver
shall be effective only to the extent permitted by law or public policy.

 

SUBORDINATION
OF BORROWER’S DEBTS TO GUARANTOR.  Guarantor agrees that the Indebtedness of
Borrower to Lender, whether now existing or hereafter created, shall be
superior to any claim that Guarantor may now have or hereafter acquire against
Borrower, whether or not Borrower becomes insolvent. Guarantor hereby expressly
subordinates any claim Guarantor may have against Borrower, upon any account
whatsoever, to any claim that Lender may now or hereafter have against
Borrower. In the event of insolvency and consequent liquidation of the assets
of Borrower, through bankruptcy, by an assignment for the benefit of creditors,
by voluntary liquidation, or otherwise, the assets of Borrower applicable to
the payment of the claims of both Lender and Guarantor shall be paid to Lender
and shall be first applied by Lender to the Indebtedness of Borrower to Lender.
Guarantor does hereby assign to Lender all claims which it may have or acquire
against Borrower or against any assignee or trustee in bankruptcy of Borrower;
provided however, that such assignment shall be effective only for the purpose
of assuring to Lender full payment in legal tender of the Indebtedness. If
Lender so requests, any notes or credit agreements now or hereafter evidencing
any debts or obligations of Borrower to Guarantor shall be marked with a legend
that the same are subject to this Guaranty and shall be delivered to Lender.
Guarantor agrees, and Lender is hereby authorized, in the name of Guarantor,
from time to time to file financing statements and continuation statements and
to execute documents and to take such other actions as Lender deems necessary
or appropriate to perfect, preserve and enforce its rights under this Guaranty.

 

MISCELLANEOUS
PROVISIONS.   The
following miscellaneous provisions are a part of this Guaranty:

 

	
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  /s/ [ILLEGIBLE]

  	
   

  
				

 

2

 

Amendments. This Guaranty, together with any Related
Documents, constitutes the entire understanding and agreement of the parties as
to the matters set forth in this Guaranty. No alteration of or amendment to
this Guaranty shall be effective unless given in writing and signed by the
party or parties sought to be charged or bound by the alteration or amendment.

 

Attorneys’
Fees; Expenses.  Guarantor agrees to pay upon demand all of
Lender’s costs and expenses, including Lender’s attorneys’ fees and Lender’s
legal expenses, incurred in connection with the enforcement of this Guaranty.
Lender may hire or pay someone else to help enforce this Guaranty, and
Guarantor shall pay the costs and expenses of such enforcement. Costs and
expenses include Lender’s attorneys’ fees and legal expenses whether or not
there is a lawsuit, including attorneys’ fees and legal expenses for bankruptcy
proceedings (including efforts to modify or vacate any automatic stay or
injunction), appeals, and any anticipated post-judgment collection services.
Guarantor also shall pay all court costs and such additional fees as may be
directed by the court.

 

Caption
Headings.  Caption
headings in this Guaranty are for convenience purposes only and are not to be
used to interpret or define the provisions of this Guaranty.

 

Governing
Law. This Guaranty will be governed by, construed and enforced in accordance
with federal law and the laws of the State of California. This Guaranty has
been accepted by Lender in the State of California.

 

Choice of
Venue.  If there is a
lawsuit, Guarantor agrees upon Lender’s request to submit to the jurisdiction
of the courts of LOS ANGELES County, State of California.

 

Integration. Guarantor further agrees that Guarantor
has read and fully understands the terms of this Guaranty; Guarantor has had
the opportunity to be advised by Guarantor’s attorney with respect to this
Guaranty; the Guaranty fully reflects Guarantor’s intentions and parol evidence
is not required to interpret the terms of this Guaranty. Guarantor hereby
indemnifies and holds Lender harmless from all losses, claims, damages, and
costs (including Lender’s attorneys’ fees) suffered or incurred by Lender as a
result of any breach by Guarantor of the warranties, representations and
agreements of this paragraph.

 

Interpretation. In all cases where there is more than
one Borrower or Guarantor, then all words used in this Guaranty in the singular
shall be deemed to have been used in the plural where the context and
construction so require; and where there is more than one Borrower named in
this Guaranty or when this Guaranty is executed by more than one Guarantor, the
words “Borrower” and “Guarantor” respectively shall mean all and any one or
more of them. The words “Guarantor,” “Borrower,” and “Lender” include the
heirs, successors, assigns, and transferees of each of them. If a court finds
that any provision of this Guaranty is not valid or should not be enforced,
that fact by itself will not mean that the rest of this Guaranty will not be
valid or enforced. Therefore, a court will enforce the rest of the provisions
of this Guaranty even if a provision of this Guaranty may be found to be
invalid or unenforceable. If any one or more of Borrower or Guarantor are
corporations, partnerships, limited liability companies, or similar entities,
it is not necessary for Lender to inquire into the powers of Borrower or
Guarantor or of the officers, directors, partners, managers, or other agents
acting or purporting to act on their behalf, and any indebtedness made or
created in reliance upon the professed exercise of such powers shall be
guaranteed under this Guaranty.

 

Notices. Any notice required to be given under
this Guaranty shall be given in writing, and, except for revocation notices by
Guarantor, shall be effective when actually delivered, when actually received
by telefacsimile (unless otherwise required by law), when deposited with a
nationally recognized overnight courier, or, if mailed, when deposited in the
United States mail, as first class, certified or registered mail postage
prepaid, directed to the addresses shown near the beginning of this Guaranty.
All revocation notices by Guarantor shall be in writing and shall be effective
upon delivery to Lender as provided in the section of this Guaranty entitled
“DURATION OF GUARANTY.” Any party may change its address for notices under this
Guaranty by giving formal written notice to the other parties, specifying that
the purpose of the notice is to change the party’s address. For notice
purposes, Guarantor agrees to keep Lender informed at all times of Guarantor’s
current address. Unless otherwise provided or required by law, if there is more
than one Guarantor, any notice given by Lender to any Guarantor is deemed to be
notice given to all Guarantors.

 

No Waiver
by Lender.  Lender
shall not be deemed to have waived any rights under this Guaranty unless such
waiver is given in writing and signed by Lender. No delay or omission on the
part of Lender in exercising any right shall operate as a waiver of such right
or any other right. A waiver by Lender of a provision of this Guaranty shall
not prejudice or constitute a waiver of Lender’s right otherwise to demand
strict compliance with that provision or any other provision of this Guaranty.
No prior waiver by Lender, nor any course of dealing between Lender and
Guarantor, shall constitute a waiver of any of Lender’s rights or of any of
Guarantor’s obligations as to any future transactions. Whenever the consent of
Lender is required under this Guaranty, the granting of such consent by Lender
in any instance shall not constitute continuing consent to subsequent instances
where such consent is required and in all cases such consent may be granted or
withheld in the sole discretion of Lender.

 

Successors
and Assigns.  Subject
to any limitations stated in this Guaranty on transfer of Guarantor’s interest,
this Guaranty shall be binding upon and inure to the benefit of the parties,
their successors and assigns.

 

DEFINITIONS.  The following capitalized words and terms shall
have the following meanings when used in this Guaranty. Unless specifically
stated to the contrary, all references to dollar amounts shall mean amounts in
lawful money of the United States of America. Words and terms used in the
singular shall include the plural, and the plural shall include the singular,
as the context may require. Words and terms not otherwise defined in this
Guaranty shall have the meanings attributed to such terms in the Uniform
Commercial Code:

 

Borrower. The word “Borrower” means NATROL, INC.,
A DELAWARE CORPORATION and includes all co-signers and co-makers signing the
Note.

 

Guarantor. The word “Guarantor” means each and
every person or entity signing this Guaranty, including without limitation
NATROL PRODUCTS, INC., A DELAWARE CORPORATION.

 

Guaranty. The word “Guaranty” means the guaranty
from Guarantor to Lender, including without limitation a guaranty of all or
part of the Note.

 

Indebtedness.  The word “Indebtedness” means Borrower’s
indebtedness to Lender as more particularly described in this Guaranty. 

 

Lender.  The word “Lender” means City National Bank,
NA, its successors and assigns.

 

Note. The word “Note” means the promissory
note dated November 4, 2004, in the original principal amount of $3,000,000.00
from Borrower to Lender, together with all renewals of, extensions of,
modifications of, refinancings of, consolidations of, and substitutions for the
promissory note or agreement.

 

Related
Documents.  The words
“Related Documents” mean all promissory notes, credit agreements, loan
agreements, environmental agreements, guaranties, security agreements,
mortgages, deeds of trust, security deeds, collateral mortgages, and all other
instruments, agreements and documents, whether now or hereafter existing,
executed in connection with the Indebtedness.

 

3

 

EACH
UNDERSIGNED GUARANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS
GUARANTY AND AGREES TO ITS TERMS. IN ADDITION, EACH GUARANTOR UNDERSTANDS THAT
THIS GUARANTY IS EFFECTIVE UPON GUARANTOR’S EXECUTION AND DELIVERY OF THIS
GUARANTY TO LENDER AND THAT THE GUARANTY WILL CONTINUE UNTIL TERMINATED IN THE
MANNER SET FORTH IN THE SECTION TITLED “DURATION OF GUARANTY”. NO FORMAL
ACCEPTANCE BY LENDER IS NECESSARY TO MAKE THIS GUARANTY EFFECTIVE. THIS
GUARANTY IS DATED NOVEMBER 4, 2004.

 

GUARANTOR:

 

 

NATROL
PRODUCTS, INC., A DELAWARE CORPORATION

 

	
   

  	
  By:

  	
  /s/ Elliott Balbert

  	
   

  
	
   

  	
  ELLIOTT BALBERT, President of
  NATROL

  
	
   

  	
  PRODUCTS, INC., A DELAWARE
  CORPORATION

  

 

[ILLEGIBLE]

 

“*”   which would
have a material adverse impact upon the operations or finances of Borrower or
its Subsidiary.

 

	
  INITIAL

  HERE

  	
   

  	
   

  
	
   

  	
   

  	
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4

 

 

 

COMMERCIAL SECURITY AGREEMENT

 

	
  Principal

  	
   

  	
  Loan Date

  	
   

  	
  Maturity

  	
   

  	
  Loan No

  	
   

  	
  Call/Cell

  	
   

  	
  Account

  	
   

  	
  Officer

  	
   

  	
  Initials

  	
   

  
	
  $

  	
  3,000,000.00

  	
   

  	
  11-04-2004

  	
   

  	
  12-01-2005

  	
   

  	
  00003

  	
   

  	
   

  	
   

  	
  709818

  	
   

  	
  DA

  	
   

  	
   

  	
   

  
																	

References in the shaded area are for Lender’s use only and do not limit
the applicability of this document to any particular loan or item.

Any item above containing “* * *” has been omitted due to text length
limitations.

 

	
  Grantor:

  	
  NATROL,
  INC., A DELAWARE CORPORATION

  	
  Lender:

  	
  City
  National Bank, NA

  
	
   

  	
  21411
  PRAIRIE

  CHATSWORTH, CA 91311

  	
   

  	
  San
  Fernando Valley Commercial Banking Services

  
	
   

  	
   

  	
   

  	
  #048000

  
	
   

  	
   

  	
   

  	
  15260
  Ventura Boulevard, Suite 1600

  
	
   

  	
   

  	
   

  	
  Sherman
  Oaks, CA 91403

  

 

THIS COMMERCIAL SECURITY AGREEMENT dated November 4. 2004, is
made and executed between NATROL. INC., A DELAWARE CORPORATION (“Grantor”) and
City National Bank, NA (“Lender”).

 

GRANT OF SECURITY INTEREST, Far valuable consideration,
Grantor grants to Lender a security interest in the Collateral to secure the
Indebtedness and agrees that Lender shall have the rights stated in this
Agreement with respect to the Collateral, in addition to all other rights which
Lender may have by law.

 

COLLATERAL
DESCRIPTION. The word “Collateral” as used in this Agreement
means the following described property, whether now owned or hereafter
acquired, whether now existing or hereafter arising, and wherever located, in
which Grantor is giving to Lender a security interest for the payment of the
Indebtedness and performance of all other obligations under the Note and this
Agreement:

 

All Inventory, Chattel Paper, Accounts, Equipment and
General Intangibles

 

In addition, the word
“Collateral” also includes all the following, whether now owned or hereafter
acquired, whether now existing or hereafter arising, and wherever located:

 

(A)   All accessions, attachments, accessories,
tools, parts, supplies, replacements of and additions to any of the collateral
described herein, whether added now or later.

 

(B)   All products and produce of any of the
property described in this Collateral section.

 

(C)   All accounts, general intangibles,
instruments, rents, monies, payments, and all other rights, arising out of a
sale, lease, consignment or other disposition of any of the property described
in this Collateral section.

 

(D)   All proceeds (including insurance proceeds)
from the sale, destruction, loss, or other disposition of any of the property
described in this Collateral section, and sums due from a third party who has
damaged or destroyed the Collateral or from that party’s insurer, whether due
to judgment, settlement or other process.

 

(E)    All records and data relating to any of the
property described in this Collateral section, whether in the form of a
writing, photograph, microfilm, microfiche, or electronic media, together with
all of Grantor’s right, title, and interest in and to all computer software
required to utilize, create, maintain, and process any such records or data on
electronic media.

 

Despite any other
provision of this Agreement, Lender is not granted, and will not have, a
nonpurchase money security interest in household goods, to the extent such a
security interest would be prohibited by applicable law. In addition, if
because of the type of any Property. Lender is required to give a notice of the
right to cancel under Truth in Lending for the Indebtedness, then Lender will
not have a security interest in such Collateral unless and until such a notice is
given.

 

CROSS-COLLATERALIZATION.
In addition to the Note, this Agreement secures all obligations, debts and
liabilities, plus interest thereon, of Grantor to Lender, or any one or more of
them, as well as all claims by Lender against Grantor or any one or more of
them, whether now existing or hereafter arising, whether related or unrelated
to the purpose of the Note, whether voluntary or otherwise, whether due or not
due, direct or indirect, determined or undetermined, absolute or contingent,
liquidated or unliquidated whether Grantor may be liable individually or
jointly with others, whether obligated as guarantor, surety, accommodation
party or otherwise, and whether recovery upon such amounts may be or hereafter
may become barred by any statute of limitations, and whether the obligation to
repay such amounts may be or hereafter may become otherwise unenforceable.

 

grantor’s representations and warranties with respect to the
collateral. With respect to the Collateral, Grantor represents and promises to
Lender that:

 

Perfection
of Security Interest. Grantor agrees to take whatever actions
are requested by Lender to perfect and continue Lender’s security interest in
the Collateral. Upon request of Lender, Grantor will deliver to Lender any and
all of the documents evidencing or constituting the Collateral, and Grantor
will note Lender’s interest upon any and all chattel paper and instruments if
not delivered to Lender for possession by Lender. This is a
continuing Security Agreement and will continue in effect even though all or
any part of the Indebtedness is paid in full and even though for a period of
time Grantor may not be indebted to Lender.

 

Notices
to Lender. Grantor will promptly notify Lender in writing at Lender’s
address shown above (or such other addresses as Lender may designate from time
to time) prior to any (1) changes in Grantor’s name; (2) change in Grantor’s
assumed business name(s); (3) change in the management of the Corporation
Grantor; (4) change in the authorized signer(s); (5) change in Grantor’s
principal office address; (6) change in Grantor’s state of organization; (7)
conversion of Grantor to a new or different type of business entity; or (8)
change in any other aspect of Grantor that directly or indirectly relates to
any agreements between Grantor and Lender. No change in Grantor’s name or state
of organization will take effect until after Lender has received notice.

 

No
Violation. The execution and delivery of this Agreement will
not violate any law or agreement governing Grantor or to which Grantor is a
party, and its certificate or articles of incorporation and bylaws do not
prohibit any term or condition of this Agreement.

 

Enforceability
of Collateral. To the extent the Collateral consists of
accounts, chattel paper, or general intangibles, as defined by the Uniform
Commercial Code, the Collateral is enforceable in accordence with its terms, is
genuine, and fully complies with all applicable laws and regulations concerning
form, content and manner of preparation and execution, and all persons
appearing to be obligated on the Collateral have authority and capacity to
contract and are in fact obligated as they appear to be on the Collateral. At
the time any account becomes subject to a security interest in favor of Lender,
the account shall be a good and valid account representing an undisputed, bona
fide indebtedness incurred by the account debtor, for merchandise held subject
to delivery instructions or previously shipped or delivered

 

 

pursuant to a contract of sale, or for services
previously performed by Grantor with or for the account debtor.  So long as this Agreement remains in effect,
Grantor shall not, without Lender’s prior written consent, compromise, settle,
adjust, or extend payment under or with regard to any such Accounts.  There shall be no setoffs or counterclaims
against any of the Collateral, and no agreement shall have been made under
which any deductions or discounts may be claimed concerning the Collateral
except those disclosed to Lender in writing.

 

Location of the Collateral.   Except in the ordinary course of Grantor’s
business, Grantor agrees to keep the Collateral (or to the extent the
Collateral consists of intangible property such as accounts or general intangibles,
the records concerning the Collateral) at Grantor’s address shown above or at
such other locations as are acceptable to Lender.  Upon Lender’s request, Grantor will deliver
to Lender in form satisfactory to Lender a schedule of real properties and Collateral
locations relating to Grantor’s operations, including without limitation the
following: (1) all real property Grantor owns or is purchasing; (2) all real
property Grantor is renting or leasing; (3) all storage facilities Grantor
owns, rents, leases, or uses; and (4) all other properties where Collateral is
or may be located.

 

Removal of the Collateral.   Except in the ordinary course of Grantor’s
business including the sales of inventory. 
Grantor shall not remove the Collateral from its existing location
without Lender’s prior written consent. 
To the extent that the Collateral consists of vehicles, or other titled
property, Grantor shall not take or permit any action which would require
application for certificates of title for the vehicles outside the State of
Delaware, without Lender’s prior written consent.  Grantor shall, whenever requested, active
Lender of the exact location of the Collateral.

 

Transactions Involving
Collateral.   Except
for Inventory sold or accounts collected in the ordinary course of Grantor’s
business, or as otherwise provided for in this Agreement.,Grantor shall not
sell, offer to sell, or otherwise transfer or dispose of the Collateral.  While Grantor is not in default under this Agreement,
Grantor may sell inventory, but only in the ordinary course of its business and
only to buyers who qualify as a buyer in the ordinary course of business.  A sale in the ordinary course of Grantor’s
business does not include a transfer in partial or total satisfaction of a debt
or any bulk sale.  Grantor shall not
pledge, mortgage, encumber or otherwise permit the Collateral to be subject to
any lien, security interest, encumbrance, or charge, other than the security
interest provided for in this Agreement, without the prior written consent of
Lender.  This includes security interests
even if junior in right to the security interests granted under the
Agreement.  Unless waived by Lender, all
proceeds from any disposition of the Collateral (for whatever reason) shall be
held in trust for Lender and shall not be commingled with any other funds;
provided however, the requirement shall not constitute consent by Lender to any
sale or other disposition.  Upon receipt,
Grantor shall immediately deliver any such proceeds to Lender.

 

Title.   Grantor represents and warrants to Lender
that Grantor holds good and marketable title to the Collateral, free and clear
of all liens and encumbrances except for the lien of this Agreement.  No financing statement covering any of the
Collateral is on file in any public office other than those which reflect the
security interest created by this Agreement or to which Lender has specifically
consented.  Grantor shall defend Lender’s
rights in the Collateral against the claims and demands of all other persons.

 

Repairs and Maintenance.   Grantor agrees to keep and maintain, and to
cause others to keep and maintain, the Collateral in good order, repair and
condition at all times while this Agreement remains in affect.  Grantor further agrees to pay when due all
claims for work done on, or services rendered or material furnished in
connection with the Collateral so that no lien or encumbrance may ever attach
to or be filed against the Collateral.

 

Inspection of Collateral.   Lender and Lender’s designated representatives
and agents shall have the right at all reasonable times to examine and inspect
the Collateral wherever located.

 

Taxes, Assessments and Liens.   Grantor will pay when due all taxes,
assessments and liens upon the Collateral, its use or operation, upon this
Agreement, upon any promissory or notes evidencing the Indebtedness, or upon
any of the other Related Documents. 
Grantor may withhold any such payment or may elect to contest any lien
if Grantor is in good faith conducting any appropriate proceeding to contest
the obligation to pay and so long as Lender’s interest in the Collateral is not
jeopardized in Lender’s sole opinion.  If
the Collateral is subjected to a lien which is not discharged within fifteen
(15) days, Grantor shall deposit with Lender cash, a sufficient corporate
surety bond or other security satisfactory to Lender in an amount adequate to
provide for the discharge of the lien plus any interest, costs, reasonable
attorneys’ fees or other charges that could accrue as a result of foreclosure
or sale of the Collateral.  In any
contest Grantor shall defend itself and Lender and shall satisfy any final
adverse judgment before enforcement against the Collateral.  Grantor shall name Lender as an additional
obligee under any surety bond furnished in the contest proceedings.  Grantor further agrees to furnish Lender with
evidence that such taxes, assessments, and governmental and other charges have
been paid in full and in a timely manner. 
Grantor may withhold any such payment or may elect to contest any lien
if Grantor is in good faith conducting an appropriate proceeding to contest the
obligation to pay and so long as Lender’s interest in the Collateral is not
jeopardized.

 

Compliance with Governmental
Requirements.   Grantor
shall comply promptly with all laws, ordinances, rules and regulations of all
governmental authorities, now or hereafter in effect, applicable to the
ownership, production, disposition, or use of the Collateral, including all
laws or regulations relating to the undue erosion of highly credible land or
relating to the conversion of wetlands for the production of an agricultural
product or commodity.  Grantor may
contest in good faith any such law, ordinance or regulation and withhold compliance
during any proceeding, including appropriate appeals, so long as Lender’s
interest in the Collateral, in Lender’s opinion, is not jeopardized.

 

Hazardous Substances.  Grantor represents and warrants that the
Collateral never has been, and never will be so long as this Agreement remains
a lien on the Collateral, used in violation of any Environmental Laws or for
the generation, manufacture, storage, transportation, treatment, disposal,
release or threatened release of any Hazardous Substances.  The representations and warranties contained
herein are based on Grantor’s due diligence in investigating the Collateral for
Hazardous Substances.  Grantor hereby (1)
releases and waives any future claims against Lender for indemnity or
contribution in the event Grantor becomes liable for cleanup or other costs
under any Environmental Laws, and (2) agrees to indemnify and hold harmless
Lender against any and all claims and losses resulting from a breach of this
provision of this Agreement.  This
obligation to indemnify shall survive the payment of the indebtedness and the
satisfaction of this Agreement.

 

Maintenance of Casualty
Insurance.   Grantor
shall procure and maintain all risks insurance, including without limitation
fire, theft and liability coverage together with such other insurance as Lender
may require with respect to the Collateral, in form, amounts, coverages and
basis reasonably acceptable to Lender and issued by a company or companies
reasonably acceptable to Lender. 
Grantor, upon request of Lender, will deliver to Lender from time to time
the policies or certificates of insurance in form satisfactory to Lender,
including stipulations that coverages will not be cancelled or diminished
without at least seven (7) days prior written notice to Lender and not
including any disclaimer of the insurer’s liability for failure to give such a
notice.  Each insurance policy also shall
include an endorsement providing that coverage in favor of Lender will not be
impaired in any way by any act, omission or default of Grantor or any other
person.  In connection with all policies
covering assets in which Lender holds or is offered a security interest,
Grantor will provide Lender with such loss payable or other endorsements as
Lender may require.  If Grantor at any
time fails to obtain or maintain any insurance as required under this
Agreement, Lender may (but shall not be obligated to) obtain such insurance as
Lender deems appropriate, including if Lender so chooses “single interest
insurance,” which will cover only Lender’s interest in the Collateral.

 

Application of Insurance
Proceeds.   Grantor
shall promptly notify Lender of any loss or damage to the Collateral.  Lender may make proof of loss if Grantor
fails to do so within fifteen (15) days of the casualty.  All proceeds of any insurance on the Collateral,
including accrued

 

 

proceeds thereon, shall
be held by Lender as part of the Collateral. If Lender consents to repair or
replacement of the damaged or destroyed Collateral, Lender shall, upon
satisfactory proof of expenditure, pay or reimburse Grantor from the proceeds
for the reasonable cost of repair or restoration. If Lender does not consent to
repair or replacement of the Collateral, Lender shall retain a sufficient
amount of the proceeds to pay all of the Indebtedness, and shall pay the balance
to Grantor. Any proceeds which have not been disbursed within six (6) months
after their receipt and which Grantor has not committed to the repair or
restoration of the Collateral shall be used to prepay the Indebtedness.

 

Insurance
Reserves.   Lender may require
Grantor to maintain with Lender reserves for payment of insurance premiums,
which reserves shall be created by monthly payments from Grantor of a sum
estimated by Lender to be sufficient to produce, at least fifteen (15) days
before the premium due date, amounts at least equal to the insurance premiums
to be paid. If fifteen (15) days before payment is due, the reserve funds are
insufficient, Grantor shall upon demand pay any deficiency to Lender. The
reserve funds shall be held by Lender as a general deposit and shall constitute
a non-interest-bearing account which Lender may satisfy by payrnent of the insurance
premiums required to be paid by Grantor as they become due. Lender does not
hold the reserve funds in trust for Grantor, and Lender is not the agent of
Grantor for payment of the insurance premiums required to be paid by Grantor.
The responsibility for the payment of premiums shall remain Grantor’s sole
responsibility.

 

Insurance
Reports.   Grantor,
upon request of Lender, shall furnish to Lender reports on each existing policy
of insurance showing such information as Lender may reasonably request
including the following; (1) the name of the insurer; (2) the risks insured;
(3) the amount of the policy; (4) the property insured; (5) the then current
value on the basis of which insurance has been obtained and the manner of
determining that value; end (6) the expiration date of the policy.  In addition, Grantor shall upon request by
Lender (however not more often than annually) have an independent appraiser
satisfactory to Lender determine, as applicable, the cash value or replacement
cost of the Collateral.

 

Financing
Statements.   Grantor authorizes Lender to file a UCC
financing statement, or alternatively, a copy of this Agreement to perfect Lender’s
security interest. At Lender’s request, Grantor additionally agrees to sign all
other documents that are necessary to perfect, protect, and continue Lender’s
security interest in the Property. Grantor will pay all filing fees, title
transfer fees, and other fees and costs involved unless prohibited by law or
unless Lender is required by law to pay such fees and costs. Grantor irrevocably
appoints Lender to execute documents necessary to transfer title if there is a
default. Lender may file a copy of this Agreement as a financing statement. If
Grantor changes Grantor’s name or address, or the name or address of any person
granting a security interest under this Agreement changes, Grantor will
promptly notify the Lender of such change.

 

GRANTOR’S
RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS.   Until default and except as otherwise
provided below with respect to accounts, Grantor may have possession of the
tangible personal property and beneficial use of all the Collateral and may use
it in any lawful manner not inconsistent with this Agreement or the Related
Documents, provided that Grantor’s right to possession and beneficial use shall
not apply to any Collateral where possession of the Collateral by Lender is
required by law to perfect Lender’s security interest in such Collateral. Until
otherwise notified by Lender, Grantor may collect any of the Collateral
consisting of accounts. At any time and even though no Event of Default exists,
Lender may exercise its rights to collect the accounts and to notify account
debtors to make payments directly to Lender for application to the
Indebtedness. If Lender at any time has possession of any Collateral, whether
before or after an Event of Default, Lender shall be deemed to have exercised
reasonable care in the custody and preservation of the Collateral if Lender
takes such action for that purpose as Grantor shall request or as Lender, in
Lender’s sole discretion, shall deem appropriate under the circumstances, but
failure to honor any request by Grantor shall not of itself be deemed to be a
failure to exercise reasonable care.  Lender shall not be required to take any steps
necessary to preserve any rights in the Collateral against prior parties, nor
to protect, preserve or maintain any security interest given to secure the
Indebtedness.

 

LENDER’S
EXPENDITURES.   If any action or proceeding is commenced that
would materially affect Lender’s interest in the Collateral or if Grantor fails
to comply with any provision of this Agreement or any Related Documents,
including but not limited to Grantor’s failure to discharge or pay when due any
amounts Grantor is required to discharge or pay under this Agreement or any
Related Documents. Lender on Grantor’s behalf may (but shall not be obligated
to) take any action that Lender deems appropriate, including but not limited to
discharging of paying all taxes, liens, security interests, encumbrances and
other claims, at any time levied or placed on the Collateral and paying all
costs for insuring, maintaining and preserving the Collateral. All such
expenditures incurred or paid by Lender for such purposes will then bear
interest at the rate charged under the Note from the date incurred or paid by
Lender to the date of repayment by Grantor. All such expenses will become a
part of the Indebtedness and, at Lender’s option, will (A) be payable on
demand; (B) be added to the balance of the Note and be apportioned among and be
payable with any installment payments to become due during either (1) the term
of any applicable insurance policy; or (2) the remaining term of the Note; or
(C) be treated as a balloon payment which will be due and payable at the Note’s
maturity. The Agreement also will secure payment of these amounts. Such right
shall be in addition to all other rights and remedies to which Lender may be
entitled upon Default.

 

DEFAULT.   Each of the following shall constitute an
Event of Default under this Agreement:

 

Payment
Default.   Grantor
fails to make any payment when due under the Indebtedness.

 

Other
Defaults.   Grantor fails
to comply with or to perform any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents or to comply
with or to perform any term, obligation, covenant or condition contained in any
other agreement between Lender and Grantor.

 

Default
in Favor of Third Parties. 
 Should Borrower or any Grantor
default under any loan, extension of credit, security agreement, purchase or
sales agreement, or any other agreement, in favor of any other creditor or
person that may materially affect any of Grantor’s property or Grantor’s or any
Grantor’s ability to repay the Indebtedness or perform their respective
obligations under this Agreement or any of the Related Documents.

 

False
Statements.   Any
warranty, representation or statement made or furnished to Lender by Grantor or
on Grantor’s behalf under this Agreement or the Related Documents is false or
misleading in any material respect, either now or at the time made or furnished
or becomes false or misleading at any time thereafter.

 

Defective
Collateraltization.   This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any collateral
document to create a valid and perfected security interest or lien at any time
and for any reason.

 

Insolvency.
  The dissolution or termination of
Grantor’s existence as a going business, the insolvency of Grantor, the
appointment of a receiver for any part of Grantor’s property, any assignment for
the benefit of creditors, any type of creditor workout, or the commencement of
any proceeding under any bankruptcy or insolvency laws by or against Grantor.

 

Creditor
or Forfeiture Proceedings. 
 Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help, repossession
or any other method, by any creditor of Grantor or by any governmental agency
against any collateral securing the Indebtedness. This includes a garnishment
of any of Grantor’s accounts, including deposit accounts, with Lender. However,
this Event of Default shall not apply if there is a good faith dispute by
Grantor as to the validity or
reasonableness of the claim which is the basis of the

 

3

 

creditor or forfeiture
proceeding and if Grantor gives Lender written notice of the creditor or
forfeiture proceeding and deposits with Lender monies or a surety bond for the
creditor or forfeiture proceeding, in an amount determined by Lender, in its
sole discretion, as being an adequate reserve or bond for the dispute.

 

Events
Affecting Guarantor.   Any of the preceding events occurs with
respect to any Guarantor of any of the Indebtedness or Guarantor dies or
becomes incompetent or revokes or disputes the validity of, or liability under,
any Guaranty of the Indebtedness.

 

Adverse
Change.   A material
adverse change occurs in Grantor’s financial condition, or Lender believes the
prospect of payment or performance of the Indebtedness is impaired.

 

Insecurity.
  Lender in good faith believes itself insecure.

 

RIGHTS
AND REMEDIES ON DEFAULT.   If an Event of Default occurs under this
Agreement, at any time thereafter, Lender shall have all the rights of a
secured party under the Delaware Uniform Commercial Code. In addition and
without limitation, Lender may exercise any one or more of the following rights
and remedies:

 

Accelerate
Indebtedness.   Lender
may declare the entire Indebtedness, including any prepayment penalty which
Grantor would be required to pay, immediately due and payable, without notice
of any kind to Grantor.

 

Assemble
Collateral.   Lender
may require Grantor to deliver to Lender all or any portion of the Collateral
and any and all certificates of title and other documents relating to the
Collateral. Lender may require Grantor to assemble the Collateral and make it
available to Lender at a place to be designated by Lender. Lender also shall
have full power to enter upon the property of Grantor to take possession of and
remove the Collateral. If the Collateral contains other goods not covered by
this Agreement at the time of repossession, Grantor agrees Lender may take such
other goods, provided that Lender makes reasonable efforts to return them to
Grantor after repossession.

 

Sell the
Collateral.   Lender
shall have full power to sell, lease, transfer, or otherwise deal with the
Collateral or proceeds thereof in Lender’s own name or that of Grantor. Lender
may sell the Collateral at public auction or private sale. Unless the
Collateral threatens to decline speedily in value or is of a type customarily
sold on a recognized market. Lender will give Grantor, and other persons as
required by law, reasonable notice of the time and place of any public sale, or the
time after which any private sale or any other disposition of the Collateral is
to be made. However, no notice need be provided to any person who, after Event
of Default occurs, enters into and authenticates an agreement waiving that
person’s right to notification of sale. The requirements of reasonable notice
shall be met if such notice is given at least ten (10) days before the time of
the sale or disposition. All expenses relating to the disposition of the
Collateral, including without limitation the expenses of retaking, holding,
insuring, preparing for sale and selling the Collateral, shall become a part of the Indebtedness secured by this
Agreement and shall be payable on demand, with interest at the Note rate from
date of expenditure until repaid.

 

Appoint
Receiver.   Lender
shall have the right to have a receiver appointed to take possession of all or
any part of the Collateral, with the power to protect and preserve the
Collateral, to operate the Collateral preceding foreclosure of sale, and to
collect the Rents from the Collateral and apply the proceeds, over and above
the cost of the receivership, against the Indebtedness. The receiver may serve
without bond if permitted by law. Lender’s right to the appointment of a
receiver shall exist whether or not the apparent value of the Collateral
exceeds the indebtedness by a substantial amount, Employment by Lender shall
not disqualify a person from serving as a receiver.

 

Collect
Revenues.   Apply Accounts. Lender, either itself or through a receiver,
may collect the payments, rents, income, and revenues from the Collateral.
Lender may at any time in Lender’s discretion transfer any Collateral into
Lender’s own name or that of Lender’s nominee and receive the payments, rents,
income, and revenues therefrom and hold the same as security for the
Indebtedness or apply it to payment of the Indebtedness in such order of
preference as Lender may determine. Insofar as the Collateral consists of
accounts, general intangibles, insurance policies, instruments, chattel paper,
choses in action, or similar property, Lender may demand, collect, receipt for,
settle, compromise, adjust, sue for, foreclose, or realize on the Collateral as
Lender may determine, whether or not Indebtedness or Collateral is then due.
For these purposes, Lender may, on behalf of and in the name of Grantor,
receive, open and dispose of mail addressed to Grantor; change any address to
which mail and payments are to be sent; and endorse notes, checks, drafts,
money orders, documents of title, instruments and items pertaining to payment,
shipment, or storage of any Collateral. To facilitate collection, Lender may
notify account debtors and obligors on any Collateral to make payments directly
to Lender.

 

Obtain Deficiency.   If Lender chooses to sell any or all of the
Collateral, Lender may obtain a judgment against Grantor for any deficiency
remaining on the Indebtedness due to Lender after application of all amounts
received from the exercise of the rights provided in this Agreement. Grantor
shall be liable for a deficiency even if the transaction described in this
Subsection is a sale of accounts or chattel paper.

 

Other
Rights and Remedies.   Lender
shall have all the rights and remedies of a secured creditor under the
provisions of the Uniform Commercial Code, as may be amended from time to time.
In addition, Lender shall have and may exercise any or all other rights and
remedies it may have available at law, in equity, or otherwise.

 

Election
of Remedies.   Except
as may be prohibited by applicable law, all of Lender’s rights and remedies,
whether evidenced by this Agreement, the Related Documents, or by any other
writing, shall be cumulative and may be exercised singularly or concurrently.
Election by Lender to pursue any remedy shall not exclude pursuit of any other
remedy, and an election to make expenditures or to take action to perform an
obligation of Grantor under this Agreement, after Grantor’s failure to perform,
shall not affect Lender’s right to declare a default and exercise its remedies.

 

MISCELLANEOUS
PROVISIONS.   The
following miscellaneous provisions are a part of this Agreement:

 

Amendments.
  This Agreement, together with any
Related Documents, constitutes the entire understanding and agreement of the
parties as to the matters set forth in this Agreement. No alteration of or
amendment to this Agreement shall be effective unless given in writing and
signed by the party or parties sought to be charged or bound by the alteration
or amendment.

 

Attorneys’
Fees; Expenses.   Grantor
across to pay upon demand all of Lender’s costs and expenses, including
Lender’s reasonable attorneys’ fees and Lender’s legal expenses, incurred in
connection with the enforcement of this Agreement. Lender may hire or pay
someone else to help enforce this Agreement, and Grantor shall pay the costs
and expenses of such enforcement. Costs and expenses include Lender’s
reasonable attorneys’ fees and legal expenses whether or not there is a
lawsuit, including reasonable attorneys’ fees and legal expenses for bankruptcy
proceedings (including efforts to modify or vacate any automatic stay or
injunction), appeals, and any anticipated post-judgment collection services.
Lender may also recover from Grantor all court, alternative dispute resolution
or other collection costs (including, without limitation, fees and charges of
collection agencies). actually incurred by Lender.

 

Caption
Headings.   Caption
headings in this Agreement are for convenience purposes only and are not to be
used to interpret or define the provisions of this Agreement.

 

Governing
Law.   This Agreement will be governed by, construed
and enforced in accordance with federal law and the laws of the State of California, except and only
to the extent of procedural matters related to the perfection and enforcement
of Lender’s rights and remedies

 

4

 

or validity of any provision of this Agreement is
challenged or questioned, such provision shall be governed by whichever
applicable state or federal law would uphold or would enforce such challenged
or questioned provision.  The loan
transaction which is evidenced by the Note and this Agreement has been applied
for, considered, approved and made, and all necessary loan documents have been
accepted by Lender in the state of California.

 

Choice of Venue.  If there is a lawsuit, Grantor agrees upon
Lender’s request to submit to the jurisdiction of the courts of LOS ANGELES
County, State of California.

 

No Waiver by Lender.  Lender shall not be deemed to have waived any
rights under this Agreement unless such waiver is given in writing and signed
by Lender.  No delay or omission on the
part of Lender in exercising any right shall operate as a waiver of such right
or any other right.  A waiver by Lender
of a provision of this Agreement shall not prejudice or constitute a waiver of
Lender’s right otherwise to demand strict compliance with that provision or any
other provision of this Agreement.  No
prior waiver by Lender, nor any course of dealing between Lender and Grantor,
shall constitute a waiver of any of Lender’s rights or of any of Grantor’s
obligations as to any future transactions. 
Whenever the consent of Lender is required under this Agreement, the
granting of such consent by Lender in any instance shall not constitute
continuing consent to subsequent instances where such consent is required and
in all cases such consent may be granted or withheld in the sole discretion of
Lender.

 

Notices.  Any notice required to be given under this
Agreement shall be given in writing, and shall be effective when actually
delivered, when actually received by telefacsimile (unless otherwise required
by law), when deposited with a nationally recognized overnight courier, or, if
mailed, when deposited in the United States mail, as first class, certified or
registered mail postage prepaid, directed to the addresses shown near the
beginning of this Agreement.  Any party
may change its address for notices under this Agreement by giving formal
written notice to the other parties, specifying that the purpose of the notice
is to change the party’s address.  For
notice purposes, Grantor agrees to keep Lender informed at all times of
Grantor’s current address.  Unless
otherwise provided or required by law, if there is more than one Grantor, any
notice given by Lender to any Grantor is deemed to be notice given to all
Grantors.

 

Power of Attorney.  Grantor here by appoints Lender as Grantor’s
invariable attorney-in-fact for the purpose of executing any documents
necessary to perfect, amend, or to continue the security interest granted in
this Agreement or to demand termination of fillings of other secured
parties.  Lender may at any time, and
without further authorization from Grantor, this carbon, photographic or other
reproduction of any financing statement or of this Agreement for use as a
financing statement.  Grantor will
reimburse Lender for all expenses for the perfection and the continuation of
the perfection of Lender’s security interest in the Collateral.

 

Severability.  If a court of competent jurisdiction finds
any provision of this Agreement to be illegal, invalid, or unenforceable as to
any circumstance, that finding shall not make the offending provision legal,
invalid, or unenforceable as to any other circumstance.  If feasible the offending provision shall be
considered modified so that it becomes legal, valid and enforceable.  If the offending provision cannot be modified
it shall be considered deleted from this Agreement.  Unless otherwise required by law, the
illegality, invalidity, or unenforceability of any provision of this Agreement
shall not affect the legality, validity or enforceability of any other
provision of this Agreement.

 

Successors and Assigns.   Subject to any limitations stated in this
Agreement on transfer of Grantor’s interest, this Agreement shall be binding
upon and inure to the benefit of the parties, their successors and assigns. If
ownership of the Collateral becomes vested in a person other than Grantor,
Lender, without notice to Grantor, may deal with Grantor’s successors with
references to this Agreement and the indebtedness by way of forbearance or
extension without releasing Grantor from the obligations of this Agreement or
liability under the indebtedness.

 

Survival of Representations and
Warranties.  All
representations, warranties, and agreements made by Grantor in this Agreement
shall survive the execution and delivery of this Agreement, shall be continuing
in nature, and shall remain in full force and effect until such time as
Grantor’s indebtedness shall be paid in full.

 

Time is of the Essence.  Time is of the essence in the performance of this
Agreement.

 

Definitions.  The following capitalized words and terms
shall have the following meanings when used in this Agreement.  Unless specifically stated to the contrary,
all references to dollar amounts shall mean amounts in lawful money of the United
States of America.  Words and terms used
in the singular shall include the plural, and the plural shall include the
singular, as the context may require. 
Words and terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code:

 

Agreement.  The Word “Agreement” means this Commercial
Security Agreement, as this Commercial Security Agreement may be amended or
modified from time to time, together with all exhibits and schedules attached
to this Commercial Security Agreement from time to time.

 

Borrower.  The word “Borrower” means NATROL. INC., A
DELAWARE CORPORATION and includes all co-signers and co-makers signing the
note.

 

Collateral.  The word “Collateral” means all of Grantor’s
right, title and interest in and to all the Collateral as described in the
Collateral Description action of this Agreement.

 

Default.  The word “Default” means the Default set
forth in this Agreement in the Section titled “Default”.

 

Environmental Laws.  The word “Environmental Laws” mean any and
all state, federal and local statute regulations and ordinances relating to the
protection of human health or the environment, including without limitation the
comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended, 42 U.S.C. Section 9801, et seq. (“CERCLA”), the Superfund
Amendments and Reauthorization Act of 1980, Pub, L no 99-499 (“SARA”) the
Hazardous Materials Transportation Act. 49 U.S.C. Section 1501, et seq., the
Resource Conservation and Recovery Act. 42 U.S.C. Section 6901 et seq.,
Chapters 6.6 through 7.7 of Division 20 of the California Health and Safety
Code, Section 25100, Seq., of other applicable state or federal laws, rules, or
regulations adopted pursuant thereto.

 

Event of Default.  The words “Event of Default” mean any of the
events of default set forth in this Agreement in the default section of this
Agreement.

 

Grantor.  The Word “Grantor” means NATROL, INC., A
DELAWARE CORPORATION.

 

Guarantor.  The word “Guarantor” means any guarantor,
surety or accommodation party of any or all of the indebtedness.

 

Guaranty.  The word “Guaranty” means the guaranty from
Guarantor to Lender, including without limitation a guaranty of all or part of
the Note.

 

Hazardous Substances.  The words “Hazardous Substances” mean
materials that, because of their quantity, concentration or physical, chemical
or infectious characteristics, may cause or pose a present or potential hazard
to human health or the environment when improperly used, wasted, stored,
disposed of, generated, manufactured, transported or otherwise handled.  The words “Hazardous Substances” are used in
their very broadest sense and include without limitation any and all hazardous
of toxic substances, materials or wears as defined by or listed under the
Environmental Laws.  The term “Hazardous
Substances” also includes without limitation, petroleum and petroleum
by-products or any fraction thereof and thereon

 

5

 

Indebtedness.   The word “Indebtedness”
means the indebtedness evidenced by the Note or Related Documents, including
all principal and interest together with all other indebtedness and costs and
expenses for which Grantor is responsible under this Agreement or under any of the
Related Documents. Specifically, without limitation, Indebtedness includes all
amounts that may be indirectly secured by the Cross-Collateralization provision
of this Agreement.

 

Lender.   The word “Lender” means City National Bank, NA, its successors and
assigns.

 

Note.   The word “Note” means the Note executed by
NATROL, INC., A DELAWARE CORPORATION in the principal amount of $3,000,000.00
dated November 4, 2004, together with all renewals of, extensions of,
modifications of, refinancings of, consolidations
of, and substitutions for the note or credit agreement.

 

Property.   The word “Property” means all of Grantor’s
right, title and interest in and to all the Property as described in the
“Collateral Description” section or this Agreement.

 

Related
Documents.   The words
“Related Documents” mean all promissory notes, credit agreements, loan
agreements, environmental agreements, guaranties, security agreements,
mortgages, deeds of trust, security deeds, collateral mortgages, and all other
instruments, agreements and documents, whether now or hereafter existing, executed in connection with the
Indebtedness.

 

GRANTOR
HAS READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY
AGREEMENT AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED NOVEMBER 4, 2004.

 

THIS
AGREEMENT IS GIVEN UNDER SEAL AND IT IS INTENDED THAT THIS AGREEMENT IS AND
SHALL CONSTITUTE AND HAVE THE EFFECT OF A SEALED INSTRUMENT ACCORDING TO LAW.

 

GRANTOR:

 

	
  NATROL, INC., A DELAWARE
  CORPORATION

  
	
   

  
	
   

  
	
  By:

  	
  /s/ Elliott Balbert

  	
  (Seal)

  
	
  ELLIOTT BALBERT, President of
  NATROL, INC., A

  
	
  DELAWARE CORPORATION

  

 

[ILLEGIBLE]

 

6

 

	
  

  	
   

  	
  CITY
  NATIONAL

  BANK

  

 

COMMERCIAL SECURITY AGREEMENT

 

	
  Principal

  	
   

  	
  Loan Date

  	
   

  	
  Maturity

  	
   

  	
  Loan No.

  	
   

  	
  Call / Coll

  	
   

  	
  Account

  	
   

  	
  Officer

  	
   

  	
  Initials

  	
   

  
	
  $

  	
  3,000,000.00

  	
   

  	
  11-04-2004

  	
   

  	
  12-01-2005

  	
   

  	
  00003

  	
   

  	
   

  	
   

  	
  709818

  	
   

  	
  DA

  	
   

  	
   

  	
   

  
																	

 

References in the shaded
area are for Lender’s use only and do not limit the applicability of this
document to any particular loan or item.

Any item above containing
“***” has been omitted due to text length limitations.

 

	
  Borrower:

  	
   

  	
  NATROL, INC., A DELAWARE CORPORATION

  	
   

  	
  Lender:

  	
   

  	
  City National Bank, NA

  
	
   

  	
   

  	
  21411 PRAIRIE

  CHATSWORTH, CA 91311

  	
   

  	
   

  	
   

  	
  San Fernando ValIey Commercial
  Banking Services

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  #048000

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  15260 Ventura Boulevard, Suite 1600

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  Sherman Oaks, CA 91403

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Grantor:

  	
   

  	
  NATROL PRODUCTS, INC., A DELAWARE CORPORATION

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  21411 PRAIRIE

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  CHATSWORTH, CA 91311

  	
   

  	
   

  	
   

  	
   

  

 

THIS
COMMERCIAL SECURITY AGREEMENT dated November 4, 2004, is made and executed among
NATROL PRODUCTS, INC., A DELAWARE CORPORATION (“Grantor”): NATROL, INC., A
DELAWARE CORPORATION (“Borrower”); and City National Bank, NA (“Lender”).

 

GRANT OF SECURITY INTEREST. For valuable consideration, Grantor grants to
Lender a security interest in the Collateral to secure the Indebtedness and
agrees that Lender shall have the rights stated in this Agreement with respect
to the Collateral, in addition to all other rights which Lender may have by
law.

 

COLLATERAL
DESCRIPTION.   The word
“Collateral” as used in this Agreement means the following described property,
whether now owned or hereafter acquired, whether now existing or hereafter
arising, and wherever located, in which Grantor is giving to Lender a security
interest for the payment of the Indebtedness and performance of all other
obligations under the Note and this Agreement:

 

All Inventory, Chattel Paper,
Accounts, Equipment and General Intangibles

 

In addition, the word
“Collateral” also includes all the following, whether now owned or hereafter
acquired, whether now existing or hereafter arising, and wherever located:

 

(A) All accessions,
attachments, accessories, tools, parts, supplies, replacements of and additions
to any of the collateral described herein, whether added now or later.

 

(B) All products and
produce of any of the property described in this Collateral section.

 

(C) All accounts, general
intangibles, instruments, rents, monies, payments, and all other rights,
arising out of a sale, lease, consignment or other disposition of any of the
property described in this Collateral section.

 

(D) All proceeds
(including insurance proceeds) from the sale, destruction, loss, or other
disposition of any of the property described in this Collateral section, and
sums due from a third party who has damaged or destroyed the Collateral or from
that party’s insurer, whether due to judgment, settlement or other process.

 

(E) All records and data
relating to any of the property described in this Collateral section, whether
in the form of a writing, photograph, microfilm, microfiche, or electronic
media, together with all of Grantor’s right, title, and interest in and to all
computer software required to utilize, create, maintain, and process any such
records or data on electronic
media.

 

Despite any other
provision of this Agreement, Lender is not granted, and will not have, a
nonpurchase money security interest in household goods, to the extent such a
security interest would be prohibited by applicable law. In addition, if
because of the type of any Property, Lender is required to give a notice of the
right to cancel under Truth in Lending for the Indebtedness, then Lender will
not have a security interest in such Collateral unless and until such a notice
is given.

 

CROSS-COLLATERALIZATION.   In
addition to the Note, this Agreement secures all obligations, debts and
liabilities, plus interest thereon, of Borrower to Lender, or any one or more
of them, as well as all claims by Lender against Borrower or any one or more of
them, whether now existing or hereafter arising, whether related or unrelated
to the purpose of the Note, whether voluntary or otherwise, whether due or not
due, direct or indirect, determined or undetermined, absolute or contingent,
liquidated or unliquidated whether Borrower or Grantor may be liable individually or jointly with others, whether
obligated as guarantor, surety, accommodation party or otherwise, and whether
recovery upon such amounts may be or hereafter may become barred by any statute
of limitations, and whether the obligation to repay such amounts may be or
hereafter may become otherwise unenforceable.

 

BORROWER’S
WAIVERS AND RESPONSIBILITIES. 
 Except as otherwise required
under this Agreement or by applicable law, (A) Borrower agrees that Lender need
not tell Borrower about any action or inaction Lender takes in connection with
this Agreement; (B) Borrower assumes the responsibility for being and keeping
informed about the Collateral; and (C) Borrower waives any defenses that may
arise because of any action or inaction of Lender, including without limitation
any failure of Lender to realize upon the Collateral or any delay by Lender in
realizing upon the Collateral; and Borrower agrees to remain liable under the
Note no matter what action Lender takes or fails to take under this Agreement.

 

GRANTOR’S
REPRESENTATIONS AND WARRANTIES.   Grantor warrants that: (A) this Agreement is
executed at Borrower’s request and not at the request of Lender; (B) Grantor has the full right, power and
authority to enter into this Agreement and to pledge the Collateral to Lender;
(C) Grantor has established adequate means of obtaining from Borrower on a
continuing basis information about Borrower’s financial condition; and (D)
Lender has made no representation to Grantor about Borrower or Borrower’s
creditworthiness.

 

GRANTOR’S
WAIVERS.   Grantor
waives all requirements of presentment, protest, demand, and notice of dishonor
or non-payment to Borrower or Grantor, or any other party to the Indebtedness
or the Collateral. Lender may do any of the following with respect to any
obligation of any Borrower, without first obtaining the consent of Grantor: (A)
grant any extension of time for any payment, (B) grant any renewal, (C) permit
any modification of payment terms or other terms, or (D) exchange or release
any Collateral or other security. No such act or failure to act shall affect
Lender’s rights against Grantor or the Collateral.

 

GRANTOR’S
REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE COLLATERAL.   With
respect to the Collateral, Grantor represents and promises to Lender that:

 

 

Perfection
of Security Interest.
  Grantor agrees to take whatever actions
are requested by Lender to perfect and continue Lender’s security interest in
the Collateral. Upon request of Lender, Grantor will deliver to Lender any and
all of the documents evidencing or constituting the Collateral, and Grantor
will note Lender’s interest upon any and all chattel paper and instruments if
not delivered to Lender for possession by Lender. This is a continuing Security Agreement and will continue in effect even
though all or any part of the Indebtedness is paid in full and even though for
a period of time Borrower may not be indebted to Lender.

 

Notices
to Lender.   Grantor
will promptly notify Lender in writing at Lender’s address shown above (or such
other addresses as Lender may designate from time to time) prior to any (1)
change in Grantor’s name; (2) change in Grantor’s assumed business name(s); (3)
change in the management of the Corporation Grantor; (4) change in the authorized
signer(s); (5) change in Grantor’s principal office address; (6) change in
Grantor’s state of organization; (7) conversion of Grantor to a new or
different type of business entity; or (8) change in any other aspect of Grantor
that directly or indirectly relates to any agreements between Grantor and
Lender. No change in Grantor’s name or state of organization will take effect
until after Lender has received notice.

 

No
Violation.   The execution and delivery of this Agreement
will not violate any law or agreement governing Grantor or to which Grantor is
a party, and its certificate or articles of incorporation and bylaws do not
prohibit any term or condition of this Agreement.

 

Enforceability
of Collateral.   To the extent the Collateral consists of accounts,
chattel paper, or general intangibles, as defined by the Uniform Commercial
Code, the Collateral is enforceable in accordance with its terms, is genuine,
and fully complies with all applicable laws and regulations concerning form,
content and manner of preparation and execution, and all persons appearing to
be obligated on the Collateral have authority and capacity to contract and are
in fact obligated as they appear to be on the
Collateral. At the time any account becomes subject to a security interest in
favor of Lender, the account shall be a good and valid account representing an
undisputed, bona fide indebtedness incurred by the account debtor, for
merchandise held subject to delivery Instructions or previously shipped or
delivered pursuant to a contract of sale, or for services previously performed
by Grantor with or for the account debtor. So long as this Agreement remains in
effect, Grantor shall not, without Lender’s prior written consent, compromise,
settle, adjust, or extend payment under or with regard to any such Accounts.
There shall be no setoffs or counterclaims against any of the Collateral, and
no agreement shall have been made under which any deductions or discounts may
be claimed concerning the Collateral except those disclosed to Lender in
writing.

 

Location
of the Collateral.   Except
in the ordinary course of Grantor’s business, Grantor agrees to keep the
Collateral (or to the extent the Collateral consists of intangible property
such as accounts or general intangibles, the records concerning the Collateral)
at Grantor’s address shown above or at such other locations as are acceptable
to Lender. Upon Lender’s request, Grantor will deliver to Lender in form
satisfactory to Lender a schedule of real properties and Collateral locations
relating to Grantor’s operations, including without limitation the following:
(1) all real property Grantor owns or is purchasing; (2) all real property
Grantor is renting or leasing; (3) all storage facilities Grantor owns, rents,
leases, or uses; and (4) an other properties where Collateral is or may be
located.

 

Removal
of the Collateral.   Except in the ordinary course of Grantor’s
business, including the sales of Inventory, Grantor shall not remove the
Collateral from its existing location without Lender’s prior written consent.
To the extent that the Collateral consists of vehicles, or other titled
property, Grantor shall not take or permit any action which would require
application for certificates of title for the vehicles outside the State of Delaware,
without Lender’s prior written consent. Grantor shall, whenever requested,
advise Lender of the exact location of the Collateral.

 

Transactions
Involving Collateral.   Except for inventory sold or accounts
collected in the ordinary course of Grantor’s business, or as otherwise
provided for in this Agreement, Grantor shall not sell, offer to sell, or
otherwise transfer or dispose of the Collateral. While Grantor is not in
default under this Agreement, Grantor may sell inventory, but only in the ordinary
course of its business and only to buyers who qualify as a buyer in the
ordinary course of business. A sale in the ordinary course of Grantor’s
business does not include a transfer in partial or total satisfaction of a debt
or any bulk sale. Grantor shall not pledge, mortgage, encumber or otherwise
permit the Collateral to be subject to any lion, security interest,
encumbrance, or charge, other than the security interest provided for in this
Agreement, without the prior written consent of Lender. This includes security
interests even if junior in right to the security interests granted under this
Agreement. Unless waived by Lender, all proceeds from any disposition of the
Collateral (for whatever reason) shall be held in trust for Lender and shall
not be commingled with any other funds; provided however, this requirement
shall not constitute consent by Lender to any sale or other disposition. Upon
receipt, Grantor shall immediately deliver any such proceeds to Lender.

 

Title.   Grantor represents and warrants to Lender that
Grantor holds good and marketable title to the Collateral, free and clear of
all liens and encumbrances except for the lien of this Agreement. No financing
statement covering any of the Collateral is on file in any public office other
than those which reflect the security interest created by this Agreement or to
which Lender has specifically consented. Grantor shall defend Lender’s rights
in the Collateral against the claims and demands of all other persons.

 

Repairs
and Maintenance.   Grantor
agrees to keep and maintain, and to cause others to keep and maintain, the
Collateral in good order, repair and condition at all times while this
Agreement remains in effect. Grantor further agrees to pay when due all claims
for work done on, or services rendered or material furnished in connection with
the Collateral so that no lien or encumbrance may ever attach to or be filed
against the Collateral.

 

Inspection
of Collateral.   Lender
and Lender’s designated representatives and agents shall have the right at all
reasonable times to examine and inspect the Collateral wherever located.

 

Taxes,
Assessments and Liens.   Grantor will pay when due all taxes,
assessments and liens upon the Collateral, its use or operation, upon this
Agreement, upon any promissory note or notes evidencing the Indebtedness, or
upon any of the other Related Documents. Grantor may withhold any such payment
or may elect to contest any lien if Grantor is in good faith conducting an
appropriate proceeding to contest the obligation to pay and so long as Lender’s
interest in the Collateral is not jeopardized in Lender’s sole opinion. If the
Collateral is subjected to a lien which is not discharged within fifteen (15)
days. Grantor shall deposit with Lender cash, a sufficient corporate surety
bond or other security satisfactory to Lender in an amount adequate to provide
for the discharge of the lien plus any interest, costs, reasonable attorneys’
fees or other charges that could accrue as a result of foreclosure or sale of
the Collateral. In any contest Grantor shall defend itself and Lender and shall
satisfy any final adverse judgment before enforcement against the Collateral.
Grantor shall name Lender as an additional obligee under any surety bond
furnished in the contest proceedings. Grantor further agrees to furnish Lender
with evidence that such taxes, assessments, and governmental and other charges
have been paid in full and in a timely manner. Grantor may withhold any such
payment or may elect to contest any lien if Grantor is in good faith conducting
an appropriate proceeding to contest the obligation to pay and so long as
Lender’s interest in the Collateral is not jeopardized.

 

Compliance
with Governmental Requirements.   Grantor shall comply promptly with all laws,
ordinances, rules and regulations of all governmental authorities, now or
hereafter in effect, applicable to the ownership, production, disposition, or
use of the Collateral, including all laws or regulations relating to the undue
erosion of highly-erodible land or relating to the conversion of wetlands for
the production of an agricultural product or commodity. Grantor may contest in
good faith any such law, ordinance or regulation and withhold compliance during
any proceeding, including appropriate appeals, so long as Lender’s interest in
the Collateral, in Lender’s opinion, is not jeopardized.

 

Hazardous
Substances.   Grantor
represents and warrants that the Collateral never has been, and never will be
so long at this Agreement

 

2

 

remains a lien on the
Collateral, used in violation of any Environmental Laws or for the generation,
manufacture, storage, transportation, treatment, disposal, release or
threatened release of any Hazardous Substance. The representations and
warranties contained herein are based on Grantor’s due diligence in
investigating the Collateral for Hazardous Substances. Grantor hereby (1)
releases and waives any future claims against Lender for indemnity or
contribution in the event Grantor becomes liable for cleanup or other costs under any Environmental Laws,
and (2) agrees to indemnify and hold harmless Lender against any and all claims
and losses resulting from a breach of this provision of this Agreement. This
obligation to indemnify shall survive the payment of the indebtedness and the
satisfaction of this Agreement.

 

Maintenance
of Casualty Insurance.   Grantor shall procure and maintain all risks
insurance, including without limitation fire, theft and liability coverage
together with such other insurance as Lender may require with respect to the
Collateral, in form, amounts, coverages and basis reasonably acceptable to
Lender and issued by a company or companies reasonably acceptable to Lender.
Grantor, upon request of Lender, will deliver to Lender from time to time the
policies or certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be cancelled or diminished without at
least seven (7) days’ prior written notice to Lender and not including any
disclaimer of the insurer’s liability for failure to give such a notice. Each
insurance policy also shall include an endorsement providing that coverage in
favor of Lender will not be impaired in any way by any act, omission or default
of Grantor or any other person. In connection with all policies covering assets
in which Lender holds or is offered a security interest, Grantor will provide
Lender with such loss payable or other endorsements as Lender may require. If
Grantor at any time fails to obtain or maintain any insurance as required under
this Agreement, Lender may (but shall not be obligated to) obtain such
insurance as Lender deems appropriate, including if Lender so chooses “single
interest insurance,” which will cover only Lender’s interest in the Collateral.

 

Application
of Insurance Proceeds. 
 Grantor shall promptly notify
Lender of any loss or damage to the Collateral.  Lender may make proof of loss if Grantor fails
to do so within fifteen (15) days of the casualty. All proceeds of any insurance
on the Collateral, including accrued proceeds thereon, shall be held by Lender
as part of the Collateral. If Lender consents to repair or replacement of the
damaged or destroyed Collateral, Lender shall, upon satisfactory proof of
expenditure, pay or reimburse Grantor from the proceeds for the reasonable cost
of repair or restoration. If Lender does not consent to repair or replacement
of the Collateral, Lender shall retain a sufficient amount of the proceeds to
pay all of the Indebtedness, and shall pay the balance to Grantor. Any proceeds
which have not been disbursed within six (6) months after their receipt and
which Grantor has not committed to the repair or restoration of the Collateral
shall be used to prepay the Indebtedness.

 

Insurance
Reserves.   Lender may
require Grantor to maintain with Lender reserves for payment of insurance
premiums, which reserves shall be created by monthly payments from Grantor of a
sum estimated by Lender to be sufficient to produce, at least fifteen (15) days
before the premium due date, amounts at least equal to the insurance premiums
to be paid. If fifteen (15) days before payment is due, the reserve funds are
insufficient, Grantor shall upon demand pay any deficiency to Lender. The
reserve funds shall be held by Lender as a general deposit and shall constitute
a non-interest-bearing account which Lender may satisfy by payment of the
insurance premiums required to be paid by Grantor as they become due. Lender
does not hold the reserve funds in trust for Grantor, and Lender is not the
agent of Grantor for payment of the insurance premiums required to be paid by
Grantor. The responsibility for the payment of premiums shall remain Grantor’s
sole responsibility.

 

Insurance
Reports.   Grantor, upon request of Lender, shall furnish
to Lender reports on each existing policy of insurance showing such information
as Lender may reasonably request including the following: (1) the name of the
insurer; (2) the risks insured; (3) the amount of the policy; (4) the property
insured; (5) the then current value on the basis of which insurance has been
obtained and the manner of determining that value; and (6) the expiration date
of the policy. In addition, Grantor shall upon request by Lender (however not
more often than annually) have an independent appraiser satisfactory to Lender
determine, as applicable, the cash value or replacement cost of the Collateral.

 

Financing
Statements.   Grantor
authorizes Lender to file a UCC financing statement, or alternatively, a copy
of this Agreement to perfect Lender’s security interest. At Lender’s request,
Grantor additionally agrees to sign all other documents that are necessary to
perfect, protect, and continue Lender’s security interest in the Property.
Grantor will pay all filing fees, title transfer fees, and other fees and costs
involved unless prohibited by law or unless Lender is required by law to pay
such fees and costs. Grantor irrevocably appoints Lender to execute documents
necessary to transfer title if there is a default. Lender may file a copy of
this Agreement as a financing statement. If Grantor changes Grantor’s name or
address, or the name or address of any person granting a security interest
under this Agreement changes, Grantor will promptly notify the Lender of such
change.

 

GRANTOR’S RIGHT TO POSSESSION AND
TO COLLECT ACCOUNTS.   Until
default and except as otherwise provided below with respect to accounts,
Grantor may have possession of the tangible personal property and beneficial
use of all the Collateral and may use it in any lawful manner not inconsistent
with this Agreement or the Related Documents, provided that Grantor’s right to
possession and beneficial use shall not apply to any Collateral where
possession of the Collateral by Lender is required by law to perfect Lender’s
security interest in such Collateral. Until otherwise notified by Lender,
Grantor may collect any of the Collateral consisting of accounts. At any time
and even though no Event of Default exists, Lender may exercise its rights to
collect the accounts and to notify account debtors to make payments directly to
Lender for application to the Indebtedness. If Lender at any time has
possession of any Collateral, whether before or after an Event of Default,
Lender shall be deemed to have exercised reasonable care in the custody and
preservation of the Collateral if Lender takes such action for that purpose as
Grantor shall request or as Lender, in Lender’s sole discretion, shall deem
appropriate under the circumstances, but failure to honor any request by Grantor
shall not of itself be deemed to be a failure to exercise reasonable care.
Lender shall not be required to take any steps necessary to preserve any rights
in the Collateral against prior parties, nor to protect, preserve or maintain
any security interest given to secure the Indebtedness.

 

LENDER’S EXPENDITURES.   If any
action or proceeding is commenced that would materially affect Lender’s
interest in the Collateral or if Grantor fails to comply with any provision of
this Agreement or any Related Documents, including but not limited to Grantor’s
failure to discharge or pay when due any amounts Grantor is required to
discharge or pay under this Agreement or any Related Documents. Lender on
Grantor’s behalf may (but shall not be obligated to) take any action that
Lender deems appropriate, including but not limited to discharging or paying
all taxes, liens, security interests, encumbrances and other claims, at any
time levied or placed on the Collateral and paying all costs for insuring,
maintaining and preserving the Collateral. All such expenditures incurred or
paid by Lender for such purposes will then bear interest at the rate charged
under the Note from the date incurred or paid by Lender to the date of
repayment by Grantor. All such expenses will became a part of the Indebtedness
and, at Lender’s option, will (A) be payable on demand; (B) be added to the
balance of the Note and be apportioned among and be payable with any
installment payments to become due during either (1) the term of any applicable
insurance policy; or (2) the remaining term of the Note; or (C) be treated as a
balloon payment which will be due and payable at the Note’s maturity. The
Agreement also will secure payment of these amounts. Such right shall be in
addition to all other rights and remedies to which Lender may be entitled upon
Default.

 

DEFAULT.   Each of
the following shall constitute an Event of Default under this Agreement:

 

Payment Default.   Borrower
fails to make any payment when due under the Indebtedness.

 

3

 

Other
Defaults.   Borrower or Grantor fails to comply with or to
perform any other term, obligation, covenant or condition contained in this
Agreement or in any
of the Related Documents or to comply with or to perform any term, obligation,
covenant or condition contained in any other agreement between Lender and
Borrower or Grantor.

 

Default In
Favor of Third Parties.   Should Borrower or any Grantor default under
any loan, extension of credit, security agreement, purchase or sales agreement,
or any other agreement, in favor of any other creditor or person that may
materially affect any of Grantor’s property or Borrower’s or any Grantor’s
ability to repay the Indebtedness or perform
their respective obligations under this Agreement or any of the Related
Documents.

 

False
Statements.   Any
warranty, representation or statement made or furnished to Lender by Borrower
or Grantor or on Borrower’s or Grantor’s behalf under this Agreement or the
Related Documents is false or misleading in any material respect, either now or
at the time made or furnished or becomes false or misleading at any time
thereafter.

 

Defective
Collateralization.   This
Agreement or any of the Related Documents ceases to be in full force and effect
(including failure of any collateral document to create a valid and perfected
security interest or lien) at any time and for any reason.

 

Insolvency.
  The dissolution or termination of
Borrower’s or Grantor’s existence as a going business, the insolvency of Borrower
or Grantor, the appointment of a receiver for any part of Borrower’s or
Grantor’s property, any assignment for the benefit of creditors, any type of
creditor workout, or the commencement of any proceeding under any bankruptcy or
insolvency laws by or against Borrower or Grantor.

 

Creditor
or Forfeiture Proceedings.   Commencement of foreclosure or forfeiture
proceedings, whether by judicial proceeding, self-help, repossession or any
other method, by any creditor of Borrower or Grantor or by any governmental
agency against any collateral securing the Indebtedness. This includes a
garnishment of any of Borrower’s or Grantor’s accounts, including deposit
accounts, with Lender. However, this Event of Default shall not apply if there
is a good faith dispute by Borrower or Grantor as to the validity or
reasonableness of the claim which is the basis of the creditor or forfeiture
proceeding and if Borrower or Grantor gives Lender written notice of the
creditor or forfeiture proceeding and deposits with Lender monies or a surety
bond for the creditor or forfeiture proceeding, in an amount determined by
Lender, in its sole discretion, as being an adequate reserve or bond for the
dispute.

 

Events
Affecting Guarantor.   Any
of the preceding events occurs with respect to any Guarantor of any of the
Indebtedness or Guarantor dies or becomes incompetent or revokes or disputes
the validity of, or liability under, any Guaranty of the Indebtedness.

 

Adverse Change.   A material adverse change
occurs in Borrower’s or Grantor’s financial condition, or Lender believes the
prospect of payment or performance of the Indebtedness is impaired.

 

Insecurity.
  Lender in good faith believes itself
insecure.

 

RIGHTS AND REMEDIES ON DEFAULT.
  If an Event of Default occurs under
this Agreement, at any time thereafter, Lender shall have all the rights of a
secured party under the Delaware Uniform Commercial Code. In addition and
without limitation, Lender may exercise any one or more of the following rights
and remedies:

 

Accelerate
Indebtedness.   Lender may declare the entire Indebtedness,
including any prepayment penalty which Borrower would be required to pay,
immediately due and payable, without notice of any kind to Borrower or Grantor.

 

Assemble
Collateral.   Lender
may require Grantor to deliver to Lender all or any portion of the Collateral and
any and all certificates of title and other documents relating to the
Collateral. Lender may require Grantor to assemble the Collateral and make it
available to Lender at a place to be designated by Lender. Lender also shall
have full power to enter upon the property of Grantor to take possession of and
remove the Collateral. If the Collateral contains other goods not covered by
this Agreement at the time of repossession, Grantor agrees Lender may take such
other goods, provided that Lender makes reasonable efforts to return them to
Grantor after repossession.

 

Sell the
Collateral.   Lender
shall have full power to sell, lease, transfer, or otherwise deal with the
Collateral or proceeds thereof in Lender’s own name or that of Grantor. Lender
may sell the Collateral at public auction or private sale. Unless the
Collateral threatens to decline speedily in value or is of a type customarily
sold on a recognized market, Lender will give Grantor, and other persons as
required by law, reasonable notice of the time and place of any public sale, or
the time after which any private sale or any other disposition of the
Collateral is to be made.  However, no
notice need be provided to any person who, after Event of Default occurs,
enters into and authenticates an agreement waiving that person’s right to
notification of sale. The requirements of reasonable notice shall be met if
such notice is given at least ten (10) days before the time of the sale or
disposition. All expenses relating to the disposition of the Collateral,
including without limitation the expenses of retaking, holding, insuring,
preparing for sale and selling the Collateral, shall become a part of the
Indebtedness secured by this Agreement and shall be payable on demand, with
interest at the Note rate from date of expenditure until repaid.

 

Appoint
Receiver.   Lender
shall have the right to have a receiver appointed to take possession of all or
any part of the Collateral, with the power to protect and preserve the
Collateral, to operate the Collateral preceding foreclosure or sale, and to
collect the Rents from the Collateral and apply the proceeds, over and above
the cost of the receivership, against the Indebtedness. The receiver may serve
without bond if permitted by law. Lender’s right to the appointment of a
receiver shall exist whether or not the apparent value of the Collateral
exceeds the Indebtedness by a substantial amount. Employment by Lender shall
not disqualify a person from serving as a receiver.

 

Collect
Revenues, Apply Accounts.   Lender, either itself or through a receiver,
may collect the payments, rents, income, and revenues from the Collateral.
Lender may at any time in Lender’s discretion transfer any Collateral into
Lender’s own name or that of Lender’s nominee and receive the payments, rents,
income, and revenues therefrom and hold the same as security for the
Indebtedness or apply it to payment of the Indebtedness in such order of
preference as Lender may
determine. Insofar as the Collateral consists of accounts, general intangibles,
insurance policies, instruments, chattel paper, choses in action, or similar
property, Lender may demand, collect, receipt for, settle, compromise, adjust,
sue for, foreclose, or realize on the Collateral as Lender may determine,
whether or not Indebtedness or Collateral is then due. For these purposes,
Lender may, on behalf of and in the name of Grantor, receive, open and dispose
of mail addressed to Grantor; change any address to which mail and payments are
to be sent; and endorse notes, checks, drafts, money orders, documents of
title, instruments and items pertaining to payment, shipment, or storage of any
Collateral.  To facilitate collection,
Lender may notify account debtors and obligors on any Collateral to make
payments directly to Lender.

 

Obtain
Deficiency.   If Lender chooses to sell any or all of the
Collateral, Lender may obtain a judgment against Borrower for any deficiency
remaining on the Indebtedness due to Lender after application of all amounts
received from the exercise of the rights provided in this Agreement. Borrower
shall be liable for a deficiency even if the transaction
described in this subsection is a sale of accounts or chattel paper.

 

Other
Rights and Remedies.   Lender
shall have all the rights and remedies of a secured creditor under the
provisions of the Uniform Commercial Code, as may be amended from time to time.
In addition, Lender shall have and may exercise any or all other rights and
remedies it may have available at law, in equity, or otherwise.

 

Election
of Remedies.   Except
as may be prohibited by applicable law, all of Lender’s rights and remedies,
whether evidenced by this Agreement, the Related Documents, or by any other
writing, shall be cumulative and may be exercised singularly or concurrently.
Election

 

4

 

by Lender to pursue any
remedy shall not exclude pursuit of any other remedy, and an election to make
expenditures or to take action to
perform an obligation of Grantor under this Agreement, after Grantor’s failure
to perform, shall not affect Lender’s right to declare a default and exercise
its remedies.

 

MISCELLANEOUS PROVISIONS.
  The following miscellaneous provisions
are a part of this Agreement:

 

Amendments.
  This Agreement, together with any
Related Documents, constitutes the entire understanding and agreement of the
parties as to the matters set forth in this Agreement. No alteration of or
amendment to this Agreement shall be effective unless given in writing and
signed by the party or parties sought to be charged or bound by the alteration
or amendment.

 

Attorneys’
Fees;  Expenses. Grantor agrees to pay upon demand all of Lender’s
costs and expenses, including Lender’s reasonable attorneys’ fees and Lender’s
legal expenses, incurred in connection with the enforcement of this Agreement.
Lender may hire or pay someone else to help enforce this Agreement, and Grantor
shall pay the costs and expenses of such enforcement. Costs and expenses
include Lender’s reasonable attorneys’ fees and legal expenses whether or not
there is a lawsuit, including reasonable attorneys’ fees and legal expenses for
bankruptcy proceedings (including efforts to modify or vacate any automatic
stay or injunction), appeals, and any anticipated post-judgment collection
services. Lender may also recover from Grantor all court, alternative dispute
resolution or other collection costs (including, without limitation, fees and
charges of collection agencies) actually incurred by Lender.

 

Caption
Headings.   Caption headings in this Agreement are for
convenience purposes only and are not to be used to interpret or define the
provisions of this Agreement.

 

Governing
Law.   This Agreement will be governed by, construed and
enforced in accordance with federal law and the laws of the State of
California, except and only to the extent of procedural matters related to the
perfection and enforcement of Lender’s rights and remedies against the
Collateral, which matters shall be governed by the laws of the State of
Delaware. However, in the event that the enforceability or validity of any
provision of this Agreement is challenged or questioned, such provision shall be
governed by whichever applicable state or federal law would uphold or would
enforce such challenged or questioned provision. The loan transaction which is
evidenced by the Note and this Agreement has been applied for, considered,
approved and made, and all necessary loan documents have been accepted by
Lender in the State of California.

 

Choice of
Venue.   If there is a
lawsuit, Grantor agrees upon Lender’s request to submit to the jurisdiction of
the courts of LOS ANGELES County, State of California.

 

Joint and
Several Liability.   All
obligations of Borrower and Grantor under this Agreement shall be Joint and
several, and all references to Grantor shall mean each and every Grantor, and
all references to Borrower shall mean each and every Borrower. This means that
each Borrower and Grantor signing below is responsible for all obligations in
this Agreement. Where any one or more of the parties is a corporation,
partnership, limited liability company or similar entity, it is not necessary
for Lender to inquire into the powers of any of the officers, directors,
partners, members, or other agents acting or purporting to act on the entity’s
behalf, and any obligations made or created in reliance upon the professed
exercise of such powers shall be guaranteed under this Agreement.

 

No Waiver
by Lender.   Lender
shall not be deemed to have waived any rights under this Agreement unless such
waiver is given in writing and signed by Lender. No delay or omission on the
part of Lender in exercising any right shall operate as a waiver of such right
or any other right. A waiver by Lender of a provision of this Agreement shall
not prejudice or constitute a waiver of Lender’s right otherwise to demand
strict compliance with that provision or any other provision of this Agreement.
No prior waiver by Lender, nor
any course of dealing between Lender and Grantor, shall constitute a waiver of
any of Lender’s rights or of any of Grantor’s obligations as to any future
transactions. Whenever this consent of Lender is required under this Agreement,
the granting of such consent by Lender in any instance shall not constitute
continuing consent to subsequent instances where such consent is required and
in all cases such consent may be granted or withheld in the sole discretion of
Lender.

 

Notices.
  Any notice required to be given under
this Agreement shall be given in writing, and shall be effective when actually
delivered, when actually received by telefacsimile (unless otherwise required
by law), when deposited with a nationally recognized overnight courier, or, if
mailed, when deposited in the United States mail, as first class, certified or
registered mail postage prepaid, directed to the addresses shown near the
beginning of this Agreement. Any party may change its address for notices under
this Agreement by giving formal written notice to the other parties, specifying
that the purpose of the notice is to change the party’s address. For notice
purposes, Grantor agrees to keep Lender informed at all times of Grantor’s
current address. Unless otherwise provided or required by law, if there is more
than one Grantor, any notice given by Lender to any Grantor is deemed to be
notice given to all Grantors.

 

Power of
Attorney.   Grantor
hereby appoints Lender as Grantor’s irrevocable attorney-in-fact for the
purpose of executing any documents necessary to perfect, amend, or to continue
the security interest granted in this Agreement or to demand termination of filings
of other secured parties. Lender may at any time, and without further
authorization from Grantor, file a carbon, photographic or other reproduction
of any financing statement or of this Agreement for use as a financing
statement. Grantor will reimburse Lender for all expenses for the perfection
and the continuation of the perfection of Lender’s security interest in the
Collateral.

 

Severability.   If a
court of competent jurisdiction finds any provision of this Agreement to be
illegal, invalid, or unenforceable as to any circumstance, that finding shall
not make the offending provision illegal, invalid, or unenforceable as to any
other circumstance. If feasible, the offending provision shall be considered
modified so that it becomes legal, valid and enforceable. If the offending
provision cannot be so modified, it shall be considered deleted from this
Agreement. Unless otherwise required by law, the illegality, invalidity, or
unenforceability of any provision of this Agreement shall not affect the
legality, validity or enforceability of any other provision of this Agreement.

 

Successors
and Assigns.   Subject
to any limitations stated in this Agreement on transfer of Grantor’s interest,
this Agreement shall be binding upon and inure to the benefit of the parties,
their successors and assigns.  If
ownership of the Collateral becomes vested in a person other than Grantor,
Lender, without notice to Grantor, may deal with Grantor’s successors with
reference to this Agreement and the Indebtedness by way of forbearance or
extension without releasing Grantor from the obligations of this Agreement or
liability under the Indebtedness.

 

Survival
of Representations and Warranties.   All representations, warranties, and
agreements made by Grantor in this Agreement shall survive the execution and
delivery of this Agreement, shall be continuing in nature, and shall remain in
full force and effect until such time as Borrower’s Indebtedness shall be paid
in full.

 

Time is
of the Essence.   Time is of the essence in the performance of
this Agreement.

 

DEFINITIONS.   The following capitalized words and terms
shall have the following meanings when used in this Agreement. Unless
specifically stated to the contrary, all references to dollar amounts shall
mean amounts in lawful money of the United States of America. Words and terms
used in the singular shall include the plural, and the plural shall include the
singular, as the context may require. Words and terms not otherwise defined in
this Agreement shall have the meanings attributed to such terms in the Uniform
Commercial Code:

 

5

 

or modified from time to
time, together with all exhibits and schedules attached to this Commercial
Security Agreement from time to time.

 

Borrower.
  The word “Borrower” means NATROL, INC.,
A DELAWARE CORPORATION and includes all co-signers and co-makers signing the
Note.

 

Collateral.
  The word “Collateral” means all of
Grantor’s right, title and interest in and to all the Collateral as described
in the Collateral Description section of this Agreement.

 

Default.   The word “Default” means the Default set
forth in this Agreement in the section titled “Default”.

 

Environmental
Laws.   The words
“Environmental Laws” mean any and all state, federal and local statutes,
regulations and ordinances relating to the protection of human health or the
environment, including without limitation the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et
seq. (“CERCLA”), the Superfund Amendments and Reauthorization Act of 1986, Pub.
L. No. 99-499 (“SARA”), the Hazardous Materials Transportation Act, 49 U.S.C.
Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C.
Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20 of the
California Health and Safety Code, Section 25100, et seq., or other applicable
state or federal laws, rules, or regulations adopted pursuant thereto.

 

Event of
Default.   The words
“Event of Default” mean any of the events of default set forth in this
Agreement in the default section of this Agreement.

 

Grantor.
  The word “Grantor” means NATROL PRODUCTS,
INC., A DELAWARE CORPORATION.

 

Guarantor.
  The word “Guarantor” means any guarantor,
surety, or accommodation party of any or all of the Indebtedness.

 

Guaranty.
  The word “Guaranty” means the guaranty
from Guarantor to Lender, including without limitation a guaranty of all or
part of the Note.

 

Hazardous
Substances.   The words “Hazardous Substances” mean
materials that, because of their quantity, concentration or physical, chemical
or infectious characteristics, may cause or pose a present or potential hazard
to human health or the environment when improperly used, treated, stored,
disposed of, generated, manufactured, transported or otherwise handled. The
words “Hazardous Substances” are used in their very broadest sense and include
without limitation any and all hazardous or toxic substances, materials or
waste as defined by or listed under the Environmental Laws. The term “Hazardous
Substances” also includes, without limitation, petroleum and petroleum
by-products or any fraction thereof and asbestos.

 

Indebtedness.
  The word “Indebtedness” means the
indebtedness evidenced by the Note or Related Documents, including all
principal and interest together with all other indebtedness and costs and
expenses for which Borrower is responsible under this Agreement or under any of
the Related Documents. Specifically, without limitation, Indebtedness includes
all amounts that may be indirectly secured by the Cross-Collateralization
provision of this Agreement.

 

Lender.
  The word “Lender” means City National Bank,
NA, its successors and assigns.

 

Note.   The
word “Note” means the Note executed by NATROL, INC., A DELAWARE CORPORATION in
the principal amount of $3,000,000.00 dated November 4, 2004, together with all
renewals of, extensions of, modifications of, refinancings of, consolidations
of, and substitutions for the note or credit agreement.

 

Property.
  The word “Property” means all of
Grantor’s right, title and interest in and to all the Property as described in
the “Collateral Description” section of this Agreement.

 

Related
Documents.   The words
“Related Documents” mean all promissory notes, credit agreements, loan
agreements, environmental agreements, guaranties, security agreements,
mortgages, deeds of trust, security deeds, collateral mortgages, and all other
instruments, agreements and documents, whether now or hereafter existing,
executed in connection with the Indebtedness.

 

BORROWER
AND GRANTOR HAVE READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS COMMERCIAL
SECURITY AGREEMENT AND AGREE TO ITS TERMS.  THIS AGREEMENT IS DATED NOVEMBER 4, 2004.

 

THIS
AGREEMENT IS GIVEN UNDER SEAL AND IT IS INTENDED THAT THIS AGREEMENT IS AND
SHALL CONSTITUTE AND HAVE THE EFFECT OF A SEALED INSTRUMENT ACCORDING TO LAW.

 

GRANTOR:

 

 

	
  NATROL PRODUCTS, INC., A DELAWARE
  CORPORATION

  
	
   

  
	
  By:

  	
  /s/ Elliott Balbert

  	
  (Seal)

  
	
   

  	
  ELLIOTT BALBERT, President of
  NATROL

  	
   

  
	
   

  	
  PRODUCTS, INC., A DELAWARE
  CORPORATION

  	
   

  
	
   

  
	
  BORROWER:

  
	
   

  
	
   

  
	
  NATROL, INC., A DELAWARE
  CORPORATION

  
	
   

  
	
  By:

  	
  /s/ Elliott Balbert

  	
  (Seal)

  
	
   

  	
  ELLIOTT BALBERT, President of
  NATROL, INC., A

  	
   

  
	
   

  	
  DELAWARE CORPORATION

  	
   

  
					

 

[ILLEGIBLE]

 

6

 

 

CORPORATE RESOLUTION TO GRANT COLLATERAL / GUARANTEE

 

	
  Principal

  	
   

  	
  Loan Date

  	
   

  	
  Maturity

  	
   

  	
  Loan No

  	
   

  	
  Call / Coll

  	
   

  	
  Account

  	
   

  	
  Officer

  	
   

  	
  Initials

  
	
  $

  	
  3,000,000.00

  	
   

  	
  11-04-2004

  	
   

  	
  12-01-2005

  	
   

  	
  00003

  	
   

  	
   

  	
   

  	
  709818

  	
   

  	
  DA

  	
   

  	
   

  
																

 

References in the shaded area are for Lender’s use only and do not limit
the

applicability of this document to any particular loan or item.

Any item above containing “***” has been omitted due to text length
limitations.

 

	
  Borrower:

  	
  NATROL, INC., A DELAWARE CORPORATION

  	
  Lender:

  	
  City
  National Bank, NA

  
	
   

  	
  21411
  PRAIRIE

  	
   

  	
  San
  Fernando Valley Commercial Banking Services

  
	
   

  	
  CHATSWORTH,
  CA 91311

  	
   

  	
  #048000

  
	
   

  	
   

  	
   

  	
  15260
  Ventura Boulevard, Suite 1600

  
	
   

  	
   

  	
   

  	
  Sherman
  Oaks, CA 91403

  

 

	
  Corporation:

  	
  NATROL PRODUCTS, INC., A DELAWARE

  
	
   

  	
  CORPORATION

  
	
   

  	
  21411
  PRAIRIE

  
	
   

  	
  CHATSWORTH,
  CA 91311

  

 

I, THE UNDERSIGNED, DO HEREBY CERTIFY THAT:

 

THE CORPORATION’S EXISTENCE.  The complete and correct name of
the Corporation is NATROL PRODUCTS, INC., A DELAWARE CORPORATION (“Corporation”).
The Corporation is a corporation for profit which is, and at all times shall
be, duly organized, validly existing, and in good standing under and by virtue
of the laws of the State of Delaware. The Corporation is duly authorized to
transact business in the State of California and all other states in which the
Corporation is doing business, having obtained all necessary filings,
governmental licenses and approvals for each state in which the Corporation is
doing business. Specifically, the Corporation is, and at all times shall be,
duly qualified as a foreign corporation in all states in which the failure to
so qualify would have a material adverse effect on its business or financial
condition. The Corporation has the full power and authority to own its
properties and to transact the business in which it is presently engaged or
presently proposes to engage. The Corporation maintains an office at 21411
PRAIRIE, CHATSWORTH, CA 91311. Unless the Corporation has designated otherwise
in writing,  the principal office is the
office at which the Corporation keeps its books and records. The Corporation
will notify Lender prior to any change in the location of The Corporation’s
state of organization or any change in The Corporation’s name. The Corporation
shall do all things necessary to preserve and to keep in full force and effect
its existence, rights and privileges, and shall comply with all regulations,
rules, ordinances, statutes, orders and decrees of any governmental or
quasi-governmental authority or court applicable to the Corporation and The
Corporation’s business activities.

 

RESOLUTIONS ADOPTED. At a meeting of the Directors of the Corporation, or if the Corporation
is a close corporation having no Board of Directors then at a meeting of the
Corporation’s shareholders, duly called and held on November 4,
2004, at which a quorum was present and voting, or by other duly
authorized action in lieu of a meeting,
the resolutions Set forth in this Resolution were adopted.

 

OFFICERS.  The following named persons are officers of
NATROL PRODUCTS, INC., A DELAWARE CORPORATION:

 

	
  NAMES

  	
   

  	
  TITLES

  	
   

  	
  AUTHORIZED

  	
   

  	
  ACTUAL SIGNATURES

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  DENNIS
  JOLICOEUR

  	
   

  	
  EVP/CFO

  	
   

  	
  Y

  	
   

  	
  X

  	
  /s/
  Dennis Jolicoeur

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  GARY
  DEMELLO

  	
   

  	
  COO

  	
   

  	
  Y

  	
   

  	
  X

  	
  /s/
  Gary Demello

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ELLIOTT
  BALBERT

  	
   

  	
  President

  	
   

  	
  Y

  	
   

  	
  X

  	
  /s/
  Elliott Balbert

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  LOIDA
  RUBIO

  	
   

  	
  Secretary

  	
   

  	
  Y

  	
   

  	
  X

  	
  /s/
  Loida Rubio

  

 

ACTIONS AUTHORIZED. Any one (1) of the authorized persons listed above may enter into any
agreements of any nature with Lender, end those agreements will bind the Corporation.
Specifically, but without limitation, any one (1) of such authorized persons
are authorized, empowered, and directed to do the following for and on behalf
of the Corporation:

 

Guaranty.  To guarantee or act as surety for loans or
other financial accommodations to Borrower from Lender on such guarantee or
surety terms as may be agreed upon between the officers of the Corporation and
Lender and in such sum or sums of money as in their judgment should be
guaranteed or assured, not exceeding, however, at any one Lime the amount of Four Million Eight Hundred Fifty Thousand & 00/100 Dollars
($4,850,000.00), in addition to such sum or sums of money as the
Corporation currently may have guaranteed to Lender (the “Guaranty”).

 

Grant Security. To mortgage, pledge, transfer, endorse,
hypothecate, or otherwise encumber and deliver to Lender any property now or
hereafter belonging to the Corporation or in which the Corporation now or
hereafter may have an interest, including without limitation all of the Corporation’s
real property and all of the Corporation’s personal property (tangible or
intangible), as security for the Guaranty, and as a security for the payment of
any loans, any promissory notes, or any other or further indebtedness of
NATROL, INC., A DELAWARE CORPORATION to Lender at any time owing, however the
same may be evidenced. Such property may be mortgaged, pledged, transferred,
endorsed, hypothecated or encumbered at the time such loans are obtained or
such indebtedness is incurred, or at any other time or times, and may be other
in addition to or in lieu of any property Theretofore mortgaged, pledged,
transferred, endorsed, hypothecated or encumbered.  The provisions of this Resolution authorizing
or relating to the pledge, mortgage, transfer, endorsement, hypothecation,
granting of a security interest in, or in any way encumbering, the assets of
the Corporation shall include, without limitation, doing so in order to lend
collateral security for the indebtedness, now or hereafter existing, and of any
nature whatsoever, of NATROL, INC., A DELAWARE CORPORATION to Lender. The
Corporation has considered the value to itself of lending collateral in support
of such indebtedness, and the Corporation represents to Lender that the
Corporation is benefited by doing so.

 

Execute Security Documents. To execute and deliver to Lender the forms of
mortgage, deed of trust, pledge agreement, hypothecation agreement, and Other
security agreements and financing statements which Lender may require and which
shall evidence the terms and conditions under and pursuant to which such liens
and encumbrances, or any of them, are given: and also to execute and deliver to
Lender any other written instruments, any chattel paper, or any other
collateral, of any kind or nature, which Lender may deem necessary or proper in
connection with or pertaining to the giving of the liens and encumbrances.
Notwithstanding the foregoing, any one of the above authorized persons may
execute, deliver, or record financing statements.

 

Further Acts.  To do
and perform such other acts and things and to execute and deliver such other
documents and agreements as the officers may in their discretion deem
reasonably necessary or proper in order to carry into effect the provisions of
this Resolution.

 

 

ASSUMED BUSINESS NAMES.  The Corporation has filed or
recorded all documents or filings required by law relating to all assumed business
names used by the Corporation. Excluding the name of the Corporation, the
following is a complete list of all assumed business names under which the
Corporation does business: None.

 

NOTICES TO LENDER.  The Corporation will promptly
notify Lender in writing at Lender’s address shown above (or such other
addresses as Lender may designate from time to time) prior to any (A) change in
the Corporation’s name; (B) change in the Corporation’s assumed business
name(s); (C) change in the management of the Corporation; (D) change in the
authorized signer(s); (E) change in the Corporation’s principal office address;
(F) change in the Corporation’s state of organization; (G) conversion of the
Corporation to a new or different type of business entity; or (H) change in any
other aspect of the Corporation that directly or indirectly relates to any
agreements between the Corporation and Lender. No change in the Corporation’s
name or state of organization will take effect until after Lender has received
notice.

 

CERTIFICATION CONCERNING OFFICERS AND RESOLUTIONS.  The
officers named above are duly elected, appointed, or employed by or for the
Corporation, as the case may be, and occupy the positions set opposite their
respective names. This Resolution now stands of record on the books of the
Corporation, is in full force and effect, and has not been modified or revoked
in any manner whatsoever.

 

NO CORPORATE SEAL.  The Corporation has no corporate
seal, and therefore, no seal is affixed to this Resolution.

 

CONTINUING VALIDITY.  Any and all acts authorized pursuant to this Resolution and
performed prior to the passage of this Resolution are hereby ratified and
approved. This Resolution shall be continuing, shall remain in full force and
effect and Lender may rely on it until written notice of its revocation shall
have been delivered to and received by Lender at Lender’s address shown above
(or such addresses as Lender may designate from time to time). Any such notice
shall not affect any of the Corporation’s agreements or commitments in effect
at the time notice is given.

 

IN TESTIMONY WHEREOF, I have hereunto set my hand and attest that
the
signatures set opposite
the names
listed above are their genuine
signatures.

 

I have read all the provisions of this Resolution, and
I personally and on behalf of the Corporation certify that all statements and
representations made in this Resolution are true and correct.  The Corporate Resolution to Grant Collateral /
Guarantee is dated November 4, 2004.

 

THIS RESOLUTION IS GIVEN UNDER SEAL AND IT IS INTENDED THAT
THIS RESOLUTION IS AND SHALL CONSTITUTE AND HAVE THE EFFECT OF A SEALED
INSTRUMENT ACCORDING TO LAW.

 

	
   

  	
  CERTIFIED
  TO AND ATTESTED BY:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  X

  	
  /s/ Loida Rubio

  	
  (Seal)

  
	
   

  	
   

  	
  LOIDA
  RUBIO, Secretary

  	
   

  

 

 

NOTE:  If the officers signing this Resolution are
designated by the foregoing document as one of the officers authorized to act on the Corporation’s behalf, it is advisable to have this Resolution
signed by at least one non-authorized officer of the Corporation.

 

[ILLEGIBLE]

 

2

 

CORPORATE RESOLUTION TO GRANT COLLATERAL / GUARANTEE

 

	
  Principal

  	
   

  	
  Loan Date

  	
   

  	
  Maturity

  	
   

  	
  Loan No

  	
   

  	
  Call / Coll

  	
   

  	
  Account

  	
   

  	
  Officer

  	
   

  	
  Initials

  
	
  $

  	
  3,000,000.00

  	
   

  	
  11-04-2004

  	
   

  	
  12-01-2005

  	
   

  	
  00003

  	
   

  	
   

  	
   

  	
  709818

  	
   

  	
  DA

  	
   

  	
   

  
																

 

References in the shaded area are for Lender’s use only and do not limit
the

applicability of this document to any particular loan or item.

Any item above containing “***” has been omitted due to text length
limitations.

 

	
  Borrower:

  	
  NATROL, INC., A DELAWARE CORPORATION

  	
  Lender:

  	
  City
  National Bank, NA

  
	
   

  	
  21411
  PRAIRIE

  	
   

  	
  San
  Fernando Valley Commercial Banking Services

  
	
   

  	
  CHATSWORTH,
  CA 91311

  	
   

  	
  #048000

  
	
   

  	
   

  	
   

  	
  15260
  Ventura Boulevard, Suite 1600

  
	
   

  	
   

  	
   

  	
  Sherman
  Oaks, CA 91403

  

 

	
  Corporation:

  	
  NATROL PRODUCTS, INC., A DELAWARE

  
	
   

  	
  CORPORATION

  
	
   

  	
  21411
  PRAIRIE

  
	
   

  	
  CHATSWORTH,
  CA 91311

  

 

 

I, THE UNDERSIGNED, DO HEREBY CERTIFY THAT:

 

THE CORPORATION’S EXISTENCE.  The complete and correct name of
the Corporation is NATROL PRODUCTS, INC., A DELAWARE CORPORATION
(“Corporation”). The Corporation is a corporation
for profit which is, and at all times shall be, duly organized, validly
existing, and in good standing under and by virtue of the laws of the State of Delaware. The
Corporation is duly authorized to transact business in the State of California
and all other states in which the Corporation is doing business, having
obtained all necessary filings, governmental licenses and approvals for each
state in which the Corporation is doing business. Specifically, the Corporation
is, and at all times shall be, duly qualified as a foreign corporation in all states
in which the failure to so qualify would have a material adverse effect on its
business or financial condition. The Corporation has the full power and
authority to own its properties and to transact the business in which it is
presently engaged or presently proposes to engage. The Corporation maintains an
office at 21411 PRAIRIE, CHATSWORTH, CA 91311. Unless the Corporation has
designated otherwise in writing, the principal office is the office at which
the Corporation keeps its books and records. The Corporation will notify Lender
prior to any change in the location of The Corporation’s state of organization
of any change in The Corporation’s name. The Corporation shall do all things
necessary to preserve and to keep in full force and effect its existence,
rights and privileges, and shall comply with all regulations, rules, ordinances,
statutes, orders and decrees of any governmental or quasi-governmental
authority or court applicable to the Corporation and The Corporation’s business
activities.

 

RESOLUTIONS ADOPTED. At a meeting of the Directors of the Corporation, or if the Corporation
is a close corporation having no Board of Directors then at a meeting of the
Corporation’s shareholders, duly called and held on November 4,
2004, at which a quorum was present and voting, or by other duly
authorized action in lieu of a meeting, the resolutions set forth in this
Resolution were adopted.

 

OFFICERS.  The following named persons are officers of
NATROL PRODUCTS, INC., A DELAWARE CORPORATION:

 

	
  NAMES

  	
   

  	
  TITLES

  	
   

  	
  AUTHORIZED

  	
   

  	
  ACTUAL SIGNATURES

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  DENNIS
  JOLICOEUR

  	
   

  	
  EVP/CFO

  	
   

  	
  Y

  	
   

  	
  X

  	
  /s/ Dennis Jolicoeur

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  GARY
  DEMELLO

  	
   

  	
  COO

  	
   

  	
  Y

  	
   

  	
  X

  	
  /s/ Gary Demello

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ELLIOTT
  BALBERT

  	
   

  	
  President

  	
   

  	
  Y

  	
   

  	
  X

  	
  /s/ Elliott Balbert

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  LOIDA
  RUBIO

  	
   

  	
  Secretary

  	
   

  	
  Y

  	
   

  	
  X

  	
  /s/ Loida Rubio

  

 

ACTIONS AUTHORIZED. Any one (1) of the authorized persons listed above may enter into any
agreements of any nature with Lender, and those agreements will bind the
Corporation. Specifically, but without limitation, any one (1) of such
authorized persons are authorized, empowered, and directed to do the following
for and on behalf of the Corporation:

 

Guaranty.  To guarantee or act as surety for loans or
other financial accommodations to Borrower from Lender on such guarantee or
surety terms as may be agreed upon between the officers of the Corporation and
Lender and in such sum or sums of money as in their judgment should be
guaranteed or assured, not exceeding, however, at any one time the amount of Four Million Eight Hundred Fifty Thousand & 00/100 Dollars
($4,850,000.00), in addition to such sum or sums of money as the
Corporation currently may have guaranteed to Lender (the “Guaranty”).

 

Grant Security.
To mortgage, pledge, transfer, endorse, hypothecate, or otherwise encumber and deliver to Lender any property now or
hereafter belonging to the Corporation or in which the Corporation now or
hereafter may have an interest, including without limitation all of the
Corporation’s real property and all of the Corporation’s personal property
(tangible or intangible), as security for the Guaranty, and as a security for
the payment of any loans, any promissory notes, or any other or further
indebtedness of NATROL, INC., A DELAWARE CORPORATION to Lender at any time
owing, however the same may be evidenced. Such property may be mortgaged,
pledged, transferred, endorsed, hypothecated or encumbered at the time such
loans are obtained or such indebtedness is incurred, or at any other time or
times, and may be either in addition to or in lieu of any property theretofore
mortgaged, pledged, transferred, endorsed, hypothecated or encumbered. The
provisions of this Resolution authorizing or relating to the pledge, mortgage,
transfer, endorsement, hypothecation, granting of a security interest in, or in
any way encumbering, the assets of the Corporation shall include, without
limitation, doing so in order to lend collateral security for the indebtedness,
now or hereafter existing, and of any nature whatsoever, of NATROL, INC., A
DELAWARE CORPORATION to Lender. The Corporation has considered the value to
itself of lending collateral in support of such indebtedness, and the
Corporation represents to Lender that the Corporation is benefited by doing so.

 

Execute Security Documents. To execute and deliver to Lender the forms of mortgage, deed of trust,
pledge agreement, hypothecation agreement, and other security agreements and
financing statements which Lender may require and which shall evidence the
terms and conditions under and pursuant to which such liens and encumbrances,
or any of them, are given; and also to execute and deliver to Lender any other
written instruments, any chattel paper, or any other collateral, of any kind or
nature, which Lender may deem necessary or proper in connection with or
pertaining to the giving of the liens and encumbrances. Notwithstanding the
foregoing, any one of the above authorized persons may execute, deliver, or
record financing statements.

 

Further Acts.  To do and perform such other acts and things
and to execute and deliver such other documents and agreements as the officers may in their discretion deem
reasonably necessary or proper in order to carry into effect the provisions of
this Resolution.

 

 

ASSUMED BUSINESS NAMES.  The Corporation has filed or
recorded all documents or filings required by law relating to all assumed
business names used by the Corporation. Excluding the name of the Corporation,
the following is a complete list of all assumed business names under which the
Corporation does business:  None.

 

NOTICES TO LENDER.  The Corporation will promptly
notify Lender in writing at Lender’s address shown above (or such other
addresses as Lender may designate from time to time) prior to any (A) change
in the Corporation’s name; (B) change in the Corporation’s assumed
business name(s); (C) change in the management of the Corporation; (D) change
in the authorized signer(s); (E) change in the Corporation’s principal
office address; (F) change in the Corporation’s state of organization; (G) conversion
of the Corporation to a new or different type of business entity; or (H) change
in any other aspect of the Corporation that directly or indirectly relates to
any agreements between the Corporation and Lender. No change in the
Corporation’s name or state of organization will take effect until after Lender
has received notice.

 

CERTIFICATION CONCERNING OFFICERS AND RESOLUTIONS.  The
officers named above are duly elected, appointed, or employed by or for the
Corporation, as the case may be, and occupy the positions set opposite their
respective names. This Resolution now stands of record on the books of the
Corporation, is in full force and effect, and has not been modified or revoked
in any manner whatsoever.

 

NO CORPORATE SEAL.  The Corporation has no corporate
seal, and therefore, no seal is affixed to this Resolution.

 

CONTINUING VALIDITY.  Any and all acts authorized
pursuant to this Resolution and performed prior to the passage of this
Resolution are hereby ratified
and approved. This Resolution shall be continuing, shall remain in full force
and effect and Lender may rely on it until written notice of its revocation
shall have been delivered to and received by Lender at Lender’s address shown
above (or such addresses as Lender may designate from time to time). Any such
notice shall not affect any of the Corporation’s agreements or commitments in
effect at the time notice is given.

 

IN TESTIMONY WHEREOF. I have hereunto set my hand and attest
that the signatures set opposite the names listed above are their genuine
signatures.

 

I have read all the provisions of this Resolution, and I
personally and on behalf of the Corporation certify that all statements and
representations made in this Resolution are true and correct. This Corporate
Resolution to Grant Collateral / Guarantee is dated November 4, 2004.

 

	
   

  	
  CERTIFIED
  TO AND ATTESTED BY:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  X

  	
  /s/ Loida Rubio

  	
   

  
	
   

  	
   

  	
  LOIDA
  RUBIO, Secretary

  	
   

  

 

NOTE:  If the officers signing this Resolution are
designated by the foregoing document as one of the officers authorized to act on the Corporation’s behalf, it is advisable to have this Resolution
signed by at least one non-authorized officer of the Corporation.

 

[ILLEGIBLE]

 

2

 

CORPORATE RESOLUTION TO BORROW /
GRANT COLLATERAL

 

	
  Principal

  	
   

  	
  Loan Date

  	
   

  	
  Maturity

  	
   

  	
  Loan No

  	
   

  	
  Call / Coll

  	
   

  	
  Account

  	
   

  	
  Officer

  	
   

  	
  Initials

  	
   

  
	
  $

  	
  3,000,000.00

  	
   

  	
  11-04-2004

  	
   

  	
  12-01-2005

  	
   

  	
  00003

  	
   

  	
   

  	
   

  	
  709818

  	
   

  	
  DA

  	
   

  	
   

  	
   

  
																	

 

References in the shaded area are for Lender’s use only and do not limit
the

applicability of this document to any particular loan or item.

Any item above containing “***” has been omitted due to text length limitations.

 

	
  Corporation:

  	
  NATROL, INC., A DELAWARE CORPORATION

  	
  Lender:

  	
  City
  National Bank, NA

  
	
   

  	
  21411
  PRAIRIE

  	
   

  	
  San
  Fernando Valley Commercial

  
	
   

  	
  CHATSWORTH,
  CA 91311

  	
   

  	
  Banking
  Services

  
	
   

  	
   

  	
   

  	
  #048000

  
	
   

  	
   

  	
   

  	
  15260
  Ventura Boulevard, Suite 1600

  
	
   

  	
   

  	
   

  	
  Sherman
  Oaks, CA 91403

  

 

I, THE UNDERSIGNED, DO HEREBY CERTIFY THAT:

 

THE CORPORATION’S EXISTENCE.  The complete and correct name of
the Corporation is NATROL, INC., A DELAWARE CORPORATION (“Corporation”). The
Corporation is a corporation
for profit which is, and at all times shall be, duly organized, validly
existing, and in good standing under and by virtue of the laws of the State of
Delaware. The Corporation is duly authorized to transact business in the State
of California and all other states in which the Corporation is doing business,
having obtained all necessary filings, governmental licenses and approvals for
each state in which the Corporation is doing business. Specifically, the
Corporation is, and at all times shall be, duly qualified as a foreign
corporation in all states in which the failure to so qualify would have a
material adverse effect on its business or financial condition. The Corporation
has the full power and authority to own its properties and to transact the
business in which it is presently engaged or presently proposes to engage. The
Corporation maintains an office at 21411 PRAIRIE, CHATSWORTH, CA 91311. Unless
the Corporation has designated otherwise in writing, the principal office is
the office at which the Corporation keeps its books and records. The
Corporation will notify Lender prior to any change in the location of The
Corporation’s state of organization or any change in The Corporation’s name.
The Corporation shall do all things necessary to preserve and to keep in full
force and effect its existence, rights and privileges, and shall comply with
all regulations, rules, ordinances, statutes, orders and decrees of any
governmental or quasi-governmental authority or court applicable to the
Corporation and The Corporation’s business activities.

 

RESOLUTIONS ADOPTED.  At a meeting of the Directors of
the Corporation, or if the Corporation is a close corporation having no Board
of Directors then at a meeting of the Corporation’s shareholders, duly called
and held on November 4, 2004, at which a
quorum was present and voting, or by other duly authorized action in lieu of a
meeting, the resolutions set forth in this Resolution were adopted.

 

OFFICERS.  The following named persons are officers of
NATROL, INC., A DELAWARE CORPORATION:

 

	
  NAMES

  	
   

  	
  TITLES

  	
   

  	
  AUTHORIZED

  	
   

  	
  ACTUAL SIGNATURES

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  DENNIS
  JOLICOEUR

  	
   

  	
  EVP/CFO

  	
   

  	
  Y

  	
   

  	
  X

  	
  /s/
  Dennis Jolicoeur

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  GARY
  DEMELLO

  	
   

  	
  COO

  	
   

  	
  Y

  	
   

  	
  X

  	
  /s/
  Gary Demello

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ELLIOTT
  BALBERT

  	
   

  	
  President

  	
   

  	
  Y

  	
   

  	
  X

  	
  /s/
  Elliott Balbert

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  LOIDA
  RUBIO

  	
   

  	
  Secretary

  	
   

  	
  Y

  	
   

  	
  X

  	
  /s/
  Loida Rubio

  

 

ACTIONS AUTHORIZED.  Any one (1) of the authorized
persons listed above may enter into any agreements of any nature with Lender,
and those agreements will bind the Corporation. Specifically, but without
limitation, any one [1] of such authorized persons are authorized, empowered,
and directed to do the following for and on behalf of the Corporation:

 

Borrow Money.
To borrow, as a cosigner or otherwise, from time to time from Lender, on such
terms as may be agreed upon between the Corporation and Lender, such sum or
sums of money as in their judgment should be borrowed, without limitation.

 

Execute Notes.
To execute and deliver to Lender the promissory note or notes, or other
evidence of the Corporation’s credit accommodations, on Lender’s forms, at such
rates of interest and on such terms as may be agreed upon, evidencing the sums
of money so borrowed or any of the Corporation’s indebtedness to Lender, and
also to execute and deliver to Lender one or more renewals, extensions,
modifications, refinancings, consolidations, or substitutions for one or more
of the notes, any portion of the notes, or any other evidence of credit
accommodations.

 

Grant Security.
To mortgage, pledge, transfer, endorse, hypothecate, or otherwise encumber and
deliver to Lender any property now or hereafter belonging to the Corporation or
in which the Corporation now or hereafter may have an interest, including
without limitation all of the Corporation’s real property and all of the
Corporation’s personal property (tangible or intangible), as security for the
payment of any loans or credit accommodations so obtained, any promissory notes
so executed (including any amendments to or modifications, renewals, and
extensions of such promissory notes), or any other or further indebtedness of
the Corporation to Lender at any time owing, however the same may be evidenced.
Such property may be mortgaged, pledged, transferred, endorsed, hypothecated or
encumbered at the time such loans are obtained or such indebtedness is
incurred, or at any other time or times, and may be either in addition to or in
lieu of any property theretofore mortgaged, pledged, transferred, endorsed,
hypothecated or encumbered.

 

Execute Security Documents. To execute and deliver to Lender the forms of mortgage, deed of trust, pledge
agreement, hypothecation agreement, and other security agreements and financing
statements which Lender may require and which shall evidence the terms and
conditions under and pursuant to which such liens and encumbrances, or any of
them, are given; and also to execute and deliver to Lender any other written
instruments, any chattel paper, or any other collateral, of any kind or nature,
which Lender may deem necessary or proper in connection with or pertaining to
the giving of the liens and encumbrances. Notwithstanding the foregoing, any
one of the above authorized persons may execute, deliver, or record financing
statements.

 

Negotiate Items.
To draw, endorse, and discount with Lender all drafts, trade acceptances,
promissory notes, or other evidences of indebtedness payable to or belonging to
the Corporation or in which the Corporation may have an interest, and either to
receive cash for the same or to cause such proceeds to be credited to the
Corporation’s account with Lender, or to cause such other disposition of the
proceeds derived therefrom as they
may deem advisable.

 

Further Acts.  In the case of lines of credit, to designate
additional or alternate individuals as being authorized to request advances
under such lines, and in all cases, to do and perform such other acts and
things, to pay any and all fees and costs, and to execute and deliver such
other documents and agreements as the officers may in their discretion deem
reasonably necessary or proper in order to carry into effect the provisions of
this Resolution. The following persons currently are authorized to request
advances and authorize payments under the line of credit until Lender receives
from the Corporation, at Lender’s address shown above, written notice of
revocation of their

 

 

authority:
 DENNIS JOLICOEUR; LOIDA RUBIO;
GARY DE MELLO; and ELLIOTT BALBERT.

 

ASSUMED BUSINESS NAMES.  The Corporation has filed or
recorded all documents or filings required by law relating to all assumed
business names used by the Corporation. Excluding the name of the Corporation,
the following is a complete list of all assumed business names under which the
Corporation does business:

 

	
  Assumed Business Name

  	
   

  	
  Filing Location

  	
   

  	
  Date

  
	
  ESSENTIALLY PURE INGREDIENTS

  	
   

  	
  LOS ANGELES COUNTY

  	
   

  	
  05-16-2000

  

 

NOTICES TO LENDER.  The Corporation will promptly
notify Lender in writing at Lender’s address shown above (or such other
addresses as Lender may designate from time to time) prior to any (A) change in
the Corporation’s name; (B) change in the Corporation’s assumed business
name(s); (C) change in the management of the Corporation; (D) change in the
authorized signer(s); (E) change in the Corporation’s principal office address:
(F) change in the Corporation’s state of organization; (G) conversion of the
Corporation to a new or different type of business entity; or (H) change in any
other aspect of the Corporation that directly or indirectly relates to any
agreements between the Corporation and Lender. No change in the Corporation’s
name or state of organization will take effect until after Lender has received
notice.

 

CERTIFICATION CONCERNING OFFICERS AND RESOLUTIONS.  The
officers named above are duly elected, appointed, or employed by or for the
Corporation, as the case may be, and occupy the positions set opposite their
respective names. This Resolution now stands of record on the books of the
Corporation, is in full force and effect, and has not been modified or revoked
in any manner whatsoever.

 

NO CORPORATE SEAL.  The Corporation has no corporate seal, and
therefore, no seal is affixed to this Resolution.

 

CONTINUING
VALIDITY.  Any and all acts authorized pursuant to this
Resolution and performed prior to the passage of this Resolution are hereby
ratified and approved. This Resolution shall be continuing, shall remain in
full force and effect and Lender may rely on it until written notice of its
revocation shall have been delivered to and received by Lender at Lender’s
address shown above (or such addresses as Lender may designate from time to
time).  Any such notice shall not affect
any of the Corporation’s agreements or commitments in effect at the time notice
is given.

 

IN TESTIMONY WHEREOF, I have hereunto set my hand and attest that the
signatures set opposite the names listed above are their genuine signatures.

 

I have read all the provisions of this Resolution, and I personally
and on behalf of the Corporation certify that all statements and
representations made, in this Resolution are true and correct. This Corporate
Resolution to Borrow / Grant Collateral is dated November 4, 2004.

 

THIS RESOLUTION IS GIVEN UNDER SEAL AND IT IS INTENDED THAT
THIS RESOLUTION IS AND SHALL CONSTITUTE AND HAVE THE EFFECT OF A SEALED
INSTRUMENT ACCORDING TO LAW.

 

	
   

  	
  CERTIFIED
  TO AND ATTESTED BY:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  X

  	
  /s/
  Loida Rubio

  	
  (Seal)

  
	
   

  	
   

  	
  LOIDA
  RUBIO, Secretary

  	
   

  

 

NOTE:  If the officers signing this Resolution are
designated by the foregoing document as one of the officers authorized to act on the Corporation’s behalf, it is advisable to have this Resolution
signed by at least one non-authorized officer of the Corporation.

 

[ILLEGIBLE]

 

2

 

CORPORATE RESOLUTION TO BORROW /
GRANT COLLATERAL

 

	
  Principal

  	
   

  	
  Loan Date

  	
   

  	
  Maturity

  	
   

  	
  Loan No

  	
   

  	
  Call / Coll

  	
   

  	
  Account

  	
   

  	
  Officer

  	
   

  	
  Initials

  
	
  $

  	
  3,000,000.00

  	
   

  	
  11-04-2004

  	
   

  	
  12-01-2005

  	
   

  	
  00003

  	
   

  	
   

  	
   

  	
  709818

  	
   

  	
  DA

  	
   

  	
   

  
																

 

References in the
shaded area are for Lender’s use only and
do not limit the applicability of this
document to any particular loan
or item.

Any
item above containing “* * *” has been
omitted due to text length limitations.

 

	
  Corporation:

  	
  natrol,
  inc., a delaware CORPORATION

  	
  Lender:

  	
  City National Bank, na

  
	
   

  	
  21411
  PRAIRIE

  CHATSWORTH, CA 31311

  	
   

  	
   

  	
  San
  Fernando Valley Commercial Banking Services

  
	
   

  	
   

  	
   

  	
   

  	
  #048000

  
	
   

  	
   

  	
   

  	
   

  	
  15280
  Ventura Boulevard, Suite 1600

  
	
   

  	
   

  	
   

  	
   

  	
  Sherman
  Oaks, CA 91403

  

 

I, THE UNDERSIGNED, DO HEREBY CERTIFY THAT:

 

THE CORPORATION’S EXISTENCE.  The complete and correct name of the
Corporation is NATROL, INC., A DELAWARE
CORPORATION (“Corporation”). The
Corporation is a corporation for profit which is, and at all
times shall be, duly organized, validly existing, and in good standing under
and by virtue of the laws of the
State of Delaware. The Corporation is duly authorized to transact business in
the State of California and all other states in which the Corporation is doing
business, having obtained all necessary filings, governmental licenses and
approvals for each state in which the Corporation is doing business.
Specifically, the Corporation is, and at all times shall be, duly qualified as
a foreign corporation in all states in which the failure to so qualify would have a material
adverse effect on its business or financial condition. The Corporation has the
full power and authority to own its properties and to transact the business in
which it is presently engaged or presently proposes to engage. The Corporation
maintains an office at 21411 PRAIRIE, CHATSWORTH, CA 91311. Unless the
Corporation has designated otherwise in writing, the principal office is the office at which the Corporation
keeps its books and records, The Corporation will notify Lender prior to any
change in the location of The Corporation’s state of organization or any change
in The Corporation’s name. The Corporation shall do all things necessary to
preserve and to keep in full force and effect its existence, rights and
privileges, and shall comply with all regulations, rules, ordinances, statutes, orders and decrees of any
governmental or quasi-governmental authority or court applicable to the
Corporation and The Corporation’s business activities.

 

RESOLUTIONS ADOPTED. At a meeting of the Directors of the Corporation, or if the Corporation
is a close corporation having no Board of Directors then at a meeting of the
Corporation’s shareholders, duly called and held on November 4,
2004, at which a quorum was present and voting, or by other duly
authorized action in lieu of a
meeting, the resolutions set forth in this Resolution were adopted.

 

OFFICERS.   The following named persons are
officers of NATROL, INC., A DELAWARE CORPORATION:

 

	
  NAMES

  	
   

  	
  TITLES

  	
   

  	
  AUTHORIZED

  	
   

  	
  ACTUAL SIGNATURES

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  DENNIS
  JOLICOEUR

  	
   

  	
  EVP/CFO

  	
   

  	
  Y

  	
  X

  	
  /s/
  Dennis Jolicoeur

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  GARY
  DEMELLO

  	
   

  	
  COO

  	
   

  	
  Y

  	
  X

  	
  /s/
  Gary Demello

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ELLIOTT
  BALBERT

  	
   

  	
  President

  	
   

  	
  Y

  	
  X

  	
  /s/
  Elliott Balbert

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  LOIDA
  RUBIO

  	
   

  	
  Secretary

  	
   

  	
  Y

  	
  X

  	
  /s/
  Loida Rubio

  

 

ACTIONS AUTHORIZED. Any one (1) of the authorized persons listed above may enter into any
agreements of any nature with Lender, and those agreements will bind the
Corporation. Specifically, but without limitation, any one (1) of such
authorized persons are authorized, empowered, and directed to do the following
for and on behalf of the Corporation:

 

Borrow Money.
To borrow, as a cosigner or otherwise, from time to time from Lender, on such
terms as may be agreed upon between the Corporation and Lender, such sum or
sums of money as in their judgment should be borrowed, without limitation.

 

Execute Notes.
To execute and deliver to Lender the promissory note or notes, or other
evidence of the Corporation’s credit accommodations, on Lender’s forms, at such
rates of interest and on such terms as may be agreed upon, evidencing the sums
of money so borrowed or any of the Corporation’s Indebtedness to Lender, and
also to execute and deliver to Lender one or more renewals, extensions,
modifications, refinancings, consolidations, or substitutions for one or more
of the notes, any portion of the notes, or any other evidence of credit
accommodations.

 

Grant Security.
To mortgage, pledge, transfer, endorse, hypothecate, or otherwise encumber and
deliver to Lender any property now or hereafter belonging to the Corporation or
in which the Corporation now or hereafter may have an interest, including
without limitation all of the Corporation’s real property and all of the
Corporation’s personal property (tangible or intangible), as security for the
payment of any loans or credit accommodations so obtained, any promissory notes
so executed (including any
amendments to or modifications, renewals, and extensions of such promissory
notes), or any other or further Indebtedness of the Corporation to Lender at
any time owing, however the same may
be evidenced. Such property may be mortgaged, pledged, transferred, endorsed,
hypothecated or encumbered at the time such loans are obtained or such
indebtedness is incurred, or at any other time or times, and may be either in
addition to or in lieu of any property theretofore mortgaged, pledged,
transferred, endorsed, hypothecated or encumbered.

 

Execute Security Documents. To execute and deliver to Lender the forms of mortgage, deed of trust,
pledge agreement, hypothecation agreement, and other security agreements and
financing statements which Lender may require and which shall evidence the
terms and conditions under and pursuant to which such liens and encumbrances,
or any of them, are given; and also to execute and deliver to Lender any other
written instruments, any chattel paper, or any other collateral, of any kind of
nature, which Lender may deem necessary or proper in connection with or
pertaining to the giving of the liens and encumbrances. Notwithstanding the
foregoing, any one of the above authorzied persons may execute, deliver, or
record financing statements.

 

Negotiate items.
To draw, endorse, and discount with Lender all drafts, trade acceptances,
promissory notes, or other evidences of indebtedness payable to or belonging to
the Corporation or in which the Corporation may have an interest, and either to
receive cash for the same or to cause
such proceeds to be credited to the Corporation’s account with Lender, or to
cause such other disposition of the proceeds derived therefrom as they may deem
advisable.

 

Further Acts.
In the case of lines of credit, to designate additional or alternate individuals
as being authorized to request advances under such lines, and in all cases, to
do and perform such other acts and things, to pay any and all fees and costs,
and to execute and deliver such other documents and agreements as the officers
may in their discretion deem reasonably necessary or proper in order to carry into
effect the provisions of this Resolution. The following persons currently are
authorized to request advances and authorize payments under the line of credit
until Lender receives from the Corporation, at Lender’s address shown above,
written notice of revocation of their

 

 

authority:  DENNIS JOLICOEUR; LOIDA RUBIO; GARY DE MELLO;
and ELLIOTT BALBERT.

 

ASSUMED BUSINESS NAMES. The Corporation has
filed or recorded all
documents or filings required by law relating to all assumed business names
used by the Corporation. Excluding the name of the Corporation, the following is
a complete list of all assumed business
names under which the Corporation does business:

 

	
  Assumed Business Name

  	
   

  	
  Filing Location

  	
   

  	
  Date

  
	
  ESSENTIALLY
  PURE INGREDIENTS

  	
   

  	
  LOS
  ANGELES COUNTY

  	
   

  	
  05-16-2000

  

 

NOTICES TO LENDER. The Corporation will promptly notify Lender
in writing at Lender’s address shown above (or such other addresses at Lender may designate from time to time) prior to any (A) change in
the Corporation’s name; (B) change in the Corporation’s assumed business
name(s), (C) change in the management of the Corporation; (D) change in the
authorized signer(s); (E) change in the Corporation’s principal office address; (F) change in the Corporation’s state
of organization; (G) conversion of the Corporation to a new or different type
of business entity; or (H) change in any other aspect of the Corporation that
directly or indirectly relates to any agreements between the Corporation and
Lender. No change in the Corporation’s name or state of organization will take effect until after Lender has received
notice.

 

CERTIFICATION CONCERNING OFFICERS AND
RESOLUTIONS. The officers
named above are duly elected, appointed, or employed by or for the Corporation,
at the case may be, and occupy the positions set opposite their respective
names . This Resolution now stands of record on the books of the Corporation, is in full force and effect, and
has not been modified or revoked in any manner whatsoever.

 

NO CORPORATE SEAL.  The Corporation has no corporate seal, and
therefore, no seal is affixed to this Resolution.

 

CONTINUING VALIDITY. Any and all acts authorized pursuant to this
Resolution and performed prior to the passage of this Resolution are hereby ratified and approved. This Resolution shall be continuing,
shall remain in full force and effect and Lender may rely or it until written
notice of its revocation shall have been delivered to and received by Lender at
Lender’s address shown above for such addresses as Lender may designate from
time to time). Any such notice shall not affect any of the Corporation’s
agreements or commitments in effect at the time notice is given.

 

IN TESTIMONY WHEREOF, I have hereunto set my hand and
attest that the signatures set opposite the names listed above are their
genuine signatures.

 

I have read at the
provisions of this Resolutions, and I personally and on behalf of the
Corporation certify that all statements and representations made in this Resolution are true and correct. This
Corporate Resolution to Borrow / Grant Collateral is
dated November 4, 2004.

 

this resolution is
given under seal and it is intended that this resolution iS AND shall CONSTITUTE and have the effect of a sealed
instrument according to law.

 

	
   

  	
  CERTIFIED TO AND ATTESTED BY:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  X

  	
  /s/  Loida Rubio

  	
  [Seal]

  
	
   

  	
   

  	
   LOIDA RUBIO, Secretary

  

 

 

NOTE:  If the officers signing this Resolution are designated by the
foregoing document as one of the officer’s authorized to act on the
Corporation’s behalf, it is advisable
to have this Resolution signed
[ILLEGIBLE] one non-authorized officer of the Corporation.

 

[ILLEGIBLE]

 

2

 

	
  

  	
   

  	
  CITY NATIONAL

  BANK

  

 

COMMERCIAL SECURITY AGREEMENT

 

	
  Principal

  	
   

  	
  Loan Date

  	
   

  	
  Maturity

  	
   

  	
  Loan No.

  	
   

  	
  Call / Coll

  	
   

  	
  Account

  	
   

  	
  Officer

  	
   

  	
  Initials

  	
   

  
	
  $

  	
  3,000,000.00

  	
   

  	
  11-04-2004

  	
   

  	
  12-01-2005

  	
   

  	
  00003

  	
   

  	
   

  	
   

  	
  709818

  	
   

  	
  DA

  	
   

  	
   

  	
   

  
																	

 

References in the shaded area are for Lender’s use only and do not
limit the applicability of this document to any particular loan or item.

Any item above containing “***” has been omitted due to text length
limitations.

 

	
  Borrower:

  	
   

  	
  NATROL, INC., A DELAWARE CORPORATION

  	
   

  	
  Lender:

  	
   

  	
  City National Bank, NA

  
	
   

  	
   

  	
  21411 PRAIRIE

  CHATSWORTH, CA 91311

  	
   

  	
   

  	
   

  	
  San Fernando Valley Commercial
  Banking Services

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  #048000

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  15260 Ventura Boulevard, Suite 1600

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  Sherman Oaks, CA 91403

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Grantor:

  	
   

  	
  PROLAB NUTRITION, INC., A CONNECTICUT

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  CORPORATION

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  21411 PRAIRIE

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  CHATSWORTH, CA 91311

  	
   

  	
   

  	
   

  	
   

  

 

THIS
COMMERCIAL SECURITY AGREEMENT dated November 4, 2004, is made and executed
among PROLAB NUTRITION, INC., A CONNECTICUT CORPORATION (“Grantor”); NATROL,
INC., A DELAWARE CORPORATION (“Borrower”); and City National Bank, NA
(“Lender”).

 

GRANT OF
SECURITY INTEREST. For valuable consideration, Grantor grants to Lender a
security interest in the Collateral to secure the Indebtedness and agrees that
Lender shall have the rights stated in this Agreement with respect to the
Collateral, in addition to all other rights which Lender may have by law.

 

COLLATERAL
DESCRIPTION.   The word
“Collateral” as used in this Agreement means the following described property,
whether now owned or hereafter acquired, whether now existing or hereafter
arising, and wherever located, in which Grantor is giving to Lender a security
interest for the payment of the Indebtedness and performance of all other
obligations under the Note and this Agreement:

 

All
Inventory, Chattel Paper, Accounts, Equipment and General Intangibles

 

In addition, the word
“Collateral” also includes all the following, whether now owned or hereafter
acquired, whether now existing or hereafter arising, and wherever located:

 

(A)   All accessions, attachments, accessories,
tools, parts, supplies, replacements of and additions to any of the collateral
described herein, whether added now or later.

 

(B)   All products and produce of any of the
property described in this Collateral section.

 

(C)   All accounts, general intangibles,
instruments, rents, monies, payments, and all other rights, arising out of a
sale, lease, consignment or other disposition of any of the property described
in this Collateral section.

 

(D)   All proceeds (including insurance proceeds)
from the sale, destruction, loss, or other disposition of any of the property
described in this Collateral section, and sums due from a third party who has
damaged or destroyed the Collateral or from that party’s insurer, whether due to
judgment, settlement or other process.

 

(E)   All records and data relating to any of the
property described in this Collateral section, whether in the form of a
writing, photograph, microfilm, microfiche, or electronic media, together with
all of Grantor’s right, title, and interest in and to all computer software
required to utilize, create, maintain, and process any such records or data on
electronic media.

 

Despite any other
provision of this Agreement, Lender is not granted, and will not have, a
nonpurchase money security interest in household goods, to the extent such a
security interest would be prohibited by applicable law. In addition, if
because of the type of any Property, Lender is required to give a notice of the
right to cancel under Truth in Lending for the Indebtedness, then Lender will
not have a security interest in such Collateral unless and until such a notice
is given.

 

CROSS-COLLATERALIZATION.
  In addition to the Note, this Agreement
secures all obligations, debts and liabilities, plus interest thereon, of
Borrower to Lender, or any one or more of them, as well as all claims by Lender
against Borrower or any one or more of them, whether now existing or hereafter
arising, whether related or unrelated to the purpose of the Note, whether
voluntary or otherwise, whether due or not due, direct or indirect, determined
or undetermined, absolute or contingent, liquidated or unliquidated whether
Borrower or Grantor may be liable individually or jointly with others, whether
obligated as guarantor, surety, accommodation party or otherwise, and whether
recovery upon such amounts may be or hereafter may become barred by any statute
of limitations, and whether the obligation to repay such amounts may be or
hereafter may become otherwise unenforceable.

 

BORROWER’S
WAIVERS AND RESPONSIBILITIES.   Except as otherwise required under this
Agreement or by applicable law, (A) Borrower agrees that Lender need not tell
Borrower about any action or inaction Lender takes in connection with this
Agreement; (B) Borrower assumes the responsibility for being and keeping
informed about the Collateral; and (C) Borrower waives any defenses that may
arise because of any action or inaction of Lender, including without limitation
any failure of Lender to realize upon the Collateral or any delay by Lender in
realizing upon the Collateral; and Borrower agrees to remain liable under the
Note no matter what action Lender takes or fails to take under this Agreement.

 

GRANTOR’S
REPRESENTATIONS AND WARRANTIES.   Grantor warrants that: (A) this Agreement is
executed at Borrower’s request and not at the request of Lender; (B) Grantor
has the full right, power and authority to enter into this Agreement and to
pledge the Collateral to Lender; (C) Grantor has established adequate means of
obtaining from Borrower on a continuing basis information about Borrower’s
financial condition; and (D) Lender has made no representation to Grantor about
Borrower or Borrower’s creditworthiness.

 

GRANTOR’S
WAIVERS.   Grantor
waives all requirements of presentment, protest, demand, and notice of dishonor
or non-payment to Borrower or Grantor, or any other party to the Indebtedness
or the Collateral. Lender may do any of the following with respect to any
obligation of any Borrower, without first obtaining the consent of Grantor: (A)
grant any extension of time for any payment, (B) grant any renewal, (C) permit
any modification of payment terms or other terms, or (D) exchange or release
any Collateral or other security. No such act or failure to act shall affect
Lender’s rights against Grantor or the Collateral.

 

GRANTOR’S
REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE COLLATERAL.   With
respect to the Collateral, Grantor represents and promises to Lender
that:

 

 

Perfection
of Security Interest.   Grantor agrees to take whatever actions are
requested by Lender to perfect and continue Lender’s security interest in the
Collateral. Upon request of Lender, Grantor will deliver to Lender any and all
of the documents evidencing or constituting the Collateral, and Grantor will
note Lender’s interest upon any and all chattel paper and instruments if not
delivered to Lender for possession by Lender. This is a
continuing Security Agreement and will continue in effect even though all or
any part of the Indebtedness is paid in full and even though for a period of
time Borrower may not be indebted to Lender.

 

Notices
to Lender.   Grantor
will promptly notify Lender in writing at Lender’s address shown above (or such
other addresses as Lender may designate from time to time) prior to any (1)
change in Grantor’s name; (2) change in Grantor’s assumed business name(s); (3)
change in the management of the Corporation Grantor; (4) change in the
authorized signer(s); (5) change in Grantor’s principal office address; (6)
change in Grantor’s state of organization; (7) conversion of Grantor to a new
or different type of business entity; or (8) change in any other aspect of
Grantor that directly or indirectly relates to any agreements between Grantor
and Lender. No change in Grantor’s name or state of organization will take
effect until after Lender has received notice.

 

No
Violation.   The
execution and delivery of this Agreement will not violate any law or agreement
governing Grantor or to which Grantor is a party, and its certificate or
articles of incorporation and bylaws do not prohibit any term or condition of
this Agreement.

 

Enforceability
of Collateral.   To the
extent the Collateral consists of accounts, chattel paper, or general
intangibles, as defined by the Uniform Commercial Code, the Collateral is
enforceable in accordance with its terms, is genuine, and fully complies with
all applicable laws and regulations concerning form, content and manner of
preparation and execution, and all persons appearing to be obligated on the
Collateral have authority and capacity to contract and are in fact obligated as
they appear to be on the Collateral. At the time any account becomes subject to
a security interest in favor of Lender, the account shall be a good and valid
account representing an undisputed, bona fide indebtedness incurred by the
account debtor, for merchandise held subject to delivery instructions or
previously shipped or delivered pursuant to a contract of sale, or for services
previously performed by Grantor with or for the account debtor. So long as this
Agreement remains in effect, Grantor shall not, without Lender’s prior written
consent, compromise, settle, adjust, or extend payment under or with regard to any
such Accounts. There shall be no setoffs or counterclaims against any of the
Collateral, and no agreement shall have been made under which any deductions or
discounts may be claimed concerning the Collateral except those disclosed to
Lender in writing.

 

Location
of the Collateral.   Except
in the ordinary course of Grantor’s business, Grantor agrees to keep the
Collateral (or to the extent the Collateral consists of intangible property
such as accounts or general intangibles, the records concerning the Collateral)
at Grantor’s address shown above or at such other locations as are acceptable
to Lender. Upon Lender’s request, Grantor will deliver to Lender in form
satisfactory to Lender a schedule of real properties and Collateral locations
relating to Grantor’s operations, including without limitation the following:
(1) all real property Grantor owns or is purchasing; (2) all real property
Grantor is renting or leasing; (3) all storage facilities Grantor owns, rents,
leases, or uses; and (4) all other properties where Collateral is or may be
located.

 

Removal
of the Collateral.   Except
in the ordinary course of Grantor’s business, including the sales of inventory,
Grantor shall not remove the Collateral from its existing location without
Lender’s prior written consent. To the extent that the Collateral consists of
vehicles, or other titled property, Grantor shall not take or permit any action
which would require application for certificates of title for the vehicles
outside the State of Connecticut, without Lender’s prior written consent.
Grantor shall, whenever requested, advise Lender of the exact location of the
Collateral.

 

Transactions
Involving Collateral.   Except for inventory sold or accounts
collected in the ordinary course of Grantor’s business, or as otherwise
provided for in this Agreement, Grantor shall not sell, offer to sell, or
otherwise transfer or dispose of the Collateral. While Grantor is not in
default under this Agreement, Grantor may sell inventory, but only in the
ordinary course of its business and only to buyers who qualify as a buyer in
the ordinary course of business. A sale in the ordinary course of Grantor’s
business does not include a transfer in partial or total satisfaction of a debt
or any bulk sale. Grantor shall not pledge, mortgage, encumber or otherwise
permit the Collateral to be subject to any lien, security interest,
encumbrance, or charge, other than the security interest provided for in this
Agreement, without the prior written consent of Lender. This includes security
interests even if junior in right to the security interests granted under this
Agreement. Unless waived by Lender, all proceeds from any disposition of the
Collateral (for whatever reason) shall be held in trust for Lender and shall
not be commingled with any other funds; provided however, this requirement
shall not constitute consent by Lender to any sale or other disposition. Upon
receipt, Grantor shall immediately deliver any such proceeds to Lender.

 

Title.
  Grantor represents and warrants to
Lender that Grantor holds good and marketable title to the Collateral, free and
clear of all liens and encumbrances except for the lien of this Agreement. No
financing statement covering any of the Collateral is on file in any public
office other than those which reflect the security interest created by this
Agreement or to which Lender has specifically consented. Grantor shall defend
Lender’s rights in the Collateral against the claims and demands of all other
persons.

 

Repairs
and Maintenance.   Grantor agrees to keep and maintain, and to
cause others to keep and maintain, the Collateral in good order, repair and
condition at all times while this Agreement remains in effect. Grantor further
agrees to pay when due all claims for work done on, or services rendered or
material furnished in connection with the Collateral so that no lien or
encumbrance may ever attach to or be filed against the Collateral.

 

Inspection
of Collateral.   Lender
and Lender’s designated representatives and agents shall have the right at all
reasonable times to examine and inspect the Collateral wherever located.

 

Taxes,
Assessments and Liens.   Grantor will pay when due all taxes,
assessments and liens upon the Collateral, its use or operation, upon this
Agreement, upon any promissory note or notes evidencing the Indebtedness, or
upon any of the other Related Documents. Grantor may withhold any such payment
or may elect to contest any lien if Grantor is in good faith conducting an
appropriate proceeding to contest the obligation to pay and so long as Lender’s
interest in the Collateral is not jeopardized in Lender’s sole opinion. If the
Collateral is subjected to a lien which is not discharged within fifteen (15)
days, Grantor shall deposit with Lender cash, a sufficient corporate surety bond
or other security satisfactory to Lender in an amount adequate to provide for
the discharge of the lien plus any interest, costs, attorneys’ fees or other
charges that could accrue as a result of foreclosure or sale of the Collateral.
In any contest Grantor shall defend itself and Lender and shall satisfy any
final adverse judgment before enforcement against the Collateral. Grantor shall
name Lender as an additional obligee under any surety bond furnished in the
contest proceedings. Grantor further agrees to furnish Lender with evidence
that such taxes, assessments, and governmental and other charges have been paid
in full and in a timely manner. Grantor may withhold any such payment or may
elect to contest any lien if Grantor is in good faith conducting an appropriate
proceeding to contest the obligation to pay and so long as Lender’s interest in
the Collateral is not jeopardized.

 

Compliance
with Governmental Requirements.   Grantor shall comply promptly with all laws,
ordinances, rules and regulations of all governmental authorities, now or
hereafter in effect, applicable to the ownership, production, disposition, or
use of the Collateral, including all laws or regulations relating to the undue
erosion of highly-erodible land or relating to the conversion of wetlands for
the production of an agricultural product or commodity. Grantor may contest in
good faith any such law, ordinance or regulation and withhold compliance during
any proceeding, including appropriate appeals, so long as Lender’s interest in
the Collateral, in Lender’s opinion, is not jeopardized.

 

Hazardous
Substances.   Grantor
represents and warrants that the Collateral never has been, and never will be
so long as this Agreement

 

2

 

remains a lien on the
Collateral, used in violation of any Environmental Laws or for the generation,
manufacture, storage, transportation, treatment, disposal, release or
threatened release of any Hazardous Substance. The representations and
warranties contained herein are based on Grantor’s due diligence in
investigating the Collateral for Hazardous Substances. Grantor hereby (1)
releases and waives any future claims against Lender for indemnity or
contribution in the event Grantor becomes liable for cleanup or other costs
under any Environmental Laws, and (2) agrees to indemnify and hold harmless
Lender against any and all claims and losses resulting from a breach of this
provision of this Agreement. This obligation to indemnify shall survive the
payment of the Indebtedness and the satisfaction of this Agreement.

 

Maintenance
of Casualty Insurance. 
 Grantor shall procure and
maintain all risks insurance, including without limitation fire, theft and
liability coverage together with such other insurance as Lender may require
with respect to the Collateral, in form, amounts, coverages and basis
reasonably acceptable to Lender and issued by a company or companies reasonably
acceptable to Lender. Grantor, upon request of Lender, will deliver to Lender
from time to time the policies or certificates of insurance in form
satisfactory to Lender, including stipulations that coverages will not be
cancelled or diminished without at least seven (7) days’ prior written notice
to Lender and not including any disclaimer of the insurer’s liability for
failure to give such a notice. Each insurance policy also shall include an
endorsement providing that coverage in favor of Lender will not be impaired in
any way by any act, omission or default of Grantor or any other person. In
connection with all policies covering assets in which Lender holds or is
offered a security interest, Grantor will provide Lender with such loss payable
or other endorsements as Lender may require. If Grantor at any time fails to
obtain or maintain any insurance as required under this Agreement, Lender may
(but shall not be obligated to) obtain such insurance as Lender deems
appropriate, including if Lender so chooses “single interest insurance,” which
will cover only Lender’s interest in the Collateral.

 

Application
of Insurance Proceeds. 
 Grantor shall promptly notify
Lender of any loss or damage to the Collateral. Lender may make proof of loss
if Grantor fails to do so within fifteen (15) days of the casualty. All
proceeds of any insurance on the Collateral, including accrued proceeds
thereon, shall be held by Lender as part of the Collateral. If Lender consents
to repair or replacement of the damaged or destroyed Collateral, Lender shall,
upon satisfactory proof of expenditure, pay or reimburse Grantor from the proceeds
for the reasonable cost of repair or restoration. If Lender does not consent to
repair or replacement of the Collateral, Lender shall retain a sufficient
amount of the proceeds to pay all of the Indebtedness, and shall pay the
balance to Grantor. Any proceeds which have not been disbursed within six (6)
months after their receipt and which Grantor has not committed to the repair or
restoration of the Collateral shall be used to prepay the Indebtedness.

 

Insurance
Reserves.   Lender may require Grantor to maintain with
Lender reserves for payment of insurance premiums, which reserves shall be
created by monthly payments from Grantor of a sum estimated by Lender to be
sufficient to produce, at least fifteen (15) days before the premium due date,
amounts at least equal to the insurance premiums to be paid. If fifteen (15)
days before payment is due, the reserve funds are insufficient, Grantor shall
upon demand pay any deficiency to Lender. The reserve funds shall be held by
Lender as a general deposit and shall constitute a non-interest-bearing account
which Lender may satisfy by payment of the insurance premiums required to be
paid by Grantor as they become due. Lender does not hold the reserve funds in
trust for Grantor, and Lender is not the agent of Grantor for payment of the
insurance premiums required to be paid by Grantor. The responsibility for the
payment of premiums shall remain Grantor’s sole responsibility.

 

Insurance
Reports.   Grantor,
upon request of Lender, shall furnish to Lender reports on each existing policy
of insurance showing such information as Lender may reasonably request
including the following: (1) the name of the insurer; (2) the risks insured;
(3) the amount of the policy; (4) the property insured; (5) the then current
value on the basis of which insurance has been obtained and the manner of
determining that value; and (6) the expiration date of the policy. In addition,
Grantor shall upon request by Lender (however not more often than annually)
have an independent appraiser satisfactory to Lender determine, as applicable,
the cash value or replacement cost of the Collateral.

 

Financing
Statements.   Grantor
authorizes Lender to file a UCC financing statement, or alternatively, a copy
of this Agreement to perfect Lender’s security interest. At Lender’s request,
Grantor additionally agrees to sign all other documents that are necessary to
perfect, protect, and continue Lender’s security interest in the Property.
Grantor will pay all filing fees, title transfer fees, and other fees and costs
involved unless prohibited by law or unless Lender is required by law to pay
such fees and costs. Grantor irrevocably appoints Lender to execute documents
necessary to transfer title if there is a default. Lender may file a copy of
this Agreement as a financing statement. If Grantor changes Grantor’s name or
address, or the name or address of any person granting a security interest
under this Agreement changes, Grantor will promptly notify the Lender of such
change.

 

GRANTOR’S RIGHT TO POSSESSION AND
TO COLLECT ACCOUNTS.   Until
default and except as otherwise provided below with respect to accounts,
Grantor may have possession of the tangible personal property and beneficial
use of all the Collateral and may use it in any lawful manner not inconsistent
with this Agreement or the Related Documents, provided that Grantor’s right to
possession and beneficial use shall not apply to any Collateral where
possession of the Collateral by Lender is required by law to perfect Lender’s
security interest in such Collateral. Until otherwise notified by Lender,
Grantor may collect any of the Collateral consisting of accounts. At any time
and even though no Event of Default exists, Lender may exercise its rights to
collect the accounts and to notify account debtors to make payments directly to
Lender for application to the Indebtedness. If Lender at any time has
possession of any Collateral, whether before or after an Event of Default,
Lender shall be deemed to have exercised reasonable care in the custody and preservation
of the Collateral if Lender takes such action for that purpose as Grantor shall
request or as Lender, in Lender’s sole discretion, shall deem appropriate under
the circumstances, but failure to honor any request by Grantor shall not of
itself be deemed to be a failure to exercise reasonable care. Lender shall not
be required to take any steps necessary to preserve any rights in the
Collateral against prior parties, nor to protect, preserve or maintain any
security interest given to secure the Indebtedness.

 

LENDER’S EXPENDITURES.   If any
action or proceeding is commenced that would materially affect Lender’s
interest in the Collateral or if Grantor fails to comply with any provision of
this Agreement or any Related Documents, including but not limited to Grantor’s
failure to discharge or pay when due any amounts Grantor is required to
discharge or pay under this Agreement or any Related Documents, Lender on
Grantor’s behalf may (but shall not be obligated to) take any action that
Lender deems appropriate, including but not limited to discharging or paying
all taxes, liens, security interests, encumbrances and other claims, at any
time levied or placed on the Collateral and paying all costs for insuring,
maintaining and preserving the Collateral. All such expenditures incurred or
paid by Lender for such purposes will then bear interest at the rate charged
under the Note from the date incurred or paid by Lender to the date of
repayment by Grantor. All such expenses will become a part of the Indebtedness and,
at Lender’s option, will (A) be payable on demand; (B) be added to the balance
of the Note and be apportioned among and be payable with any installment
payments to become due during either (1) the term of any applicable insurance
policy; or (2) the remaining term of the Note; or (C) be treated as a balloon
payment which will be due and payable at the Note’s maturity. The Agreement
also will secure payment of these amounts. Such right shall be in addition to
all other rights and remedies to which Lender may be entitled upon Default.

 

DEFAULT.   Each of the following shall constitute an
Event of Default under this Agreement:

 

Payment
Default.   Borrower
fails to make any payment when due under the Indebtedness.

 

3

 

Other
Defaults.   Borrower or Grantor fails to comply with or to
perform any other term, obligation, covenant or condition contained in this
Agreement or in any of the Related Documents or to comply with or to perform
any term, obligation, covenant or condition contained in any other agreement
between Lender and Borrower or Grantor.

 

Default
in Favor of Third Parties.   Should Borrower or any Grantor default under
any loan, extension of credit, security agreement, purchase of sales agreement,
or any other agreement, in favor of any other creditor or person that may
materially affect any of Grantor’s property or Borrower’s or any Grantor’s
ability to repay the Indebtedness or perform their respective obligations under
this Agreement or any of the Related Documents.

 

False
Statements.   Any warranty, representation or statement made
or furnished to Lender by Borrower or Grantor or on Borrower’s or Grantor’s
behalf under this Agreement or the Related Documents is false or misleading in
any material respect, either now or at the time made or furnished or becomes
false or misleading at any time thereafter.

 

Defective
Collateralization.   This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any collateral
document to create a valid and perfected security interest or lien) at any time
and for any reason.

 

Insolvency.
  The dissolution or termination of
Borrower’s or Grantor’s existence as a going business, the insolvency of
Borrower or Grantor, the appointment of a receiver for any part of Borrower’s
or Grantor’s property, any assignment for the benefit of creditors, any type of
creditor workout, or the commencement of any proceeding under any bankruptcy or
insolvency laws by or against Borrower or Grantor.

 

Creditor
or Forfeiture Proceedings.   Commencement of foreclosure or forfeiture
proceedings, whether by judicial proceeding, self-help, repossession or any
other method, by any creditor of Borrower or Grantor or by any governmental
agency against any collateral securing the Indebtedness. This includes a
garnishment of any of Borrower’s or Grantor’s accounts, including deposit
accounts, with Lender. However, this Event of Default shall not apply if there
is a good faith dispute by Borrower or Grantor as to the validity or
reasonableness of the claim which is the basis of the creditor or forfeiture
proceeding and if Borrower or Grantor gives Lender written notice of the
creditor or forfeiture proceeding and deposits with Lender monies or a surety
bond for the creditor or forfeiture proceeding, in an amount determined by
Lender, in its sole discretion, as being an adequate reserve or bond for the
dispute.

 

Events
Affecting Guarantor.   Any
of the preceding events occurs with respect to any Guarantor of any of the
Indebtedness or Guarantor dies or becomes incompetent or revokes or disputes
the validity of, or liability under, any Guaranty of the Indebtedness.

 

Adverse
Change.   A material
adverse change occurs in Borrower’s or Grantor’s financial condition, or Lender
believes the prospect of payment or performance of the Indebtedness is
impaired.

 

Insecurity.   Lender in good faith believes itself
insecure.

 

RIGHTS AND REMEDIES ON DEFAULT.
  If an Event of Default occurs under
this Agreement, at any time thereafter, Lender shall have all the rights of a
secured party under the Connecticut Uniform Commercial Code. In addition and
without limitation, Lender may exercise any one or more of the following rights
and remedies:

 

Accelerate
Indebtedness.   Lender
may declare the entire Indebtedness, including any prepayment penalty which
Borrower would be required to pay, immediately due and payable, without notice
of any kind to Borrower or Grantor.

 

Assemble
Collateral.   Lender
may require Grantor to deliver to Lender all or any portion of the Collateral
and any and all certificates of title and other documents relating to the
Collateral. Lender may require Grantor to assemble the Collateral and make it
available to Lender at a place to be designated by Lender. Lender also shall
have full power to enter upon the property of Grantor to take possession of and
remove the Collateral. If the Collateral contains other goods not covered by
this Agreement at the time of repossession, Grantor agrees Lender may take such
other goods, provided that Lender makes reasonable efforts to return them to
Grantor after repossession.

 

Sell the
Collateral.   Lender shall have full power to sell, lease,
transfer, or otherwise deal with the Collateral or proceeds thereof in Lender’s
own name or that of Grantor. Lender may sell the Collateral at public auction
or private sale. Unless the Collateral threatens to decline speedily in value
or is of a type customarily sold on a recognized market, Lender will give
Grantor, and other persons as required by law, reasonable notice of the time
and place of any public sale, or the time after which any private sale or any
other disposition of the Collateral is to be made. However, no notice need be
provided to any person who, after Event of Default occurs, enters into and
authenticates an agreement waiving that person’s right to notification of sale.
The requirements of reasonable notice shall be met if such notice is given at
least ten (10) days before the time of the sale or disposition. All expenses
relating to the disposition of the Collateral, including without limitation the
expenses of retaking, holding, insuring, preparing for sale and selling the
Collateral, shall become a part of the Indebtedness secured by this Agreement
and shall be payable on demand, with interest at the Note rate from date of
expenditure until repaid.

 

Appoint
Receiver.   Lender
shall have the right to have a receiver appointed to take possession of all or
any part of the Collateral, with the power to protect and preserve the Collateral,
to operate the Collateral preceding any transfer of title to the Collateral in
extinguishment of the Indebtedness, and to collect the Rents from the
Collateral and apply the proceeds, over and above the cost of the receivership,
against the Indebtedness, and to exercise any other powers permitted by
applicable law. The receiver may serve without bond if permitted by law.
Lender’s right to the appointment of a receiver shall exist whether or not the
apparent value of the Collateral exceeds the Indebtedness by a substantial
amount. Employment by Lender shall not disqualify a person from serving as a
receiver.

 

Collect
Revenues.   Apply
Accounts. Lender, either itself or through a receiver, may collect the
payments, rents, income, and revenues from the Collateral. Lender may at any
time in Lender’s discretion transfer any Collateral into Lender’s own name or
that of Lender’s nominee and receive the payments, rents, income, and revenues
therefrom and hold the same as security for the Indebtedness or apply it to
payment of the Indebtedness in such order of preference as Lender may
determine. Insofar as the Collateral consists of accounts, general intangibles,
insurance policies, instruments, chattel paper, choses in action, or similar
property, Lender may demand, collect, receipt for, settle, compromise, adjust,
sue for, foreclose, or realize on the Collateral as Lender may determine,
whether or not Indebtedness or Collateral is then due. For these purposes,
Lender may, on behalf of and in the name of Grantor, receive, open and dispose
of mail addressed to Grantor; change any address to which mail and payments are
to be sent; and endorse notes, checks, drafts, money orders, documents of
title, instruments and items pertaining to payment, shipment, or storage of any
Collateral. To facilitate collection, Lender may notify account debtors and
obligors on any Collateral to make payments directly to Lender.

 

Obtain
Deficiency.   If Lender
chooses to sell any or all of the Collateral, Lender may obtain a judgment against
Borrower for any deficiency remaining on the Indebtedness due to Lender after
application of all amounts received from the exercise of the rights provided in
this Agreement. Borrower shall be liable for a deficiency even if the
transaction described in this subsection is a sale of accounts or chattel
paper.

 

Other
Rights and Remedies.   Lender
shall have all the rights and remedies of a secured creditor under the
provisions of the Uniform Commercial Code, as may be amended from time to time.
In addition, Lender shall have and may exercise any or all other rights and
remedies it may have available at law, in equity, or otherwise.

 

4

 

Agreement, the Related
Documents, or by any other writing, shall be cumulative and may be exercised
singularly or concurrently. Election by Lender to pursue any remedy shall not
exclude pursuit of any other remedy, and an election to make expenditures or to
take action to perform an obligation of Grantor under this Agreement, after
Grantor’s failure to perform, shall not affect Lender’s right to declare a
default and exercise its remedies.

 

MISCELLANEOUS PROVISIONS.
  The following miscellaneous provisions are a
part of this Agreement:

 

Amendments.
  This Agreement, together with any
Related Documents, constitutes the entire understanding and agreement of the
parties as to the matters set forth in this Agreement. No alteration of or
amendment to this Agreement shall be effective unless given in writing and
signed by the party or parties sought to be charged or bound by the alteration
or amendment.

 

Attorneys’
Fees; Expenses.   Grantor
agrees to pay upon demand all of Lender’s costs and expenses, including
Lender’s attorneys’ fees and Lender’s legal expenses, incurred in connection with
the enforcement of this Agreement. Lender may hire or pay someone else to help
enforce this Agreement, and Grantor shall pay the costs and expenses of such
enforcement. Costs and expenses include Lender’s attorneys’ fees and legal
expenses whether or not there is a lawsuit, including attorneys’ fees and legal
expenses for bankruptcy proceedings (including efforts to modify or vacate any
automatic stay or injunction), appeals, and any anticipated post-judgment
collection services. Grantor also shall pay all court costs and such additional
fees as may be directed by the court.

 

Caption
Headings.   Caption
headings in this Agreement are for convenience purposes only and are not to be
used to interpret or define the provisions of this Agreement.

 

Governing
Law.   This Agreement will be governed
by, construed and enforced in accordance with federal law and the laws of the
State of California, except and only to the extent of procedural matters
related to the perfection and enforcement of Lender’s rights and remedies
against the Collateral, which matters shall be governed by the laws of the
State of Connecticut. However, in the event that the enforceability or validity
of any provision of this Agreement is challenged or questioned, such provision
shall be governed by whichever applicable state or federal law would uphold or
would enforce such challenged or questioned provision. The loan transaction
which is evidenced by the Note and this Agreement has been applied for,
considered, approved and made, and all necessary loan documents have been
accepted by Lender in the State of California.

 

Choice of
Venue.   If there is a
lawsuit, Grantor agrees upon Lender’s request to submit to the jurisdiction of
the courts of LOS ANGELES County, State of California.

 

Joint and
Several Liability.   All
obligations of Borrower and Grantor under this Agreement shall be joint and
several, and all references to Grantor shall mean each and every Grantor, and
all references to Borrower shall mean each and every Borrower. This means that
each Borrower and Grantor signing below is responsible for all obligations in
this Agreement. Where any one or more of the parties is a corporation,
partnership, limited liability company or similar entity, it is not necessary
for Lender to inquire into the powers of any of the officers, directors,
partners, members, or other agents acting or purporting to act on the entity’s
behalf, and any obligations made or created in reliance upon the professed
exercise of such powers shall be guaranteed under this Agreement.

 

No Waiver
by Lender.   Lender
shall not be deemed to have waived any rights under this Agreement unless such
waiver is given in writing and signed by Lender. No delay or omission on the
part of Lender in exercising any right shall operate as a waiver of such right
or any other right. A waiver by Lender of a provision of this Agreement shall
not prejudice or constitute a waiver of Lender’s right otherwise to demand
strict compliance with that provision or any other provision of this Agreement.
No prior waiver by Lender, nor any course of dealing between Lender and
Grantor, shall constitute a waiver of any of Lender’s rights or of any of
Grantor’s obligations as to any future transactions. Whenever the consent of
Lender is required under this Agreement, the granting of such consent by Lender
in any instance shall not constitute continuing consent to subsequent instances
where such consent is required and in all cases such consent may be granted or
withheld in the sole discretion of Lender.

 

Notices.
  Any notice required to be given under this
Agreement shall be given in writing, and shall be effective when actually
delivered, when actually received by telefacsimile (unless otherwise required
by law), when deposited with a nationally recognized overnight courier, or, if
mailed, when deposited in the United States mail, as certified or registered
mail postage prepaid, directed to the addresses shown near the beginning of
this Agreement. Any party may change its address for notices under this
Agreement by giving formal written notice to the other parties, specifying that
the purpose of the notice is to change the party’s address. For notice purposes,
Grantor agrees to keep Lender informed at all times of Grantor’s current
address. Unless otherwise provided or required by law, if there is more than
one Grantor, any notice given by Lender to any Grantor is deemed to be notice
given to all Grantors.

 

Power of
Attorney.   Grantor
hereby appoints Lender as Grantor’s irrevocable attorney-in-fact for the
purpose of executing any documents necessary to perfect, amend, or to continue
the security interest granted in this Agreement or to demand termination of
filings of other secured parties. Lender may at any time, and without further
authorization from Grantor, file a carbon, photographic or other reproduction
of any financing statement or of this Agreement for use as a financing
statement. Grantor will reimburse Lender for all expenses for the perfection
and the continuation of the perfection of Lender’s security interest in the
Collateral.

 

Severability.   If a
court of competent jurisdiction finds any provision of this Agreement to be
illegal, invalid, or unenforceable as to any circumstance, that finding shall
not make the offending provision illegal, invalid, or unenforceable as to any
other circumstance. If feasible, the offending provision shall be considered
modified so that it becomes legal, valid and enforceable. If the offending
provision cannot be so modified, it shall be considered deleted from this Agreement.
Unless otherwise required by law, the illegality, invalidity, or
unenforceability of any provision of this Agreement shall not affect the
legality, validity or enforceability of any other provision of this Agreement.

 

Successors
and Assigns.   Subject to any limitations stated in this
Agreement on transfer of Grantor’s interest, this Agreement shall be binding
upon and inure to the benefit of the parties, their successors and assigns. If
ownership of the Collateral becomes vested in a person other than Grantor,
Lender, without notice to Grantor, may deal with Grantor’s successors with
reference to this Agreement and the Indebtedness by way of forbearance or
extension without releasing Grantor from the obligations of this Agreement or
liability under the Indebtedness.

 

Survival
of Representations and Warranties.   All representations, warranties, and
agreements made by Grantor in this Agreement shall survive the execution and
delivery of this Agreement, shall be continuing in nature, and shall remain in full
force and effect until such time as Borrower’s Indebtedness shall be paid in
full.

 

Time is
of the Essence.   Time is of the essence in the performance of
this Agreement.

 

DEFINITIONS.   The following capitalized words and terms
shall have the following meanings when used in this Agreement. Unless
specifically stated to the contrary, all references to dollar amounts shall
mean amounts in lawful money of the United States of America. Words and terms
used in the singular shall include the plural, and the plural shall include the
singular, as the context may require. Words and terms not otherwise defined in
this Agreement shall have the meanings attributed to such terms in the Uniform
Commercial Code:

 

5

 

or
modified from time to time, together with all exhibits and schedules attached
to this Commercial Security Agreement from time to time.

 

Borrower.  The word “Borrower” means NATROL, INC.,  A DELAWARE CORPORATION and includes all
co-signers and co-makers signing the Note

 

Collateral.  The word “Collateral” means all of Grantor’s
right, title and interest in and to all the Collateral as described in the
Collateral Description section of this Agreement.

 

Default.  The word “Default” means the Default set forth
in this Agreement in the section titled “Default”.

 

Environmental Laws.  The words “Environmental Laws”
mean any and all state, federal and local statutes, regulations and ordinances
relating to the protection of human health or the environment, including
without limitation the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. (“CERCLA”),
the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499
(“SARA”), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et
seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et
seq., Chapters 6.5 through 7.7 of Division 20 of the California Health and
Safety Code, Section 25100, et seq., or other applicable state or federal laws, rules, or regulations
adopted pursuant thereto.

 

Event of Default.  The words “Event of Default” mean any of the
events of default set forth in this Agreement in the default section of this
Agreement.

 

Grantor.  The word “Grantor” means PROLAB NUTRITION,
INC., A CONNECTICUT CORPORATION.

 

Guarantor.  The word “Guarantor” means any guarantor,
surety, or accommodation party of any or all of the Indebtedness.

 

Guaranty.  The word “Guaranty” means the guaranty from
Guarantor to Lender, including without limitation a guaranty of all or part of
the Note.

 

Hazardous Substances.  The words “Hazardous Substances”
mean materials that, because of their quantity, concentration or physical,
chemical or infectious characteristics, may cause or pose a present or
potential hazard to human health or the environment when improperly used,
treated, stored, disposed of, generated, manufactured, transported or otherwise
handled. The words “Hazardous Substances” are used in their very broadest sense
and include without limitation any and all hazardous or toxic substances,
materials or waste as defined by or listed under the Environmental Laws. The
term “Hazardous Substances” also includes, without limitation, petroleum and
petroleum by-products or any fraction thereof and asbestos.

 

Indebtedness.  The word “Indebtedness” means the indebtedness
evidenced by the Note or Related Documents, including all principal and
interest together with all other indebtedness and costs and expenses for which
Borrower is responsible under this Agreement or under any of the Related
Documents.  Specifically, without
limitation, Indebtedness includes all amounts that may be indirectly secured by
the Cross-Collateralization provision of this Agreement.

 

Lender.  The word “Lender” means City National Bank,
NA, its successors and assigns.

 

Note.  The word “Note” means the Note executed by
NATROL, INC., A DELAWARE CORPORATION in the principal amount of $3,000,000.00
dated November 4, 2004, together with all renewals of, extensions of,
modifications of, refinancings of, consolidations of, and substitutions for the note or credit agreement.

 

Property.  The word “Property” means all of Grantor’s
right, title and interest in and to all the Property as described in the
“Collateral Description” section of this Agreement.

 

Related Documents.  The words “Related Documents”
mean all promissory notes, credit agreements, loan agreements, environmental
agreements, guaranties, security agreements, mortgages, deeds of trust,
security deeds, collateral mortgages, and all other instruments, agreements and
documents, whether now or hereafter existing, executed in connection with the
indebtedness.

 

BORROWER
AND GRANTOR HAVE READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY AGREEMENT AND AGREE
TO ITS TERMS.  THIS AGREEMENT IS DATED
NOVEMBER 4, 2004.

 

GRANTOR:

 

 

 

PROLAB NUTRITION, INC., A CONNECTICUT CORPORATION

 

 

	
  By:

  	
  /s/ Elliott Balbert

  	
   

  
	
   

  	
  ELLIOTT
  BALBERT, President of PROLAB

  NUTRITION, INC., A CONNECTICUT CORPORATION

  

 

 

BORROWER:

 

 

 

NATROL,
INC., A DELAWARE CORPORATION

 

 

	
  By:

  	
  /s/ Elliott Balbert

  	
   

  
	
   

  	
  ELLIOTT
  BALBERT, President of NATROL, INC., A

  DELAWARE CORPORATION

  

 

[ILLEGIBLE]

 

6

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