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Exhibit 10.19
 
Execution Version
 
 

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SENIOR SUBORDINATED NOTE PURCHASE AND SECURITY AGREEMENT
 
AMONG
 
PHYSICIANS FORMULA, INC.,
as the Borrower,
 
THE GUARANTORS PARTY HERETO
 
AND
 
MILL ROAD CAPITAL, L.P.,
as the Purchaser, a Holder and the Holder Representative
 
Dated as of November 6, 2009
 
 

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SENIOR SUBORDINATED NOTE PURCHASE AND SECURITY AGREEMENT

Physicians Formula, Inc.
1055 West 8th Street
Azusa, CA 91702

 

 
Dated as of November 6, 2009

 
Mill Road Capital, L.P.,
   as the Purchaser, a Holder and
   the Holder Representative,
Two Sound View Drive
Greenwich, CT 06830

Ladies and Gentlemen:

Physicians Formula, Inc., a New York corporation (the “Borrower”), Physicians
Formula Holdings, Inc., a Delaware corporation (“Holdings”) and the direct
parent of the Borrower, and the other direct and indirect Subsidiaries of
Holdings from time to time party to this Agreement, as Guarantors, hereby agree
with you as follows:

ARTICLE I.
PURCHASE AND SALE OF THE SENIOR SUBORDINATED NOTES

1.1            The Notes. The Borrower has authorized the issuance and sale of
its Senior Subordinated Notes due May 6, 2013 in the aggregate original
principal amount of eight million dollars ($8,000,000) in the form set forth as
Exhibit A attached hereto (referred to herein individually as a “Note” and
collectively as the “Notes”, which terms shall also include any notes delivered
in exchange therefor or replacement thereof).  Commencing on the date of
issuance, the Notes will accrue interest on the unpaid principal amount thereof
at an interest rate per annum (the “Interest Rate”) consisting of (i) fifteen
percent (15.00%) per annum in cash interest plus (ii) four percent (4.00%) per
annum to be added automatically to the unpaid principal amount of the Notes
(“PIK Interest”) on each Interest Payment Date.

(b)            Interest on the Notes shall be computed based on a 360-day year
and actual days elapsed.  Cash interest on the Notes shall be payable monthly in
arrears on the first day of each calendar month (each, an “Interest Payment
Date”) commencing on December 1, 2009, by wire transfer of immediately available
funds to one or more accounts designated by the relevant Holders.  All accrued
PIK Interest shall be compounded quarterly on the first day of each calendar
quarter.  The records of the Holders shall, absent manifest error, be conclusive
evidence of the outstanding principal balance of the Notes, including all PIK
Interest added to the principal amount thereof and the compounding thereof, but
any failure of any Holder to record, or any error in so recording, any such
amount on such Holder’s records shall not limit or otherwise affect the
obligations of the Borrower under the Notes to make all payments of principal of
and interest thereon when due.

 
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1.2            Purchase and Sale of the Notes.  The Borrower agrees to issue and
sell to the Purchaser, and, subject to and in reliance upon the representations,
warranties, covenants, terms and conditions of this Agreement, the Purchaser
agrees to purchase from the Borrower a Note in the principal amount of eight
million dollars ($8,000,000) at a closing (the “Closing”) to be held at the
offices of Foley Hoag LLP located in Boston, Massachusetts at 10:00 a.m. Boston
time, or at such other location and time as agreed to by the Borrower and the
Purchaser, on the date on which this Agreement is executed and delivered and
upon satisfaction or waiver of the conditions described in Article VI hereof
(the “Closing Date”).  At the Closing, the Borrower will issue and deliver one
Note to the Purchaser, payable to the Purchaser or its registered assigns, in
the principal amount of eight million dollars ($8,000,000), against receipt of
the aggregate face amount of such Note in immediately available funds by wire
transfer to an account of the Borrower or an account of such other third party
as directed by the Borrower on or prior to the date hereof; provided that it is
understood and agreed that the Purchaser may, upon notice to the Borrower,
deduct from such issue price payable by the Purchaser to the Borrower at the
Closing the amount of any fees and expenses due the Purchaser hereunder,
including, without limitation, pursuant to Sections 1.11 and 6.11.

1.3            Payments and Endorsements.

(a)            Payments of principal, interest and premium, if any, on the Notes
and other payments under the Operative Documents shall be made prior to 2:00
p.m. (Greenwich, Connecticut time) on the date due, and shall be made without
set-off or counterclaim, directly by wire transfer of immediately available
funds to the account or accounts designated in writing by the Holder
Representative, without any presentment or notation of payment, except that
prior to any transfer of any Note the Holder thereof shall endorse on such Note
a record of the date to which interest has been paid and all payments made on
account of principal of such Note.  All payments and prepayments of principal of
and interest on the Notes shall be applied (to the extent thereof) to all of the
Notes pro rata based on the principal amount outstanding and held by each Holder
thereof.  The Borrower hereby authorizes each Holder to endorse on the Notes
held by such Holder the PIK Interest paid thereon, and the Borrower shall, upon
the request of any Holder of one or more Notes and in lieu of endorsement of
such PIK Interest, issue to such Holder one or more additional Notes evidencing
the PIK Interest paid on the Notes held by such Holder, in each case, promptly
upon the request of such Holder, all of which shall be made, issued and
otherwise effected in accordance with the terms of Section 1.8.

(b)            Each Holder that is not a United States person (as such term is
defined in Section 7701(a)(30) of the Code) shall submit to the Borrower and the
Holder Representative on or before the Closing Date or, if later, the date such
Person becomes a Holder of one or more Notes hereunder, two duly completed and
signed copies of (i) either Form W-8 BEN (relating to such Holder and entitling
it to a complete exemption from withholding under the Code on all amounts to be
received by such Holder, including fees, pursuant to the Operative Documents and
the Obligations) or Form W-8 ECI (relating to all amounts to be received by such
Holder, including fees, pursuant to the Operative Documents and the Obligations)
of the United States Internal Revenue Service or (ii) solely if such Holder is
claiming exemption from United States withholding tax under Section 871(h) or
881(c) of the Code with respect to payments of “portfolio interest”, a Form W-8
BEN, or any successor form prescribed by the Internal Revenue Service, and a
certificate representing that such Holder is not a bank for purposes of Section
881(c) of the Code, is not a 10-percent shareholder (within the meaning of
Section 871(h)(3)(B) of the Code) of the Borrower and is not a controlled
foreign corporation related to the Borrower (within the meaning of Section
864(d)(4) of the Code).  Thereafter and from time to time, each Holder of one or
more Notes shall submit to the Borrower and the Holder Representative such
additional duly completed and signed copies of one or the other of such Forms
(or such successor forms as shall be adopted from time to time by the relevant
United States taxing authorities) and such other certificates as may be (i)
requested by the Borrower in a written notice, directly or through the Holder
Representative, to such Holder and (ii) required under then-current United
States law or regulations to avoid or reduce United States withholding taxes on
payments in respect of all amounts to be received by such Holder, including
fees, pursuant to the Operative Documents or the Obligations.  Upon the request
of the Borrower or the Holder Representative, each Holder of one or more Notes
that is a United States person (as such term is defined in Section 7701(a)(30)
of the Code) shall submit to the Borrower and the Holder Representative two duly
completed and signed copies of form W-9 (or such successor forms as shall be
adopted from time to time by the relevant United States taxing authorities) or
such other certificate, as requested, to the effect that it is such a United
States person.

 
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(c)            If any Holder of one or more Notes determines, as a result of any
change in applicable law, regulation or treaty, or in any official application
or interpretation thereof, that it is unable to submit to the Borrower or the
Holder Representative any form or certificate that such Holder is obligated to
submit pursuant to subsection (b) of this Section 1.3 or that such Holder is
required to withdraw or cancel any such form or certificate previously submitted
or any such form or certificate otherwise becomes ineffective or inaccurate,
such Holder shall promptly notify the Borrower and the Holder Representative of
such fact and the Holder shall to that extent not be obligated to provide any
such form or certificate and will be entitled to withdraw or cancel any affected
form or certificate, as applicable.

(d)            The obligations of the Borrower and the Guarantors under this
Section 1.3 shall survive the payment in full of all amounts due hereunder or
under the Notes and the termination of this Agreement and the other Operative
Documents.

1.4            Redemptions; Prepayments; Repurchases.

(a)            Redemptions at Maturity.  Unless the maturity of the Notes is
accelerated pursuant to Article VIII hereof, the Notes shall mature and be
redeemed by the Borrower in one installment which shall be paid on May 6,
2013.  On the stated or accelerated maturity date of the Notes, the Borrower
will pay in cash the principal amount of the Notes then outstanding together
with all accrued and unpaid interest thereon, including, without limitation, all
PIK Interest.  No redemption of less than all of the Notes shall affect the
obligation of the Borrower to make the redemption required by the preceding
sentence.

(b)            Optional Prepayments.  The Borrower may voluntarily prepay the
Notes, in whole or in part, at any time (subject to clause (e) below).  Optional
prepayments permitted pursuant to this clause (b) may only be made upon payment
to the Holder Representative (on behalf of the relevant Holders) of an amount
equal to the sum of the principal amount to be prepaid, together with all
accrued and unpaid interest (including PIK Interest) on the principal amount so
prepaid through the date of prepayment, plus the Prepayment Premium, if any,
indicated in clause (d) below corresponding to the period in which the
prepayment occurs.  Written notice of any prepayment pursuant to this Section
1.4(b) shall be given to the Holder Representative at least five (5) Business
Days prior to the date of any such prepayment.

 
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(c)            Repurchase upon a Change of Control.  Without in any way limiting
the Holders’ rights under Article VIII hereof with respect to any event
described in this clause (c) that also constitutes an Event of Default, but
subject to clause (e) below, if there shall occur a Change of Control, then the
Borrower shall, immediately upon the occurrence of such Change in Control, offer
in writing to repurchase Notes at a purchase price equal to the entire principal
amount of the Notes, together with all accrued and unpaid interest (including
PIK Interest) on the principal amount through the date of repurchase, plus the
Prepayment Premium, if any, indicated in clause (d) below corresponding to the
period in which the repurchase occurs.  If any Holder shall not have responded
to any such offer within ten Business Days of receipt of same, such Holder shall
be deemed to have rejected such offer.

(d)            Prepayment Premium.  In the event of any prepayment or repurchase
of the Notes prior to the Maturity Date pursuant to clauses (b) or (c) above,
the Borrower shall pay to the Holder Representative (on behalf of the Holders)
the prepayment premium indicated below corresponding to the time period in which
such prepayment or repurchase occurs or is required to occur (the “Prepayment
Premium”) (which prepayment premium shall be paid to the Holder Representative
(on behalf of the Holders) as liquidated damages and compensation for the costs
of making funds available with respect to the loans evidenced by the Notes):

Period
Prepayment Premium
(% of the aggregate principal amount of the Notes prepaid or repurchased)
   
Closing Date through November 5, 2010
5%
November 6, 2010 through November 5, 2011
4%
November 6, 2011 through November 5, 2012
2%
November 6, 2012 through May 5, 2013
1%

(e)            Consent of Senior Lender.  Notwithstanding the foregoing
provisions of clauses (b) and (c) above, the Borrower shall have no right to
voluntarily prepay the Notes under clause (b) above or obligation to mandatorily
repurchase the Notes under clause (c) above unless the Borrower or the Senior
Lender (if required pursuant to the Intercreditor Agreement) shall have
delivered (or caused to be delivered) to the Holder Representative all required
written consents, if any, of the Senior Lender and any other holders of the
Senior Obligations to such optional prepayment or repurchase in form and
substance reasonably satisfactory to the Required Holders, which delivery shall
be made, in the case of any such voluntary prepayment, at least five (5)
Business Days prior to the date of such voluntary prepayment.

 
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(f)             Pro Rata Prepayment.  Except as set forth in Section 11.5, each
prepayment or other repayment of the Notes shall be made as to all of the Notes
and shall be made so that the Notes held by each Holder shall be prepaid or
repaid in a principal amount which shall bear the same ratio to the aggregate
unpaid principal amount being redeemed, prepaid or repaid on all of the Notes as
the unpaid principal amount of the Notes then held by such Holder bears to the
aggregate unpaid principal amount of all of the Notes.

(g)            No Other Acquisition of Notes.  The Borrower will not purchase,
redeem, prepay, tender for or otherwise acquire or repay, directly or
indirectly, any of the outstanding Notes except upon the redemption, prepayment
or repurchase of the Notes in accordance with the other terms of this Section
1.4.  The Borrower will promptly cancel all Notes acquired by it pursuant to any
purchase, redemption, prepayment or tender for the Notes pursuant to any
provision of this Agreement or otherwise, and no Notes may be issued in
substitution or exchange for any such Notes.

1.5            Default Rate of Interest.  If an Event of Default has occurred
and is continuing, from and after the date such Event of Default has occurred,
the entire outstanding unpaid principal balance of the Notes and any unpaid
interest from time to time in default shall (both before and after acceleration
and entry of judgment) bear interest, payable in cash on demand, at a rate per
annum equal to the Interest Rate payable pursuant to Section 1.1 hereof plus
three percent (3%) per annum; provided, however, that upon the cessation or cure
of such Event of Default, if no other Event of Default is then continuing, the
Notes shall again bear interest at the Interest Rate as set forth in Section 1.1
hereof.

1.6            Maximum Legal Rate of Interest. Notwithstanding any provision to
the contrary contained herein, in the Notes or in any other Operative Document,
no such provision shall require the payment or permit the collection of any
amount of interest in excess of the maximum amount of interest permitted by
applicable law (“Excess Interest”).  If any Excess Interest is provided for, or
is adjudicated to be provided for, herein, in the Notes or in any other
Operative Document, then in such event: (a) the provisions of this Section shall
govern and control; (b) neither the Borrower nor any guarantor or endorser shall
be obligated to pay any Excess Interest; (c) any Excess Interest that the
Holders may have received hereunder shall, at the option of the Required
Holders, be (i) applied as a credit against the then-outstanding principal
amount of Obligations hereunder and accrued and unpaid interest thereon (not to
exceed the maximum amount permitted by applicable law), (ii) refunded to the
Borrower, or (iii) any combination of the foregoing; (d) the interest rate
payable hereunder, under the Notes or under any other Operative Document shall
be automatically subject to reduction to the maximum lawful contract rate
allowed under applicable usury laws (the “Maximum Rate”), and this Agreement,
the Notes and the other Operative Documents shall be deemed to have been, and
shall be, reformed and modified to reflect such reduction in the relevant
interest rate; and (e) neither the Borrower nor any guarantor or endorser shall
have any action against the Holders for any damages whatsoever arising out of
the payment or collection of any Excess Interest.  Notwithstanding the
foregoing, if for any period of time interest on any of Obligations is
calculated at the Maximum Rate rather than the applicable rate under this
Agreement and the Operative Documents, and thereafter such applicable rate
becomes less than the Maximum Rate, the rate of interest payable on the
Obligations shall remain at the Maximum Rate until each Holder has received the
amount of interest which it would have received during such period on the
Obligations had the rate of interest not been limited to the Maximum Rate during
such period.

 
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1.7            Payment or Delivery on Non-Business Days.  Whenever any payment
or delivery to be made shall be due on a day which is not a Business Day, such
payment or delivery may be made on the next succeeding Business Day, and, if a
payment, such extension of time shall in such case be included in the
computation of payment of interest due.

1.8            Transfer and Exchange of Notes.  The Borrower shall keep a
register in which it shall provide for the registration of the Notes and the
registration of transfers of Notes.  The Holder of any Note may, prior to
maturity, prepayment or repurchase of such Note, surrender such Note at the
principal office of the Borrower for transfer or exchange.  Any Holder desiring
to transfer or exchange any Note (including, but not limited to, any assignment
of a Note or Notes contemplated by Section 11.5 hereof) shall first notify the
Borrower in writing at least ten (10) Business Days in advance of such transfer
or exchange.  Promptly, but in any event within ten (10) Business Days after
such notice to the Borrower from the Holder Representative (on behalf of a
Holder of one or more Notes) of  a Holder’s intention to make such an exchange
of such Holder’s Note(s) and without expense (other than transfer taxes, if any)
to such Holder, the Borrower shall issue in exchange therefor another Note or
Notes in the same aggregate principal amount, as of the date of such issuance,
as the unpaid principal amount of the Note so surrendered and having the same
maturity and rate of interest, containing the same provisions and subject to the
same terms and conditions as the Note so surrendered (provided that no minimum
shall apply to a liquidating distribution of Notes to investors in a Holder and
any Notes so distributed may be subsequently transferred by such investor and
its successors in the original denomination thereof without further
restriction).  Each new Note shall be made payable to such Person or Persons, or
assigns, as the Holder of such surrendered Note may designate, and such transfer
or exchange shall be made in such a manner that no gain or loss of principal or
interest shall result therefrom.  The Borrower shall have no obligation or
liability under any Note to any Person other than the registered Holder of each
such Note.  Assignments and transfers of Notes by the Holders shall be made in
compliance with Section 11.5 hereof.

1.9            Replacement of Notes.  Upon receipt of evidence satisfactory to
the Borrower of the loss, theft, destruction or mutilation of any Note and, if
requested in the case of any such loss, theft or destruction, upon delivery of
an indemnity agreement reasonably satisfactory to the Borrower, or, in the case
of any such mutilation, upon surrender and cancellation of such Note the
Borrower will issue a new Note of like tenor and amount and dated the date to
which interest has been paid, in lieu of such lost, stolen, destroyed or
mutilated Note; provided, however, if any Note of which a Holder, its nominee,
or any of its partners is the Holder is lost, stolen or destroyed, the affidavit
of an authorized partner or officer of the Holder setting forth the
circumstances with respect to such loss, theft or destruction shall be accepted
as satisfactory evidence thereof, and no indemnification shall be required as a
condition to the execution and delivery by the Borrower of a new Note in
replacement of such lost, stolen or destroyed Note other than the Holder’s
written agreement to indemnify the Borrower.

1.10          Ranking.  The Obligations and the rights and remedies of the
Holders under the Operative Documents relating to the indebtedness evidenced by
the Notes shall be senior in right of payment to all Subordinated Debt (other
than any indebtedness which has priority by operation of law) of Holdings, the
Borrower and the other Subsidiaries.  The Obligations and the rights and
remedies of the Holders under the Operative Documents relating to the
indebtedness evidenced by the Notes shall be subordinate and junior in right of
payment to the Senior Obligations in the manner and to the extent provided in
the Intercreditor Agreement.

 
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1.11          Closing Fee; Expenses.  At the Closing the Borrower shall pay to
the Purchaser or its designee a closing fee of $160,000 (the “Closing Fee”),
payable in cash, and such fee shall be in addition to the other amounts required
to be paid at the Closing pursuant to Section 6.15 hereof.  At the option of the
Purchaser by notice to the Borrower, the amount of such fee and the other
amounts required to be paid pursuant to Section 6.15 hereof may be paid by the
Purchaser by deducting such amounts from the purchase price of the Notes payable
at the Closing.

1.12          Original Issue Discount.  The Borrower and the Holders intend, for
applicable income tax purposes: (i) that the Notes are debt for U.S. federal
income tax purposes, that the issuance of the Notes and the Holders’ right to
receive warrants constitutes an “investment unit” as of the date hereof within
the meaning of Section 1273 of the Code, and that the right to receive warrants
is not received in exchange for any debt owned by the Borrower to any Holders as
of the date hereof, (ii) that the Notes issued to the Holder (other than any
notes delivered in exchange therefor or replacement thereof) constitute a single
debt instrument for purposes of Sections 1271 through 1275 of the Code and the
Treasury Regulations thereunder (pursuant to Treasury Regulations Section
1.1275-2(c)), (iii) that the Notes are issued with original issue discount
(“OID”), and (iv) that the Borrower shall timely calculate and report the amount
of OID as required by applicable law.  The Borrower and the Holders agree to
adhere to the terms of this Note for U.S. federal income tax purposes and not to
take any action or file any tax return, report or declaration inconsistent
herewith (including with respect to the amount of OID on the Notes), except as
required by applicable law.

1.13          Security Interest. The Obligations shall be secured by a perfected
security interest (subject, in terms of priority, only to Liens created under
the Senior Loan Documents and Permitted Liens entitled to priority under
applicable law) in all of the assets of the Borrower, Holdings and the other
Guarantors, whether now owned or hereafter acquired, pursuant to and subject to
the limitations and the terms and conditions of Article II herein, the Guarantor
Security Agreement and the other Security Documents.

1.14          Amendments for Mezzanine Financing and Warrants.  The parties
agree to amend the Operative Documents to reflect the terms and conditions set
forth in Annex A attached hereto (the “Mezzanine Financing”) and to cause
Holdings to issue warrants to Purchaser on the terms and conditions set forth in
Annex A; provided that all such terms and conditions and the issuance of the
warrants are approved by the stockholders of Holdings.  Holdings agrees (i) as
soon as reasonably practicable following the date of this Agreement, Holdings
shall prepare in accordance with the provisions of the Securities Exchange Act
of 1934, as amended, and file with the Commission a proxy statement (the “Proxy
Statement”) to be sent to the stockholders of Holdings in connection with a
meeting for the purpose of approving the issuance of the warrants and the other
terms of the Mezzanine Financing (the “Stockholders Meeting”); (ii) as soon as
reasonably practicable after such filing with the Commission (if Holdings learns
that no review of the Proxy Statement will be made by the staff of the
Commission) or as soon as reasonably practicable after the completion of any
review of the Proxy Statement made by staff of the Commission, Holdings shall
mail, or cause to be mailed, the Proxy Statement in which Holdings shall make a
recommendation that the stockholders of Holdings approve the issuance of the
warrants and the other terms of the Mezzanine Financing; and (iii) within 60
days of such mailing, Holdings shall hold the Stockholders Meeting.  Purchaser
will cooperate with Holdings in the preparation of the Proxy Statement.  For the
avoidance of doubt, any amendments to the Operative Documents as a result of the
transactions set forth in Annex A shall not result in any payment of a
Prepayment Premium.  Upon the approval of such terms and conditions by the
stockholders of Holdings, the parties shall execute and deliver documentation to
effect such terms and conditions and to issue the warrants, including without
limitation, an amendment to this Agreement substantially in the form attached
hereto as Annex A-1, an amended and restated promissory note substantially in
the form attached hereto as Annex A-2, a warrant substantially in the form
attached hereto as Annex A-3 and a registration rights agreement substantially
in the form attached hereto as Annex A-4.

 
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1.15          Standstill.  Until September 30, 2012, MRC and its Affiliates
shall not (a) acquire more than 35% of the common stock of Holdings or (b) seek
to elect voting seats on the Board of Directors of Holdings (except as permitted
in Section 7.33 herein), in each case, without the prior written consent of the
Board of Directors of Holdings. These restrictions shall be released upon the
receipt by the Borrower of any bid (other than a bid from MRC or its Affiliates)
for the acquisition of Holdings and its Subsidiaries.  The Borrower shall
provide MRC with notice of the receipt of any such bid within three Business
Days of receipt by the Borrower or any of its Affiliates.

ARTICLE II.
SECURITY INTEREST.

2.1            Grant of Security Interest.  The Borrower hereby pledges,
collaterally assigns and grants to the Holder Representative and to the Holders,
a Lien and security interest (collectively referred to as the “Security
Interest”) in the Collateral, as security for the payment and performance of all
Obligations; provided, however, notwithstanding the foregoing, no Lien is hereby
granted on any Excluded Property, and such Excluded Property shall not be deemed
to be “Collateral”; provided further that if and when any property shall cease
to be Excluded Property, a Lien on and security interest in such property shall
be deemed granted therein and such property shall be deemed to be
“Collateral.”  Following the written request by the Required Holders, the
Borrower shall grant the Holder Representative and the Holders, a Lien and
security interest in all commercial tort claims that it may have against any
Person.

2.2            Notifying Account Debtors and Other Obligors; Collection of
Collateral.  The Holder Representative may at any time (whether or not a Default
Period then exists) deliver a Record giving an account debtor or other Person
obligated to pay an Account, a General Intangible, or other amount due, notice
that the Account, General Intangible, or other amount due has been assigned to
the Holder Representative for security and must be paid directly to the Holder
Representative.  The Borrower shall join in giving such notice and shall
Authenticate any Record giving such notice upon the Holder Representative’s
request.  After the Borrower or the Holder Representative gives such notice, the
Holder Representative may, but need not, in the Holder Representative’s or in
the Borrower’s name, demand, sue for, collect or receive any money or property
at any time payable or receivable on account of, or securing, such Account,
General Intangible, or other amount due, or grant any extension to, make any
compromise or settlement with or otherwise agree to waive, modify, amend or
change the obligations (including collateral obligations) of any account debtor
or other obligor.  The Holder Representative may, in the Holder Representative’s
name or in the Borrower’s name, as the Borrower’s agent and attorney-in-fact,
notify the United States Postal Service to change the address for delivery of
the Borrower’s mail to any address designated by the Holder Representative,
otherwise intercept the Borrower’s mail, and receive, open and dispose of the
Borrower’s mail, applying all Collateral as permitted under this Agreement and
holding all other mail for the Borrower’s account or forwarding such mail to the
Borrower’s last known address.

 
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2.3            Collateral Assignment of Insurance.  As additional security for
the Obligations, the Borrower hereby collaterally assigns to the Holder
Representative and to the Holders, all rights of the Borrower under every policy
of insurance covering the Collateral and all business records and other
documents relating to it, and all monies (including, without limitation, all
proceeds and refunds) that may be payable under any policy, and the Borrower
hereby directs the issuer of each policy to pay all such monies directly to the
Holder Representative.  At any time, whether or not a Default Period then
exists, the Holder Representative may (but need not), in the Holder
Representative’s or the Borrower’s name, execute and deliver proofs of claim,
receive payment of proceeds and endorse checks and other instruments
representing payment of the policy of insurance, and adjust, litigate,
compromise or release claims against the issuer of any policy.  Any monies
received under any insurance policy assigned to the Holder Representative, other
than liability insurance policies, or received as payment of any award or
compensation for condemnation or taking by eminent domain, shall be paid to the
Holder Representative and, as determined by the Holder Representative in its
sole discretion, either be applied to prepayment of the Obligations or disbursed
to the Borrower under staged payment terms reasonably satisfactory to the Holder
Representative for application to the cost of repairs, replacements, or
restorations which shall be effected with reasonable promptness and shall be of
a value at least equal to the value of the items or property destroyed.

2.4            Borrower’s Premises.

(a)            Holder Representative’s Right to Occupy the Borrower’s
Premises.  The Borrower hereby grants to the Holder Representative the right, at
any time during a Default Period and without notice or consent, to take
exclusive possession of all locations where the Borrower conducts its business
or has any rights of possession, including without limitation the locations
described on Schedule 2.4 (the “Premises”), until the earlier of (i) payment in
full and discharge of all Obligations or (ii) final sale or disposition of all
items constituting Collateral and delivery of those items to purchasers.

(b)            Holder Representative’s Use of the Borrower’s Premises.  During
any Default Period, the Holder Representative may use the Premises to store,
process, manufacture, sell, use, and liquidate or otherwise dispose of items
that are Collateral, and for any other incidental purposes deemed appropriate by
the Holder Representative in good faith.

(c)            Borrower’s Obligation to Reimburse the Holder
Representative.  The Holder Representative shall not be obligated to pay rent or
other compensation for the possession or use of any Premises, but if the Holder
Representative elects to pay rent or other compensation to the owner of any
Premises in order to have access to the Premises, then the Borrower shall
promptly reimburse the Holder Representative all such amounts, as well as all
actual out-of-pocket taxes, fees, charges and other expenses at any time payable
by the Holder Representative with respect to the Premises by reason of the
execution, delivery, recordation, performance or enforcement of any terms of
this Agreement.

 
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2.5            License.  Without limiting the generality of any other Security
Document, the Borrower hereby grants to the Holder Representative a
non-exclusive, worldwide and royalty-free license during any Default Period to
use or otherwise exploit all Intellectual Property Rights of the Borrower for
the purpose of: (a) completing the manufacture of any in-process materials
during any Default Period so that such materials become saleable Inventory, all
in accordance with the same quality standards previously adopted by the Borrower
for its own manufacturing and subject to the Borrower’s reasonable exercise of
quality control; and (b) selling, leasing or otherwise disposing of any or all
Collateral.

2.6            Financing Statements.

(a)            Authorization to File.  The Borrower authorizes the Holder
Representative to file financing statements describing Collateral to perfect the
Holder Representative’s Security Interest in the Collateral, and the Holder
Representative may describe the Collateral as “all personal property” or “all
assets” or describe specific items of Collateral including without limitation
any commercial tort claims.  All financing statements filed before the date of
this Agreement to perfect the Security Interest were authorized by the Borrower
and are hereby re-authorized.  Following the termination of this Agreement and
payment of all Obligations, the Holder Representative shall, at the Borrower’s
expense and within the time periods required under applicable law, release or
terminate any filings or other agreements that perfect the Security Interest.

(b)            Termination.  The Holder Representative shall, at the Borrower’s
expense, release or terminate any filings or other agreements that perfect the
Security Interest, provided that there are no suits, actions, proceedings or
claims pending or threatened against any Indemnitee under this Agreement with
respect to any Indemnified Liabilities, upon the Holder Representative’s receipt
of the following, in form and content satisfactory to the Holder Representative:
(i) cash payment in full of all payment Obligations and a completed performance
by the Borrower with respect to its other Obligations under this Agreement, (ii)
a release of all claims against the Holder Representative by the Borrower
relating to the Holder Representative’s performance and obligations under the
Operative Documents, and (iii) an agreement by the Borrower and any Guarantor,
and any new lender to the Borrower to indemnify the Holder Representative for
any payments received by the Holder Representative that are applied to the
Obligations as a final payoff that may subsequently be returned or otherwise not
paid for any reason.

2.7            Setoff.  The Holder Representative may at any time during a
Default Period, in its sole discretion and without demand or notice to anyone,
setoff any liability owed to the Borrower by the Holder Representative against
any Obligations, whether or not due; provided that in no event shall Holder
Representative offset against the Borrower’s payroll account number 4121973010
maintained at Senior Lender so long as the funds held in such payroll account
are limited to the amount required to satisfy the Borrower’s payroll obligations
during the following seven day period (as of any date of determination).

 
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2.8            Collateral Related Matters.  This Agreement does not contemplate
a sale of Accounts or chattel paper, and, as provided by law, the Borrower is
entitled to any surplus and shall remain liable for any deficiency.  The Holder
Representative’s duty of care with respect to Collateral in its possession (as
imposed by law) will be deemed fulfilled if it exercises reasonable care in
physically keeping such Collateral, or in the case of Collateral in the custody
or possession of a bailee or other third Person, exercises reasonable care in
the selection of the bailee or third Person, and the Holder Representative need
not otherwise preserve, protect, insure or care for such Collateral.  The Holder
Representative shall not be obligated to preserve rights the Borrower may have
against prior parties, to liquidate the Collateral at all or in any particular
manner or order or apply the Proceeds of the Collateral in any particular order
of application.  The Holder Representative has no obligation to clean-up or
prepare Collateral for sale.  The Borrower waives any right it may have to
require the Holder Representative to pursue any third Person for any of the
Obligations.

2.9            Notices Regarding Disposition of Collateral.  If notice to the
Borrower of any intended disposition of Collateral or any other intended action
is required by applicable law in a particular situation, such notice will be
deemed commercially reasonable if given in the manner specified in Section 11.3
at least ten (10) calendar days before the date of intended disposition or other
action.

2.10          Limitation on Security Interest.  Notwithstanding anything herein
to the contrary, the Security Interest granted hereunder together with any other
security interest granted under the other Security Documents shall be capped at
an amount equal to the lesser of (a) 10% of the aggregate market value of all
assets of the Holdings, the Borrower and its Subsidiaries and (b) 10% of the
aggregate market value of all outstanding Capital Stock of Holdings, in each
case, as determined on the Closing Date.

2.11          Senior Lender Acting as Bailee.  With respect to any provision in
this Agreement, the Guarantor Security Agreement or any other Security Document
which requires the Borrower, Holdings or any other Guarantor to deliver
possession or control of any negotiable document, instrument, certificated
securities, promissory notes, deposit accounts, security accounts, commodity
accounts, and letter of credit rights, other Collateral or other assets that are
collateral requiring possession or control thereof in order to perfect the
security interest of the Holder Representative and the Holders therein under the
Uniform Commercial Code, no such delivery or giving of control to the Holder
Representative shall be required to the extent such Collateral or other assets
are required to be delivered to or control is required to be given to Senior
Lender in accordance with the Senior Credit Agreement, it being understood that
the Senior Lender is acting as agent and bailee for the benefit of the Holder
Representative and the Holders pursuant to the terms of the Intercreditor
Agreement.

 
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ARTICLE III.
DEFINITIONS; INTERPRETATION

3.1            Definitions.  As used herein, the following terms shall have the
following meanings:

“Accounts” shall have the meaning given it under the UCC.

“Additional Guarantor Supplement” means a Guaranty in the form of Exhibit D
attached hereto.

“Adjusted EBITDA” means, determined on a consolidated basis for the Borrower and
its wholly-owned subsidiaries, the Borrower’s net income, calculated before (in
each case, to the extent included in determining net income) (i) interest
expense, (ii) provision for income taxes, (iii) depreciation and amortization
expense, (iv) gains arising from the write-up of assets, (v) any extraordinary
gains, (vi) stock-based compensation expenses, (vii) changes resulting from the
valuation of goodwill and intangible assets made in accordance with FASB
Accounting Standard 142, (viii) changes resulting from foreign exchange
adjustments arising from a revaluation of assets subject to foreign currency
revaluation, and (ix) provisions arising from adjustments to the Borrower’s
inventory reserves for obsolete, excess, or slow-moving inventory.

“Affiliate” or “Affiliates” means, as to any Person, any other Person controlled
by, controlling or under common control with the first Person.  For purposes of
this definition, “control,” when used with respect to any specified Person,
means the power to direct the management and policies of such Person, directly
or indirectly, whether through the ownership of voting securities, by contract
or otherwise.

“Agreement” means this Senior Subordinated Note Purchase and Security Agreement.

“Approved Fund” means any Fund that is administered, managed or serviced by (a)
a Holder, (b) an Affiliate of a Holder that is under common control with such
Affiliate, or (c) an entity or an Affiliate of an entity that administers,
manages or services a Holder that is under common control with such Affiliate.

“Authenticated” means (a) to have signed; or (b) to have executed or to have
otherwise adopted a symbol, or have encrypted or similarly processed a Record in
whole or in part, with the present intent of the authenticating Person to
identify the Person and adopt or accept a Record.

“Book Net Worth” means the aggregate of the Owners’ equity in the Borrower,
determined in accordance with GAAP, and calculated without regard to any change
in the valuation of goodwill and intangible assets made in accordance with FASB
Accounting Standard 142.

“Borrower” shall have the meaning assigned to that term in the first paragraph
of this Agreement.

 
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“Borrower Inventory G/L Reserve” means the dollar amount carried in the
Borrower’s general ledger reserve for inventory considered to be obsolete,
excessive, or otherwise having a value less than cost.  For clarification
purposes, as of September 30, 2009, the Borrower’s general ledger reserve was
$5,446,000.

“Business Day” means any day (other than a Saturday or Sunday) on which banks
are not authorized or required to close in Greenwich, Connecticut, the State of
New York or the State of California.

“Capital Expenditures” means for a period, any expenditure of money during such
period for the lease, purchase or other acquisition of any capital asset
(including fixtures for in-store displays) and any capitalized costs incurred as
a result of the Borrower’s move from Covina, CA to City of Industry, CA, or for
the lease of any other asset whether payable currently or in the future, but
excluding any prepaid operating expenses.

“Capital Stock” means any and all shares, interests, participation or other
equivalents (however designated) of capital stock of a corporation, any and all
equivalent ownership interests in a Person (other than a corporation), any and
all warrants, options or rights to purchase or any other securities convertible
into any of the foregoing.

“Capitalized Lease Obligation” means any obligations for the payment of rent for
any real or personal property under leases or agreements to lease that, in
accordance with GAAP, have been or should be capitalized on the books of the
lessee and, for purposes hereof, the amount of any such obligation shall be the
capitalized amount thereof determined in accordance with GAAP.

“Cash Equivalents” shall have the meaning assigned to such term in Section 7.6
hereof.

“Change of Control” means the occurrence of any of the following events:

(a)            Any Person or “group” (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934) who does not have an ownership
interest in the Borrower on the Closing Date is or becomes the “beneficial
owner” (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of
1934, except that any such Person, entity or group will be deemed to have
“beneficial ownership” of all securities that such Person, entity or group has
the right to acquire, whether such right is exercisable immediately or only
after the passage of time), directly or indirectly, of more than twenty-five
percent (25%) of the voting power of all classes of ownership of the Borrower;

(b)            During any consecutive two-year period, individuals who at the
beginning of such period constituted the board of Directors of the Borrower
(together with any new Directors whose election to such board of Directors, or
whose nomination for election by the Owners of the Borrower, was approved by a
vote of two thirds of the Directors then still in office who were either
Directors at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the board of Directors of the Borrower then in office;

 
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(c)            Holdings ceases to own, directly or indirectly, beneficially and
of record, 100% of the Borrower; or

(d)            Either Ingrid Jackel ceases to be employed as the Chief Executive
Officer of the Borrower or Jeffrey P. Rogers ceases to be employed as the
President of the Borrower, and not replaced by a Person with substantially
comparable experience within 90 days of any such event.

“Closing” shall have the meaning assigned to such term in Section 1.2 hereof.

“Closing Date” shall have the meaning assigned to such term in Section 1.2
hereof.

“Closing Fee” shall have the meaning given to such term in Section 1.11 hereof.

“Code” means the Internal Revenue Code of 1986 and the rules and regulations
thereunder, as the same may from time to time be supplemented or amended and
remain in effect.

“Collateral” means all of the Borrower’s Accounts, chattel paper and electronic
chattel paper, deposit accounts, documents, Equipment, General Intangibles,
goods, instruments, Inventory, Investment Property, letter-of-credit rights,
letters of credit, all sums on deposit in any collection account, and any items
in any lockbox; together with (a) all substitutions and replacements for and
products of such property; (b) in the case of all goods, all accessions; (c) all
accessories, attachments, parts, Equipment and repairs now or subsequently
attached or affixed to or used in connection with any goods; (d) all warehouse
receipts, bills of lading and other documents of title that cover such goods now
or in the future; (e) all collateral subject to the Lien of any of the Security
Documents; (f) any money, or other assets of the Borrower that come into the
possession, custody, or control of the Holder Representative now or in the
future; (g) Proceeds of any of the above Collateral; (h) books and records of
the Borrower, including without limitation all mail or e-mail addressed to the
Borrower; and (i) all of the above Collateral, whether now owned or existing or
acquired now or in the future or in which the Borrower has rights now or in the
future.

“Collateral Access Agreement” means a landlord waiver, bailee letter, or
acknowledgement agreement of any lessor, warehouseman, processor, consignee, or
other Person in possession of, having a Lien upon, or having rights or interests
in the Borrower’s, Holdings’, or a Subsidiary’s books and records, equipment, or
inventory, in each case, in form and substance satisfactory to the Holder
Representative in the Holder Representative’s Permitted Discretion.

“Collateral Pledge Agreement” means each of those certain Collateral Pledge
Agreements of each of Holdings and the Borrower dated as of November 6, 2009 in
the forms attached hereto as Exhibit D.

“Commission” means the United States Securities and Exchange Commission (or any
other federal agency at that time administering the Securities Act).

 
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“Compliance Certificate” shall have the meaning assigned to such term in Section
7.1(a) hereof and is in the form of Exhibit C attached hereto or in such form
that is acceptable to the Required Holders in their sole discretion.

“Constituent Documents” means with respect to any Person, as applicable, that
Person’s certificate of incorporation, articles of incorporation, by-laws,
certificate of formation, articles of organization, limited liability company
agreement, management agreement, operating agreement, shareholder agreement,
partnership agreement or similar document or agreement governing such Person’s
existence, organization or management or concerning disposition of ownership
interests of such Person or voting rights among such Person’s owners.

“December G/L Adjustment” means an amount equal to the product of (i)
$11,484,000 minus the Borrower Inventory G/L Reserve as of December 31, 2009,
times (ii) sixty-percent (60%).  The December G/L Adjustment shall reflect the
Borrower’s estimate of the effect of its customers’ annual product line
adjustments.  Any reversals of such December G/L Adjustment in subsequent months
will also increase each of the foregoing minimum required amounts by the amount
of such reversal.

“Default” means any Event of Default or any event or condition the occurrence of
which would, with the passage of any applicable grace period or the giving of
notice, or both, constitute an Event of Default.

“Default Period” means any period commencing on the day an Event of Default
occurs, through and including the date identified by the Holder Representative
(on behalf of the Required Holders) in a Record as the date that the Event of
Default has been cured or waived.

“Director” means with respect to any Person, a director if such Person is a
corporation, or a governor or manager if such Person is a limited liability
company.

“Domestic Subsidiary” shall mean, with respect to any Person, any Subsidiary of
such Person which is incorporated or organized under the laws of any state of
the United States or the District of Columbia.

“Electronic Record” means a Record that is created, generated, sent,
communicated, received, or stored by electronic means, but does not include any
Record that is sent, communicated, or received by fax.

“Environmental Law” means any federal, state, local or other governmental
statute, regulation, law or ordinance dealing with the protection of human
health and the environment.

“Equipment” shall have the meaning given it under the UCC.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended
from time to time.

“ERISA Affiliate” means any trade or business (whether or not incorporated) that
is a member of a group which includes the Borrower and which is treated as a
single employer under Section 414 of the Code.

 
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“Event of Default” means any event or condition identified as such in Section
8.1 hereof.

“Excess Interest” shall have the meaning assigned to such term in Section 1.6
hereof.

“Excluded Property” means, collectively, (i) any permit, lease or license or any
contractual obligation entered into by the Borrower (A) that prohibits or
requires the consent of any Person other than the Borrower, Holdings and its
Subsidiaries which has not been obtained as a condition to the creation by the
Borrower of a Lien on any right, title or interest in such permit, lease,
license or contractual obligation or any Capital Stock or equivalent thereof
related thereto or that contains terms stating that the granting of a lien
therein would otherwise result in a material loss by the Borrower of any
material rights therein, (B) to the extent that any law applicable thereto
prohibits the creation of a Lien thereon or (C) to the extent that a Lien
thereon would give any other party a legally enforceable right to terminate such
permit, lease, license or any contractual obligation, but only, with respect to
the prohibition in (A), (B) and (C) to the extent, and for as long as, such
prohibition is not terminated or rendered unenforceable or otherwise deemed
ineffective by the UCC or any other applicable law, (ii) property or assets
owned by the Borrower that is subject to a purchase money Lien or a Capital
Lease Obligation permitted hereunder if the contractual obligation pursuant to
which such Lien is granted (or in the document providing for such Capital Lease
Obligation) prohibits or requires the consent of any Person other than the
Borrower, Holdings and its Subsidiaries which has not been obtained as a
condition to the creation of any other Lien on such property or such assets,
(iii) any “intent to use” trademark applications for which a statement of use
has not been filed (but only until such statement is filed with, and accepted
by, the United States Patent and Trademark Office) (each such trademark, an
“Intent To Use Trademark”), (iv) any Intellectual Property Right owned by the
Borrower if the grant of a security interest in such Intellectual Property Right
would result in the cancellation or voiding of such Intellectual Property Right,
and (iv) shares of capital stock having voting power in excess of 65% of the
voting power of all classes of capital stock of a first tier controlled foreign
corporation (as that term is defined in the Code); provided, however, “Excluded
Property” shall not, except as explicitly stated herein, include any proceeds,
products, substitutions or replacements of Excluded Property (unless such
proceeds, products, substitutions or replacements would otherwise constitute
Excluded Property).

“Foreign Subsidiary” of any Person, shall mean any Subsidiary of such Person
that is not organized or incorporated in the United States or any State or
territory thereof.

“Fund” means any Person (other than a natural person) and any other special
purpose investment vehicle, securitization vehicle, money market account,
investment account or other account that is (or will be) engaged in making,
purchasing, holding or otherwise investing in commercial loans, subordinated
loans, similar extensions of credit or any of the foregoing, whether or not in
combination with warrants or other equity securities.

“GAAP” means United States generally accepted accounting principles,
consistently applied.

“General Intangibles” shall have the meaning given it under the UCC.

 
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“Guarantor” and “Guarantors” means Holdings and each direct or indirect Domestic
Subsidiary of the Borrower or Holdings (including any Domestic Subsidiary formed
or acquired after the Closing Date) other than the Borrower.

“Guarantor Security Agreement” means that certain Guarantor Security Agreement
dated as of November 6, 2009 among Holdings, the other Guarantors and the
Purchaser in the form attached hereto as Exhibit B.

“Guaranty” and “Guaranties” shall have the meanings assigned to such term in
Section 9.1 hereof.

“Hazardous Substances” means pollutants, contaminants, hazardous substances,
hazardous wastes, or petroleum, and all other chemicals, wastes, substances and
materials listed in, regulated by or identified in any Environmental Law.

“Holder Representative-Related Persons” means MRC and any successor Holder
Representative pursuant to Section 10.9, together with their respective
affiliates, and the officers, directors, employees, agents and attorneys-in-fact
of such Persons and affiliates.

“Holder” or “Holders” shall mean the Purchaser (so long as it holds one or more
Notes) and any other holder or holders from time to time of one or more Notes.

“Holdings” shall have the meaning assigned to that term in the first paragraph
of this Agreement.

“Indemnitee” shall have the meaning assigned to such term in Section 11.8
hereof.

“Indemnified Liability” shall have the meaning assigned to such term in Section
11.8 hereof.

“Information” shall have the meaning assigned to such term in Section 11.22
hereof.

“Infringement” or “Infringing” when used with respect to Intellectual Property
Rights means any infringement or other violation of Intellectual Property
Rights.

“Intellectual Property Rights” means all actual or prospective rights arising in
connection with any intellectual property or other proprietary rights, including
without limitation all rights arising in connection with copyrights, patents,
service marks, trade dress, trade secrets, trademarks, trade names or mask
works.

“Intent to Use Trademark” is defined in the definition of Excluded Property.

“Intercreditor Agreement” means that certain Intercreditor Agreement dated as of
the date hereof among the Senior Lender, the Borrower and the Purchaser,
including (subject to the terms of such agreement) any successor agreement
pursuant to a refinancing of the Senior Obligations.

 
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“Interest Payment Date” shall have the meaning assigned to such term in Section
1.1(b) hereof.

“Interest Rate” shall have the meaning assigned to such term in Section 1.1(a)
hereof.

“Inventory” shall have the meaning given it under the UCC.

“Investment Property” shall have the meaning given it under the UCC.

“Licensed Intellectual Property” shall have the meaning assigned to such term in
Section 5.8 hereof.

“Lien” means any security interest, mortgage, deed of trust, pledge, lien,
charge, adverse claim, trust claim, encumbrance, title retention agreement or
analogous instrument or device, including without limitation the interest of
each lessor under any capitalized lease and the interest of any bondsman under
any payment or performance bond, in, of or on any assets or properties of a
Person, whether now owned or subsequently acquired and whether arising by
agreement or operation of law.

“Material Adverse Effect” means any of the following:

(a)            A material adverse effect on the business, operations, results of
operations, assets, liabilities or financial condition of the Borrower;

(b)            A material adverse effect on the ability of the Borrower to
perform its obligations under the Operative Documents, or any other document or
agreement related to this Agreement; or

(c)            A material adverse effect on the ability of the Holder
Representative or the Holders to enforce the Obligations or to realize the
intended benefits of the Security Documents, including without limitation a
material adverse effect on the validity or enforceability of any Operative
Document or of any rights against any Guarantor, or on the status, existence,
perfection, priority (subject to Permitted Liens) or enforceability of any Lien
securing payment or performance of the Obligations.

“Maturity Date” shall be May 6, 2013.

“Maximum Rate” shall have the meaning assigned to such term in Section 1.6
hereof.

“Mezzanine Financing” shall have the meaning assigned to such term in Section
1.14 hereof.

“MRC” means Mill Road Capital, L.P.

“MRC’s Designee” shall have the meaning assigned to such term in Section 7.33
hereof.

“Multiemployer Plan” means a multiemployer plan (as defined in Section
4001(a)(3) of ERISA) to which the Borrower or any ERISA Affiliate contributes or
is obligated to contribute.

 
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“Net Cash Proceeds” means the cash proceeds of any asset sale (including cash
proceeds received as deferred payments pursuant to a note, installment
receivable or otherwise, but only upon actual receipt) net of (a) attorney,
accountant, and investment banking fees, (b) brokerage commissions, (c) amounts
required to be applied to prior Liens or the repayment of debt secured by a Lien
not prohibited by this Agreement on the asset being sold, and (d) taxes paid or
reasonably estimated to be payable as a result of such asset sale.

“Net Income” means after-tax net income from continuing operations, including
extraordinary losses but excluding extraordinary gains, all as determined in
accordance with GAAP.

“Note” and “Notes” shall have the meaning assigned to that term in Section
1.1(a) hereof.

“Obligations” shall mean all indebtedness, obligations and liabilities of the
Borrower and/or the Guarantors to any of the Holders, individually or
collectively, whether existing on the date of this Agreement or arising
thereafter, direct or indirect, joint or several, absolute or contingent,
matured or unmatured, liquidated or unliquidated, secured or unsecured, arising
by contract, operation of law or otherwise, arising or incurred or owing under
this Agreement, the Notes or any of the other Operative Documents or in respect
of any of the Notes or other instruments, agreements or documents at any time
evidencing any of the foregoing, in each case whether on account of principal,
interest, premium, reimbursement obligations, fees, indemnities, costs, expenses
or otherwise (including all interest, fees and other amounts that, but for the
filing of a petition in bankruptcy, would otherwise accrue (whether or not a
claim for post-filing or post-petition interest is allowed in such proceeding),
and including all fees and disbursements of counsel that are required to be paid
by the Borrower or any Guarantor pursuant to any of the Operative Documents),
and including obligations to perform acts and refrain from taking actions as
well as obligations to pay money.

“OFAC” shall have the meaning assigned to such term in Section 5.12 hereof.

“Officer” means with respect to any Person, an officer if such Person is a
corporation, an officer or a manager if such Person is a limited liability
company, or an officer or a partner if such Person is a partnership.

“Operative Documents” means this Agreement, the Notes, the Guaranties, the
Security Documents, the Intercreditor Agreement and each other agreement,
instrument or document now or hereafter executed and pursuant to or in
connection with any of the foregoing.

“Owned Intellectual Property” shall have the meaning assigned to such term in
Section 5.8 hereof.

“Owner” means with respect to the Borrower, each Person having legal or
beneficial title to an ownership interest in the Borrower or a right to acquire
such an interest.

“Patent and Trademark Security Agreement” means each Patent and Trademark
Security Agreement entered into between the Borrower or any of the Guarantors
and the Holder Representative in the forms attached hereto as Exhibit C.

 
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“Pension Plan” means a pension plan (as defined in Section 3(2) of ERISA)
maintained for employees of the Borrower or any ERISA Affiliate and covered by
Title IV of ERISA.

“Permitted Discretion” means a determination made by the Holder Representative
from the perspective of a secured lender.

“Permitted Lien” and “Permitted Liens” shall have the meaning assigned to such
term in Section 7.3(a) hereof.

“Person” means any individual, corporation, partnership, joint venture, limited
liability company, association, joint stock company, trust, unincorporated
organization or government or any agency or political subdivision of a
governmental entity.

“PIK Interest” shall have the meaning assigned to that term in Section 1.1(a)
hereof.

“Plan” means an employee benefit plan (as defined in Section 3(3) of ERISA)
maintained for employees of the Borrower or any ERISA Affiliate.

“Premises” shall have the meaning assigned to such term in Section 2.4(a)
hereof.

“Proceeds” shall have the meaning given it under the UCC.

“Prepayment Premium” shall have the meaning assigned to such term in Section
1.4(d) hereof.

“Property” means, as to any Person, all types of real, personal, tangible,
intangible or mixed property owned by such Person, whether or not included in
the most recent balance sheet of such Person and its subsidiaries under GAAP.

“Proxy Statement” shall have the meaning assigned to such term in Section 1.14
hereof.

“Purchaser” shall mean MRC and its successors and assigns.

“Record” means information that is inscribed on a tangible medium or that is
stored in an electronic or other medium and is retrievable in perceivable form,
and includes all information that is required to be reported by the Borrower to
Holder Representative pursuant to Section 7.1.

“Refinancing Indebtedness” means refinancings, renewals, or extensions of
indebtedness so long as:

(a)            the principal amount of such refinancings, renewals, or
extensions of indebtedness does not exceed the principal amount of indebtedness
refinanced, renewed, or extended (plus all accrued interest on the indebtedness
and the amount of all reasonable amounts of fees and expenses reasonably
incurred, including premiums, incurred in connection therewith),

(b)            such refinancings, renewals, or extensions do not result in a
shortening of the average weighted maturity (measured as of the refinancing,
renewal, or extension) of the indebtedness so refinanced, renewed, or extended
(excluding the effects of prepayments of such indebtedness in connection with
such refinancing), nor are they on terms or conditions that, after being
compared to the terms or conditions of the existing indebtedness and taken as a
whole, are or could reasonably be expected to be materially more burdensome or
restrictive to the Borrower,

 
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(c)            if the indebtedness that is refinanced, renewed, or extended was
subordinated in right of payment to the Obligations, then the terms and
conditions of the refinancing, renewal, or extension must include subordination
terms and conditions that are at least as favorable to the Holders (as
determined by Holder Representative in Holder Representative’s sole discretion)
as those that were applicable to the refinanced, renewed, or extended
indebtedness, and

(d)            the indebtedness that is refinanced, renewed, or extended is not
recourse to any Person that is liable on account of the indebtedness other than
those Persons which were obligated with respect to the indebtedness that was
refinanced, renewed, or extended.

“Reportable Event” means a reportable event (as defined in Section 4043 of
ERISA), other than an event for which the 30-day notice requirement under ERISA
has been waived in regulations issued by the Pension Benefit Guaranty
Corporation.

“Required Holders” means, as of the date of determination, for so long as any of
the Notes remain outstanding, Holders holding Notes representing at least a
majority of the aggregate outstanding principal amount of all Notes then
outstanding, acting or voting together as a single class.

“Responsible Officer” means the chief executive officer, the president, the
chief financial officer, or any vice president responsible for financial affairs
of the Borrower, Holdings or any other Guarantor, as applicable.

“San Gabriel Valley Site Liabilities” means any and all losses and obligations
arising from or related to any of the following:  (a) any hazardous substances
or other contamination present at, in, on or under, or that originated at or
migrated from, the Borrower’s or any Subsidiary’s leased real property in the
City of Industry, California on or prior to the date hereof, including any
obligations to or asserted by the California Regional Water Quality Control
Board, the United States Environmental Protection Agency or other government
agency; (b) any involvement in, with or at the San Gabriel Valley Superfund Site
and/or the Puente Valley Area or Operable Unit thereof in connection with the
Borrower’s or any Subsidiary’s leased real property in the City of Industry,
California (collectively, the “San Gabriel Valley Superfund Site”); and (c) all
pending and any future asserted personal injury, property or natural resource
damage, toxic tort or other lawsuits or claims related to hazardous substances
or other contaminants within the San Gabriel Valley Superfund Site and/or any
Hazardous Substances or other contamination present at, in, on or under, or that
originated at or migrated from, the Borrower’s or any Subsidiary’s leased real
property in the City of Industry, California on or prior to the date hereof,
including any contamination related claims or lawsuits filed or to be filed by
water suppliers located within the San Gabriel Valley Superfund Site thereof in
connection with the Borrower’s or any Subsidiary’s leased real property in the
City of Industry, California.

 
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“San Gabriel Valley Superfund Site” has the meaning set forth in the definition
of “San Gabriel Valley Site Liabilities.

“Securities Act” shall mean the Securities Act of 1933, as amended, or any
similar successor federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.

“Security Documents” means this Agreement, the Guarantor Security Agreement,
each Collateral Pledge Agreement, each Patent and Trademark Security Agreement,
and any other document delivered to the Holder Representative from time to time
to create and/or perfect a security interest in Collateral or other assets that
are collateral, directly or indirectly, for the Obligations.

“Security Interest” shall have the meaning assigned to such term in Section 2.1
hereof.

“Senior Collateral” means all of the property, rights and interests of Holdings,
the Borrower and any other Subsidiaries that are or are intended to be subject
to the security interests and Liens created by the Senior Credit Agreement and
the other Senior Loan Documents.

“Senior Credit Agreement” means that certain Wells Fargo Business Credit and
Security Agreement dated as of the date hereof between the Borrower, as borrower
and Senior Lender, as lender, including any successor agreement pursuant to a
refinancing of the Senior Obligations.

“Senior Lender” shall mean Wells Fargo Bank, National Association acting through
its Wells Fargo Business Credit operating division, as the lender under the
Senior Credit Agreement, and its successors or assigns thereunder.

“Senior Loan Documents” shall mean the Senior Credit Agreement plus the “Loan
Documents” as such term is defined in the Senior Credit Agreement (or to any
substantially equivalent term or concept in any amended or successor Senior
Credit Agreement).

“Senior Obligations” shall have the meaning assigned to such term in the
Intercreditor Agreement (with respect to Senior Lender only) and the term
“Indebtedness” in the Senior Credit Agreement (or to any substantially
equivalent term or concept in any amended or successor Senior Credit Agreement).

“Stockholders Meeting” shall have the meaning assigned to such term in Section
1.14 hereof.

“Subordinated Debt” means indebtedness of Holdings, the Borrower or any other
Subsidiaries other than the Senior Obligations, including without limitation all
interest on Subordinated Debt, whether payable in cash or in kind, all on terms
and conditions, and in amounts, satisfactory to the Required Holders in their
sole discretion (as evidenced by their written approval).

“Subordination Agreement” means any agreement providing for the subordination of
any Subordinated Debt on terms and conditions satisfactory to the Required
Holders in their sole discretion (as evidenced by their written approval).

 
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“Subsidiary” means any Person of which more than 50% of the outstanding
ownership interests having general voting power under ordinary circumstances to
elect a majority of the board of directors or the equivalent of such Person,
irrespective of whether or not at the time ownership interests of any other
class or classes shall have or might have voting power by reason of the
happening of any contingency, is at the time directly or indirectly owned by the
Borrower, by the Borrower and one or more other Subsidiaries, or by one or more
other Subsidiaries.

“Uniform Commercial Code” or “UCC” means the Uniform Commercial Code as adopted
in the State of New York from time to time.

“U.S. Dollars” and “$” each means the lawful currency of the United States of
America.

3.2            Interpretation.  The foregoing definitions are equally applicable
to both the singular and plural forms of the terms defined.  The words “hereof”,
“herein”, and “hereunder” and words of like import when used in this Agreement
shall refer to this Agreement as a whole and not to any particular provision of
this Agreement.  The words “party” or “parties” when used with reference to this
Agreement shall include each party to this Agreement and, by their acceptance of
a Note, each Holder.  The words “include”, “includes” and “including” when used
in this Agreement are not limiting.  All references to time of day herein are
references to Greenwich, Connecticut time unless otherwise specifically
provided.  Except as otherwise specifically provided herein, reference to any
document or agreement shall include such document or agreement as amended,
waived, supplemented or otherwise modified and in effect from time to time in
accordance with its terms and the terms of this Agreement.  Where the character
or amount of any asset or liability or item of income or expense is required to
be determined or any consolidation or other accounting computation is required
to be made for the purposes of this Agreement, it shall be done in accordance
with GAAP except where such principles are inconsistent with the specific
provisions of this Agreement.

3.3            Change in Accounting Principles.  If, after the date of this
Agreement, there shall occur any change in GAAP from those used in the
preparation of the financial statements referred to in Section 7.1 hereof and
such change shall result in a change in the method of calculation of any
financial covenant, standard or term found in this Agreement, either the
Borrower, Holdings or the Required Holders may by notice to the Holder
Representative, the Borrower and Holdings, respectively, require that the Holder
Representative, the Borrower and Holdings negotiate in good faith to amend such
covenants, standards, and terms so as equitably to reflect such change in
accounting principles, with the desired result being that the criteria for
evaluating the financial condition of the Holdings and its Subsidiaries shall be
the same as if such change had not been made.  No delay by the Borrower,
Holdings or the Holder Representative in requiring such negotiation shall limit
their right to so require such a negotiation at any time after such a change in
accounting principles.  Until any such covenant, standard, or term is amended in
accordance with this Section 3.3, financial covenants shall be computed and
determined in accordance with GAAP in effect prior to such change in accounting
principles.  Without limiting the generality of the foregoing, the Borrower and
Holdings shall neither be deemed to be in compliance with any financial covenant
hereunder nor out of compliance with any financial covenant hereunder if such
state of compliance or noncompliance, as the case may be, would not exist but
for the occurrence of a change in accounting principles after the date hereof.

 
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ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER

4.1            Representations and Warranties of the Purchaser.  The Purchaser
hereby represents and warrants, which representations and warranties shall
survive the closing, that:

(a)            The Purchaser is a limited partnership, duly formed and validly
existing under the laws of the State of Delaware, and has duly authorized,
executed and delivered this Agreement and such of the other Operative Documents
as require execution by it.

(b)            It is the present intention of the Purchaser to acquire its Note
for its own account, and not as nominee or agent.

(c)            The Note is being and will be acquired for the purpose of
investment and not with a view to distribution or resale thereof in violation of
the securities laws; subject, nevertheless, to the condition that, except as
otherwise provided herein and subject to compliance with applicable securities
laws, the disposition of the property of the Purchaser shall at all times be
within its control.  The Purchaser was not formed solely for the purpose of
making an investment in the Borrower.  The Purchaser is an “accredited investor”
as that term is defined in Regulation D promulgated under the Securities Act
with such knowledge and experience in financial and business matters as are
necessary in order to evaluate the merits and risks of an investment in the
Notes.  In making its decision to invest in the Note, the Purchaser has relied
upon independent investigations made by the Purchaser and the Purchaser's
representatives, including the Purchaser's own professional, tax and other
advisors.  The Purchaser and its representatives have been given the opportunity
to ask questions of, and to receive answers from, the Borrower concerning the
terms and conditions of the investment in the Note.  The Purchaser has reviewed,
or has had the opportunity to review, all information it deems necessary and
appropriate for the Purchaser to evaluate the financial risks inherent in an
investment in the Note.  The Purchaser understands that its investment in the
Note involves a high degree of risk and that no governmental authority has
passed on or made any recommendation or endorsement of the Note.

(d)            The Purchaser understands that it must bear the economic risk of
its investment for an indefinite period of time because the Note is not, and
will not be, registered under the Securities Act or any applicable state
securities laws and may not be resold unless subsequently registered under the
Securities Act and such other laws or unless an exemption from such registration
is available.  The Purchaser acknowledges that, in issuing the Note, the
Borrower is relying on the representations and warranties of the Purchaser in
this Section 4.1.

(e)            No Person has or will have, as a result of the transactions
contemplated by this Agreement, any rights, interest or valid claim against or
upon the Borrower for any commission, fee or other compensation as a finder or
broker because of any act or omission by the Purchaser or any agent of the
Purchaser.

 
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ARTICLE V.
REPRESENTATIONS AND WARRANTIES OF THE BORROWER

Holdings and the Borrower represent and warrant to the Purchaser as follows:

5.1            Existence and Power; Name; Chief Executive Office; Inventory and
Equipment Locations; Federal Employer Identification Number and Organizational
Identification Number.  The Borrower is a corporation, organized, validly
existing and in good standing under the laws of the State of New York and is
licensed or qualified to transact business in all jurisdictions where the
character of the property owned or leased or the nature of the business
transacted by it makes such licensing or qualification necessary, except to the
extent that the failure to be so licensed or qualified could reasonably be
expected to result in a Material Adverse Effect.  The Borrower has all requisite
power and authority to conduct its business, to own its properties and to
execute and deliver, and to perform all of its obligations under, those
Operative Documents and any other documents or agreements that it has entered
into with the Holder Representative related to this Agreement.  During the past
five (5) years, the Borrower has done business solely under the names set forth
on Schedule 5.1 in addition to its correct legal name.  The Borrower’s chief
executive office and principal place of business is located at the address set
forth on Schedule 5.1, and all of the Borrower’s records relating to its
business or the Collateral are kept at that location.  All Inventory and
Equipment is located at that location or at one of the other locations set forth
on Schedule 5.1, other than Inventory in-transit between such locations in the
ordinary course of business.  The Borrower’s name, Federal Employer
Identification Number and Organization Identification Number are correctly set
forth at the end of the Agreement next to the Borrower’s signature.

5.2            Capitalization.  The Capitalization Chart set forth on Schedule
5.2 constitutes a correct and complete list of all ownership interests of the
Borrower and all rights to acquire ownership interests, including the record
holder, number of interests and percentage interests on a fully diluted basis as
of the date hereof, and the Organizational Chart set forth on Schedule 5.2 shows
the ownership structure of all Subsidiaries of the Borrower.

5.3            Authorization of Borrowing; No Conflict as to Law or
Agreements.  The execution, delivery and performance by the Borrower of the
Operative Documents and any other documents or agreements described in or
related to this Agreement, and the issuance and sale of the Notes have been
authorized and do not (i) require the consent or approval of the Borrower’s
Owners; (ii) require the authorization, consent or approval by, or registration,
declaration or filing with, or notice to, any governmental agency or
instrumentality, whether domestic or foreign, or any other Person, except to the
extent obtained, accomplished or given prior to the date of this Agreement;
(iii) violate any provision of any law, rule or regulation (including Regulation
X of the Board of Governors of the Federal Reserve System) or of any order,
writ, injunction or decree presently in effect having applicability to the
Borrower or of the Borrower’s Constituent Documents; (iv) result in a breach of
or constitute a default or event of default under any indenture or loan or
credit agreement or any other material agreement, lease or instrument to which
the Borrower is a party or by which it or its properties may be bound or
affected; or (v) result in, or require, the creation or imposition of any Lien
(other than the Security Interest and Liens in favor of the Senior Lender) upon
or with respect to any of the properties now owned or subsequently acquired by
the Borrower.

 
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5.4            Legal Agreements.  This Agreement, the other Operative Documents,
and any other document or agreement described in or related to this Agreement,
will constitute the legal, valid and binding obligations of the Borrower,
enforceable against the Borrower in accordance with their respective terms,
except as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors’ rights generally and by general equitable principles (whether
enforcement is sought by proceedings in equity or at law).

5.5            Subsidiaries.  Except as set forth on Schedule 5.5, the Borrower
has no Subsidiaries.

5.6            Financial Condition; No Adverse Change.  The Borrower has
furnished to the Holder Representative its audited financial statements for its
fiscal year ended December 31, 2008 and unaudited financial statements for the
fiscal-year-to-date period ended August 31, 2009 and those statements fairly
present in all material respects the Borrower’s financial condition as of those
dates and the results of the Borrower’s operations and cash flows for the
periods then ended and were prepared in accordance with GAAP.  Since the date of
the most recent financial statements, there has been no Material Adverse Effect.

5.7            Litigation.  There are no actions, suits or proceedings pending
or, to the Borrower’s knowledge, threatened against or affecting the Borrower,
Holdings or Subsidiaries or the properties of the Borrower, Holdings or
Subsidiaries before any court or governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, which, if determined
adversely to the Borrower, Holdings or Subsidiaries, would reasonably be
expected to have a Material Adverse Effect.

5.8            Intellectual Property Rights.

(i)             Owned Intellectual Property.  Set forth on Schedule 5.8 is a
complete list of all registered patents, applications for patents, trademarks,
applications to register trademarks, service marks, applications to register
service marks, and registered copyrights and applications to register copyrights
for which the Borrower is the owner of record (the “Owned Intellectual
Property”).  Except as set forth on Schedule 5.8 and except for such Owned
Intellectual Property that is not material to the Borrower’s business, (A) the
Borrower owns the Owned Intellectual Property free and clear of all restrictions
(including without limitation covenants not to sue any Person), court orders,
injunctions, decrees, writs or Liens, whether by agreement memorialized in a
Record Authenticated by the Borrower or otherwise, (B) no Person other than the
Borrower owns or has been granted any right in the Owned Intellectual Property,
(C) all Owned Intellectual Property is valid, subsisting and enforceable, and
(D) the Borrower has taken all commercially reasonable action necessary to
maintain and protect the Owned Intellectual Property.

(ii)            Agreements with Employees and Contractors.  The Borrower has
entered into an agreement with each Person that is an employee obligating such
Person to assign to the Borrower, without additional compensation, any
Intellectual Property Rights developed by such Person in the course of such
Person’s employment with the Borrower (except to the extent permitted by such
agreement or prohibited by law).

 
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(iii)           Intellectual Property Rights Licensed from Others.  Set forth on
Schedule 5.8 is a complete list of all agreements under which the Borrower has
licensed Intellectual Property Rights from another Person (“Licensed
Intellectual Property”) other than readily available, non-negotiated licenses of
computer software and other intellectual property used solely for performing
accounting, word processing and similar administrative tasks (“Off-the-shelf
Software”) and a summary of any ongoing payments the Borrower is obligated to
make with respect to Licensed Intellectual Property.  Except as set forth on
Schedule 5.8, in any other schedule or exhibit to this Agreement, or in any
other Record, copies of which have been given to the Holder Representative, the
Borrower’s licenses to use the Licensed Intellectual Property are in full force
and effect and are free and clear of all restrictions, Liens, court orders,
injunctions, decrees, or writs, whether agreed to in a Record Authenticated by
the Borrower or otherwise.  Except as disclosed on Schedule 5.8, the Borrower is
not contractually obligated to make royalty payments of a material nature, or
pay fees to any owner of, licensor of, or other claimant to, any Intellectual
Property Rights.

(iv)           Other Intellectual Property Needed for Business.  Except for
Off-the-shelf Software and as disclosed on Schedule 5.8, the Owned Intellectual
Property and the Licensed Intellectual Property constitute all Intellectual
Property Rights used or necessary to conduct the Borrower’s business as it is
presently conducted or as the Borrower reasonably foresees conducting it and the
Borrower owns, possesses or has the right to use all such Intellectual Property
Rights.

(v)            Infringement.  Except as set forth on Schedule 5.8, the Borrower
has no knowledge of, and has not received notice either orally or in a Record
alleging, any Infringement of another Person’s Intellectual Property Rights
(including any claim set forth in a Record that the Borrower must license or
refrain from using the Intellectual Property Rights of any Person) nor, to the
Borrower’s knowledge, is there any threatened claim in writing or any reasonable
basis for any such claim.

5.9            Taxes.  The Borrower, Holdings and Subsidiaries have paid or
caused to be paid to the proper authorities when due all federal, state and
local taxes required to be withheld by each of them.  The Borrower, Holdings and
Subsidiaries have filed all federal, state and local tax returns which to the
knowledge of the Officers of the Borrower, Holdings and Subsidiaries, as the
case may be, are required to be filed, and the Borrower, Holdings and
Subsidiaries have paid or caused to be paid to the respective taxing authorities
all taxes as shown on these returns or on any assessment received by any of them
to the extent such taxes have become due.

5.10          Titles and Liens.  The Borrower has good and marketable title to
all Collateral free and clear of all Liens other than Permitted Liens.  No
financing statement naming the Borrower as debtor is on file in any office
except to perfect only Permitted Liens.

5.11          No Defaults.  The Borrower is in compliance with all provisions of
all agreements, instruments, decrees and orders to which it is a party or by
which it or its property is bound or affected, the breach or default of which
could reasonably be expected to have a Material Adverse Effect.

 
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5.12          Submissions to the Holder Representative.  All financial and other
information provided to the Holder Representative by or on behalf of the
Borrower in connection with this Agreement (i) is true, correct and complete in
all material respects, (ii) does not omit any material fact that would cause
such information to be misleading, and (iii) as to projections, budgets,
valuations or proforma financial statements, presents a good faith opinion as to
such projections, budgets, valuations and proforma condition and results as of
the date such projections, budgets, valuations and proforma financial statements
were provided to the Holder Representative.

5.13          Financing Statements.  The Borrower has previously authorized the
filing of financing statements sufficient when filed to perfect the Security
Interest and other Liens created by the Security Documents.  When the financing
statements are filed, the Holder Representative will have a valid and perfected
security interest in all Collateral capable of being perfected by the filing of
financing statements.  None of the Collateral is or will become a fixture on
real estate, unless a sufficient fixture filing has been filed with respect to
such Collateral.

5.14          Rights to Payment.  Except to the extent that the Holder
Representative has been notified in an Authenticate Record, each right to
payment and each instrument, document, chattel paper and other agreement
constituting or evidencing Collateral is (or, in the case of all future
Collateral, will be when arising or issued) the valid, genuine and legally
enforceable obligation, subject to no defense, setoff or counterclaim of the
account debtor or other obligor named in that instrument.

5.15          Employee Benefit Plans.

(i)             Maintenance and Contributions to Plans.  Except as set forth on
Schedule 5.15, neither the Borrower nor any ERISA Affiliate (A) maintains or has
maintained any Pension Plan, (B) contributes or has contributed to any
Multiemployer Plan, or (C) provides or has provided post-retirement medical or
insurance benefits to employees or former employees (other than benefits
required under Section 601 of ERISA, Section 4980B of the Code, or applicable
state law).

(ii)            Knowledge of Plan Noncompliance with Applicable Law.  Except as
set forth on Schedule 5.15, neither the Borrower nor any ERISA Affiliate has (A)
knowledge that the Borrower or the ERISA Affiliate is not in full compliance
with the requirements of ERISA, the Code, or applicable state law with respect
to any Plan, (B) knowledge that a Reportable Event occurred or continues to
exist in connection with any Pension Plan, or (C) sponsored a Plan that it
intends to maintain as qualified under the Code that is not so qualified, and no
fact or circumstance exists which may have an adverse effect on such Plan’s tax
qualified status.

(iii)           Funding Deficiencies and Other Liabilities.  Neither the
Borrower nor any ERISA Affiliate has liability for any (A) accumulated funding
deficiency (as defined in Section 302 of ERISA and Section 412 of the Code)
under any Plan, whether or not waived, (B) withdrawal, partial withdrawal,
reorganization or other event under any Multiemployer Plan under Section 4201 or
4243 of ERISA or (C) event or circumstance which could result in financial
obligation to the Pension Benefit Guaranty Corporation, the Internal Revenue
Service, the Department of Labor or any participant in connection with any Plan
(other than routine claims for benefits under the Plan).

 
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(iv)           No Controlled Group Liabilities.  The Borrower has not incurred
nor reasonably expects to incur any liability under Title IV of ERISA from any
ERISA Affiliate.

5.16          Environmental Matters.

(i)             Hazardous Substances on Premises.  Except as set forth on
Schedule 5.16 and except for the existence of the San Gabriel Valley Site
Liabilities, there are not present in, on or under the Premises any Hazardous
Substances in such form or quantity as to create any material liability or
obligation for either the Borrower or the Holder Representative or the Holders
under the common law of any jurisdiction or under any Environmental Law, and no
Hazardous Substances have ever been stored, buried, spilled, leaked, discharged,
emitted or released in, on or under the Premises in such a way as to create a
material liability.

(ii)            Disposal of Hazardous Substances.  Except as set forth on
Schedule 5.16, the Borrower has not disposed of Hazardous Substances, in such a
manner as to create any material liability under any Environmental Law.

(iii)           Claims and Proceedings with Respect to Environmental Law
Compliance.  Except as set forth on Schedule 5.16 and except for the existence
of the San Gabriel Valley Site Liabilities, there have not existed in the past,
nor are there any threatened or impending requests, claims, notices,
investigations, demands, administrative proceedings, hearings or litigation
relating in any way to the Premises or the Borrower, alleging material liability
under, violation of, or noncompliance with any Environmental Law or any license,
permit or other authorization issued pursuant to such an Environmental Law.

(iv)           Compliance with Environmental Law; Permits and
Authorizations.  Except as set forth on Schedule 5.16, the Borrower (A) conducts
its business at all times in compliance with applicable Environmental Law, (B)
possesses valid licenses, permits and other authorizations required under
applicable Environmental Law for the lawful and efficient operation of its
business, none of which are scheduled to expire, or are subject to withdrawal,
or material limitation within the next 12 months and (C) has not been denied
insurance on grounds related to potential environmental liability.

(v)            Status of Premises.  Except as set forth on Schedule 5.16 and
except for the existence of the San Gabriel Valley Site Liabilities, the
Premises are not and never have been listed on the National Priorities List, the
Comprehensive Environmental Response, Compensation and Liability Information
System or any similar federal, state or local list, schedule, log, inventory or
database.

(vi)           Environmental Audits, Reports, Permits and Licenses.  The
Borrower has delivered to the Holder Representative all environmental
assessments, audits, reports, permits, licenses and other documents describing
or relating in any way to the Premises or the Borrower’s businesses.

 
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5.17          Commercial Tort Claims.  Neither Holdings, the Borrower, nor any
Subsidiaries has any known commercial tort claims as of the Closing Date.

5.18          Margin Rules.  Neither Holdings, nor the Borrower nor any other
Subsidiary owns or has any present intention of purchasing or carrying, and no
portion of the proceeds of the loans evidenced by the Note shall be used for
purchasing or carrying, any “margin security” or “margin stock” as such terms
are used in Regulations T, U or X of the Board of Governors of the Federal
Reserve System.

5.19          Representation by Counsel.  The Borrower and Holdings each
acknowledge that it has been advised by counsel in connection with the
negotiation, execution and delivery of each Operative Document.

5.20          Relationship of Parties, etc.  The Borrower and Holdings
acknowledge and agree that neither the Purchaser nor any other Holder has any
fiduciary relationship with or duty to Holdings, the Borrower or any of their
Subsidiaries or Affiliates arising out of or in connection with this Agreement
or any of the other Operative Documents.  Borrower and Holdings further
acknowledge and agree that no joint venture exists between the Borrower,
Holdings and/or any of their Subsidiaries or Affiliates, on the one hand, and
the Purchaser or any other Holder, on the other hand.

5.21          Brokers.  Except as otherwise disclosed in writing to the
Purchaser prior to the date hereof, no broker, finder or other intermediary has
brought about the obtaining, making or closing of the transactions contemplated
by the Operative Documents, and neither Holdings, nor the Borrower nor any other
Subsidiary has or will have any obligation to any person in respect of any
finder’s or brokerage fees in connection herewith or therewith.

5.22          Foreign Assets Control Regulations and Anti-Money Laundering.

(a)        Neither Holdings, nor the Borrower nor any other Subsidiary (i) is a
Person whose property or interest in property is blocked or subject to blocking
pursuant to Section 1 of Executive Order 13224 of September 23, 2001 Blocking
Property and Prohibiting Transactions With Persons Who Commit, Threaten to
Commit, or Support Terrorism (66 Fed. Reg. 49079 (2001)), (ii) engages in any
dealings or transactions prohibited by Section 2 of such executive order or
(iii) is a person on the list of Specially Designated Nationals and Blocked
Persons or subject to the limitations or prohibitions under any other U.S.
Department of Treasury’s Office of Foreign Assets Control regulation or
executive order.

(b)            Holdings, the Borrower and each other Subsidiary are, to the
extent required by law, in compliance, in all material respects, with the
Patriot Act.  No part of the proceeds of the loans evidenced by the Notes will
be used, directly or indirectly, for any payments to any governmental official
or employee, political party, official of a political party, candidate for
political office, or anyone else acting in an official capacity, in order to
obtain, retain or direct business or obtain any improper advantage, in violation
of the United States Foreign Corrupt Practices Act of 1977, as amended.

5.23          Securities Act.  Neither Holdings, nor the Borrower, nor any other
Subsidiary, nor anyone acting on the behalf of any such Person has offered or
will offer to sell Notes or other securities to, or has solicited or will
solicit offers with respect thereto from, or has entered into or will enter into
any preliminary conversations or negotiations relating thereto with, any Person,
so as to bring the issuance and sale of the Notes under the registration
provisions of the Securities Act or the registration provisions of any
securities or Blue Sky laws of any applicable jurisdiction.  Assuming the
accuracy of the representations and warranties of the Purchaser set forth
herein, the issuance of the Notes is not required to be registered under the
Securities Act or any applicable state securities laws, and such issuances shall
be in compliance with all applicable federal and state securities laws.

 
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5.24          Delivery of and Senior Loan Documents.  Holder Representative has
received complete copies of the Senior Loan Documents (including all exhibits,
schedules and disclosure letters referred to therein or delivered pursuant
thereto, if any) and all amendments thereto, waivers relating thereto and other
side letters or agreements affecting the terms thereof.  None of such documents
and agreements has been amended or supplemented, nor have any of the provisions
thereof been waived, except pursuant to a written agreement or instrument which
has heretofore been delivered to Holder Representative.

ARTICLE VI.
CONDITIONS PRECEDENT

The obligation of the Purchaser to purchase its Note at the Closing is subject
to the satisfaction (or waiver by the Purchaser, in its sole discretion) of the
following conditions precedent:

6.1            Representations and Warranties.  Each of the representations and
warranties of the Borrower and Holdings set forth herein and in the other
Operative Documents shall be true and correct in all respects as of the Closing
Date, except to the extent any of the same expressly relates to an earlier date.

6.2            No Default.  No Default or Event of Default shall have occurred
and be continuing or would occur as a result of the purchase and sale of the
Purchaser’s Note and the use of the proceeds thereof by the Borrower and its
Subsidiaries.

6.3            No Violation of Order or Judgment.  The purchase and sale of the
Purchaser’s Note shall not violate any order, judgment or decree of any court or
other authority or any provision of law or regulation applicable to the
Purchaser as then in effect.

6.4            Documentation at Closing.  The Purchaser shall have received each
of the following agreements, instruments, documents, certificates and opinions
in form and substance reasonably satisfactory to the Purchaser and its counsel
and duly executed and delivered by the parties thereto:

(a)            this Agreement;

(b)            the Purchaser’s Note;

 
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(c)            the Guarantor Security Agreement;

(d)            each Patent and Trademark Security Agreement;

(e)            each Collateral Pledge Agreement;

(f)             the Intercreditor Agreement;

(g)            certificates of insurance or insurance binders evidencing
compliance with Section 7.15 hereof;

(h)            Reserved;

(i)             copies of Holdings’, the Borrower’s and each other Subsidiary’s
charter and bylaws (or other comparable organizational documents), and all
amendments thereto, certified in each instance by an Officer of such Person to
be true, correct and complete on the Closing Date and, in the case of charter or
other comparable organizational documents, by the Secretary of State of its
jurisdiction of formation, incorporation or other organization, as the case may
be;

(j)             copies of resolutions of Holdings, the Borrower’s and each other
Subsidiary’s Board of Directors (or comparable governing body) and shareholders
or members (if required) authorizing the execution, delivery and performance of
this Agreement and the other Operative Documents to which it is a party and the
consummation of the transactions contemplated hereby and thereby, together with
specimen signatures of the persons authorized to execute the Operative Documents
on Holdings, the Borrower’s and each other Subsidiary’s behalf, all certified in
each instance by an Officer of such Person;

(k)            certificates of good standing for Holdings, the Borrower and each
other Subsidiary from the office of the Secretary of State of the jurisdiction
of its formation, incorporation or other organization and, in the case of the
Borrower, in all jurisdictions where the character of the property owned or
leased or the nature of the business transacted by the Borrower makes such
licensing or qualification necessary;

(l)             the Holder Representative shall have received for the Purchaser
the favorable written opinion of Kirkland & Ellis LLP, counsel to the Borrower
and the Guarantors, in form and substance reasonably satisfactory to the
Purchaser;

(m)           a certificate of a Responsible Officer of each of the Borrower and
Holdings as to the accuracy of the Borrower’s and Holdings’ representations and
warranties and as to such other matters as the Purchaser may request;

(n)            the results of UCC searches of each of the Borrower, Holder and
its Subsidiaries in form and substance reasonably satisfactory to the Purchaser
and evidence in form and substance reasonably satisfactory to the Purchaser that
all Liens encumbering the assets of Holdings and its Subsidiaries (other than
Liens in favor of the Senior Lender or MRC or Permitted Liens or Liens to be
released on the Closing Date) have been released;

 
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(o)            each document (including any Uniform Commercial Code financing
statement) required by this Agreement or the other Operative Documents, any
related agreement or under law or reasonably requested by Purchaser to be filed,
registered or recorded in order to create, in favor of Purchaser, a perfected
security interest in or lien upon the Collateral and any other assets that are
collateral under any of the Security Documents shall have been properly filed,
registered or recorded in each jurisdiction in which the filing, registration or
recordation thereof is so required or requested, and Purchaser shall have
received an acknowledgment copy, or other evidence satisfactory to it, of each
such filing, registration or recordation and satisfactory evidence of the
payment of any necessary fee, tax or expense relating thereto;

(p)            copies of the Senior Credit Agreement and the other principal
Senior Loan Documents with terms, conditions and amounts reasonably satisfactory
to the Purchaser, each certified by a Responsible Officer of the Borrower as
true, correct and complete, and evidence reasonably satisfactory to the
Purchaser that all conditions precedent to the loans to be made thereunder to
Borrower at the closing thereunder have been made or will be made simultaneously
with the Closing; and

(q)            such other documents, instruments and certificates, and
completion of such other matters, as the Purchaser may reasonably deem
reasonably necessary or appropriate.

6.5            Financial Information.  The Purchaser shall have received such
financial statements, evaluations, certifications and other financial
information as it may require (including, but not limited to, the latest month
and year-to-date internally prepared financings statements of the Borrower,
Holdings and its Subsidiaries) in order to satisfy itself as to the financial
condition of Holdings, the Borrower and the other Subsidiaries, and the lack of
material contingent liabilities of Holdings, the Borrower and the other
Subsidiaries.

6.6            Litigation.  No litigation, arbitration, proceeding or
investigation shall be pending or threatened that questions the validity or
legality of the transactions contemplated by any Operative Document or seeks a
restraining order, injunction or damages in connection therewith or that, in the
judgment of the Purchaser, might adversely affect the transactions contemplated
hereby or might have a Material Adverse Effect.

6.7            Material Adverse Effect.  No Material Adverse Effect shall have
occurred with respect to the Borrower or Holdings since the date of the
Purchaser’s latest examination of the Borrower and Holdings.

6.8            Necessary Consents.  Purchaser shall have received, in form and
substance reasonably satisfactory to the Purchaser, all consents, waivers,
acknowledgments and other agreements from third persons that Purchaser may deem
reasonably necessary or desirable in order to effectuate the provisions or
purposes of this Agreement and the other Operative Documents (other than those
contemplated by Section 1.14 hereof).

6.9            Material Agreements.  There shall not have occurred any default
of any material contract or agreement of Borrower or Holdings which would
reasonably be expected to have a Material Adverse Effect.

 
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6.10          Due Diligence.  The Purchaser shall be satisfied with the results
of its due diligence investigation of Holdings, the Borrower and the other
Subsidiaries, including, but not limited to, with respect to business,
accounting, legal, customer, supplier and environmental matters, and the
Purchaser shall have received such information as it may require (including in
order to satisfy itself as to the financial condition of Holdings, the Borrower
and the other Subsidiaries.

6.11          Fees.  The Purchaser shall have received the Closing Fee as
provided for in Section 1.11 hereof and payment of all costs, expenses and other
amounts described in Section 11.4(a)(i) as to which the Purchaser gives the
Borrower notice prior to or at the Closing, including attorneys’ fees payable by
Borrower in accordance herewith.

ARTICLE VII.
COVENANTS

So long as any Note or any other Obligation remains unpaid, the Borrower,
Holdings, and to the extent set forth herein, each other Subsidiary of Holdings
shall comply with each of the following covenants, unless the Holder
Representative shall consent otherwise in an Authenticated Record delivered to
the Borrower.

7.1            Reporting Requirements.  The Borrower shall deliver to the Holder
Representative the following information, compiled where applicable using GAAP
consistently applied, in form and content acceptable to the Holder
Representative:

(a)            Annual Financial Statements.  As soon as available and in any
event within 90 days after the Borrower’s fiscal year end, the Borrower’s
audited financial statements prepared by an independent certified public
accountant acceptable to the Holder Representative (it being understood that
Deloitte & Touche is acceptable), which shall include the Borrower’s balance
sheet, income statement, and statement of retained earnings and cash flows
prepared, if requested by the Holder Representative, on a consolidated and
consolidating basis to include Holdings and Subsidiaries.  The annual financial
statements shall be accompanied by the unqualified opinion of such accountant
(provided, that a qualification or exception may be included in any such audit
report or opinion for any period ending within the 12-month period preceding the
Maturity Date to the extent such qualification is a result of the line of credit
under the Senior Credit Agreement or the Obligations being reported as short
term indebtedness) and a certificate (the “Compliance Certificate”) in the form
of Exhibit E that is signed by a Responsible Officer of the Borrower.  Each
Compliance Certificate that accompanies an annual financial statement shall also
be accompanied by (i) copies of all management letters prepared by the
Borrower’s accountants; and (ii) a detailed statement, including computations,
signed by the accountant demonstrating whether or not the Borrower is in
compliance with the financial covenants of this Agreement.  In addition, the
Borrower shall use commercially reasonable efforts to obtain and deliver to the
Holder Representative with the Compliance Certificate a report signed by the
accountant stating that in making the investigations necessary to render the
accountant’s opinion, the accountant obtained no knowledge, except as
specifically stated, of any other Event of Default under the Agreement.

 
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(b)            Monthly Financial Statements.  As soon as available and in any
event within 30 days after the end of each month, the Borrower prepared balance
sheet, income statement, and statement of cash flows prepared for that month and
for the year–to-date period then ended, prepared, if requested by the Holder
Representative, on a consolidated and consolidating basis to include Holdings
and Subsidiaries, and stating in comparative form the figures for the
corresponding date and periods in the prior fiscal year and the final budget
delivered to and accepted by the Holder Representative, subject to quarter-end
and year-end adjustments and the absence of footnotes.  The financial statements
shall be accompanied by a Compliance Certificate in the form of Exhibit E that
is signed by a Responsible Officer of the Borrower.

(c)            10-Q Financial Reports.  As soon as available and in any event
within forty-five (45) days after the end of each fiscal quarter of the
Borrower, the Borrower’s 10-Q financial reports filed with the Commission.  This
requirement may be satisfied by the Borrower by posting a link to the filing on
the Borrower’s publicly-accessible website.

(d)            Collateral Reports.  Simultaneously with delivery to the Senior
Lender, a calculation of the Borrower’s Eligible Accounts and Eligible Inventory
(each as defined in the Senior Credit Agreement).

(e)            Projections.  No later than 15 days after the beginning of each
fiscal year, the Borrower’s projected balance sheet and income statement and
statement of cash flows for each month of such fiscal year, certified by a
Responsible Officer of the Borrower to the effect that (a) such projections were
prepared in good faith by the Borrower, (ii) the Borrower has a reasonable basis
for the assumptions contained in such projections when made and (iii) such
projections have been prepared in accordance with such assumptions.

(f)             Reserved.

(g)            Customer Lists.  On January 1 and July 1 of each calendar year,
an updated customer listing (with contact names and addresses).

(h)            Litigation.  No later than five days after a Responsible Officer
obtains actual knowledge thereof, a Record notifying the Holder Representative
of any litigation or other proceeding before any court or governmental agency
which seeks a monetary recovery against the Borrower in excess of $100,000.

(i)             Intellectual Property.  (i) No later than 30 days after the end
of each fiscal quarter, a Record notifying the Holder Representative of any
Intellectual Property Rights of the Borrower acquired during such fiscal
quarter, together with copies of all registrations and filings with respect to
same; (ii) except as permitted under Section 7.18 and except for Permitted
Liens, no later than five (5) Business Days before it disposes of material
Intellectual Property Rights, a Record notifying the Holder Representative of
the Borrower’s intention to dispose of such rights, along with copies of all
proposed documents and written agreements concerning the disposal of such rights
as reasonably requested by the Holder Representative; and (iii) promptly after a
Responsible Officer obtains actual knowledge thereof (and in any event, within
five Business Days), a Record notifying the Holder Representative of (A) any
Infringement by any Person of  material Intellectual Property Rights owned by
the Borrower, (B) any written material claims that the Borrower is Infringing
another Person’s Intellectual Property Rights and (C) except as permitted under
Section 7.18, any threatened cancellation, termination or material limitation of
the material Owned Intellectual Property or Licensed Intellectual Property.

 
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(j)             Defaults.  No later than three days after learning of the
probable occurrence of any Event of Default, a Record notifying the Holder
Representative of the Event of Default and the steps being taken by the Borrower
to cure the Event of Default.

(k)            Reserved.

(l)             Changes in Officers and Directors.  Promptly following
occurrence, a Record notifying the Holder Representative of any change in the
persons constituting the Borrower’s Officers and Directors.

(m)           Collateral.  Promptly after a Responsible Officer obtains actual
knowledge thereof (and in any event within five Business Days), a Record
notifying the Holder Representative of any loss of or material damage to any
Collateral or of any substantial adverse change in any Collateral or the
prospect of its payment.

(n)            Commercial Tort Claims.  Promptly after a Responsible Officer
obtains actual knowledge thereof (and in any event within five Business Days), a
Record notifying the Holder Representative of any commercial tort claims brought
by the Borrower against any Person, including the name and address of each
defendant, a summary of the facts, an estimate of the Borrower’s damages, copies
of any complaint or demand letter submitted by the Borrower, and such other
information as the Holder Representative may reasonably request.

(o)            Reports to Owners.  Promptly upon distribution (and in any event
within five Business Days), copies of all financial statements, reports and
proxy statements which the Borrower shall have sent to its Owners.

(p)            Tax Returns of the Borrower.  No later than five days after they
are required to be filed, copies of the Borrower’s signed and dated state and
federal income tax returns and all related schedules, and copies of any
extension requests.

(q)            Tax Returns and Financial Statements of Guarantors.  No later
than May 15 of each year or thirty days after they are required to be filed,
whichever is later, the current financial statement and signed and dated state
and federal income tax returns and related schedules of each Guarantor, and
copies of any extension requests.

(r)             Violations of Law.  No later than three days after discovery of
any violation, a Record notifying the Holder Representative of the Borrower’s
violation of any law, rule or regulation, the non-compliance with which could
have a Material Adverse Effect on the Borrower.

(s)            Pension Plans.  (i) Promptly upon discovery, and in any event
within 30 days after the Borrower knows that any Reportable Event with respect
to any Pension Plan has occurred, a Record authenticated by a Responsible
Officer of the Borrower notifying the Holder Representative of the Reportable
Event in detail and the actions which the Borrower proposes to take to correct
the deficiency, together with a copy of any related notice sent to the Pension
Benefit Guaranty Corporation; (ii) promptly upon discovery, and in any event
within 10 days after the Borrower fails to make a required quarterly Pension
Plan contribution under Section 412(m) of the Code, a Record authenticated by a
Responsible Officer of the Borrower notifying the Holder Representative of the
failure in detail and the actions that the Borrower will take to cure the
failure, together with a copy of any related notice sent to the Pension Benefit
Guaranty Corporation; and (iii) promptly upon discovery, and in any event within
10 days after the Borrower knows that it may be liable or may be reasonably
expected to have liability for any withdrawal, partial withdrawal,
reorganization or other event under any Multiemployer Plan under Sections 4201
or 4243 of ERISA, a Record authenticated by a Responsible Officer of the
Borrower notifying the Holder Representative of the details of the event and the
actions that the Borrower proposes to take in response.

 
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(t)             Other Reports.  From time to time, with reasonable promptness,
all customer lists, receivables schedules, inventory reports, collection
reports, deposit records, invoices to account debtors, shipment documents and
delivery receipts for goods sold, and such other materials, reports, records or
information as the Holder Representative may request.

7.2            Financial Covenants.  The Borrower agrees to comply with the
financial covenants described below, which shall be calculated using GAAP
consistently applied, except as they may be otherwise modified by the following
capitalized definitions:

(a)            Minimum Book Net Worth.  The Borrower shall maintain its Book Net
Worth during each period set forth below in an amount not less than the amount
set forth below:

Month Ending
Minimum Book Net Worth
   
November 30, 2009
$39,400,000
December 31, 2009
$37,400,000
January 31, 2010
$37,600,000
February 28, 2010
$38,000,000
March 31, 2010
$38,400,000
April 30, 2010
$38,800,000
May 31, 2010
$39,000,000
June 30, 2010
$39,000,000
July 31, 2010
$38,600,000
August 31, 2010
$38,200,000
September 30, 2010
$37,800,000
October 31, 2010
$37,800,000
November 30, 2010
$37,400,000
December 31, 2010
$37,200,000
January 31, 2011
$37,200,000
February 28, 2011
$37,200,000

 
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provided however, that each of foregoing minimum required amounts (other than
the minimum amount required for the November 30, 2009 test date) shall be
increased by an amount equal to the greater of (i) the December G/L Adjustment,
or (ii) zero (-0-).

(b)            Minimum Adjusted EBITDA.  Starting with the fiscal quarter ending
March 31, 2011 and thereafter, the Borrower shall achieve Adjusted EBITDA each
fiscal quarter, for the twelve-month period then ended, of not less than the
amounts set forth in the Senior Credit Agreement for each respective period as
adjusted to provide for a 20% cushion.

(c)            Capital Expenditures.  The Borrower shall not incur or contract
to incur Capital Expenditures of more than the following:  (i) fiscal year
ending December 31, 2009, $7,200,000; and (ii) fiscal year ending December 31,
2010 $6,600,000; provided, however, in the event the Borrower does not expend
the entire $7,200,000 during the fiscal year ending December 31, 2009, the
Borrower may carry forward to the fiscal year ending December 31, 2010 (but not
to subsequent fiscal years) up to $720,000 of such unutilized portion.  All
Capital Expenditures during fiscal year 2010 shall be applied first to reduce
the $6,600,000 limit for fiscal year 2010, and then to reduce the carry-forward
from fiscal year 2009, if any.

(d)            Future Financial Covenants.  With respect to future periods not
covered by the foregoing Sections 7.2(a), (b), and (c), the Borrower and the
Holder Representative agree to negotiate in good faith to establish, no later
than April 30, 2009, minimum Book Net Worth, minimum Adjusted EBITDA, and
maximum Capital Expenditures requirements for such future periods through the
Maturity Date; provided that such requirements will reflect a 20% cushion from
those agreed to with the Senior Lender for such future periods.

7.3            Other Liens and Permitted Liens.

(a)            Other Liens; Permitted Liens.  The Borrower shall not create,
incur or suffer to exist any Lien upon any of its assets, now owned or later
acquired, as security for any indebtedness, with the exception of the following
(each a “Permitted Lien”; collectively, “Permitted Liens”):  (i) in the case of
real property, covenants, restrictions, rights, easements and irregularities in
title which do not materially interfere with the Borrower or any Guarantor’s
business or operations; (ii) Liens in existence on the date of this Agreement
that are described on Schedule 7.3; (iii) the Security Interest and Liens
created by the Security Documents; (iv) purchase money Liens relating to the
acquisition of Equipment not exceeding the lesser of cost or fair market value,
not exceeding $550,000 in the aggregate during any fiscal year, and so long as
no Default Period is then in existence and none would exist immediately after
giving effect to such acquisition; (v) Liens for taxes not yet delinquent or
which are being contested in good faith by appropriate proceedings; provided,
that adequate reserves with respect thereto are maintained by the Borrower or
the applicable Guarantor and such Liens do not have a priority over the Lien of
the Holder Representative and the Holders in the Collateral; (vi) Liens created
by operation of law or contract not securing the payment of indebtedness for
money borrowed or guaranteed, including landlords’, carriers’, warehousemen’s,
mechanics’, materialmen’s, repairmen’s or other like Liens arising in the
ordinary course of business which are not overdue for a period of more than 60
days and, if overdue, for which adequate reserves have been made; (vii) any
interest or title of a lessor or sublessor under any lease permitted by this
Agreement; (viii) licenses (ranged on a non-exclusive basis), sublicenses,
leases or subleases granted to third parties in the ordinary course of business
and not interfering with the business of the Borrower or the Guarantors; (ix)
pledges or deposits in connection with workers’ compensation, unemployment
insurance and other social security legislation and deposits securing liability
to insurance carriers under insurance or self-insurance arrangements; (x)
deposits to secure the performance of bids, trade contracts (other than for
borrowed money), leases, statutory obligations, surety and appeal bonds,
performance bonds and other obligations of a like nature incurred in the
ordinary course of business; (xi) Liens arising out of consignment or similar
arrangements for the sale of goods entered into by the Borrower or the
Guarantors in the ordinary course of business; (xii) Liens in favor of customs
and revenue authorities arising as a matter of law which secure payment of
customs duties in connection with the importation of Inventory in the ordinary
course of business; (xiii) customary rights of setoff and bankers’ liens
existing in the ordinary course of business upon deposits of the Borrower and
the Guarantors; (xiv) precautionary Liens filed by equipment lessors pursuant to
operating leases of the Borrower and the Guarantors; provided that no such Lien
covers any property other than the property subject to such lease; (xiv) Liens
arising from any judgment against the Borrower or any Guarantor not constituting
an Event of Default so long such Liens do not have a priority over the Lien of
the Holder Representative and the Holders in the Collateral; (xvi) Liens
securing Indebtedness permitted by Section 7.4(f) and (g).

 
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(b)            Financing Statements.  The Borrower shall not authorize the
filing of any financing statement by any Person as Secured Party with respect to
any of the Borrower’s assets, other than by (i) the Holder Representative or
(ii) a Person holding a Permitted Lien (provided such filing shall only cover
the assets of the Borrower in which such Person is allowed to have a Permitted
Lien in accordance with this Section 7.3).  The Borrower shall not amend any
financing statement filed by the Holder Representative as Secured Party except
as permitted by law.

7.4            Indebtedness.  The Borrower shall not incur, create, assume or
permit to exist any indebtedness or liability on account of deposits or letters
of credit issued on the Borrower’s behalf, or advances or any indebtedness for
borrowed money of any kind, whether or not evidenced by an instrument, except:
(a) the Obligations; (b) indebtedness of the Borrower described on Schedule 7.4,
and any Refinancing Indebtedness in respect of such indebtedness (provided that
if the amount of the Refinancing Indebtedness exceeds $550,000, the Borrower
shall provide the Holder Representative with 10 days prior notice of the
Borrower’s intent to incur the Refinancing Indebtedness and a description of the
material terms of such Refinancing Indebtedness); (c) indebtedness secured by
Permitted Liens; (d) indebtedness evidenced by performance bonds issued in the
ordinary course of business or reimbursement obligations in respect thereof in
an aggregate amount at any time not exceeding $550,000; (e) Capitalized Lease
Obligations in a principal amount not exceeding $550,000 outstanding at anytime;
(f) indebtedness incurred by the Borrower to one or more of its insurance
companies, incurred in the ordinary course of business to finance payment of its
insurance premiums, not to exceed in the aggregate $1,650,000 outstanding at any
time; (g)(i) indebtedness owed to Senior Lender so long as such indebtedness
remains subject to the Intercreditor Agreement and (ii) any Subordinated Debt so
long as such Subordinated Debt remains subject to a Subordination Agreement; (h)
unsecured interest rate hedge agreements or currency hedge agreements entered
into in the ordinary course of the Borrower’s business for bona fide hedging
purposes and not for speculation; and (i) other unsecured Indebtedness not
referred to in any other clause of this Section 7.4 in an aggregate principal
amount not exceeding $110,000 at any time.  With respect to any such
Subordinated Debt, the Borrower shall only make payments of such Subordinated
Debt to the extent permitted under the terms of the applicable Subordination
Agreement.

 
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7.5            Guaranties.  The Borrower shall not assume, guarantee, endorse or
otherwise become directly or contingently liable for the obligations of any
Person (collectively, “Contingent Obligations”), except: (a) the endorsement of
negotiable instruments by the Borrower for deposit or collection or similar
transactions in the ordinary course of business; (b) guaranties, endorsements
and other direct or contingent liabilities in connection with the obligations of
other Persons in existence on the date of this Agreement and described on
Schedule 7.5, including extensions and renewals thereof which do not increase
the amount of such obligations as of the date of such extension or renewal; (c)
Contingent Obligations incurred in the ordinary course of business with respect
to surety and appeal bonds, performance bonds and other similar obligations; (d)
Contingent Obligations consisting of customary indemnity obligations under real
property leases entered into in the ordinary course of business; and (e) other
Contingent Obligations not exceed $110,000 in the aggregate at any time
outstanding.

7.6            Investments and Subsidiaries.  The Borrower shall not make or
permit to exist any loans or advances to, or make any investment or acquire any
interest whatsoever in, any Person, including without limitation any partnership
or joint venture, nor purchase or hold beneficially any stock or other
securities or evidence of indebtedness of any Person, except:

(a)            investments in direct obligations of the United States of America
or any of its political subdivisions whose obligations constitute the full faith
and credit obligations of the United States of America and have a maturity of
one year or less, commercial paper issued by U.S. corporations rated “A 1” or “A
2” by Standard & Poor’s Ratings Services or “P 1” or “P 2” by Moody’s Investors
Service or certificates of deposit or bankers’ acceptances having a maturity of
one year or less issued by members of the Federal Reserve System having deposits
in excess of $110,000,000 (which certificates of deposit or bankers’ acceptances
are fully insured by the Federal Deposit Insurance Corporation) (“Cash
Equivalents”);

(b)            travel advances or loans to the Borrower’s Officers and employees
not exceeding at any one time an aggregate outstanding balance of $55,000;

(c)            prepaid rent not exceeding one month or security deposits;

(d)            current investments in the Subsidiaries in existence on the date
of this Agreement which are identified on Schedule 5.5;

(e)            extensions of trade credit in the ordinary course of business;

(f)             subject to the limitations set forth in Section 5.23,
investments received in connection with bankruptcy or reorganization of, or
settlement of delinquent Accounts and disputes with, customers and suppliers;

(g)            investments outstanding on the Closing Date and set forth on
Schedule 7.6;

 
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(h)            deposits made in the ordinary course of business securing
contractual obligations of the Borrower to the extent constituting a Permitted
Lien; provided that if any such deposit exceeds $55,000, the Borrower shall
promptly notify the Holder Representative of the material terms of such deposit;

(i)             Contingent Obligations expressly permitted hereunder;

(j)             deposit accounts maintained in the ordinary course of business;
and

(k)            loans and advances that otherwise would be permitted to be made
as a distribution in accordance with Section 5.7; and

(l)             other investments, loans and advances not listed above not to
exceed $275,000 in the aggregate at any time outstanding.

7.7            Dividends and Distributions.  Except as set forth in this
Agreement, the Borrower shall not declare or pay any dividends (other than
dividends payable solely in stock of the Borrower) on any class of its stock, or
make any payment on account of the purchase, redemption or retirement of any
shares of its stock, or other securities or evidence of its indebtedness (other
than scheduled payments with respect to indebtedness permitted under this
Agreement, to the extent not prohibited by any intercreditor or subordination
agreement to which the Holder Representative is a party (including the
Intercreditor Agreement)) or make any distribution regarding its stock, either
directly or indirectly; provided that (i) the Borrower may make distributions to
Holdings, in amount not to exceed $110,000 per fiscal year, solely to permit
Holdings to pay, as and when due and payable, obligations incurred in the
ordinary course of business relating solely to holding company activities, and
(ii) the Borrower may make distributions to Holdings to the extent that Holdings
pays, on behalf of the Borrower, any taxes owing by the Borrower.

7.8            Salaries.  [Intentionally Omitted.

7.9            Key Person Life Insurance.  [Intentionally Omitted.]

7.10          Books and Records; Collateral Examination; Inspection and
Appraisals.

(a)            Books and Records; Inspection.  The Borrower shall keep complete
and accurate books and records with respect to the Collateral and the Borrower’s
business and financial condition and any other matters that the Holder
Representative may request, in accordance with GAAP consistently applied.  The
Borrower shall permit any employee, attorney, accountant or other agent of the
Holder Representative to audit, review, make extracts from and copy any of its
books and records at any time during ordinary business hours, and to discuss the
Borrower’s affairs with any of its Directors, Officers, employees, Owners or
agents.

(b)            Authorization to the Borrower’s Agents to Make Disclosures to the
Holder Representative.  The Borrower authorizes all accountants and other
Persons acting as its agent to disclose and deliver to the Holder
Representative’s employees, accountants, attorneys and other Persons acting as
its agent, at the Borrower’s expense, all financial information, books and
records, work papers, management reports and other information in their
possession regarding the Borrower; provided that legal counsel for the Borrower
shall not be required to disclose information to the Holder Representative that
consists of attorney-client privileged communications between the Borrower and
such counsel.

 
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(c)            Collateral Exams, Audits, and Inspections.  The Borrower shall
permit the Holder Representative’s employees, accountants, attorneys or other
Persons acting as its agent, to examine, audit, and inspect any Collateral or
any other property of the Borrower at any time during ordinary business hours.

(d)            Collateral Appraisals.  The Holder Representative may also
obtain, from time to time, but no more than once every 120 days during the
period commencing on the date of this Agreement and ending on the first
anniversary thereafter and then two times each one-year period thereafter, at
the Borrower’s expense, an appraisal of the Borrower’s inventory and other
Collateral by an appraiser acceptable to the Holder Representative in its sole
discretion; provided that during a Default Period, the Holder Representative may
obtain at any time (and from time to time) in the Holder Representative’s sole
discretion such appraisals of the Borrower’s inventory and other Collateral at
the Borrower’s expense.

7.11          Account Verification; Payment of Permitted Liens.

(a)            Account Verification.  The Holder Representative or its agents
may (i) contact account debtors and other obligors at any time to verify the
Borrower’s Accounts; and (ii) require the Borrower to send requests for
verification of Accounts or send notices of assignment of Accounts to account
debtors and other obligors.

(b)            Covenant to Pay Permitted Liens.  The Borrower shall pay when due
each account payable due to any Person holding a Permitted Lien (as a result of
such payable) on any Collateral, except as expressly provided in Section 7.3(a).

7.12          Compliance with Laws.

(a)            General Compliance with Applicable Law; Use of Collateral.  The
Borrower shall (i) comply, and cause each Subsidiary to comply, with the
requirements of applicable laws and regulations, the non compliance with which
would have a Material Adverse Effect on its business or its financial condition;
and (ii) use and keep the Collateral, and require that others use and keep the
Collateral, only for lawful purposes, without violation of any material federal,
state or local law, statute or ordinance.

(b)            Compliance with Federal Regulatory Laws.  The Borrower shall
(i)  prohibit and cause each Subsidiary to prohibit, any Person that is an Owner
or Officer from being listed on the Specially Designated Nationals and Blocked
Person List or other similar lists maintained by the Office of Foreign Assets
Control (“OFAC”), the Department of the Treasury or included in any Executive
Orders, (ii) not permit the proceeds of the sale and purchase of the Notes or
any other financial accommodation extended by the Holders in any way that
violates any foreign asset control regulations of OFAC or other applicable law,
(iii) comply, and cause each Subsidiary to comply, with all applicable Bank
Secrecy Act laws and regulations, as amended from time to time, and (iv)
otherwise comply with the U.S.A. Patriot Act.

 
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(c)            Compliance with Environmental Laws.  The Borrower shall (i)
comply, and cause each Subsidiary to comply, with the requirements of applicable
Environmental Laws and obtain and comply with all permits, licenses and similar
approvals required by them, and (ii) not generate, use, transport, treat, store
or dispose of any Hazardous Substances in such a manner as to create any
material liability or obligation under the common law of any jurisdiction or any
Environmental Law.

7.13          Payment of Taxes and Other Claims.  The Borrower shall pay or
discharge, when due, and cause each Subsidiary to pay or discharge, when due,
(a) all taxes, assessments and governmental charges levied or imposed upon it or
upon its income or profits, upon any properties belonging to it (including
without limitation the Collateral) or upon or against the creation, perfection
or continuance of the Security Interest, prior to the date on which penalties
attach, (b) all federal, state, provincial and local taxes required to be
withheld by it, and (c) all lawful claims for labor, materials and supplies
which, if unpaid, might by law become a Lien upon any properties of the
Borrower, although the Borrower shall not be required to pay any such tax,
assessment, charge or claim whose amount, applicability or validity is being
contested in good faith by appropriate proceedings and for which proper reserves
have been made.

7.14          Maintenance of Collateral and Properties.

(a)            The Borrower shall keep and maintain the Collateral and all of
its other properties necessary or useful in its business in good condition,
repair and working order (ordinary wear and tear excepted) and will from time to
time replace or repair any worn, defective or broken parts, although the
Borrower may discontinue the operation and maintenance of any properties if the
Borrower believes that such discontinuance is desirable to the conduct of its
business and not disadvantageous in any material respect to the Holder
Representative and the Holders.  The Borrower shall take all commercially
reasonable steps necessary to protect and maintain its Intellectual Property
Rights.

(b)            The Borrower shall defend the Collateral against all Liens,
claims and demands of all third Persons claiming any interest in the
Collateral.  The Borrower shall keep all Collateral free and clear of all Liens
except Permitted Liens.  The Borrower shall take all commercially reasonable
steps necessary to prosecute any Person Infringing its Intellectual Property
Rights and to defend itself against any Person accusing it of Infringing any
Person’s Intellectual Property Rights.

7.15          Insurance.  The Borrower shall at all times maintain insurance
with insurers acceptable to the Holder Representative, in such amounts and on
such terms (including deductibles) as the Holder Representative in its sole
discretion may require and including, as applicable and without limitation,
business interruption insurance (including force majeure coverage), hazard
coverage on an “all risks” basis for all tangible Collateral, and theft and
physical damage coverage for Collateral consisting of motor vehicles.  All
insurance policies must contain an appropriate lender’s interest endorsement or
clause, and name the Holder Representative as an additional insured.

 
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7.16          Preservation of Existence.  The Borrower shall preserve and
maintain its existence and all of its rights, privileges and franchises
necessary or desirable in the ordinary conduct of its business and shall conduct
its business in an orderly, efficient and regular manner.

7.17          Delivery of Instruments, etc.  Upon written request by the Holder
Representative, the Borrower shall promptly deliver to the Holder Representative
in pledge all instruments, documents and chattel paper constituting Collateral
in an amount in excess of $50,000 (individually or in the aggregate), endorsed
or assigned by the Borrower.

7.18          Sale or Transfer of Assets; Suspension of Business
Operations.  The Borrower shall not sell, lease, assign, transfer or otherwise
dispose of (a) the stock of any Subsidiary, (b) all or a substantial part of its
assets, or (c) any Collateral or any interest in Collateral (whether in one
transaction or in a series of transactions) to any other Person other than (i)
the sale of Inventory in the ordinary course of business; (ii) the use of cash
and Cash Equivalents in the ordinary course of business; (iii) the sale of
obsolete, surplus, uneconomical, or worn-out assets; (iv) leases or subleases
granted to third parties in the ordinary course of business and in each case not
interfering with the business of the Borrower; (v) subject to Section 7.23,
write-offs or grants of discounts or forgiveness of Accounts, without recourse,
which are at least 90 days past due in connection with the compromise or
collection thereof in the ordinary course of business which do not interfere in
any material respect of the Borrower; and (vi) transfers arising from
investments, loans and advances to the extent permitted under Section 7.6.  The
Borrower shall not liquidate, dissolve or suspend business operations.  The
Borrower shall not transfer any part of its ownership interest in any
Intellectual Property Rights and shall not permit its rights as licensee of
Licensed Intellectual Property to lapse, except that the Borrower may transfer
such rights or permit them to lapse if it has reasonably determined that such
Intellectual Property Rights are no longer useful in its business.  If the
Borrower transfers (other than by license) any Intellectual Property Rights for
value, the Borrower shall pay the Proceeds to the Holder Representative for
application to the Obligations.  The Borrower shall not license any other Person
to use any of the Borrower’s Intellectual Property Rights, except that the
Borrower may grant licenses in the ordinary course of its business in connection
with sales of Inventory or the provision of services to its customers.

7.19          Consolidation and Merger; Asset Acquisitions.  The Borrower shall
not consolidate with or merge into any other entity, or permit any other entity
to merge into it, or acquire (in a transaction analogous in purpose or effect to
a consolidation or merger) all or substantially all of the assets of any other
entity, except for (i) any merger or consolidation of a Subsidiary into the
Borrower, with the Borrower being the survivor thereof and (ii) any merger or
consolidation of a Subsidiary into another Subsidiary.  The Borrower shall not
form or acquire any additional Subsidiary after the date of this Agreement.

7.20          Sale and Leaseback.  The Borrower shall not enter into any
arrangement, directly or indirectly, with any other Person pursuant to which the
Borrower shall sell or transfer any real or personal property, whether owned now
or acquired in the future, and then rent or lease all or part of such property
or any other property which the Borrower intends to use for substantially the
same purpose or purposes as the property being sold or transferred.

 
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7.21          Restrictions on Nature of Business.  The Borrower will not engage
in any line of business materially different from that presently engaged in by
the Borrower, and will not purchase, lease or otherwise acquire assets not
related to its business.

7.22          Accounting.  The Borrower will not adopt any material change in
accounting principles except as required by GAAP, consistently applied.  The
Borrower will not change its fiscal year.

7.23          Discounts, etc.  After notice from the Holder Representative
during a Default Period, (i) the Borrower will not grant any discount, credit or
allowance to any customer of the Borrower or accept any return of goods sold and
(ii) the Borrower will not at any time modify, amend, subordinate, cancel or
terminate any Account.

7.24          Pension Plans.  Except as disclosed to the Holder Representative
in a Record prior to the date of this Agreement, neither the Borrower nor any
ERISA Affiliate will (a) adopt, create, assume or become party to any Pension
Plan, (b) become obligated to contribute to any Multiemployer Plan, (c) incur
any obligation to provide post-retirement medical or insurance benefits with
respect to employees or former employees (other than benefits required by law),
or (d) amend any Plan in a manner that would materially increase its funding
obligations.

7.25          Place of Business; Name.  The Borrower will not transfer its chief
executive office or principal place of business, or move, relocate, close or
sell any business Premises, unless (i) the Holder Representative has received 30
days advance notice thereof, (ii) the Holder Representative continuously
maintains a perfected Lien on the Collateral with the priority contemplated by
this Agreement, and (iii) the Borrower exercises commercially reasonable efforts
to provide the Holder Representative with a Collateral Access Agreement no later
than the date that such transfer, move, or relocation occurs.  The Borrower will
not permit any tangible Collateral or any records relating to the Collateral to
be located in any state or area in which, in the event of such location, a
financing statement covering such Collateral would be required to be, but has
not in fact been, filed in order to perfect the Security Interest.  The Borrower
will not change its name or jurisdiction of organization.

7.26          Constituent Documents.  The Borrower will not amend its
Constituent Documents.

7.27          Reserved.

7.28          Performance by the Holder Representative.  If the Borrower fails
to perform or observe any of its obligations under this Agreement at any time,
the Holder Representative may, but need not, perform or observe them on behalf
of the Borrower and may, but need not, take any other actions which the Holder
Representative may reasonably deem necessary to cure or correct this failure;
and the Borrower shall pay the Holder Representative upon written demand the
amount of all costs and expenses (including reasonable attorneys’ fees and legal
expenses) incurred by the Holder Representative in performing these obligations,
together with interest on these amounts at the Default Rate.

 
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7.29          Holder Representative Appointed as the Borrower’s Attorney in
Fact.  To facilitate the Holder Representative’s performance or observance of
the Borrower’s obligations under this Agreement, the Borrower hereby irrevocably
appoints the Holder Representative and the Holder Representative’s agents, as
the Borrower’s attorney in fact (which appointment is coupled with an interest)
with the right (but not the duty) to create, prepare, complete, execute,
deliver, endorse or file on behalf of the Borrower any instruments, documents,
assignments, security agreements, financing statements, applications for
insurance and any other agreements or any Record required to be obtained,
executed, delivered or endorsed by the Borrower in accordance with the terms of
this Agreement.

7.30          Use of Proceeds.

(a)            The Borrower and Holdings will use the proceeds of the loans
evidenced by the Notes (a) to repay existing indebtedness of the Borrower and
Holdings to MRC in full, (b) to repay existing indebtedness of Holdings and the
Borrower to Union Bank, N.A., (c) for the working capital of Holdings, the
Borrower and the other Subsidiaries and (d) to finance future growth
initiatives.

(b)            No portion of the proceeds of the loans evidenced by the Notes
shall be used for the “purpose of purchasing or carrying” any “margin stock” or
“margin security” as such terms are used in Regulations T, U and X of the Board
of Governors of the Federal Reserve System, or otherwise in violation of such
regulations.

7.31          Further Assurances.

(a)            Holdings shall, unless the Required Holders otherwise consent,
cause each Domestic Subsidiary formed or acquired after the date of this
Agreement to become a Guarantor by timely complying with the requirements of
Article IX hereof.  Upon execution and delivery of an Additional Guarantor
Supplement or other Guaranty in compliance with such requirements, each such
Person shall become a Guarantor of the Obligations and shall have all of the
rights, benefits, duties, and obligations in such capacity under the Operative
Documents.

(b)            At any time and from time to time Holdings shall, and shall cause
each of its Domestic Subsidiaries to, execute and deliver such further documents
and take such further action as may reasonably be requested by the Holder
Representative to effect the purposes of the Operative Documents.

7.32          Reports to other Creditors.  Promptly after filing the same, the
Borrower and Holdings shall furnish to the Holder Representative copies of any
compliance certificate and other material information furnished, to the Senior
Lender or any other holders of the Senior Obligations, or to the holders of any
Subordinated Debt pursuant to the terms of any indenture, loan or credit or
similar agreement and not otherwise required to be furnished to the Holder
Representative pursuant to any other provision of this Agreement.

 
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7.33          Board Seat.

(a)            Upon the earlier to occur of (x) Holdings’ proxy statement (for
the election of directions) for the annual meeting of stockholders to be held in
calendar year 2010 or (y) June 30, 2010 (the “Designee Date”), and for as long
as the Notes are outstanding, MRC shall have the right to nominate one
individual to serve as a member of Holdings’ Board of Directors (“MRC’s
Designee”), and Holdings agrees (i) to increase the size of Holdings’ Board of
Directors and appoint MRC’s Designee to Holdings’ Board of Directors as promptly
as practicable after the Designee Date, or, at Holdings’ option, to nominate
MRC’s Designee and recommend to Holdings’ stockholders that MRC’s Designee be
elected to Holdings’ Board of Directors at the annual meeting of stockholders of
Holdings in 2010, and (ii) to recommend to Holdings’ stockholders that MRC’s
Designee be elected to Holdings’ Board of Directors at annual meetings of
stockholders occurring after the Designee Date and thereafter for as long as the
Notes are outstanding.

(b)            In connection with any election of directors at an annual meeting
of stockholders to which this Section 7.33 applies, MRC agrees to provide
advance notice of MRC’s Designee to Holdings within the time periods set forth
in Holdings’ Amended and Restated Bylaws.  MRC agrees to provide notice of the
initial MRC Designee to Holdings no later than April 30, 2010.  In connection
with MRC’s nomination of any MRC Designee, the MRC Designee shall deliver a
completed and signed questionnaire regarding the background and qualifications
of such person to serve as a director, a copy of which may be obtained upon
request to the secretary of Holdings, a signed consent to be named in Holdings’
proxy statement as a nominee for election as a director, such additional
information that Holdings may reasonably request to determine the eligibility or
qualifications of such person to serve as a director of Holdings, or that could
be material to a reasonable stockholder’s understanding of the qualifications
and/or independence, or lack thereof, of such nominee as a director and all
other documents reasonably requested by Holdings, including certifications as to
compliance with Holdings’ insider trading policy and code of conduct.

7.34          Other Agreements.  Enter into any material amendment, waiver or
modification of the Senior Loan Documents or any related agreements, other than
as permitted by the Intercreditor Agreement.

ARTICLE VIII.
EVENTS OF DEFAULT AND REMEDIES

8.1            Events of Default.  If any one or more of the following events or
conditions (each, an “Event of Default”) shall occur or exist:

(a)            The Borrower fails to pay any amount of any Note on the date that
it becomes due and payable;

(b)            The Borrower fails to observe or perform (i) any covenant or
agreement of the Borrower set forth in Sections 7.1 (o), and (p) and such
failure to observe or perform shall continue unremedied for a period of 10 days
after such failure, (ii) any covenant or agreement of the Borrower set forth in
Section 7.12 and such failure shall not be cured within 30 days after the
occurrence of such failure, (iii) any covenant or agreement of the Borrower set
forth in Section 7.13; provided that if such a breach of Section 7.13 relates to
a tax, assessment or charge that is less than $55,000, the Borrower shall have
up to 30 days to cure such breach before it shall be deemed to be an Event of
Default, or (iv) any other covenant or agreement of the Borrower in this
Agreement (not described in clauses (i), (ii), and (iii) of this paragraph (b)),
or in any of the Operative Documents;

 
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(c)            Any covenant in Section 7.2 becomes inapplicable due to the lapse
of time, and the Borrower shall fail to agree to amend the covenant to apply to
future periods (it being understood that the new covenant levels shall provide
for at least a 20% cushion from those provided in the Senior Credit Agreement
with respect to such period for this Section 8.1(c) to apply);

(d)            Reserved.

(e)            Reserved.

(f)            A Change of Control shall occur;

(g)            (i) The Borrower or any Guarantor becomes insolvent or admits in
a Record an inability to pay debts as they mature, or the Borrower or any
Guarantor makes an assignment for the benefit of creditors; or the Borrower or
any Guarantor applies for or consents to the appointment of any receiver,
trustee, or similar officer for the benefit of the Borrower or any Guarantor, or
for any of their properties; or (ii) any receiver, trustee or similar officer is
appointed without the application or consent of the Borrower or such Guarantor;
or any judgment, writ, warrant of attachment or execution or similar process is
issued or levied against a substantial part of the property of the Borrower or
any Guarantor which remains undismissed, undischarged, unstayed, or unbonded for
a period of 60 days or longer;

(h)            (i) The Borrower or any Guarantor files a petition under any
chapter of the United States Bankruptcy Code or under the laws of any other
jurisdiction naming the Borrower or such Guarantor as debtor; (ii) any such
petition is instituted against the Borrower or any such Guarantor which remains
undismissed or undischarged for a period of 60 days or longer; (iii) the
Borrower or any Guarantor institutes (by petition, application, answer, consent
or otherwise) any bankruptcy, insolvency, reorganization, debt arrangement,
dissolution, liquidation or similar proceeding under the laws of any
jurisdiction; or (iv) any such proceeding is instituted (by petition,
application or otherwise) against the Borrower or any such Guarantor which
remains undismissed or undischarged for a period of 60 days or longer.

(i)             Reserved.

(j)             Any representation or warranty made by the Borrower or any
Guarantor in this Agreement or in any Guaranty, or by the Borrower (or any
Responsible Officer of the Borrower) or any Guarantor in any agreement,
certificate, instrument or financial statement or other statement delivered to
the Holder Representative in connection with this Agreement or pursuant to such
Guaranty is untrue or misleading in any material respect when delivered to the
Holder Representative;

 
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(k)            A final, non-appealable arbitration award, judgment, or decree or
order for the payment of money in an amount in excess of $550,000 (to the extent
not insured or subject to indemnity), is entered against the Borrower which is
not stayed or appealed within 60 days from the entry thereof;

(l)             The Borrower is in default beyond any applicable grace period
with respect to (i) any bond, debenture, note or other evidence of indebtedness
issued by the Borrower that is held by any third Person other than the Holder
Representative, or under any instrument under which any such evidence of
indebtedness has been issued or by which it is governed, or (ii) any lease or
other contract, which in each case under clauses (i) or (ii) of this paragraph
relates to an amount owing in excess of $550,000 individually or in the
aggregate, in each case, except for obligations owed to the Senior Lender under
the Senior Loan Documents;

(m)           The Borrower liquidates, dissolves, terminates or suspends its
business operations or otherwise fails to operate its business in the ordinary
course, or merges with another Person; or sells or attempts to sell all or
substantially all of its assets;

(n)            The Borrower fails to pay any indebtedness or obligation owed to
the Holder Representative or any Holder which is unrelated to this Agreement as
it becomes due and payable;

(o)            Any Guarantor repudiates or purports to revoke such Guarantor’s
Guaranty, or fails to perform any obligation under such Guaranty, or any
individual Guarantor dies or becomes incapacitated, or any other Guarantor
ceases to exist for any reason (except as expressly permitted under this
Agreement);

(p)            The Borrower engages in any act prohibited by the Intercreditor
Agreement or any Subordination Agreement, or makes any payment on Junior
Obligations (as defined in the Intercreditor Agreement) that a Junior
Obligations Secured Party (as defined in the Intercreditor Agreement) was not
contractually entitled to receive, including pursuant to or restricted by the
Junior Obligations Security Documents (as defined in the Intercreditor
Agreement) or the Intercreditor Agreement;

(q)            A Material Adverse Effect shall occur, as determined by the
Holder Representative in the Holder Representative’s Permitted Discretion;

(r)             (i) The Borrower hires an Officer or appoints a Director who has
been convicted of any felony offence under state or federal law, or (ii) any
Director or Responsible Officer of the Borrower is indicted for a felony offence
under state or federal law if, with respect to this clause (ii), (x) such
indictment has not been dismissed within 15 days of the indictment of such
Director or Responsible Officer, or (y) such Director or Responsible Officer of
the Borrower has not been relieved of his or her duties as a Director or
Officer, as applicable, within 15 days of such indictment.

(s)            Any Director, Officer, Guarantor, or Owner of at least 20% of the
issued and outstanding capital stock of the Borrower is indicted for a felony
offence under state or federal law, or the Borrower hires an Officer or appoints
a Director who has been convicted of any such felony offense, or a Person
becomes an Owner of at least 20% of the issued and outstanding capital stock of
the Borrower who has been convicted of any such felony offense;

 
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(t)             (i) Any Reportable Event, which constitutes sufficient grounds
for termination of any Pension Plan or for the appointment of a trustee to
administer any Pension Plan, has occurred and is continuing 30 days after the
Borrower gives the Holder Representative a Record notifying it of the Reportable
Event; or a trustee is appointed by an appropriate court to administer any
Pension Plan; or the Pension Benefit Guaranty Corporation institutes proceedings
to terminate or appoint a trustee to administer any Pension Plan; (ii) the
Borrower or any ERISA Affiliate files for a distress termination of any Pension
Plan under Title IV of ERISA; (iii) the Borrower or any ERISA Affiliate fails to
make any quarterly Pension Plan contribution required under Section 412(m) of
the Code, which may, either by itself or in combination with other failures,
result in the imposition of a Lien on the Borrower’s assets in favor of the
Pension Plan; or (iv) any withdrawal, partial withdrawal, reorganization or
other event occurs with respect to a Multiemployer Plan which could reasonably
be expected to result in a material liability by the Borrower to the
Multiemployer Plan under Title IV of ERISA; and/or

(u)            An event of default has occurred under the Senior Loan Documents
or the Intercreditor Agreement, which default shall not have been cured or
waived within any applicable grace period and for which the Senior Obligations
shall be accelerated or declared to be due and payable prior to their stated
maturity,

then, and in any such event described in clauses (a) through (u) above in this
Section 8.1,

(1)            the Required Holders may, by notice to the Borrower, declare the
entire unpaid principal amount of the Notes, plus all interest accrued and
unpaid thereon (including all PIK Interest) and all other amounts payable under
this Agreement, the Notes and the other Operative Documents to be forthwith due
and payable, whereupon the Notes, all such accrued interest and all such amounts
shall become and be forthwith due and payable (unless there shall have occurred
an Event of Default under clause (g) or (h) of this Section 8.1, in which case
all such amounts shall automatically become due and payable), without
presentment, demand, protest or further notice of any kind, all of which are
hereby expressly waived by the Borrower, and

(2)            the Holder Representative may, and at the request of the Required
Holders, shall exercise any and all rights and remedies under this Agreement,
the Notes and the other Operative Documents and proceed to protect and enforce
such rights by suit in equity, action at law and/or other appropriate proceeding
either for specific performance of any covenant, provision or condition
contained or incorporated by reference in this Agreement, the Notes or the other
Operative Documents or in aid of the exercise of any power granted in this
Agreement, the Notes or the other Operative Documents, and proceed to enforce
the payment of Obligations hereunder or any other legal or equitable right.  No
remedy herein conferred upon any Holder is intended to be exclusive of any other
remedy and each and every remedy shall be cumulative and shall be in addition to
every other remedy given hereunder or now or hereafter existing at law or in
equity or by statute or any other provision of law.

 
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8.2            Distribution of Proceeds.  In the event that following the
occurrence or during the continuance of any Default or Event of Default, any
Holder receives any monies with respect to the amounts due hereunder or under
the Notes, such monies shall be distributed for application as follows:

(a)            First, to the payment of, or (as the case may be) the
reimbursement of the Holders for or in respect of, all costs, expenses,
disbursements and losses which shall have been incurred or sustained by the
Holders in connection with the collection of such monies by the Holders, for the
exercise, protection or enforcement by the Holders of all or any of the rights,
remedies, powers and privileges of the Holders under this Agreement or any of
the other Operative Documents, pro rata based on the relative amount so incurred
or sustained;

(b)            Second, to all other Obligations in such order or preference as
the Required Holders may determine; provided, however, that distributions shall
be made among the Holders pro rata in accordance with the Obligations owing to
them; and

(c)            Third, the excess, if any, shall be returned to the Borrower or
to such other Persons as are entitled thereto.

8.3            Annulment of Defaults.  Section 8.1 is subject to the condition
that, if at any time after the principal of any of the Notes shall have become
due and payable, and before any judgment or decree for the payment of the moneys
so due, or any portion thereof, shall have been entered, then and in every such
case the Holders of a majority (or if a higher percentage would be required
under Section 11.2 to waive the underlying Event of Default, then such higher
percentage) in principal amount of all Notes then outstanding, voting together
as a single class, may, by written instrument filed with the Borrower, rescind
and annul such declaration and its consequences; but no such rescission or
annulment shall extend to or affect any subsequent Default or Event of Default
or impair any right consequent thereon.

ARTICLE IX.
THE GUARANTIES

9.1            The Guaranties.  The payment and performance of the Obligations
shall at all times be guaranteed by each Guarantor pursuant to this Article IX
or pursuant to one or more guaranty agreements in form and substance reasonably
acceptable to the Required Holders, as the same may be amended, modified or
supplemented from time to time (individually a “Guaranty” and collectively the
“Guaranties”).

To induce the Holders to purchase the Notes and in consideration of benefits
expected to accrue to the Borrower and each Guarantor by reason thereof and for
other good and valuable consideration, receipt of which is hereby acknowledged,
each Guarantor (including any Domestic Subsidiary formed or acquired after the
Closing Date executing an Additional Guarantor Supplement or such other form of
Guaranty as is reasonably acceptable to the Required Holders) hereby
unconditionally and irrevocably guarantees jointly and severally to the Holders,
the due and punctual payment of all present and future Obligations, including,
but not limited to, the due and punctual payment of principal of and interest on
the Notes and the due and punctual payment of all other Obligations now or
hereafter owed by the Borrower under the Operative Documents, in each case as
and when the same shall become due and payable, whether at stated maturity, by
acceleration or otherwise, according to the terms hereof and thereof (including
interest, fees and other amounts which, but for the filing of a petition in
bankruptcy, would otherwise accrue on any such indebtedness, obligation, or
liability).  In case of failure by the Borrower or any other obligor punctually
to pay any Obligations guaranteed hereby, each Guarantor hereby unconditionally
agrees to make such payment or to cause such payment to be made punctually as
and when the same shall become due and payable, whether at stated maturity, by
acceleration, or otherwise, and as if such payment were made by the Borrower or
such obligor.  Each Guarantor agrees that its guaranty set forth in this Article
IX is a guaranty of payment when due and not of collection, and each Guarantor
waives (to the extent permitted by law) any right to require that any resort be
made by the Holder Representative or any Holder to any collateral for the
Obligations.

 
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9.2            Guaranty Unconditional.  The obligations of each Guarantor under
this Article IX shall be unconditional and absolute and, without limiting the
generality of the foregoing, shall not be released, discharged, or otherwise
affected by:

(a)            any extension, renewal, settlement, compromise, waiver, or
release in respect of any obligation of the Borrower, any Guarantor or any other
obligor under this Agreement or any other Operative Document or by operation of
law or otherwise;

(b)            any modification or amendment of or supplement to this Agreement
or any other Operative Document;

(c)            any change in the corporate existence, structure, or ownership
of, or any insolvency, bankruptcy, reorganization, or other similar proceeding
affecting, the Borrower, any Guarantor or any other obligor, or any of their
respective assets, or any resulting release or discharge of any obligation of
the Borrower, any Guarantor or other obligor contained in any Operative Document
or otherwise;

(d)            the existence of any claim, set-off, or other rights which the
Borrower, any Guarantor or any other obligor may have at any time against any
Holder, or any other Person, whether or not arising in connection herewith;

(e)            any failure to assert, or any assertion of, any claim or demand
or any exercise of, or failure to exercise, any rights or remedies against the
Borrower, any Guarantor or any other obligor or any other Person or Property;

(f)             any application of any sums by whomsoever paid or howsoever
realized to any obligation of the Borrower, any Guarantor or any other obligor,
regardless of what obligations of the Borrower, any Guarantor or any other
obligor remain unpaid;

(g)            any invalidity or unenforceability, for any reason, relating to
or against the Borrower, any Guarantor or any other obligor of this Agreement or
of any other Operative Document, or any provision of applicable law or
regulation purporting to prohibit the payment by the Borrower, any Guarantor or
any other obligor of the principal of or interest on any Note or any other
amount payable under the Operative Documents; or

 
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(h)            any other act or omission to act or delay of any kind by any
Holder or any other Person or any other circumstance whatsoever that might, but
for the provisions of this paragraph, constitute a legal or equitable discharge
of the obligations of any Guarantor under this Article IX.

9.3            Discharge Only upon Payment in Full; Reinstatement in Certain
Circumstances.  Each Guarantor’s obligations under this Article IX shall remain
in full force and effect until the Obligations and all other amounts payable by
the Borrower and the Guarantors under this Agreement and all other Operative
Documents shall have been paid in full (other than contingent indemnification
obligations for which no claim has been asserted).  If at any time any payment
of the principal of or interest on any Note or any other amount payable by the
Borrower, any Guarantor or any other obligor under the Operative Documents is
rescinded or must be otherwise restored or returned upon the insolvency,
bankruptcy, or reorganization of the Borrower, any Guarantor or any other
obligor, or otherwise, each Guarantor’s obligations under this Article IX with
respect to such payment shall be reinstated at such time as though such payment
had become due but had not been made at such time.

9.4            Subrogation.  Each Guarantor agrees it will not exercise any
rights which it may acquire by way of subrogation by any payment made hereunder,
or otherwise, until all the Obligations shall have been paid in full (other than
contingent indemnification obligations for which no claim has been
asserted).  If any amount shall be paid to a Guarantor on account of such
subrogation rights at any time prior to the payment in full of the Obligations
and all other amounts payable by the Borrower hereunder and the other Operative
Documents, such amount shall be held in trust for the benefit of the Holders
(and their respective affiliates) and shall forthwith be paid to the Holders
(and their respective affiliates) or be credited and applied to the Obligations,
whether matured or unmatured, in each case accordance with the terms of this
Agreement and the other Operative Documents, subject to the Intercreditor
Agreement.

9.5            Waivers.  Each Guarantor irrevocably waives, to the extent
permitted by law, acceptance hereof, presentment, demand, protest, and any
notice not provided for herein, as well as any requirement that at any time any
action be taken by the Holders or any other Person against the Borrower or other
obligor, another guarantor, or any other Person.

9.6            Limit on Recovery.  Notwithstanding any other provision hereof,
the right of recovery against each Guarantor under this Article IX shall not
exceed the amount that is $1.00 less than the lowest amount that would render
such Guarantor’s obligations under this Article IX void or voidable under
applicable law, including, without limitation, applicable fraudulent conveyance,
fraudulent transfer or similar laws.

9.7            Stay of Acceleration.  If acceleration of the time for payment of
any amount payable by the Borrower, any Guarantor or any other obligor under
this Agreement or any other Operative Document is stayed upon the insolvency,
bankruptcy or reorganization of the Borrower, such Guarantor or such obligor,
all such amounts otherwise subject to acceleration under the terms of this
Agreement or the other Operative Documents shall nonetheless be payable by the
Guarantors hereunder forthwith on demand by the Required Holders, subject to
applicable law.

 
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9.8            Benefit to Guarantors.  The Borrower and the Guarantors are
engaged in related businesses and integrated to such an extent that the
financial strength and flexibility of the Borrower has a direct impact on the
success of each Guarantor.  Each Guarantor will derive substantial direct and
indirect benefit from the extensions of credit hereunder.

9.9            Guarantor Covenants.  Each Guarantor shall take such action as
the Borrower is required by this Agreement to cause such Guarantor to take, and
shall refrain from taking such action as the Borrower is required by this
Agreement to prohibit such Guarantor from taking.

9.10          Further Assurances.  In the event the Borrower, Holdings or any
other Guarantor forms or acquires any other Subsidiary after the date hereof,
the Borrower and the Guarantors shall promptly upon (and in any event within
five (5) Business Days after) such formation or acquisition cause such newly
formed or acquired Domestic Subsidiary to execute an Additional Guarantor
Supplement or such other Guaranty as the Required Holders may then require, and
the Borrower and the Guarantors shall also deliver to the Holder Representative,
or cause such Subsidiary to deliver to the Holder Representative, at the
Borrower’s cost and expense, such other instruments, documents, certificates and
opinions reasonably required by the Required Holders in connection therewith.

ARTICLE X.
HOLDER REPRESENTATIVE

10.1          Appointment and Authorization.  Each Holder, by acceptance of any
Note(s) held by it, hereby irrevocably appoints, designates and authorizes the
Purchaser to take such action on its behalf under the provisions of this
Agreement and each other Operative Document and to exercise such powers and
perform such duties as are expressly delegated to it by the terms of this
Agreement or any other Operative Document, together with such powers as are
reasonably incidental thereto, including without limitation the authority to
negotiate and execute subordination and intercreditor agreements on behalf of
the Holders related to any Subordinated Debt, and each Holder expressly agrees
that the terms of all such subordination and intercreditor agreements shall
inure to the benefit of, and be binding upon, each Holder.  Notwithstanding any
provision to the contrary contained elsewhere in this Agreement or in any other
Operative Document, the Holder Representative shall not have any duties or
responsibilities, except those expressly set forth herein, nor shall the Holder
Representative have or be deemed to have any fiduciary relationship with any
Holder, and no implied covenants, functions, responsibilities, duties,
obligations or liabilities shall be read into this Agreement or any other
Operative Document or otherwise exist against the Holder Representative.

10.2          Delegation of Duties.  The Holder Representative may execute any
of its duties under this Agreement or any other Operative Document by or through
agents, employees or attorneys-in-fact and shall be entitled to advice of
counsel concerning all matters pertaining to such duties.  The Holder
Representative shall not be responsible to the Holders for the negligence or
misconduct of any agent or attorney-in-fact that it selects with reasonable
care.

10.3          Liability of Holder Representative.  None of the Holder
Representative-Related Persons shall (i) be liable to the Holders for any action
taken or omitted to be taken by any of them under or in connection with this
Agreement or any other Operative Document (except for its own gross negligence
or willful misconduct), or (ii) be responsible in any manner to any of the
Holders for any recital, statement, representation or warranty made by Holdings,
the Borrower, any other Subsidiary or Affiliate of Holdings or the Borrower, or
any officer thereof, contained in this Agreement or in any other Operative
Document, or in any certificate, report, statement or other document referred to
or provided for in, or received by the Holder Representative under or in
connection with, this Agreement or any other Operative Document, or the
validity, effectiveness, genuineness, enforceability or sufficiency of this
Agreement or any other Operative Document, or for any failure of the Borrower,
Holdings, any other Guarantor or any other party to any Operative Document to
perform its obligations hereunder or thereunder.  No Holder
Representative-Related Person shall be under any obligation to any Holder to
ascertain or to inquire as to the observance or performance of any of the
agreements contained in, or conditions of, this Agreement or any other Operative
Document, or to inspect any Property, books or records of Holdings, the
Borrower, any other Subsidiary or Affiliate of Holdings.

 
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10.4          Reliance.

(a)           The Holder Representative shall be entitled to rely, and shall be
fully protected in relying, upon any writing, resolution, notice, consent,
certificate, affidavit, letter, telegram, facsimile, telex or telephone message,
statement or other document or conversation believed by it to be genuine and to
have been signed, sent or made by the proper Person or Persons, and upon advice
and statements of legal counsel (including counsel to the Borrower, Holdings or
any other Guarantor), independent accountants and other experts selected by the
Holder Representative.  The Holder Representative shall be fully justified in
failing or refusing to take any action under this Agreement or any other
Operative Document unless it shall first receive such advice or concurrence of
the Holders as it deems appropriate and, if it so requests, it shall first be
indemnified to its satisfaction by the Holders against any and all liability and
expense which may be incurred by it by reason of taking or continuing to take
any such action.  The Holder Representative shall in all cases be fully
protected in acting, or in refraining from acting, under this Agreement or any
other Operative Document in accordance with a request or consent of the Holders,
and such request and any action taken or failure to act pursuant thereto shall
be binding upon all of the Holders.

(b)           The Borrower and Holdings shall be entitled to rely, and shall be
fully protected in relying (without investigation or inquiry), upon the Holder
Representative in any instance where the Holder Representative purports to be
acting on behalf of a Holder, Holders, or Required Holders; and the Holders
shall indemnify, defend, and hold Borrower and Holdings harmless with respect to
such reliance.

10.5          Notice of Default.  The Holder Representative shall not be deemed
to have knowledge or notice of the occurrence of any Default or Event of
Default, unless the Holder Representative shall have received written notice
from a Holder or the Borrower referring to this Agreement, describing such
Default or Event of Default and stating that such notice is a “notice of
default”.  In the event that the Holder Representative receives such a notice,
the Holder Representative shall give notice thereof to the Holders.  The Holder
Representative may (but shall not be obligated to) take such action, or refrain
from taking such action, with respect to such Default or Event of Default as it
shall deem advisable or in the best interest of the Holders.

 
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10.6          Credit Decision.  Each Holder, by acceptance of any Note(s) held
by it, expressly acknowledges that none of the Holder Representative-Related
Persons has made any representation or warranty to it and that no act by the
Holder Representative hereinafter taken, including any review of the affairs
Holdings and its Subsidiaries, shall be deemed to constitute any representation
or warranty by the Holder Representative to any Holder.  Each Holder, by
acceptance of any Note(s) held by it, represents to the Holder Representative
that it has, independently and without reliance upon the Holder Representative
and based on such documents and information as it has deemed appropriate, made
its own appraisal of and investigation into the business, prospects, operations,
property, financial and other condition and creditworthiness of Holdings, the
Borrower and the other Subsidiaries, and all applicable laws relating to the
transactions contemplated thereby, and made its own decision to enter into this
Agreement and extend credit to the Borrower hereunder.  Each Holder also
represents that it will, independently and without reliance upon the Holder
Representative and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit analysis, appraisals
and decisions in taking or not taking action under this Agreement and the other
Operative Documents, and to make such investigations as it deems necessary to
inform itself as to the business, prospects, operations, property, financial and
other condition and creditworthiness of Holdings, the Borrower and the other
Subsidiaries.  Except for notices, reports and other documents expressly herein
required to be furnished to Holdings or the Borrower by the Holder
Representative, the Holder Representative shall not have any duty or
responsibility to provide any Holder with any credit or other information
concerning the business, prospects, operations, property, financial and other
condition or creditworthiness of Holdings and its Subsidiaries which may come
into the possession of the Holder Representative.

10.7          Indemnification.  Whether or not the transactions contemplated
hereby shall be consummated, the Holders, by acceptance of any Note(s) held by
them, agree that, upon demand therefor they shall indemnify the Holder
Representative (to the extent not reimbursed by or on behalf of the Borrower and
without limiting the obligation of the Borrower to do so), ratably from and
against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses and disbursements of any kind
whatsoever which may at any time (including at any time following the repayment
of the Notes and at any time following the termination or resignation of the
Holder Representative) be imposed on, incurred by or asserted against the Holder
Representative (in its capacity as the Holder Representative and not as a
Holder) in any way relating to or arising out of this Agreement, any other
Operative Document or any other document contemplated by or referred to herein
or the transactions contemplated hereby or thereby or any action taken or
omitted by the Holder Representative under or in connection with any of the
foregoing; provided, however, that no Holder shall be liable for the payment to
the Holder Representative of any portion of such liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements resulting solely from the Holder Representative’s gross negligence
or willful misconduct.  In addition, each Holder shall reimburse the Holder
Representative upon demand for its ratable share of any costs or out-of-pocket
expenses (including attorneys’ fees and expenses) incurred by the Holder
Representative in its capacity as the Holder Representative and not as a Holder
in connection with the administration, modification, amendment or enforcement
(whether through negotiations, legal proceedings or otherwise) of, or legal
advice in respect of rights or responsibilities under, this Agreement, any other
Operative Document, or any document contemplated by or referred to herein to the
extent that the Holder Representative is not reimbursed for such expenses by or
on behalf of the Borrower.  The obligation of the Holders in this Section 10.7
shall survive the payment of all Obligations.

 
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10.8          Holder Representative in Individual Capacity.  The Purchaser and
its affiliates may purchase Notes made by, make loans to, acquire equity
interests in, make other investments in, and generally engage in any kind of
lending, financial advisory or other business with Holdings, the Borrower and
their Subsidiaries and Affiliates as though the Purchaser were not the Holder
Representative hereunder and without notice to or consent of the Holders,
including, without limitation with respect to the purchase of its Note at the
Closing, and the Holders specifically acknowledge the Purchaser can take all
actions with respect to its Note as it deems appropriate without reference to
any agency created hereunder or any duty to the Holders created thereby or at
common law.  With respect to its Note, the Purchaser shall have the same rights
and powers under this Agreement and the other Operative Documents as any other
Holder and may exercise the same as though it were not the Holder
Representative, and the terms “Holder” and “Holders” (and the plural forms
thereof) shall include the Purchaser in its individual capacity.

10.9          Successor Holder Representative.  The Holder Representative may
resign as Holder Representative upon thirty (30) days’ prior notice to the
Holders.  If the Holder Representative shall resign as Holder Representative
under this Agreement, the Holders shall appoint from among the Holders a
successor agent for the Holders, which successor shall be acceptable to the
Borrower (with the Borrower’s consent not to be unreasonably withheld).  If no
successor agent is appointed prior to the effective date of the resignation of
the Holder Representative, the Holder Representative may thereupon appoint a
successor agent from among the Holders, which successor shall be acceptable to
the Borrower (with the Borrower’s consent not to be unreasonably
withheld).  Upon the acceptance of its appointment as successor agent hereunder,
such successor agent shall succeed to all the rights, powers and duties of the
retiring Holder Representative and the term “Holder Representative” shall mean
such successor agent and the retiring Holder Representative’s appointment,
powers and duties as Holder Representative shall be terminated.  After any
retiring Holder Representative’s  resignation hereunder as Holder
Representative, the provisions of this Article X and Sections 11.4 and 11.7
shall inure to its benefit as to any actions taken or omitted to be taken by it
while it was Holder Representative under this Agreement.  If no successor agent
has accepted appointment as Holder Representative by the date which is thirty
(30) days following a retiring Holder Representative’s notice of resignation
(or, if later, ten (10) days after the date upon which the Holder Representative
designates a successor agent), the retiring Holder Representative’s resignation
shall nevertheless thereupon become effective and the Holders shall perform all
of the duties of the Holder Representative hereunder until such time, if any, as
the Holder Representative appoint a successor agent as provided for above.

ARTICLE XI.
MISCELLANEOUS

11.1          No Waiver; Cumulative Remedies.  No failure or delay on the part
of the Holder Representative or any Holder in exercising any right, power or
remedy hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any such right, power or remedy preclude any other or
further exercise thereof or the exercise of any other right, power or remedy
hereunder.  The remedies herein provided are cumulative and not exclusive of any
rights or remedies provided by law.

 
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11.2          Amendments, Waivers and Consents.  Any provision in this
Agreement, the Notes or the other Operative Documents to the contrary
notwithstanding, changes in or additions to this Agreement and the other
Operative Documents may be made, and compliance with any covenant or provision
set forth herein or therein may be omitted or waived, if the Borrower shall
obtain consent thereto in writing from the Required Holders, and shall, in any
case, deliver copies of such consent in writing to all other Holders of Notes;
provided that (i) without the consent of all Holders of Notes, no such consent
or waiver shall be effective to reduce the amount of, to postpone the date fixed
for the payment of, the principal of (including any required redemption) or
interest or Prepayment Premium payable on any Note, to decrease the Interest
Rate or the Prepayment Premium, to decrease or postpone any prepayments or
redemptions, to increase the proportion of interest payable as PIK Interest
rather than as cash interest, to alter, amend or waive compliance with Section
8.1(a), to alter or amend the consent mechanism provided for under Section 8.3
or this Section 11.2, or to release any material Guarantor from its guaranty
hereunder or any Guaranty, and (ii) without the consent of the Holder
Representative, no such consent or waiver shall be effective to alter the rights
or obligations of the Holder Representative.  If the Required Holders vote to
alter, amend or waive compliance with the Intercreditor Agreement or any
subordination or intercreditor agreement relating to any Subordinated Debt, then
all Holders shall be bound by such vote and agree to sign such consent or other
document as may be necessary to effectuate such alteration, amendment or
waiver.  Any waiver or consent may be given subject to satisfaction of
conditions stated therein and any waiver or consent shall be effective only in
the specific instance and for the specific purpose for which given.  Written
notice of any waiver or consent effected under this subsection shall promptly be
delivered by the Borrower to any Holders who did not execute the same.

11.3          Addresses for Notices, Etc.  All notices, requests, demands and
other communications provided for hereunder shall be in writing and mailed (by
first class registered or certified mail, postage prepaid), sent by express
overnight courier service or electronic facsimile transmission with a copy by
mail, sent as an Electronic Record and delivered by encrypted e-mail, or
delivered to the applicable party at the addresses indicated below:

If to the Borrower or any Guarantor:

Physicians Formula, Inc.
1055 West 8th Street
Azusa, CA 91702
Attention:  Jeff Berry, Chief Financial Officer
Telephone: 626-334-3395
Fax: 626-812-9462
Email: jeff.berry@physiciansformula.com

With a copy (delivery of which alone shall not constitute notice) to:

Kirkland & Ellis LLP
300 N. LaSalle Street, Suite 3200

 
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Chicago, IL 60654
Attention: Louis R. Hernandez, Esq.
Telephone: 312-862-2000
Fax: 312-862-2200
Email: lhernandez@kirkland.com

If to the Purchaser or the initial Holder Representative:

Mill Road Capital, L.P.
Two Sound View Drive
Greenwich, CT 06830
Attention: Thomas Lynch, Managing Director
Telephone: 203-987-3501
Fax: 203-621-3280
Email: tlynch@millroadcapital.com

With a copy (delivery of which alone shall not constitute notice) to:

Foley Hoag LLP
155 Seaport Boulevard
Boston, MA  02210
Attention:  Peter M. Rosenblum, Esq.
Telephone: 617-832-1000
Fax: 617-832-7000
Email: prosenblum@foleyhoag.com

If to any other Holder or any successor Holder Representative, at such Holder’s
or successor Holder Representative’s address for notices as set forth in the
transfer records of the Borrower or, as to each of the foregoing, at such other
address as shall be designated by such Person in a written notice to the other
party complying as to delivery with the terms of this Section.

All such notices, requests, demands and other communications shall, when mailed
or sent, respectively, be effective (i) three (3) Business Days after being
deposited in the mails, (ii) one Business Day after being deposited with the
express overnight courier service or (iii) the Business Day when sent when sent
by electronic facsimile transmission (with receipt confirmed) or sent as an
Electronic Record by electronic mail or similar secure electronic channel to
which the parties have agreed, respectively, addressed as aforesaid.

11.4          Costs, Expenses and Taxes. 

(a)            The Borrower agrees to pay on demand (i) all reasonable costs and
expenses of the Purchaser in connection with the preparation, negotiation,
approval, execution and delivery of this Agreement, the Notes, the other
Operative Documents and all other instruments and documents to be delivered
hereunder and thereunder, and in connection with the consummation of the
transactions contemplated hereby and thereby; (ii) all reasonable costs and
expenses of the Holders and the Holder Representative in connection with the
interpretation, administration, amendment or waiver (whether or not such
amendment or waiver becomes effective) of any of this Agreement, the Notes, the
other Operative Documents and all other instruments and documents to be
delivered hereunder and thereunder; (iii) all costs and expenses (including
court costs) of the Holders and the Holder Representative in connection with any
Event of Default hereunder or the enforcement of any of this Agreement, the
Notes, the other Operative Documents and all other instruments and documents to
be delivered hereunder and thereunder and the exercise of the rights and
remedies of any of the Holders hereunder or thereunder; provided, that the (A)
Holder Representative and the (B) Holders collectively shall each be limited to
a single counsel in each relevant jurisdiction.  Notwithstanding the preceding
sentence, and in addition to the provisions of such sentence, the Borrower
agrees to pay on demand all reasonable fees and out of pocket expenses of Foley
Hoag LLP, counsel to the Purchaser, and any counsel to the Holders (which other
designated counsel shall, at any time, be limited to a single counsel in each
relevant jurisdiction) selected by the Required Holders, in each case in
connection with the transactions contemplated by the Operative Documents,
including without limitation any interpretation, amendment, waiver (whether or
not such amendment or waiver becomes effective) or enforcement of this
Agreement, the Notes, the other Operative Documents and all other instruments
and documents to be delivered hereunder and thereunder or the exercise of the
rights and remedies of the Holders hereunder and thereunder.  In addition, the
Borrower agrees to pay the expenses of preparing Notes from time to time in
connection with exchanges and transfers of Notes and the expenses of delivering
copies of Operative Documents to Holders, and the Borrower agrees to indemnify,
pay and hold each Holder harmless from and against any and all liabilities with
respect to or resulting from any delay in paying or omission to pay taxes (other
than transfer taxes) and filing fees with respect to such transfer.

 
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(b)            The Borrower and Holdings, jointly and severally, agree to pay
any and all stamp, documentary and other similar taxes payable or determined to
be payable in connection with the execution and delivery of this Agreement, the
Notes, the other Operative Documents and the other instruments and documents to
be delivered hereunder or thereunder, including interest and penalties, in the
event any such taxes are assessed, irrespective of when such assessment is made
and whether or not any credit is then in use or available hereunder, except in
each case, in the case of an assignment of any of the Notes.  A certificate of
the Holder Representative or any Holder requiring payment or reimbursement by
the Borrower or Holdings pursuant to this Section 11.4(b) shall be conclusive if
reasonably determined and set forth with reasonable detail absent manifest
error, it being understood, however, that (i) the Borrower and Holdings shall
only be required to pay or reimburse the Person making such claim for that
portion of such tax reasonably attributable to its purchase of one or more Notes
and extensions of credit under this Agreement and the other Operative Documents,
and not for any portion of such tax attributable to other activities or
transactions of such Person, (ii) no Person shall be required to make its tax
returns, books or records available to Holdings, the Borrower or any other
Subsidiary to verify its compliance with the provisions of this Section and
(iii) for the avoidance of doubt, in no event shall the Borrower or Holdings be
responsible for the income or franchise taxes of any Holder.

 
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(c)            The provisions of this Section 11.4 shall survive the payment in
full of all amounts due under this Agreement, the Notes and the other Operative
Documents and the termination of this Agreement and the other Operative
Documents.

11.5          Assignability, Binding Agreement.  This Agreement may not be
assigned by the Borrower or any Guarantor without the prior written consent of
each Holder.  Any Holder of one or more Notes may assign this Agreement and its
Notes, in the minimum aggregate amount of $500,000 plus multiples of $100,000 in
excess thereof (except in the case of an assignment by a Holder of the entire
aggregate balance of its Notes, and except in the case of an assignment to a
Holder or an Affiliate under common control of such Holder or an Approved Fund
of a Holder), (i) freely without consent to another Holder or to an Affiliate
under common control of such Holder of the assigning Holder or to an Approved
Fund with respect to the assigning Holder, and (ii) with the prior consent of
the Holder Representative and (so long as no Event of Default then exists) the
Borrower (which consent of the Borrower shall not be unreasonably withheld or
delayed) to any commercial bank, financial institution, Fund, or other
investment fund or investor.  This Agreement shall be binding upon and
enforceable by, and shall inure to the benefit of, the parties hereto, the
Holders from time to time and their respective successors and permitted
assigns.  Notwithstanding the foregoing, nothing in this Agreement is intended
to give any Person not named herein the benefit of any legal or equitable right,
remedy or claim under this Agreement.  The parties hereto and, whether or not a
signatory hereto, each Holder (by its acceptance of any Note(s) held by it)
hereby acknowledge and agree that the Intercreditor Agreement entered into by
the Purchaser as Holder Representative, and any subordination or intercreditor
agreements entered into by the Holder Representative on behalf of the Holders
relating to any Subordinated Debt, shall inure to the benefit of, and be binding
upon each Holder as if it were a party thereto, and each Holder agrees to
execute and deliver such further instruments or documents as the Senior Lender
(with respect to the Intercreditor Agreement) or the Holder Representative or
the Purchaser (with respect to any such subordination or intercreditor
agreements relating to any Subordinated Debt) shall reasonably require to give
effect to the foregoing.

11.6          Payments in Respect of Notes.  Except as set forth in Section
11.5, the Holders of the Notes, by their acceptance thereof, agree that, with
respect to all sums received by them applicable to the payment of principal of
or interest on the Notes, equitable adjustment will be made among them so that,
in effect, all such sums shall be shared ratably by all of the Holders of the
Notes whether received by voluntary payment, by realization upon security or
guaranties, by the exercise of the right of set-off, by counterclaim or
cross-action or by the enforcement of any or all of the Notes.  Except as set
forth in Section 11.5, if any Holder of one or more Notes receives any payment
on its Notes in excess of its pro rata portion, then such Holder receiving such
excess payment shall purchase for cash from the other Holders of the Notes an
interest in their Notes in such amounts as shall result in a ratable
participation by all of the Holders of the Notes in the aggregate unpaid amount
of Notes then outstanding.

11.7          Reserved.

11.8          Indemnification.  In addition to the payment of expenses pursuant
to Section 11.4, whether or not the transactions contemplated hereby shall be
consummated, the Borrower agrees, to indemnify, pay and hold the Holder
Representative and each Holder and the partners, members, officers, directors,
employees and agents of such Person (collectively, the “Indemnitees”) harmless
from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, claims, costs, expenses and disbursements
of any kind or nature whatsoever (including, without limitation, litigation and
court costs, settlement costs and the reasonable fees and disbursements of
counsel for such Indemnitees) in connection with any investigative,
administrative or judicial proceeding (whether or not such Indemnitees shall be
designated a party thereto), or otherwise, which may be imposed on, incurred by,
or asserted against such Indemnitee, in any manner relating to or arising out of
(i) this Agreement, the Notes and the other Operative Documents and all other
matters related thereto or in connection therewith, (ii) the Holders’ agreement
to purchase the Notes, or the use or intended use of the proceeds of the Notes
hereunder, (iii) the violation of any securities law by the Borrower or Holdings
in connection with or otherwise affecting the transactions contemplated by the
Operative Documents, (iv) the failure of any of the parties (other than the
Holder Representative and the Holders) to the Operative Documents to comply with
any law, rule or regulation applicable to the transactions contemplated thereby
or (v) any Environmental Law or any Hazardous Substances (A) present on or under
the Premises (B) released from or onto the Premises, or (C) generated by
Holdings and/or any Subsidiary (all of the foregoing, collectively, the
“Indemnified Liabilities”); provided that the Borrower shall have no obligation
to an Indemnitee hereunder with respect to Indemnified Liabilities which are
determined by a final court decision or arbitral award to have resulted from the
gross negligence or willful misconduct of that Indemnitee or any employee,
partner, member, officer, director or agent of that Indemnitee.  To the extent
that the undertaking to indemnify, pay and hold harmless set forth in the
preceding sentence may be unenforceable because it violates any law or public
policy, the Borrower and Holdings shall contribute the maximum portion which it
is permitted to pay and satisfy under applicable law, to the payment and
satisfaction of all Indemnified Liabilities incurred or suffered by the
Indemnitees or any of them.  This indemnification shall survive the payment and
satisfaction of all Obligations and the termination of this Agreement and the
other Operative Documents, and shall remain in force beyond the expiration of
any applicable statute of limitations and payment or satisfaction in full of any
single claim under this indemnification.

 
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11.9          Set-Off.  In addition to any rights now or hereafter granted under
applicable law and not by way of limitation of any such rights, upon the
occurrence and during the continuation of any Event of Default, each Holder and
its affiliates are hereby authorized by the Borrower and each Guarantor at any
time or from time to time, without notice to the Borrower or such Guarantor or
to any other Person, any such notice being hereby expressly waived, to set off
and to appropriate and to apply any and all deposits (general or special,
including, but not limited to, indebtedness evidenced by certificates of
deposit, whether matured or unmatured, but not including trust accounts, and in
whatever currency denominated) and any other indebtedness at any time held or
owing by such Holder or such an affiliate to or for the credit or the account of
the Borrower or such Guarantor, whether or not matured, against and on account
of the Obligations of the Borrower or such Guarantor to the Holders under the
Operative Documents, including, but not limited to, all claims of any nature or
description arising out of or connected with the Operative Documents,
irrespective of whether or not (a) such Holder shall have made any demand
hereunder or (b) the principal of or the interest on the loans or Notes and
other amounts due under this Agreement of the other Operative Documents shall
have become due and payable pursuant to Section 8.1 and although said
obligations and liabilities, or any of them, may be contingent or unmatured;
provided that in no event shall any Holder offset against the Borrower’s payroll
account number 4121973010 maintained at Senior Lender so long as the funds held
in such payroll account are limited to the amount required to satisfy the
Borrower’s payroll obligations during the following seven day period (as of any
date of determination).  Such Holder shall promptly notify the Borrower after
any such set-off and application made by such Holder; provided, however, that
the failure to give such notice shall not affect the validity of such set-off
and application.

 
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11.10        Marshaling; Payments Set Aside.  No Holder shall be under any
obligation to marshal any assets in favor of the Borrower, any Guarantor or any
other Person or against or in payment of any or all of the Obligations.  To the
extent that the Borrower or any Guarantor makes a payment or payments to the
Holders, or the Holders exercise their rights of setoff, and such payment or
payments or the proceeds of such setoff or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside or required
(including pursuant to any settlement entered into by the Holders in their
discretion) to be repaid to a trustee, receiver or any other party in connection
with any bankruptcy, insolvency or similar proceeding, or otherwise, then to the
extent of such recovery the obligation or part thereof originally intended to be
satisfied shall be revived and continued in full force and effect as if such
payment had not been made or such setoff had not occurred.

11.11        Survival of Representations and Warranties.  All representations
and warranties made to any party to this Agreement, the Notes, the other
Operative Documents or any other instrument or document delivered in connection
herewith or therewith, shall survive the execution and delivery hereof and
thereof, regardless of any investigation made by the Holders or on behalf of the
Holders.

11.12        Entire Agreement.  This Agreement, together with the other
Operative Documents, embodies the entire agreement and understanding between the
Borrower, the Guarantors, the Holder Representative and the Holders, and
supersedes all prior agreements and understandings of such Persons, verbal or
written, relating to the subject matter hereof and thereof.

11.13        Severability.  The invalidity or unenforceability of any provision
hereof shall in no way afflict the validity or enforceability of any other
provision.

11.14        Waiver of Jury Trial; Waiver of Certain Damages.  EACH OF THE
BORROWER, EACH GUARANTOR, THE PURCHASER, THE HOLDER REPRESENTATIVE AND (BY
ACCEPTANCE OF ANY NOTE(S) HELD BY IT) EACH HOLDER HEREBY WAIVES ITS RIGHT TO
JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN
CONNECTION WITH THIS AGREEMENT, THE NOTES OR ANY OF THE OTHER OPERATIVE
DOCUMENTS, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THEREUNDER OR THE PERFORMANCE
OF SUCH RIGHTS AND OBLIGATIONS OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS,
STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY, INCLUDING ,
WITHOUT LIMITATION, ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS OR
ACTIONS OF THE PURCHASER RELATING TO THE ADMINISTRATION OR ENFORCEMENT OF THE
NOTES AND THE OTHER OPERATIVE DOCUMENTS, AND AGREES THAT IT WILL NOT SEEK TO
CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT
BE OR HAS NOT BEEN WAIVED.  EXCEPT AS PROHIBITED BY LAW, EACH PARTY HEREBY
WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION REFERRED TO
IN THE PRECEDING SENTENCE ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL
DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES.  EACH OF
THE PARTIES (a) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER
PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT,
IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS, AND (b)
ACKNOWLEDGES THAT EACH OF THE OTHER PARTIES HAVE BEEN INDUCED TO ENTER INTO THIS
AGREEMENT AND THE OTHER OPERATIVE DOCUMENTS TO WHICH IT IS A PARTY BECAUSE OF,
AMONG OTHER THINGS, THE WAIVERS AND CERTIFICATIONS CONTAINED HEREIN.

 
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11.15        Governing Law; Jurisdiction; Venue; Place of Performance.  THIS
AGREEMENT AND EACH OF THE OTHER OPERATIVE DOCUMENTS ARE CONTRACTS UNDER THE LAWS
OF THE STATE OF NEW YORK AND SHALL FOR ALL PURPOSES BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF SAID STATE (EXCLUDING THE LAWS APPLICABLE TO
CONFLICTS OR CHOICE OF LAW).  THE BORROWER AND EACH GUARANTOR CONSENT TO THE
JURISDICTION OF THE FEDERAL AND STATE COURTS LOCATED IN NEW YORK COUNTY IN THE
STATE OF NEW YORK IN CONNECTION WITH ANY SUIT TO ENFORCE THE RIGHTS OF ANY
HOLDERS UNDER THIS AGREEMENT OR ANY OF THE OTHER OPERATIVE DOCUMENTS AND CONSENT
TO SERVICE OF PROCESS IN ANY SUCH SUIT BEING MADE UPON THE BORROWER OR ANY SUCH
GUARANTOR, AS THE CASE MAY BE, BY MAIL AT THE BORROWER’S OR SUCH GUARANTOR’S
ADDRESS SET FORTH HEREIN.  THE BORROWER AND EACH GUARANTOR IRREVOCABLY WAIVES
ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY
SUCH ACTION BROUGHT IN THE COURTS REFERRED TO IN THIS SECTION AND IRREVOCABLY
WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH ACTION THAT SUCH ACTION HAS
BEEN BROUGHT IN AN INCONVENIENT FORUM.  ANY SUIT OR JUDICIAL PROCEEDING BY THE
BORROWER OR ANY GUARANTOR AGAINST THE PURCHASER, ANY OTHER HOLDER OR THE HOLDER
REPRESENTATIVE OR ANY OF THEIR AFFILIATES INVOLVING, DIRECTLY OR INDIRECTLY, ANY
MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY OPERATIVE
DOCUMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THE OPERATIVE DOCUMENTS
SHALL BE BROUGHT ONLY IN A FEDERAL OR STATE COURT LOCATED IN NEW YORK COUNTY IN
THE STATE OF NEW YORK.

11.16        No Limitation.  Nothing in Section 11.15 shall affect the right of
any Holder to serve process in any manner permitted by law, or limit any right
that any Holder may have to bring proceedings against the Borrower or any
Guarantor in the courts of any jurisdiction or to enforce in any lawful manner a
judgment obtained in one jurisdiction in any other jurisdiction.

11.17        Section Headings; Construction.  The descriptive headings in this
Agreement have been inserted for convenience only and shall not be deemed to
limit or otherwise affect the construction of any provision thereof or
hereof.  The parties have participated jointly in the negotiation and drafting
of this Agreement and the other agreements, documents and instruments executed
and delivered in connection herewith with counsel sophisticated in investment
transactions.  In the event an ambiguity or question of intent or interpretation
arises, this Agreement and the agreements, documents and instruments executed
and delivered in connection herewith shall be construed as if drafted jointly by
the parties and no presumption or burden of proof shall arise favoring or
disfavoring any party by virtue of the authorship of any provisions of this
Agreement and the agreements, documents and instruments executed and delivered
in connection herewith.

 
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11.18        Counterparts.  This Agreement may be executed simultaneously in any
number of counterparts, each of which when so executed and delivered shall be
taken to be an original; but such counterparts shall together constitute but one
and the same document.  Any counterpart may be executed by the delivery of a
facsimile signature thereon by telecopier or by electronic mail, each of which
shall be of the same legal effect, validity and enforceability as an original
manually executed signature page.

11.19        Further Assurances.  From and after the date of this Agreement,
upon the reasonable request of the Holder Representative or the Holders, the
Borrower and each Guarantor shall execute and deliver, and shall cause their
respective Subsidiaries to execute and deliver, such instruments, documents and
other writings as may be reasonably necessary or desirable to confirm and carry
out and to effectuate fully the intent and purposes of the Operative Documents.

11.20        Specific Performance.  Upon breach by the Borrower or any Guarantor
or the occurrence and continuance of any Event of Default with respect to any
obligation hereunder under the Notes or under any other Operative Document, each
Holder shall be entitled to protect and enforce its rights at law, or in equity
or by other appropriate proceedings for specific performance of such obligation,
or for an injunction against such breach or default, or in aid of the exercise
of any power or remedy granted hereby or thereby or by law.

11.21        Actions by Holders.  Except as provided in Section 11.2, wherever
in this Agreement action is required or permitted to be taken by, or consent is
required of, or a matter requires the satisfaction of, the Holders, such action
may be taken by, and/or such consent may be obtained from, and/or such
satisfaction may be expressed by, the Required Holders.

11.22        Confidential Information.  Each of the Holders (by the acceptance
of any Note(s) held by it) and the Holder Representative agree to maintain the
confidentiality of the Information (as defined below), except that Information
may be disclosed (a) to its and its Affiliates’ directors, officers, employees
and agents, including accountants, legal counsel and other advisors to the
extent any such Person has a need to know such Information (it being understood
that the Persons to whom such disclosure is made will first be informed of the
confidential nature of such Information and instructed to keep such Information
confidential), (b) to the extent requested by any regulatory authority
(including any self-regulatory authority), (c) to the extent required by
applicable laws or regulations or by any subpoena or similar legal process, (d)
to any other party hereto, the Holder Representative or any other Holder, (e) in
connection with the exercise of any remedies hereunder or under any other
Operative Document or any suit, action or proceeding relating to this Agreement
or any other Operative Document or the enforcement of rights hereunder or
thereunder, (f) subject to an agreement containing provisions substantially the
same as those of this Section, to (A) any assignee of or participant in, or any
prospective assignee of or participant in, any of its rights or obligations
under this Agreement, any Note(s) or (B) any actual or prospective counterparty
(or its advisors) to any swap or derivative transaction relating to Holdings,
the Borrower or any other Subsidiary and their obligations, (g) with the prior
written consent of the Borrower or Holdings, (h) to the extent such Information
(A) becomes publicly available other than as a result of a breach of this
Section or (B) becomes available to the Holders or the Holder Representative on
a non-confidential basis from a source other than Holdings, the Borrower or any
other Subsidiary or any of their directors, officers, employees or agents,
including accountants, legal counsel and other advisors, (i) to rating agencies
if requested or required by such agencies in connection with a rating relating
to the Notes or Obligations, (j) to entities which compile and publish
information about the subordinated debt market, provided that only basic
information about the amount, pricing and structure of the transaction evidenced
hereby may be disclosed pursuant to this subsection (j), or (k) in any press
release, “tombstone” advertisement or other similar publicity announcement,
provided that only basic information about the identity or the Borrower and the
amount and structure of the transaction evidenced hereby (and in no event any
proprietary or confidential business information about the Borrower or any
Guarantor) may be disclosed pursuant to this subsection (k).

 
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For purposes of this Section, “Information” means all information received from
Holdings or any of its Subsidiaries relating to Holdings, the Borrower or any
other Subsidiaries or any of their respective businesses, other than any such
information that is available to the Holders on a nonconfidential basis prior to
disclosure by Holdings, the Borrower or any other Subsidiaries.

The provisions of this Section 11.22 shall survive termination of this
Agreement.

11.23        Material Nonpublic Information.  MRC shall reserve the right to
elect not to receive any information required to be disclosed under the terms of
any Operative Document, to the extent such information would be considered to be
material nonpublic information as defined under any applicable federal or state
securities laws.

11.24        Publicity.  Except as may be required by applicable law, and except
for disclosures on a confidential basis to any investors in, senior lenders to,
or legal counsel and other professional advisers to the Borrower or any
Guarantor, and except for disclosures in the ordinary course of business in
credit applications or government filings, without the prior written consent of
the Purchaser neither the Borrower nor any Guarantor shall, and the Borrower and
the Guarantors shall not permit any of their Affiliates to, (i) disclose to any
Person the interest rates, fees or pricing terms, or any other financial or
other material terms and conditions, provided in this Agreement and the other
Operative Documents or (ii) issue a publicity release or announcement or
otherwise make any other public disclosure concerning this Agreement or the
transactions contemplated hereby intended primarily for publicity purposes and
having no independent business purpose other than publicity.  If any
announcement is required by law to be made by the Borrower, any Guarantor or any
of their Affiliates, prior to making such announcement the Borrower will, if
possible in compliance with such law, deliver a draft of such announcement to
the Purchaser and shall give the Purchaser a reasonable opportunity to comment
thereon.

 
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11.25        Limitation of Liability.  No party shall have any liability to any
other party (whether sounding in tort, contract, or otherwise) for consequential
damages suffered by any other party in connection with, arising out of, or in
any way related to the transactions or relationships contemplated by the
Operative Documents, or any act, omission or event occurring in connection
therewith, or for any special exemplary or punitive damages, and each party
hereby waives, to the maximum extent not prohibited by law, any right it may
have to claim or recover any of the foregoing.

11.26        USA Patriot Act.  Each Holder that is subject to the requirements
of the Patriot Act hereby notifies the Borrower and each Guarantor that,
pursuant to the requirements of the Patriot Act, it may be required to obtain,
verify, and record information that identifies the Borrower or such Guarantor,
which information includes the name and address of the Borrower and such
Guarantor and other information that will allow such Holder to identify the
Borrower and such Guarantor in accordance with the Patriot Act.

11.27        Arbitration. Arbitration.  The Purchaser, the Holder
Representative, each Holder (by acceptance of any Note(s) held by it) and the
Borrower agree, upon demand by either party, to submit to binding arbitration
all claims, disputes and controversies between or among them (and their
respective employees, officers, directors, attorneys, and other agents), whether
in tort, contract or otherwise, in any way arising out of or relating to (a) any
credit subject to this Agreement, or any of the Operative Documents, and their
negotiation, execution, collateralization, administration, repayment,
modification, extension, substitution, formation, inducement, enforcement,
default or termination; or (b) requests for additional credit.

(b)            Governing Rules.  Any arbitration proceeding will (a) proceed in
a location in New York, New York selected by the American Arbitration
Association (“AAA”); (b) be governed by the Federal Arbitration Act (Title 9 of
the United States Code), notwithstanding any conflicting choice of law provision
in any of the documents between the parties; and (c) be conducted by the AAA, or
such other administrator as the parties shall mutually agree upon, in accordance
with the AAA’s commercial dispute resolution procedures, unless the claim or
counterclaim is at least $1,000,000.00 exclusive of claimed interest,
arbitration fees and costs in which case the arbitration shall be conducted in
accordance with the AAA’s optional procedures for large, complex commercial
disputes (the commercial dispute resolution procedures or the optional
procedures for large, complex commercial disputes to be referred to in this
Agreement, as applicable, as the “Rules”).  If there is any inconsistency
between the terms of this Agreement and the Rules, the terms and procedures set
forth in this Agreement shall control.  Any party who fails or refuses to submit
to arbitration following a demand by any other party shall bear all costs and
expenses incurred by such other party in compelling arbitration of any
dispute.  Nothing contained in this Agreement shall be deemed to be a waiver by
any party that is a bank of the protections afforded to it under 12 U.S.C. §91
or any similar applicable state law.

(c)            No Waiver of Provisional Remedies, Self-Help and
Foreclosure.  The arbitration requirement does not limit the right of any party
to (a) foreclose against real or personal property collateral; (b) exercise
self-help remedies relating to collateral or proceeds of collateral such as
setoff or repossession; or (c) obtain provisional or ancillary remedies such as
replevin, injunctive relief, attachment or the appointment of a receiver, before
during or after the pendency of any arbitration proceeding.  This exclusion does
not constitute a waiver of the right or obligation of any party to submit any
dispute to arbitration or reference under this Agreement, including without
limitation those arising from the exercise of the actions detailed in clauses
(a), (b) and (c) of this Section 11.27(c).

 
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(d)            Arbitrator Qualifications and Powers.  Any arbitration proceeding
in which the amount in controversy is $5,000,000.00 or less will be decided by a
single arbitrator selected according to the Rules, and who shall not render an
award of greater than $5,000,000.00.  Any dispute in which the amount in
controversy exceeds $5,000,000.00 shall be decided by majority vote of a panel
of three arbitrators; provided however, that all three arbitrators must actively
participate in all hearings and deliberations.  The arbitrator will be a neutral
attorney licensed in the State of New York or a neutral retired judge of the
state or federal judiciary of New York, in either case with a minimum of ten
years experience in the substantive law applicable to the subject matter of the
dispute to be arbitrated.  The arbitrator will determine whether or not an issue
is arbitratable and will give effect to the statutes of limitation in
determining any claim.  In any arbitration proceeding the arbitrator will decide
(by documents only or with a hearing at the arbitrator’s discretion) any
pre-hearing motions which are similar to motions to dismiss for failure to state
a claim or motions for summary adjudication.  The arbitrator shall resolve all
disputes in accordance with the substantive law of New York and may grant any
remedy or relief that a court of such state could order or grant within the
scope of this Agreement and such ancillary relief as is necessary to make
effective any award.  The arbitrator shall also have the power to award recovery
of all costs and fees, to impose sanctions and to take such other action as the
arbitrator deems necessary to the same extent a judge could pursuant to the
Federal Rules of Civil Procedure, the New York Rules of Civil Procedure or other
applicable law.  Judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction.  The institution and maintenance of an
action for judicial relief or pursuit of a provisional or ancillary remedy shall
not constitute a waiver of the right of any party, including the plaintiff, to
submit the controversy or claim to arbitration if any other party contests such
action for judicial relief.

(e)            Discovery.  In any arbitration proceeding, discovery will be
permitted in accordance with the Rules.  All discovery shall be expressly
limited to matters directly relevant to the dispute being arbitrated and must be
completed no later than 20 days before the hearing date.  Any requests for an
extension of the discovery periods, or any discovery disputes, will be subject
to final determination by the arbitrator upon a showing that the request for
discovery is essential for the party’s presentation and that no alternative
means for obtaining information is available.

(f)             Class Proceedings and Consolidations.  No party to this
Agreement shall be entitled to join or consolidate disputes by or against others
in any arbitration, except parties who have executed any Operative Document, or
to include in any arbitration any dispute as a representative or member of a
class, or to act in any arbitration in the interest of the general public or in
a private attorney general capacity.

(g)            Payment of Arbitration Costs and Fees.  The arbitrator shall
award all costs and expenses of the arbitration proceeding.

 
68

--------------------------------------------------------------------------------

 

(h)            Miscellaneous.  To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the dispute with the
AAA.  No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results of the proceeding, except for disclosures of
information by a party required in the ordinary course of its business or by
applicable law or regulation.  If more than one agreement for arbitration by or
between the parties potentially applies to a dispute, the arbitration provision
most directly related to the Operative Documents or the subject matter of the
dispute shall control.  This arbitration provision shall survive termination,
amendment or expiration of any of the Operative Documents or any relationship
between the parties.

11.28        INTERCREDITOR AGREEMENT.  THE TERMS AND CONDITIONS OF THIS
AGREEMENT INCLUDING WITHOUT LIMITATION ARTICLES II AND VIII AND THE OTHER
OPERATIVE DOCUMENTS ARE SUBJECT TO THE TERMS OF THE INTERCREDITOR AGREEMENT.
 
 
[The remainder of this page has been left blank intentionally.]

 
69

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, the parties hereto have duly authorized and executed this
Senior Subordinated Note Purchase and Security Agreement under seal as of the
date first above written.

 
BORROWER:
       
PHYSICIANS FORMULA, INC.,
 
a New York Corporation
             
By:
/s/ Ingrid Jackel
   
Name: Ingrid Jackel
   
Title: Chief Executive Officer
       
Federal Employer Identification No. 13-3015258
 
Organizational Identification No.  N/A
       
GUARANTORS:
       
PHYSICIANS FORMULA HOLDINGS, INC.,
 
a Delaware Corporation
             
By:
/s/ Ingrid Jackel
   
Name: Ingrid Jackel
   
Title: Chief Executive Officer
       
PHYSICIANS FORMULA COSMETICS, INC.,
 
a Delaware Corporation
             
By:
/s/ Ingrid Jackel
   
Name: Ingrid Jackel
   
Title: Chief Executive Officer
             
PHYSICIANS FORMULA DRTV, LLC,
 
a Delaware Limited Liability Company
             
By:
/s/ Ingrid Jackel
   
Name: Ingrid Jackel
   
Title: Chief Executive Officer

 
 
Signature Page to Senior Subordinated Note Purchase Agreement

 

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ACCEPTED AND AGREED:
       
PURCHASER AND INITIAL
 
HOLDER REPRESENTATIVE:
       
MILL ROAD CAPITAL, L.P.,
 
a Delaware Limited Partnership
             
By:
/s/ Charles Goldman
   
Name: Charles Goldman
   
Title: Managing Director

 
 
Signature Page to Senior Subordinated Note Purchase Agreement

 

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TABLE OF CONTENTS

ARTICLE I. PURCHASE AND SALE OF THE SENIOR SUBORDINATED NOTES
1
 
1.1
The Notes.
1
 
1.2
Purchase and Sale of the Notes
2
 
1.3
Payments and Endorsements.
2
 
1.4
Redemptions; Prepayments; Repurchases.
3
 
1.5
Default Rate of Interest
5
 
1.6
Maximum Legal Rate of Interest
5
 
1.7
Payment or Delivery on Non-Business Days
6
 
1.8
Transfer and Exchange of Notes
6
 
1.9
Replacement of Notes
6
 
1.10
Ranking
6
 
1.11
Closing Fee; Expenses
7
 
1.12
Original Issue Discount.
7
 
1.13
Security Interest.
7
 
1.14
Amendments for Mezzanine Financing and Warrants.
7
 
1.15
Standstill.
8
       
ARTICLE II. SECURITY INTEREST.
8
 
2.1
Grant of Security Interest
8
 
2.2
Notifying Account Debtors and Other Obligors; Collection of Collateral
8
 
2.3
Collateral Assignment of Insurance
9
 
2.4
Borrower’s Premises.
9
 
2.5
License
10
 
2.6
Financing Statements.
10
 
2.7
Setoff
10
 
2.8
Collateral Related Matters
11
 
2.9
Notices Regarding Disposition of Collateral
11
 
2.10
Limitation on Security Interest
11
 
2.11
Senior Lender Acting as Bailee
11
       
ARTICLE III. DEFINITIONS; INTERPRETATION
12
 
3.1
Definitions.
12
 
3.2
Interpretation
23
 
3.3
Change in Accounting Principles
23
       
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
24
 
4.1
Representations and Warranties of the Purchaser
24
       
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF THE BORROWER
25
 
5.1
Existence and Power; Name; Chief Executive Office; Inventory and Equipment
Locations; Federal Employer Identification Number and Organizational
Identification Number..
25
 
5.2
Capitalization.
25
 
5.3
Authorization of Borrowing; No Conflict as to Law or Agreements.
25

 

--------------------------------------------------------------------------------

 
 

 
5.4
Legal Agreements.
26
 
5.5
Subsidiaries..
26
 
5.6
Financial Condition; No Adverse Change
26
 
5.7
Litigation.
26
 
5.8
Intellectual Property Rights.
26
 
5.9
Taxes.
27
 
5.10
Titles and Liens.
27
 
5.11
No Defaults.
27
 
5.12
Submissions to the Holder Representative.
28
 
5.13
Financing Statements.
28
 
5.14
Rights to Payment.
28
 
5.15
Employee Benefit Plans.
28
 
5.16
Environmental Matters.
29
 
5.17
Commercial Tort Claims.
30
 
5.18
Margin Rules.
30
 
5.19
Representation by Counsel.
30
 
5.20
Relationship of Parties, etc.
30
 
5.21
Brokers.
30
 
5.22
Foreign Assets Control Regulations and Anti-Money Laundering.
30
 
5.23
Securities Act.
30
 
5.24
Delivery of and Senior Loan Documents.
31
       
ARTICLE VI. CONDITIONS PRECEDENT
31
 
6.1
Representations and Warranties.
31
 
6.2
No Default.
31
 
6.3
No Violation of Order or Judgment.
31
 
6.4
Documentation at Closing.
31
 
6.5
Financial Information.
33
 
6.6
Litigation.
33
 
6.7
Material Adverse Effect.
33
 
6.8
Necessary Consents.
33
 
6.9
Material Agreements.
33
 
6.10
Due Diligence.
34
 
6.11
Fees.
34
       
ARTICLE VII. COVENANTS
34
 
7.1
Reporting Requirements.
34
 
7.2
Financial Covenants.
37
 
7.3
Other Liens and Permitted Liens.
38
 
7.4
Indebtedness
39
 
7.5
Guaranties
40
 
7.6
Investments and Subsidiaries
40
 
7.7
Dividends and Distributions
41
 
7.8
Salaries.  [Intentionally Omitted.
41
 
7.9
Key Person Life Insurance.  [Intentionally Omitted.]
41
 
7.10
Books and Records; Collateral Examination; Inspection and Appraisals.
41
 
7.11
Account Verification; Payment of Permitted Liens.
42

 

--------------------------------------------------------------------------------

 
 

 
7.12
Compliance with Laws.
42
 
7.13
Payment of Taxes and Other Claims
43
 
7.14
Maintenance of Collateral and Properties.
43
 
7.15
Insurance
43
 
7.16
Preservation of Existence
44
 
7.17
Delivery of Instruments, etc
44
 
7.18
Sale or Transfer of Assets; Suspension of Business Operations
44
 
7.19
Consolidation and Merger; Asset Acquisitions
44
 
7.20
Sale and Leaseback
44
 
7.21
Restrictions on Nature of Business
45
 
7.22
Accounting
45
 
7.23
Discounts, etc
45
 
7.24
Pension Plans
45
 
7.25
Place of Business; Name
45
 
7.26
Constituent Documents
45
 
7.27
Reserved.
45
 
7.28
Performance by the Holder Representative
45
 
7.29
Holder Representative Appointed as the Borrower’s Attorney in Fact
46
 
7.30
Use of Proceeds.
46
 
7.31
Further Assurances.
46
 
7.32
Reports to other Creditors
46
 
7.33
Board Seat.
47
 
7.34
Other Agreements
47
       
ARTICLE VIII. EVENTS OF DEFAULT AND REMEDIES
47
 
8.1
Events of Default
47
 
8.2
Distribution of Proceeds
51
 
8.3
Annulment of Defaults
51
       
ARTICLE IX. THE GUARANTIES
51
 
9.1
The Guaranties.
51
 
9.2
Guaranty Unconditional.
52
 
9.3
Discharge Only upon Payment in Full; Reinstatement in Certain Circumstances.
53
 
9.4
Subrogation.
53
 
9.5
Waivers.
53
 
9.6
Limit on Recovery.
53
 
9.7
Stay of Acceleration.
53
 
9.8
Benefit to Guarantors.
54
 
9.9
Guarantor Covenants.
54
 
9.10
Further Assurances.
54
       
ARTICLE X. HOLDER REPRESENTATIVE
54
 
10.1
Appointment and Authorization.
54
 
10.2
Delegation of Duties.
54
 
10.3
Liability of Holder Representative.
54
 
10.4
Reliance.
55

 

--------------------------------------------------------------------------------

 
 

 
10.5
Notice of Default.
55
 
10.6
Credit Decision.
56
 
10.7
Indemnification.
56
 
10.8
Holder Representative in Individual Capacity.
57
 
10.9
Successor Holder Representative.
57
       
ARTICLE XI. MISCELLANEOUS
57
 
11.1
No Waiver; Cumulative Remedies.
57
 
11.2
Amendments, Waivers and Consents.
58
 
11.3
Addresses for Notices, Etc.
58
 
11.4
Costs, Expenses and Taxes.
59
 
11.5
Assignability, Binding Agreement.
61
 
11.6
Payments in Respect of Notes.
61
 
11.7
Reserved.
61
 
11.8
Indemnification.
61
 
11.9
Set-Off.
62
 
11.10
Marshaling; Payments Set Aside.
63
 
11.11
Survival of Representations and Warranties.
63
 
11.12
Entire Agreement.
63
 
11.13
Severability.
63
 
11.14
Waiver of Jury Trial; Waiver of Certain Damages.
63
 
11.15
Governing Law; Jurisdiction; Venue; Place of Performance.
64
 
11.16
No Limitation.
64
 
11.17
Section Headings; Construction.
64
 
11.18
Counterparts.
65
 
11.19
Further Assurances.
65
 
11.20
Specific Performance.
65
 
11.21
Actions by Holders.
65
 
11.22
Confidential Information.
65
 
11.23
Material Nonpublic Information.
66
 
11.24
Publicity.
66
 
11.25
Limitation of Liability.
67
 
11.26
USA Patriot Act.
67
 
11.27
Arbitration.
67
 
11.28
INTERCREDITOR AGREEMENT.
69

 

--------------------------------------------------------------------------------

 

SCHEDULES, EXHIBITS AND ANNEXES
 
 
Exhibit A
—
Form of Senior Subordinated Note

 
Exhibit B
—
Form of Guarantor Security Agreement

 
Exhibit C
—
Form of Patent and Trademark Security Agreement

 
Exhibit D
—
Form of Collateral Pledge Agreement

 
Exhibit E
—
Compliance Certificate

 
Exhibit F
—
Additional Guarantor Supplement

 
Schedule 2.4
—
Premises

 
Schedule 5.1
—
Names, Address, Locations

 
Schedule 5.2
—
Capitalization

 
Schedule 5.5
—
Subsidiaries

 
Schedule 5.8
—
Intellectual Property

 
Schedule 5.15
—
Employee Benefit Plans

 
Schedule 5.16
—
Environmental Matters

 
Schedule 7.3
—
Liens

 
Schedule 7.4
—
Indebtedness

 
Schedule 7.5
—
Guaranties

 
Schedule 7.6
—
Investments

 
Annex A
—
Amended Terms and Conditions of Senior Subordinated Notes and Issuance of
Warrants

 
Annex A-1
—
Form of Amendment to Purchase and Security Agreement

 
Annex A-2
—
Form of Amended Senior Subordinated Note

 
Annex A-3
—
Form of Warrant

 
Annex A-4
—
Form of Registration Rights Agreement

 
 

--------------------------------------------------------------------------------

 

Exhibit A
Form of Senior Subordinated Note

See Attached

 

--------------------------------------------------------------------------------

 

THIS INSTRUMENT AND THE RIGHTS AND OBLIGATIONS EVIDENCED HEREBY ARE SUBORDINATE
IN THE MANNER AND TO THE EXTENT SET FORTH IN THAT CERTAIN INTERCREDITOR
AGREEMENT (THE “INTERCREDITOR AGREEMENT”) DATED AS OF NOVEMBER 6, 2009 BY AND
AMONG WELLS FARGO BANK, NATIONAL ASSOCIATION ACTING THROUGH ITS WELLS FARGO
BUSINESS CREDIT OPERATING DIVISION, MILL ROAD CAPITAL, L.P. AND PHYSICIANS
FORMULA, INC.; AND EACH HOLDER OF THIS INSTRUMENT, BY ITS ACCEPTANCE HEREOF,
IRREVOCABLY AGREES TO BE BOUND BY THE PROVISIONS OF THE INTERCREDITOR AGREEMENT.

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD OR TRANSFERRED
WITHOUT COMPLIANCE WITH THE REGISTRATION OR QUALIFICATION PROVISIONS OF
APPLICABLE FEDERAL AND STATE SECURITIES LAWS OR APPLICABLE EXEMPTIONS THEREFROM.

THIS NOTE HAS BEEN ISSUED WITH ORIGINAL ISSUE DISCOUNT FOR U.S. FEDERAL INCOME
TAX PURPOSES.  FOR FURTHER INFORMATION REGARDING THE ISSUE PRICE, AMOUNT OF OID,
ISSUE DATE, THE YIELD TO MATURITY OF THIS NOTE AND ANY OTHER INFORMATION
REQUIRED UNDER TREASURY REGULATIONS SECTION 1.275-3(b)(1)(i), THE HOLDER OF THIS
NOTE SHOULD CONTACT THE OFFICE OF THE CHIEF FINANCIAL OFFICER OF PHYSICIANS
FORMULA INC. AT 1055 WEST 8TH STREET, AZUSA, CA 91702, TEL NO. (626) 334-3395 AT
ANY TIME BEGINNING 10 DAYS AFTER THE DATE OF ISSUANCE.

PHYSICIANS FORMULA, INC.
FORM OF SENIOR SUBORDINATED NOTE

$8,000,000.00
November 6, 2009

FOR VALUE RECEIVED, Physicians Formula, Inc., a New York corporation (the
“Maker”), hereby promises to pay to the order of Mill Road Capital, L.P., a
Delaware limited partnership (“MRC”), or its registered assigns and transferees
(collectively, the “Payee”) the principal sum of Eight Million Dollars
($8,000,000.00), plus the aggregate amount of accrued interest from time to time
capitalized thereon, less the aggregate amount of principal prepaid or repaid
from time to time, in each case, pursuant to the terms and conditions of and at
the times provided in the Purchase Agreement (as defined below).

1.              Notes.  This Senior Subordinated Note (this “Note”) is issued
pursuant to, and is subject to the terms and entitled to the benefits of, the
Senior Subordinated Note Purchase and Security Agreement of even date herewith
among the Maker, MRC and the Guarantors (as defined therein), as amended,
restated, supplemented or otherwise modified from time to time in accordance
with its terms (the “Purchase Agreement”).  The Payee is entitled to enjoy the
benefits of and to enforce the provisions of the Purchase Agreement as a Holder
and is subject to the obligations thereunder of Holder.  Terms used herein and
not otherwise defined herein shall have the meanings ascribed thereto in the
Purchase Agreement.

2.              Interest.  Commencing on the date of issuance, this Note will
accrue interest on the unpaid principal amount thereof at the Interest Rate
specified in, and subject to adjustment as provided in, the Purchase
Agreement.  Interest on this Note shall be computed based on a 360-day year and
actual days elapsed, and all PIK Interest on this Note shall be compounded
quarterly on the first day of each calendar quarter.  Cash interest on this Note
shall be payable monthly in arrears on each Interest Payment Date commencing on
December 1, 2009 by wire transfer of immediately available funds to one or more
accounts designated by the Payee.  The records of the Payee shall, absent
manifest error, be conclusive evidence of the outstanding principal balance of
this Note, including all PIK Interest added to the principal amount thereof and
the compounding thereof, but any failure of the Payee to record, or any error in
so recording, any such amount on the Payee’s records shall not limit or
otherwise affect the obligations of the Maker under this Note to make all
payments of principal of and interest thereon when due.

 

--------------------------------------------------------------------------------

 

If an Event of Default has occurred and is continuing, from and after the date
such Event of Default has occurred the entire outstanding unpaid principal
balance of this Note and any unpaid interest from time to time in default shall
(both before and after acceleration and entry of judgment) bear interest,
payable in cash on demand, at a rate per annum equal to the Interest Rate
payable pursuant to Section 1.1 of the Purchase Agreement plus three percent
(3%); provided, however, that upon the cessation or cure of such Event of
Default, if no other Event of Default is then continuing, this Note shall again
bear interest at the applicable Interest Rate as set forth in Section 1.1 of the
Purchase Agreement.

The obligations of the Maker to pay interest under this Note are subject in all
events to the provisions of Section 1.6 of the Purchase Agreement relating to
Excess Interest and the Maximum Rate.

3.              Maturity; Required Redemption.  Unless the maturity of this Note
is accelerated pursuant to Article VIII of the Purchase Agreement, this Note
shall mature and be redeemed by the Maker in one installment which shall be paid
on May 6, 2013.  On the stated or accelerated maturity date of the Notes, the
Maker will pay in cash the principal amount of the Notes then outstanding
together with all accrued and unpaid interest thereon, including, without
limitation, all PIK interest.

4.              Optional Prepayments.  The Maker may voluntarily prepay this
Note, in whole or in part, at any time.  Optional prepayments permitted pursuant
to the Purchase Agreement may only be made upon payment to the Payee of an
amount equal to the sum of the principal amount to be prepaid, together with all
accrued and unpaid interest (including PIK Interest) on the amount so prepaid
through the date of prepayment, plus the Prepayment Premium, if any, as provided
in the Purchase Agreement.

5.              Repurchase upon a Change of Control.  The Maker is obligated
upon the occurrence of a Change of Control to repurchase this Note in whole on
the terms and conditions set forth in Section 1.4(c) of the Purchase Agreement.

6.              Prepayment Premium.  In the event of any prepayment of this Note
prior to the Maturity Date pursuant to Sections 1.4(b) and (c) of the Purchase
Agreement, the Maker shall pay to the Payee the Prepayment Premium indicated in
the Purchase Agreement corresponding to the time period in which such prepayment
occurs or is required to occur.

7.              Guaranty and Security.  The payment and performance of this Note
is and shall at all times be guaranteed (the “Guaranty”) by each Guarantor
pursuant to Article IX of the Purchase Agreement.  This Note is secured pursuant
to the terms of (a) the security interest granted by the Borrower under Article
II of the Purchase Agreement, (b) the Guarantor Security Agreement dated as of
the date hereof among the Guarantors and the Payee and (c) the other Security
Documents.  The Payee is entitled to the benefits of the Guaranty, the Guarantor
Security Agreement, the other Security Documents and the other Operative
Documents, and may enforce the agreements of the Maker contained therein, and
the Payee may exercise the remedies provided for thereby or otherwise available
in respect thereof, all in accordance with the terms thereof.

 

--------------------------------------------------------------------------------

 

8.              Remedies on Default. Etc.  Reference is made to the Purchase
Agreement for the remedies available to the Payee upon the occurrence of an
Event of Default as described in the Purchase Agreement.  The Maker hereby
agrees to pay on demand all reasonable costs and expenses, including without
limitation attorneys’ fees and costs of collection, incurred or paid by the
holder of this Note in enforcing this Note in accordance with the Purchase
Agreement.

9.              No Impairment.  No provision of the Purchase Agreement or this
Note shall alter or impair the obligation of the Maker, which is absolute and
unconditional, to pay the principal and interest on this Note at the times,
places and rates, and in the currency, provided.

10.            Waivers; Amendments.  The Maker and each endorser and guarantor
hereby waives presentment, demand, protest and notice of any kind.  No failure
or delay on the part of the Maker or the Payee or holder hereof in exercising
any right, power, privilege or remedy hereunder or under the Purchase Agreement
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such right, power, privilege or remedy preclude any other or further
exercise thereof or the exercise of any other right, power, privilege or
remedy.  The remedies provided for herein and in the Purchase Agreement are
cumulative and are not exclusive of any remedies that may be available to the
Maker or the Payee at law or in equity or otherwise.  This Note may not be
amended and the provisions hereof may not be waived, except in accordance with
the terms of the Purchase Agreement.

11.            Lost Notes, etc.  If this Note is mutilated, destroyed, lost or
stolen, upon receipt of evidence satisfactory to the Maker of such loss, theft,
destruction or mutilation of this Note and, if requested in the case of any such
loss, theft or destruction, upon delivery of an indemnity agreement reasonably
satisfactory to the Maker, or, in the case of any such mutilation, upon
surrender and cancellation of this Note, the Maker shall issue a new Note of
like tenor and amount and dated the date to which interest has been paid, in
lieu of this Note; provided, however, if Payee, its nominee, or any of its
partners or members is the holder of this Note and this Note is lost, stolen or
destroyed, the affidavit of an authorized partner, member or officer of such
holder setting forth the circumstances with respect to such loss, theft or
destruction shall be accepted as satisfactory evidence thereof, and no
indemnification shall be required as a condition to the execution and delivery
by the Maker of a new Note in replacement of this Note other than the holder’s
written agreement to indemnify the Maker.

12.            Waiver of Jury Trial.  EACH OF THE MAKER, EACH GUARANTOR AND THE
PAYEE HEREBY WAIVES ITS RIGHT TO JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM
ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THE PURCHASE AGREEMENT, THIS NOTE
OR ANY OF THE OTHER OPERATIVE DOCUMENTS, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR
THEREUNDER OR THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS OR ANY COURSE OF
CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS
OF ANY PARTY, INCLUDING , WITHOUT LIMITATION, ANY COURSE OF CONDUCT, COURSE OF
DEALINGS, STATEMENTS OR ACTIONS OF THE PAYEE RELATING TO THE ADMINISTRATION OR
ENFORCEMENT OF THE NOTES AND THE OPERATIVE DOCUMENTS, AND AGREES THAT IT WILL
NOT SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY
TRIAL CANNOT BE OR HAS NOT BEEN WAIVED.  EXCEPT AS PROHIBITED BY LAW, EACH OF
THE MAKER, EACH GUARANTOR AND THE PAYEE HEREBY WAIVES ANY RIGHT IT MAY HAVE TO
CLAIM OR RECOVER IN ANY LITIGATION REFERRED TO IN THE PRECEDING SENTENCE ANY
SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN,
OR IN ADDITION TO, ACTUAL DAMAGES.  EACH OF THE MAKER, EACH GUARANTOR AND THE
PAYEE (a) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER OF
SUCH PERSONS HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT  SUCH PERSON WOULD
NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS AND (b)
ACKNOWLEDGES THAT EACH OTHER SUCH PERSON HAS BEEN INDUCED TO ENTER INTO THE
PURCHASE AGREEMENT AND THE OTHER OPERATIVE DOCUMENTS TO WHICH IT IS A PARTY
BECAUSE OF, AMONG OTHER THINGS, THE WAIVERS AND CERTIFICATIONS CONTAINED
THEREIN.

 

--------------------------------------------------------------------------------

 

13.            Governing Law; Jurisdiction; Venue.  THIS NOTE AND EACH OF THE
OTHER OPERATIVE DOCUMENTS ARE CONTRACTS UNDER THE LAWS OF THE STATE OF NEW YORK
AND SHALL FOR ALL PURPOSES BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF SAID STATE (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF
LAW).  THE MAKER AND EACH GUARANTOR CONSENT TO THE JURISDICTION OF THE FEDERAL
AND STATE COURTS LOCATED IN NEW YORK COUNTY IN THE STATE OF NEW YORK IN
CONNECTION WITH ANY SUIT TO ENFORCE THE RIGHTS OF THE PAYEE UNDER THIS NOTE OR
ANY OF THE OTHER OPERATIVE DOCUMENTS AND CONSENT TO SERVICE OF PROCESS IN ANY
SUCH SUIT BEING MADE UPON THE MAKER OR ANY SUCH GUARANTOR, AS THE CASE MAY BE,
BY MAIL AT THE MAKER’S OR SUCH GUARANTOR’S ADDRESS SET FORTH IN THE PURCHASE
AGREEMENT.  THE MAKER AND EACH GUARANTOR IRREVOCABLY WAIVES ANY OBJECTION WHICH
IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH ACTION BROUGHT
IN THE COURTS REFERRED TO IN THIS SECTION AND IRREVOCABLY WAIVES AND AGREES NOT
TO PLEAD OR CLAIM IN ANY SUCH ACTION THAT SUCH ACTION HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM.  ANY SUIT OR JUDICIAL PROCEEDING BY THE MAKER OR ANY
GUARANTOR AGAINST THE PAYEE INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY
WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH THIS NOTE OR ANY OTHER
OPERATIVE DOCUMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THE OPERATIVE
DOCUMENTS SHALL BE BROUGHT ONLY IN A FEDERAL OR STATE COURT LOCATED IN NEW YORK
COUNTY IN THE STATE OF NEW YORK.

[The remainder of this page has been left blank intentionally.]

 

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, the Maker has caused this Senior Subordinated Note to be
duly executed under seal on the date set forth above by a duly authorized
representative of the Maker.

 
PHYSICIANS FORMULA, INC.
             
By:
     
Name:
   
Title:

 

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Exhibit B
Form of Guarantor Security Agreement

See Attached

 

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THE RIGHTS OF THE BENEFICIARY OF THIS INSTRUMENT ARE SUBORDINATED IN THE MANNER
AND TO THE EXTENT SET FORTH IN THAT CERTAIN INTERCREDITOR AGREEMENT
(THE”INTERCREDITOR AGREEMENT”) DATED AS OF NOVEMBER 6, 2009 BY AND AMONG WELLS
FARGO BANK, NATIONAL ASSOCIATION ACTING THROUGH ITS WELLS FARGO BUSINESS CREDIT
OPERATING DIVISION, MILL ROAD CAPITAL, L.P. AND PHYSICIANS FORMULA, INC.

FORM OF GUARANTOR SECURITY AGREEMENT

THIS GUARANTOR SECURITY AGREEMENT (“Agreement”), dated as of November 6, 2009,
is made by and among PHYSICIANS FORMULA HOLDINGS, INC., a Delaware corporation,
PHYSICIANS FORMULA COSMETICS, INC., a Delaware corporation, PHYSICIANS FORMULA
DRTV, LLC, a Delaware limited liability company (each a “Grantor” and,
collectively, the “Grantors”), and MILL ROAD CAPITAL, L.P., a Delaware limited
partnership (the “Holder Representative”).

The Holder Representative has entered into that certain Senior Subordinated Note
Purchase and Security Agreement of even date herewith (as the same may be
amended, supplemented or restated from time to time, the “Purchase Agreement”)
with PHYSICIANS FORMULA, INC., a New York corporation (the “Borrower”) and the
other Grantors, pursuant to which the Holder Representative has agreed to
purchase Borrower’s Senior Subordinated Notes due May 6, 2013 (individually a
“Note” and collectively, the “Notes”).

It is a condition precedent to the purchase of the Notes by the Holder
Representative under the Purchase Agreement that each Grantor shall have
executed and delivered this Agreement.

ACCORDINGLY, in consideration of the mutual covenants contained in the Purchase
Agreement and herein, the parties hereby agree as follows:

1.             Definitions.  All terms defined in the recitals hereto and the
Purchase Agreement that are not otherwise defined herein shall have the meanings
given them in the recitals and the Purchase Agreement. All terms defined in the
UCC and not otherwise defined herein have the meanings assigned to them in the
UCC.  In addition, the following terms have the meanings set forth below or in
the referenced Section of this Agreement:

“Accounts” shall have the meaning given it under the UCC.

“Collateral” means all of the Grantors’ Accounts, chattel paper and electronic
chattel paper, deposit accounts, documents, Equipment, General Intangibles,
goods, instruments, Inventory, Investment Property, letter-of-credit rights,
letters of credit, all sums on deposit in any collection account, and any items
in any lockbox; together with (i) all substitutions and replacements for and
products of such property; (ii) in the case of all goods, all accessions; (iii)
all accessories, attachments, parts, Equipment and repairs now or subsequently
attached or affixed to or used in connection with any goods; (iv) all warehouse
receipts, bills of lading and other documents of title that cover such goods now
or in the future; (v) all collateral subject to the Lien of any of the Security
Documents; (vi) any money, or other assets of the Grantors that come into the
possession, custody, or control of the Holder Representative now or in the
future; (vii) Proceeds of any of the above Collateral; (viii) books and records
of the Grantors, including without limitation all mail or e-mail addressed to
the Grantors; and (ix) all of the above Collateral, whether now owned or
existing or acquired now or in the future or in which the Grantors have rights
now or in the future.

 

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“Equipment” shall have the meaning given it under the UCC.

“Event of Default” has the meaning given it in Section 6.

“Excluded Property” means, collectively, (i) any permit, lease or license or any
contractual obligation entered into by the Grantors (A) that prohibits or
requires the consent of any Person other than the Grantors and their
Subsidiaries which has not been obtained as a condition to the creation by the
Grantors of a Lien on any right, title or interest in such permit, lease,
license or contractual obligation or any Capital Stock or equivalent thereof
related thereto or that contains terms stating that the granting of a lien
therein would otherwise result in a material loss by the Grantors of any
material rights therein, (B) to the extent that any law applicable thereto
prohibits the creation of a Lien thereon or (C) to the extent that a Lien
thereon would give any other party a legally enforceable right to terminate such
permit, lease, license or any contractual obligation, but only, with respect to
the prohibition in (A), (B) and (C) to the extent, and for as long as, such
prohibition is not terminated or rendered unenforceable or otherwise deemed
ineffective by the UCC or any other applicable law, (ii) property or assets
owned by the Grantors that is subject to a purchase money Lien or a Capital
Lease Obligation if the contractual obligation pursuant to which such Lien is
granted (or in the document providing for such Capital Lease Obligation)
prohibits or requires the consent of any Person other than the Grantors and
their Subsidiaries which has not been obtained as a condition to the creation of
any other Lien on such property or such assets, (iii) any “intent to use”
trademark applications for which a statement of use has not been filed (but only
until such statement is filed with, and accepted by, the United States Patent
and Trademark Office) (each such trademark, an “Intent To Use Trademark”) and
(iv) shares of capital stock having voting power in excess of 65% of the voting
power of all classes of capital stock of a first tier controlled foreign
corporation (as that term is described in the IRC); provided, however, “Excluded
Property” shall not include any proceeds, products, substitutions or
replacements of Excluded Property (unless such proceeds, products, substitutions
or replacements would otherwise constitute Excluded Property).

“General Intangibles” shall have the meaning given it under the UCC.

“Inventory” shall have the meaning given it under the UCC.

“Investment Property” shall have the meaning given it under the UCC.

“Permitted Liens” means (i) the Security Interest, (ii) covenants, restrictions,
rights, easements and minor irregularities in title which do not materially
interfere with any Grantor’s business or operations as presently conducted,
(iii) licenses (ranged on a non-exclusive basis), sublicenses, leases or
subleases granted to third parties in the ordinary course of business and not
interfereing with the business of any Grantor, and (iv) Liens in existence on
the date hereof and as described on Exhibit C hereto.

 

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“Security Interest” has the meaning given in Section 2.

“UCC” means the Uniform Commercial Code as in effect from time to time in the
State of New York.

2.              Security Interest.  The Grantors hereby pledge, collaterally
assign and grant to the Holder Representative and the Holders a Lien and
security interest (collectively referred to as the “Security Interest”) in the
Collateral as security for the payment and performance of all Obligations;
provided, however, notwithstanding the foregoing, no Lien is hereby granted on
any Excluded Property, and such Excluded Property shall not be deemed to be
“Collateral”; provided further, that if and when any property shall cease to be
Excluded Property, a Lien on and security interest in such property shall be
deemed granted therein and such property shall be deemed to be “Collateral.”

3.              Representations, Warranties and Agreements.  Each Grantor hereby
represents, warrants and agrees as follows:

(a)            Title.  The Grantor (i) has good and marketable title to each
item of Collateral in existence on the date hereof, free and clear of all Liens
except the Permitted Liens, (ii) will have, at the time the Grantor acquires any
rights in Collateral hereafter arising, good and marketable title to each such
item of Collateral free and clear of all Liens except Permitted Liens, (iii)
will keep all Collateral free and clear of all Liens except Permitted Liens, and
(iv) will defend the Collateral against all claims or demands of all Persons
other than the Holder Representative and the holders of Permitted Liens.  The
Grantor will not sell or otherwise dispose of the Collateral or any interest
therein outside the ordinary course of business, without the prior written
consent of the Holder Representative, except for: (i) the use of cash and Cash
Equivalents in the ordinary course of business; (ii) the sale of obsolete,
surplus, uneconomical, or worn-out assets; (iii) leases or subleases granted to
third parties in the ordinary course of business in each case not interfering
with the business of the Grantor; (iv) licenses of Intellectual Property Rights
granted to third parties in the ordinary course of business in each case not
interfering with the business of the Grantor; and (v) subject to Section 7.23 of
the Purchase Agreement, write-offs or grants of discounts or forgiveness of
Accounts, without recourse, which are at least 90 days past due in connection
with the compromise or collection thereof in the ordinary course of business
which do not interfere in any material respect of Grantor.

(b)            Chief Executive Office; Identification Number.  The Grantor’s
chief executive office and principal place of business is located at the address
set forth under its signature below.  The Grantor’s federal employer
identification number and organization identification number is correctly set
forth under its signature below.

(c)            Location of Collateral.  As of the date hereof, the tangible
Collateral is located at the locations identified on Exhibit A attached hereto,
other than tangible Collateral in transit between such locations in the ordinary
course of business.  The Grantor will not permit any tangible Collateral to be
located in any state (and, if a county filing is required, in any county) in
which a financing statement covering such Collateral is required to be, but has
not in fact been, filed in order to perfect the Security Interest.

 

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(d)            Changes in Name, Constituent Documents, Location.  The Grantor
will not change its name, Constituent Documents, or jurisdiction of
organization, without the prior written consent of the Holder
Representative.  The Grantor will not change its business address, without
thirty (30) days prior written notice to the Holder Representative.

(e)            Fixtures.  The Grantor will not permit any tangible Collateral
(other than in-store displays) to become part of or to be affixed to any real
property without first assuring to the reasonable satisfaction of the Holder
Representative that the Security Interest will be prior and senior to any Lien
then held or thereafter acquired by any mortgagee of such real property or the
owner or purchaser of any interest therein.  If any part or all of the tangible
Collateral (other than in-store displays) is now or will become so related to
particular real estate as to be a fixture, the real estate concerned is
accurately set forth in Exhibit B hereto.

(f)             Rights to Payment.  Each right to payment and each instrument,
document, chattel paper and other agreement constituting or evidencing
Collateral is (or will be when arising, issued or assigned to the Holder
Representative) the valid, genuine and legally enforceable obligation, subject
to no defense, setoff or counterclaim (other than those arising in the ordinary
course of business), of the account debtor or other obligor named therein or in
the Grantor’s records pertaining thereto as being obligated to pay such
obligation.  The Grantor will neither agree to any material modification or
amendment nor agree to any forbearance, release or cancellation of any such
obligation, and will not subordinate any such right to payment to claims of
other creditors of such account debtor or other obligor.

(g)            Commercial Tort Claims.  Promptly after a Responsible Officer
obtains actual knowledge thereof (and in any event, within five Business Days),
the Grantor will deliver to the Holder Representative notice of any commercial
tort claims brought against any Person, including the name and address of each
defendant, a summary of the facts, an estimate of the Grantor’s damages, copies
of any complaint or demand letter submitted by the Grantor, and such other
information as the Holder Representative may reasonably request.  Upon written
request by the Holder Representative, the Grantor will grant the Holder
Representative a security interest in all commercial tort claims it may have
against any such Person.

(h)            Miscellaneous Covenants.  The Grantor will:

(i)             keep all tangible Collateral in good repair, working order and
condition, ordinary wear and tear excepted, and will, from time to time, replace
any worn, broken or defective parts thereof, although Grantor may discontinue
the operation  and maintenance of any properties if Grantor believes that such
discontinuance is desirable to the conduct of its business and not
disadvantageous in any material respect to the Holder Representative;

(ii)            pay or discharge when due all taxes and other governmental
charges levied or assessed upon or against any Collateral or upon or against the
creation, perfection or continuance of the Security Interest, although Grantor
shall not be required to pay any such tax, assessment, charge or claim whose
amount, applicability or validity is being contested in good faith by
appropriate proceedings and for which proper reserves have been made;

 

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(iii)           at any time during ordinary business hours, permit the Holder
Representative or its representatives to examine or inspect any Collateral,
wherever located, and to examine, inspect and copy the Grantor’s books and
records pertaining to the Collateral and its business and financial condition
and to send and discuss with account debtors and other obligors requests for
verifications of amounts owed to the Grantor;

(iv)           keep accurate and complete records pertaining to the Collateral
and pertaining to the Grantor’s business and financial condition in accordance
with GAAP consistently applied and cause the Company to submit such periodic
reports regarding the Collateral and its business and financial condition as in
accordance with the Purchase Agreement;

(v)            promptly, after a Responsible Officer obtains actual knowledge
thereof (and in any event within five Business Days), notify the Holder
Representative of any loss of or material damage to any Collateral or of any
substantial adverse change in any Collateral or the prospect of its payment;

(vi)           if the Holder Representative at any time so requests in writing
(after the occurrence and during the continuance of an Event of Default),
promptly deliver to the Holder Representative any instrument, document or
chattel paper constituting Collateral in an amount in excess of $50,000, duly
endorsed or assigned by the Grantor;

(vii)          at all times keep all tangible Collateral insured with insurers
acceptable to the Holder Representative, in such amounts and on such terms
(including deductibles) as the Holder Representative in its sole discretion may
require and including, as applicable and without limitation, business
interruption insurance (including force majeure coverage), hazard coverage on an
“all risks” basis for all tangible Collateral, and theft and physical damage
coverage for Collateral consisting of motor vehicles, with all insurance
policies containing an appropriate lender’s interest endorsement or clause, and
name the Holder Representative as an additional insured;

(viii)         from time to time authorize or execute such financing statements
as the Holder Representative may reasonably require in order to perfect the
Security Interest and, if any Collateral consists of a motor vehicle, execute
such documents as may be required to have the Security Interest properly noted
on a certificate of title;

(ix)            pay when due or reimburse the Holder Representative on demand
for all costs of collection of any of the Obligations and all expenses
(including in each case all reasonable attorneys’ fees) incurred by the Holder
Representative in connection with the creation, perfection, satisfaction,
protection, defense or enforcement of the Security Interest or the creation,
continuance, protection, defense or enforcement of this Agreement or any or all
of the Obligations, including expenses incurred in any litigation or bankruptcy
or insolvency proceedings: provided that such incurrence is not a product of the
Holder Representative’s gross negligence, bad faith or will misconduct;

(x)            authorize, execute, deliver or endorse any and all instruments,
documents, assignments, security agreements and other agreements and writings
which the Holder Representative may at any time reasonably request in order to
secure, protect, perfect or enforce the Security Interest and the Holder
Representative’s rights under this Agreement; and

 

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(xi)            not use or keep any Collateral, or permit it to be used or kept
by any Subsidiary, for any unlawful purpose or in violation of any federal,
state or local law, statute or ordinance.

(i)             Holder Representative’s Right to Take Action.  Each Grantor
authorizes the Holder Representative to file from time to time where permitted
by law, such financing statements against collateral described as “all personal
property” or “all assets” as the Holder Representative deems reasonably
necessary or useful to perfect the Security Interest.  Each Grantor will not
amend any financing statements in favor of the Holder Representative except as
permitted by law.  Further, if any Grantor at any time fails to perform or
observe any agreement contained in Section 3(h), and if such failure continues
for a period of ten (10) days after the Holder Representative gives such Grantor
written notice thereof (or, in the case of the agreements contained in clauses
(vii) and (viii) of Section 3(h), immediately upon the occurrence of such
failure, without notice or lapse of time), the Holder Representative may (but
need not) perform or observe such agreement on behalf and in the name, place and
stead of such Grantor (or, at the Holder Representative’s option, in the Holder
Representative’s own name) and may (but need not) take any and all other actions
which the Holder Representative may reasonably deem necessary to cure or correct
such failure (including, without limitation, the payment of taxes, the
satisfaction of security interests, liens, or encumbrances, the performance of
obligations under contracts or agreements with account debtors or other
obligors, the procurement and maintenance of insurance, the execution of
financing statements, the endorsement of instruments, the qualification and
licensing of such Grantor to do business in any jurisdiction, and the
procurement of repairs or transportation); and, except to the extent that the
effect of such payment would be to render any loan or forbearance of money
usurious or otherwise illegal under any applicable law, such Grantor shall
thereupon pay the Holder Representative on demand the amount of all moneys
expended and all costs and expenses (including reasonable attorneys’ fees)
incurred by the Holder Representative in connection with or as a result of the
Holder Representative’s performing or observing such agreements or taking such
actions, together with interest thereon from the date expended or incurred by
the Holder Representative at the highest rate then applicable to any of the
Obligations.  To facilitate the performance or observance by the Holder
Representative of such agreements of the Grantors, each Grantor hereby
irrevocably appoints (which appointment is coupled with an interest) the Holder
Representative, or its delegate, as the attorney-in-fact of such Grantor with
the right (but not the duty) from time to time to create, prepare, complete,
execute, deliver, endorse or file, in the name and on behalf of such Grantor,
any and all instruments, documents, financing statements, applications for
insurance and other agreements and writings required to be obtained, executed,
delivered or endorsed by such Grantor under this Section 3 and Section 4 below.

(j)             Senior Lender as Bailee.  With respect to any provision in this
Agreement which requires any Grantor to deliver possession or control of any
negotiable document, instrument, certificated securities, promissory notes,
deposit accounts, security accounts, commodity accounts, and letter of credit
rights or other Collateral requiring possession or control thereof in order to
perfect the security interest of the Holder Representative and the Holders
therein under the UCC, no such delivery or giving of control to the Holder
Representative shall be required to the extent such Collateral is required to be
delivered to or control is required to be given to the Senior Lender in
accordance with the Senior Credit Agreement, it being understood that the Senior
Lender is acting as agent and bailee for the benefit of the Holder
Representative and the Holders pursuant to the terms of the Intercreditor
Agreement.

 

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(k)            Future Grantors.  The Borrower, Holdings and each Guarantor are
required to cause each of their Domestic Subsidiaries formed or acquired after
the Closing Date to execute and deliver to the Holder Representative,
concurrently with the formation or acquisition thereof, a joinder to this
Agreement substantially in the form of Exhibit D hereto and the Additional
Guarantor Supplement substantially in the form of Exhibit F attached to the
Purchase Agreement.

4.              Rights of the Holder Representative.  At any time and from time
to time, whether before or after an Event of Default, the Holder Representative
may take any or all of the following actions:

(a)            Account Verification.  The Holder Representative may at any time
and from time to time send or require the Grantors to send requests for
verification of accounts or notices of assignment to account debtors and other
obligors.  The Holder Representative may also at any time and from time to time
telephone account debtors and other obligors to verify accounts.

(b)            Collection Account.  The Holder Representative may establish a
collateral account for the deposit of checks, drafts and cash payments made by
the Grantors’ account debtors. If a collateral account is so established, each
Grantor shall promptly deliver to the Holder Representative, for deposit into
said collateral account, all payments on Accounts and chattel paper received by
it.  All such payments shall be delivered to the Holder Representative in the
form received (except for any Grantor’s endorsement where necessary).  Until so
deposited, all payments on Accounts and chattel paper received by any Grantor
shall be held in trust by such Grantor for and as the property of the Holder
Representative and shall not be commingled with any funds or property of such
Grantor.  All deposits in said collateral account shall constitute proceeds of
Collateral and shall not constitute payment of any Obligation.  Unless otherwise
agreed in writing, no Grantor shall have any right to withdraw amounts on
deposit in any collateral account.

(c)            Lockbox.  The Holder Representative may, by notice to the
Grantors, require each Grantor to direct each of its account debtors to make
payment directly to a special lockbox to be under the control of the Holder
Representative. Each Grantor hereby authorizes and directs the Holder
Representative to deposit all checks, drafts and cash payments received in said
lockbox into the collateral account established as set forth above.

(d)            Direct Collection.  The Holder Representative may notify any
account debtor, or any other Person obligated to pay any amount due, that such
chattel paper, Account, or other right to payment has been assigned or
transferred to the Holder Representative for security and shall be paid directly
to the Holder Representative.  At any time after the Holder Representative or
any Grantor gives such notice to an account debtor or other obligor, the Holder
Representative may (but need not), in its own name or in such Grantor’s name,
demand, sue for, collect or receive any money or property at any time payable or
receivable on account of, or securing, any such chattel paper, Account, or other
right to payment, or grant any reasonable to, make any compromise or settlement
with or otherwise agree to waive, modify, amend or change the obligations
(including collateral obligations) of any such account debtor or other obligor.

 

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5.              Assignment of Insurance.  Each Grantor hereby collaterally
assigns to the Holder Representative, as additional security for the payment of
the Obligations, any and all moneys (including but not limited to proceeds of
insurance and refunds of unearned premiums) due or to become due under, and all
other rights of such Grantor under or with respect to, any and all policies of
insurance covering the Collateral, each Grantor hereby directs the issuer of any
such policy to pay any such moneys directly to the Holder Representative.  After
the occurrence and during the continuance of an Event of Default, the Holder
Representative may (but need not), in its own name or in any Grantor’s name,
execute and deliver proofs of claim, receive all such moneys, endorse checks and
other instruments representing payment of such moneys, and adjust, litigate,
compromise or release any claim against the issuer of any such policy.

6.              Events of Default.  Each of the following occurrences shall
constitute an event of default under this Agreement (herein called “Event of
Default”):  (i) an Event of Default shall occur under the Purchase Agreement;
(ii) any Grantor shall fail to pay any or all of the Obligations when due or (if
payable on demand) on demand; or (iii) any Grantor shall fail to observe or
perform any covenant or agreement herein binding on it.

7.              Remedies upon Event of Default.  Upon the occurrence and during
the continuance of an Event of Default, the Holder Representative may exercise
any one or more of the following rights and remedies: (i) declare all unmatured
Obligations to be immediately due and payable, and the same shall thereupon be
immediately due and payable, without presentment or other notice or demand; (ii)
exercise and enforce any or all rights and remedies available upon default to a
secured party under the UCC, including but not limited to the right to take
possession of any Collateral, proceeding without judicial process or by judicial
process (without a prior hearing or notice thereof, which each Grantor hereby
expressly waives), and the right to sell, lease or otherwise dispose of any or
all of the Collateral, and in connection therewith, the Holder Representative
may require the Grantors to make the Collateral available to the Holder
Representative at a place to be designated by the Holder Representative which is
reasonably convenient to both parties, and if notice to the Grantors of any
intended disposition of Collateral or any other intended action is required by
law in a particular instance, such notice shall be deemed commercially
reasonable if given (in the manner specified in Section 9) at least ten (10)
days prior to the date of intended disposition or other action; (iii) exercise
or enforce any or all other rights or remedies available to the Holder
Representative by law or agreement against the Collateral, against any Grantor
or against any other Person or property.  Upon the occurrence and during the
continuance of an Event of Default, the Holder Representative is hereby granted
a nonexclusive, worldwide and royalty-free license to use or otherwise exploit
all Intellectual Property Rights owned by or licensed to any Grantor that the
Holder Representative deems reasonably necessary or appropriate to the
disposition of any Collateral.

8.              Other Personal Property.  Unless at the time the Holder
Representative takes possession of any tangible Collateral, or within seven (7)
days thereafter, any Grantor gives written notice to the Holder Representative
of the existence of any goods, papers or other property of such Grantor, not
affixed to or constituting a part of such Collateral, but which are located or
found upon or within such Collateral, describing such property, the Holder
Representative shall not be responsible or liable to such Grantor for any action
taken or omitted by or on behalf of the Holder Representative with respect to
such property.

 

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9.              Notices; Requests for Accounting.  All notices, requests,
demands and other communications provided for hereunder shall be in writing and
mailed (by first class registered or certified mail, postage prepaid), sent by
express overnight courier service or electronic facsimile transmission with a
copy by mail, sent as an Electronic Record and delivered by encrypted e-mail, or
delivered to the applicable party at the addresses indicated below:

If to the Borrower or any Guarantor:

Physicians Formula, Inc.
1055 West 8th Street
Azusa, CA 91702
Attention:  Jeff Berry, Chief Financial Officer
Telephone: 626-334-3395
Fax: 626-812-9462
Email: jeff.berry@physiciansformula.com

With a copy (delivery of which alone shall not constitute notice) to:

Kirkland & Ellis LLP
300 N. LaSalle Street
Chicago, IL 60654
Attention: Louis R. Hernandez, Esq.
Telephone: 312-862-2000
Fax: 312-862-2200
Email: lhernandez@kirkland.com

If to the Purchaser or the initial Holder Representative:

Mill Road Capital, L.P.
Two Sound View Drive
Greenwich, CT 06830
Attention: Thomas Lynch, Managing Director
Telephone: 203-987-3501
Fax: 203-621-3280
Email: tlynch@millroadcapital.com

With a copy (delivery of which alone shall not constitute notice) to:

Foley Hoag LLP
155 Seaport Boulevard
Boston, MA  02210
Attention:  Peter M. Rosenblum, Esq.
Telephone: 617-832-1000

 

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Fax: 617-832-7000
Email: prosenblum@foleyhoag.com

If to any other Holder or any successor Holder Representative, at such Holder’s
or successor Holder Representative’s address for notices as set forth in the
transfer records of the Borrower or, as to each of the foregoing, at such other
address as shall be designated by such Person in a written notice to the other
party complying as to delivery with the terms of this Section.

All such notices, requests, demands and other communications shall, when mailed
or sent, respectively, be effective (i) three (3) Business Days after being
deposited in the mails, (ii) one Business Day after being deposited with the
express overnight courier service or (iii) the Business Day when sent when sent
by electronic facsimile transmission (with receipt confirmed) or sent as an
Electronic Record by electronic mail or similar secure electronic channel to
which the parties have agreed, respectively, addressed as aforesaid.  All
requests under Section 9-210 of the UCC (1) shall be made in a writing signed by
an authorized Person, (2) shall be personally delivered, sent by registered or
certified mail, return receipt requested, or by overnight courier of national
reputation (3) shall be deemed to be sent when received by the Holder
Representative and (4) shall otherwise comply with the requirements of Section
9-210.  Each Grantor requests that the Holder Representative respond to all such
requests which on their face appear to come from an authorized individual and
releases the Holder Representative from any liability for so responding.  Each
Grantor shall pay the Holder Representative the maximum amount allowed by law
for responding to such requests.

10.            Miscellaneous.  This Agreement has been duly and validly
authorized by all necessary corporate (or equivalent company) action. This
Agreement does not contemplate a sale of accounts, or chattel paper. This
Agreement can be waived, modified, amended, terminated or discharged, and the
Security Interest can be released, only explicitly in a writing signed by the
Holder Representative, and, in the case of amendment or modification, in a
writing signed by the Grantors.  A waiver signed by the Holder Representative
shall be effective only in the specific instance and for the specific purpose
given.  Mere delay or failure to act shall not preclude the exercise or
enforcement of any of the Holder Representative’s rights or remedies.  All
rights and remedies of the Holder Representative shall be cumulative and may be
exercised singularly or concurrently, at the Holder Representative’s option, and
the exercise or enforcement of any one such right or remedy shall neither be a
condition to nor bar the exercise or enforcement of any other.  The Holder
Representative’s duty of care with respect to Collateral in its possession (as
imposed by law) shall be deemed fulfilled if the Holder Representative exercises
reasonable care in physically safekeeping such Collateral or, in the case of
Collateral in the custody or possession of a bailee or other third person,
exercises reasonable care in the selection of the bailee or other third person,
and the Holder Representative need not otherwise preserve, protect, insure or
care for any Collateral.  The Holder Representative shall not be obligated to
preserve any rights the Grantors may have against prior parties, to realize on
the Collateral at all or in any particular manner or order, or apply any cash
proceeds of Collateral in any particular order unless otherwise provided in the
Purchase Agreement.  This Agreement shall be binding upon and inure to the
benefit of the Grantors and the Holder Representative and their respective
successors and assigns and shall take effect when signed by the Grantor and the
Holder Representative and delivered to the Holder Representative, and each
Grantor waives notice of the Holder Representative’s acceptance hereof.  A
carbon, photographic or other reproduction of this Agreement or of any financing
statement signed by any Grantor shall have the same force and effect as the
original for all purposes of a financing statement.  This Agreement shall be
governed by and construed in accordance with the substantive laws (other than
conflict laws) of the State of New York.  If any provision or application of
this Agreement is held unlawful or unenforceable in any respect, such illegality
or unenforceability shall not affect other provisions or applications which can
be given effect and this Agreement shall be construed as if the unlawful or
unenforceable provision or application had never been contained herein or
prescribed hereby. All representations and warranties contained in this
Agreement shall survive the execution, delivery and performance of this
Agreement and the creation and payment of the Obligations.  The parties hereto
hereby (i) consent to the personal jurisdiction of the state and federal courts
located in the State of New York in connection with any controversy related to
this Agreement; (ii) waive any argument that venue in any such forum is not
convenient, (iii) agree that any litigation initiated by the Holder
Representative or the Grantor in connection with this Agreement or the other
Operative Documents may be venued in either the state or federal courts located
in New York County, New York; and (iv) agree that a final judgment in any such
suit, action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.

 

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11.            Arbitration.  The Holder Representative and each Grantor agree,
upon demand by either party, to submit to binding arbitration all claims,
disputes and controversies between or among them (and their respective
employees, officers, directors, attorneys, and other agents), whether in tort,
contract or otherwise, in any way arising out of or relating to this Agreement
and its negotiation, execution, collateralization, administration, repayment,
modification, extension, substitution, formation, inducement, enforcement,
default or termination.

(a)            Governing Rules.  Any arbitration proceeding will (i) proceed in
a location in New York, New York selected by the American Arbitration
Association (“AAA”); (ii) be governed by the Federal Arbitration Act (Title 9 of
the United States Code), notwithstanding any conflicting choice of law provision
in any of the documents between the parties; and (iii) be conducted by the AAA,
or such other administrator as the parties shall mutually agree upon, in
accordance with the AAA’s commercial dispute resolution procedures, unless the
claim or counterclaim is at least $1,000,000.00 exclusive of claimed interest,
arbitration fees and costs in which case the arbitration shall be conducted in
accordance with the AAA’s optional procedures for large, complex commercial
disputes (the commercial dispute resolution procedures or the optional
procedures for large, complex commercial disputes to be referred to herein, as
applicable, as the “Rules”).  If there is any inconsistency between the terms
hereof and the Rules, the terms and procedures set forth herein shall
control.  Any party who fails or refuses to submit to arbitration following a
demand by any other party shall bear all costs and expenses incurred by such
other party in compelling arbitration of any dispute.  Nothing contained herein
shall be deemed to be a waiver by any party that is a bank of the protections
afforded to it under 12 U.S.C. §91 or any similar applicable state law.

(b)            No Waiver of Provisional Remedies, Self-Help and
Foreclosure.  The arbitration requirement does not limit the right of any party
to (i) foreclose against real or personal property collateral; (ii) exercise
self-help remedies relating to collateral or proceeds of collateral such as
setoff or repossession; or (iii) obtain provisional or ancillary remedies such
as replevin, injunctive relief, attachment or the appointment of a receiver,
before, during or after the pendency of any arbitration proceeding.  This
exclusion does not constitute a waiver of the right or obligation of any party
to submit any dispute to arbitration or reference hereunder, including those
arising from the exercise of the actions detailed in sections (i), (ii) and
(iii) of this paragraph.

 

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(c)            Arbitrator Qualifications and Powers.  Any arbitration proceeding
in which the amount in controversy is $5,000,000.00 or less will be decided by a
single arbitrator selected according to the Rules, and who shall not render an
award of greater than $5,000,000.00.  Any dispute in which the amount in
controversy exceeds $5,000,000.00 shall be decided by majority vote of a panel
of three arbitrators; provided however, that all three arbitrators must actively
participate in all hearings and deliberations.  The arbitrator will be a neutral
attorney licensed in the State of New York or a neutral retired judge of the
state or federal judiciary of New York, in either case with a minimum of ten
years experience in the substantive law applicable to the subject matter of the
dispute to be arbitrated.  The arbitrator will determine whether or not an issue
is arbitratable and will give effect to the statutes of limitation in
determining any claim.  In any arbitration proceeding the arbitrator will decide
(by documents only or with a hearing at the arbitrator's discretion) any
pre-hearing motions which are similar to motions to dismiss for failure to state
a claim or motions for summary adjudication.  The arbitrator shall resolve all
disputes in accordance with the substantive law of New York and may grant any
remedy or relief that a court of such state could order or grant within the
scope hereof and such ancillary relief as is necessary to make effective any
award.  The arbitrator shall also have the power to award recovery of all costs
and fees, to impose sanctions and to take such other action as the arbitrator
deems necessary to the same extent a judge could pursuant to the Federal Rules
of Civil Procedure, the New York Code of Civil Procedure or other applicable
law.  Judgment upon the award rendered by the arbitrator may be entered in any
court having jurisdiction.  The institution and maintenance of an action for
judicial relief or pursuit of a provisional or ancillary remedy shall not
constitute a waiver of the right of any party, including the plaintiff, to
submit the controversy or claim to arbitration if any other party contests such
action for judicial relief.

(d)            Discovery.  In any arbitration proceeding, discovery will be
permitted in accordance with the Rules.  All discovery shall be expressly
limited to matters directly relevant to the dispute being arbitrated and must be
completed no later than twenty (20) days before the hearing date.  Any requests
for an extension of the discovery periods, or any discovery disputes, will be
subject to final determination by the arbitrator upon a showing that the request
for discovery is essential for the party's presentation and that no alternative
means for obtaining information is available.

(e)            Class Proceedings and Consolidations.  No party hereto shall be
entitled to join or consolidate disputes by or against others in any
arbitration, except parties who have executed this Agreement or any other
contract, instrument or document relating to any Obligations, or to include in
any arbitration any dispute as a representative or member of a class, or to act
in any arbitration in the interest of the general public or in a private
attorney general capacity.

(f)             Payment of Arbitration Costs and Fees.  The arbitrator shall
award all costs and expenses of the arbitration proceeding.

 

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(g)            Miscellaneous.  To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the dispute with the
AAA.  No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business or by applicable law or
regulation.  If more than one agreement for arbitration by or between the
parties potentially applies to a dispute, the arbitration provision most
directly related to the documents between the parties or the subject matter of
the dispute shall control.  This arbitration provision shall survive
termination, amendment or expiration of any of the documents or any relationship
between the parties.

[Signatures on next page]

 

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date and year first above written.

 
GRANTORS:
           
PHYSICIANS FORMULA HOLDINGS, INC.
   
a Delaware Corporation
           
By:
     
Print Name:
     
Title:
             
Address:
1055 West 8th Street
     
Azusa, CA 91702
     
Attn: Jeff Berry
     
Fax: 626-812-9462
     
Email:
     
jeff.berry@physiciansformula.com
           
FID:
     
OID:
                     
PHYSICIANS FORMULA COSMETICS, INC.
   
a Delaware Corporation
           
By:
     
Print Name:
     
Title:
             
Address:
1055 West 8th Street
     
Azusa, CA 91702
     
Attn: Jeff Berry
     
Fax: 626-812-9462
     
Email:
     
jeff.berry@physiciansformula.com
           
FID:
     
OID:
   

 
[Signature Page to Guarantor Security Agreement]

 

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PHYSICIANS FORMULA DRTV, LLC
   
a Delaware Limited Liability Company
                   
By:
     
Print Name:
     
Title:
             
Address:
1055 West 8th Street
     
Azusa, CA 91702
     
Attn: Jeff Berry
     
Fax: 626-812-9462
     
Email:
     
jeff.berry@physiciansformula.com
           
FID:
     
OID:
                     
HOLDER REPRESENTATIVE:
                   
MILL ROAD CAPITAL, L.P.
   
a Delaware Limited Partnership
                   
By:
     
Print Name:
     
Title:
             
Address:
Two Sound View Drive
     
Greenwich, CT 06830
     
Attn: Thomas Lynch, Managing Director
     
Fax: 203-987-3501
     
Email: tlynch@millroadcapital.com
 

 
[Signature Page to Guarantor Security Agreement]

 

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EXHIBIT A

LOCATION OF COLLATERAL

Location
 
1055 W. 8th Street
Azusa, CA 91702
     
1425 Max Brose Drive #8
London, Ontario   N6N 0A2
Canada
     
435 Park Court
Lino Lakes, MN 55014
 
230 South Ninth Avenue
City of Industry, CA 91746
 
250 South Ninth Avenue
City of Industry, CA 91746
 
753-755 Arrow Grand Circle Way
Covina, CA 91722
 
2169 Wright Ave.
La Verne, CA 91750
 

 

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EXHIBIT B

FIXTURES

None.

 

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EXHIBIT C

PERMITTED LIENS

Creditor
Collateral
Jurisdiction
Filing Date
Filing No.
U.S. District Court, California Central District*
 
CA
02/04/2009
2:09-CV-0866-ABC-FMO
Liens in favor of the Senior Lender
       

* This judgment lien has been discharged.

 

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EXHIBIT D

JOINDER

AGREEMENT TO BE BOUND BY GUARANTOR SECURITY AGREEMENT

This Agreement to be bound by the Guarantor Security Agreement (this
“Agreement”) is executed as of the ___ day of ______________, ___, by
______________, a _____________ (the “New Subsidiary”).

RECITALS

A.             Pursuant to that certain Senior Subordinated Note Purchase and
Security Agreement dated as of November 6, 2009 among Physicians Formula, Inc.,
a New York corporation (the “Borrower”), the Guarantors party thereto and Mill
Road Capital, L.P. (the “Holder Representative”) (as it may be amended,
restated, supplemented or otherwise modified from time to time, the “Purchase
Agreement”; capitalized terms used herein without definition shall have the
meanings assigned to them in the Purchase Agreement), the Holder Representative
purchased certain Notes from the Borrower.

B.             As a condition subsequent to the execution of the Purchase
Agreement by the Lender, each Domestic Subsidiary of the Borrower existing as of
the Closing Date entered into a guaranty and executed the Guarantor Security
Agreement dated as of November 6, 2009 (as it may be amended, restated,
supplemented or otherwise modified from time to time, the “Security Agreement”),
each in favor of the Holder Representative.

C.             The Purchase Agreement provides that when the Borrower, Holdings
or any Guarantor acquires or forms a new Domestic Subsidiary, such Person will
cause such Domestic Subsidiary to provide a Guaranty and to become a party to
the Security Agreement.

D.             On [Insert Date], the New Subsidiary [Describe
acquisition/formation of New Subsidiary]. The New Subsidiary anticipates that it
will benefit from the funds available to the Borrower under the Purchase
Agreement, and in recognition of this benefit and in order to comply with the
Purchase Agreement, the New Subsidiary is willing to enter into this Agreement.

AGREEMENT

NOW, THEREFORE, the New Subsidiary agrees as follows:

SECTION 1.           Representations and Warranties. On and as of the date of
this Agreement (the “Effective Date”) and for the benefit of the Lender, the New
Subsidiary hereby makes, as to itself, each of the representations and
warranties contained in the Security Agreement.

SECTION 2.           Agreement to be Bound. The New Subsidiary agrees that, on
and as of the Effective Date, it shall become a Grantor under the Security
Agreement, and shall be bound by all the provisions of the Security Agreement in
the same manner as if the New Subsidiary had executed the Security Agreement on
the Closing Date.  Notwithstanding the foregoing, (i) references in the Security
Agreement to information regarding any Grantor being set forth on the signature
page for such such Grantor, shall, in the case of the New Subsidiary, refer to
its signature page hereto and (ii) references to Exhibits A-C in the Security
Agreement shall refer, with respect to the New Subsidiary, to Exhibits A-C
hereto.

 

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SECTION 3.           Waiver. Without limiting the generality of the waivers in
the Security Agreement, the New Subsidiary specifically agrees to be bound by
the Security Agreement, and waives any right to notice of acceptance of its
execution of this Agreement and of its agreement to be bound by the Security
Agreement.

SECTION 4.           Governing Law. This Agreement shall be governed by, and
construed and interpreted in accordance with, the laws of the State of New York
(without reference to its choice of law rules).

IN WITNESS WHEREOF, the New Subsidiary has caused this Agreement to be bound by
the Security Agreement to be executed by its duly authorized officer as of this
__ day of ___________, ___.

 
________________, a _____________
                   
By:
     
Name:
     
Title:
   

[Attach Exhibits A-C of the Guarantor Security Agreement]

 

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Exhibit C
Form of Patent and Trademark Security Agreement

See Attached

 

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FORM OF PATENT AND TRADEMARK SECURITY AGREEMENT

This Patent and Trademark Security Agreement (this “Agreement”), dated as of
November 6, 2009, is made by and between [_________], a [________]  having a
business location at the address set forth below next to its signature (the
“Debtor”), and Mill Road Capital, L.P., a Delaware Limited Partnership (the
“Secured Party”), having a business location at the address set forth below next
to its signature.

Recitals

Physicians Formula, Inc. (the “Company”), an Affiliate of the Debtor, the
Debtor, the other Guarantors party thereto and the Secured Party are parties to
that certain Senior Subordinated Note Purchase and Security Agreement of even
date herewith (as the same may hereafter be amended, supplemented or restated
from time to time, the “Purchase Agreement”) setting forth the terms on which
the Secured Party shall purchase notes from the Company.

As a condition to the Secured Party’s obligation to purchase notes, the Secured
Party has required the execution and delivery of this Agreement by the Debtor.

ACCORDINGLY, in consideration of the mutual covenants contained in the Operative
Documents and herein, the parties hereby agree as follows:

1.              Definitions. All terms defined in the Recitals hereto or in the
Purchase Agreement that are not otherwise defined herein shall have the meanings
given to them therein. In addition, the following terms have the meanings set
forth below:

“Patents” means all of the Debtor’s right, title and interest in and to patents
or applications for patents, fees or royalties with respect thereto, and
including without limitation the right to sue for past, present and future
infringement and damages therefor, all as presently existing or hereafter
arising or acquired, including without limitation the patents listed on Exhibit
A.

“Security Interest” has the meaning given in Section 2 below.

“Trademarks” means all of the Debtor’s right, title and interest in and to: (i)
trademarks, service marks, registrations and applications for registration
therefor, and the respective goodwill associated therewith, (ii) fees or
royalties with respect thereto, and (iii) the right to sue for past, present and
future infringement, dilution and damages therefor, all as presently existing or
hereafter arising or acquired, including, without limitation, the marks listed
on Exhibit B.

2.              Security Interest. The Debtor hereby pledges, collaterally
assigns and grants to the Secured Party a Lien and security interest
(collectively referred to as the “Security Interest”) in the Patents and in the
Trademarks, as security for the payment and performance of all Obligations;
provided, however, notwithstanding the foregoing, no Lien is hereby granted on
any Excluded Property, and such Excluded Property shall not be deemed to be
“Collateral”; provided further, that if and when any property shall cease to be
Excluded Property, a Lien on and security interest in such property shall be
deemed granted therein and such property shall be deemed to be “Collateral.”  As
set forth in the Purchase Agreement, the Security Interest is coupled with a
security interest in substantially all of the personal property of the
Debtor.  This Agreement grants only the Security Interest herein described, is
not intended to and does not affect any present transfer of title of any
Trademarks owned by the Debtor and makes no assignment and grants no right to
assign or perform any other action with respect to any intent to use Trademark
applications owned by the Debtor, unless such action is permitted under 15
U.S.C. § 1060.

 

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3.             Representations, Warranties and Agreements.  The Debtor
represents, warrants and agrees as follows:

(a)            Existence; Authority.  The Debtor is a corporation duly
organized, validly existing and in good standing under the laws of its state of
incorporation, and this Agreement has been duly and validly authorized by all
necessary corporate action on the part of the Debtor.

(b)            Patents.Exhibit A accurately lists all Patents owned or
controlled by the Debtor as of the date hereof, or to which the Debtor has a
right as of the date hereof to have assigned to it, and accurately reflects the
existence and status of applications and letters patent pertaining to the
Patents as of the date hereof.  If after the date hereof, the Debtor owns,
controls or has a right to have assigned to it any Patents not listed on Exhibit
A, or if Exhibit A ceases to accurately reflect the existence and status of
applications and letters patent pertaining to the Patents, then the Debtor shall
provide written notice to the Secured Party with a replacement Exhibit A in
accordance with Section 7.1(i) of the Purchase Agreement, which upon acceptance
by the Secured Party shall become part of this Agreement.

(c)            Trademarks.Exhibit B accurately lists all Trademarks (excluding
“intent-to-use” Trademark applications as described in the definition of
“Collateral” in the Purchase Agreement”) owned or controlled by the Debtor as of
the date hereof and accurately reflects the existence and status of Trademarks
and all applications and registrations pertaining thereto as of the date hereof;
provided, however, that Exhibit B need not list common law marks (i.e.,
Trademarks for which there are no applications or registrations) which are not
material to the Debtor’s or any Affiliate’s business(es).  If after the date
hereof, the Debtor owns or controls any Trademarks (excluding “intent-to-use”
Trademark applications as described in the definition of “Collateral” in the
Purchase Agreement”) not listed on Exhibit B (other than common law marks which
are not material to the Debtor’s or any Affiliate’s business(es)), or if Exhibit
B ceases to accurately reflect the existence and status of applications and
registrations pertaining to the Trademarks, then the Debtor shall provide
written notice to the Secured Party with a replacement  Exhibit B in accordance
with Section 7.1(i) of the Purchase Agreement, which upon acceptance by the
Secured Party shall become part of this Agreement.

(d)            Third Parties.  As of the date hereof, (i) neither Physicians
Formula Holdings, Inc., nor any of its Subsidiaries (other than Physicians
Formula, Inc.) owns, controls, or has a right to have assigned to it any items
that would, if such item were owned by the Debtor, constitute Patents or
Trademarks and (ii) no other third party owns, controls, or has a right to have
assigned to it any items that would constitute Patents or Trademarks used by the
Company or the Debtor in its business operations other than licenses of Patents
and Trademarks granted to third parties in the ordinary course of business,
copies of which have been provided to Secured Party.  If after the date hereof
any such party owns, controls, or has a right to have assigned to it any such
items, then the Company and the Debtor shall promptly either: (x) cause such
third party to assign all of its rights in such item(s) to the Company or the
Debtor as applicable; or (y) notify the Secured Party of such item(s) and cause
such third party to execute and deliver to the Secured Party a patent and
trademark security agreement substantially in the form of this Agreement.

 

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(e)            Title.  The Debtor has good and marketable title to each Patent
and each Trademark listed on Exhibit A and Exhibit B, free and clear of all
Liens except Permitted Liens.  The Debtor (i) will have, at the time the Debtor
acquires any Patents or Trademarks hereafter arising, good and marketable title
to each such Patent or Trademark free and clear of all Liens except Permitted
Liens, and (ii) will keep all Patents and Trademarks free and clear of all Liens
except Permitted Liens.

(f)             No Sale.  Except as permitted in the Purchase Agreement, the
Debtor will not assign, transfer, encumber or otherwise dispose of the Patents
or Trademarks, or any interest therein, without the Secured Party’s prior
written consent.

(g)            Defense.  The Debtor will at its own expense and using
commercially reasonable efforts, protect and defend the Patents and Trademarks
against all claims or demands of all Persons other than those holding Permitted
Liens.

(h)            Maintenance.  The Debtor will at its own expense maintain the
Patents and the Trademarks to the extent legally permissible and to the extent
reasonably advisable in its business including, but not limited to, filing all
applications to obtain letters patent or trademark registrations and all
affidavits, maintenance fees, annuities, and renewals possible with respect to
letters patent, trademark registrations and applications therefor.  The Debtor
covenants that it will not abandon nor fail to pay any maintenance fee or
annuity due and payable on any Patent or Trademark, nor fail to file any
required affidavit or renewal in support thereof, without first providing the
Secured Party: (i) sufficient written notice, of at least thirty (30) days, to
allow the Secured Party to timely pay any such maintenance fees or annuities
which may become due on any Patents or Trademarks, or to file any affidavit or
renewal with respect thereto, and (ii) a separate written power of attorney or
other authorization to pay such maintenance fees or annuities, or to file such
affidavit or renewal, should such be necessary or desirable.

(i)             Secured Party’s Right to Take Action .  If the Debtor fails to
perform or observe any of its covenants or agreements set forth in this Section
3, and if such failure continues for a period of ten (10) calendar days after
the Secured Party gives the Debtor written notice thereof (or, in the case of
the agreements contained in subsection (h), immediately upon the occurrence of
such failure, without notice or lapse of time), or if the Debtor notifies the
Secured Party that it intends to abandon a Patent or Trademark, the Secured
Party may (but need not) perform or observe such covenant or agreement or take
steps to prevent such intended abandonment on behalf and in the name, place and
stead of the Debtor (or, at the Secured Party’s option, in the Secured Party’s
own name) and may (but need not) take any and all other actions which the
Secured Party may reasonably deem necessary to cure or correct such failure or
prevent such intended abandonment.

 

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(j)             Costs and Expenses.  Except to the extent that the effect of
such payment would be to render any loan or forbearance of money usurious or
otherwise illegal under any applicable law, the Debtor shall pay the Secured
Party on demand the amount of all moneys expended and all costs and expenses
(including reasonable attorneys’ fees and disbursements) incurred by the Secured
Party in connection with or as a result of the Secured Party’s taking action
under subsection (i) or exercising its rights under Section 5, together with
interest thereon from the date expended or incurred by the Secured Party at the
Default Rate.

(k)            Power of Attorney. To facilitate the Secured Party’s taking
action under subsection (i) and exercising its rights under Section 5, the
Debtor hereby irrevocably appoints (which appointment is coupled with an
interest) the Secured Party, or its delegate, as the attorney-in-fact of the
Debtor with the right (but not the duty) from time to time to create, prepare,
complete, execute, deliver, endorse or file, in the name and on behalf of the
Debtor, any and all instruments, documents, applications, financing statements,
and other agreements and writings required to be obtained, executed, delivered
or endorsed by the Debtor under this Section 3, or, necessary for the Secured
Party, upon the occurrence and during the continuation of an Event of Default,
to enforce or use the Patents or Trademarks or to grant or issue any exclusive
or non-exclusive license under the Patents or Trademarks to any third party, or
to sell, assign, transfer, pledge, encumber or otherwise transfer title in or
dispose of the Patents or Trademarks to any third party. The Debtor hereby
ratifies all that such attorney shall lawfully do or cause to be done by virtue
hereof. The power of attorney granted herein shall terminate upon the
termination of the Purchase Agreement as provided therein and the payment and
performance of all Obligations.

4.              Events of Default.  Each of the following occurrences shall
constitute an event of default under this Agreement (herein called “Event of
Default”):  (a) an Event of Default, as defined in the Purchase Agreement, shall
occur; or (b) the Debtor shall fail promptly to observe or perform any covenant
or agreement herein binding on it; or (c) any of the representations or
warranties contained in Section 3 shall prove to have been incorrect in any
material respect when made except if made as of an earlier date, in which case,
on such date.

5.              Remedies.  Upon the occurrence and continuance of an Event of
Default and at any time thereafter, the Secured Party may, at its option, take
any or all of the following actions:

(a)            The Secured Party may exercise any or all remedies available
under the Purchase Agreement.

(b)            The Secured Party may sell, assign, transfer, pledge, encumber or
otherwise dispose of the Patents and Trademarks in accordance with this
Agreement.

(c)            The Secured Party may enforce the Patents and Trademarks and any
licenses thereunder, and if Secured Party shall commence any suit for such
enforcement, the Debtor shall, at the request of Secured Party, do any and all
lawful acts and execute any and all proper documents required by Secured Party
in aid of such enforcement.

6.              Purchase Agreement.  The Debtor hereby acknowledges and affirms
that the rights and remedies with respect to the Patents and Trademarks are more
fully set forth in the Purchase Agreement, the terms and provisions of which are
hereby incorporated by reference as if fully set forth herein.  In the event of
any conflict between the terms of this Agreement and the terms of the Purchase
Agreement, the terms of the Purchase Agreement shall govern.

 

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7.              Termination.  This Agreement and the Security Interest granted
hereby shall terminate in full as set forth in Section 2.6 of the Purchase
Agreement.  In connection with any termination or release pursuant to Section
2.6 of the Purchase Agreement, the Secured Party shall promptly execute and
deliver to the Debtor all documents that the Debtor shall reasonably request to
evidence such termination or release.

8.              Miscellaneous.  This Agreement can be waived, modified, amended,
terminated or discharged, and the Security Interest can be released, only
explicitly in a writing signed by the Secured Party.  A waiver signed by the
Secured Party shall be effective only in the specific instance and for the
specific purpose given. Mere delay or failure to act shall not preclude the
exercise or enforcement of any of the Secured Party’s rights or remedies. All
rights and remedies of the Secured Party shall be cumulative and may be
exercised singularly or concurrently, at the Secured Party’s option, and the
exercise or enforcement of any one such right or remedy shall neither be a
condition to nor bar the exercise or enforcement of any other. All notices to be
given to the Debtor under this Agreement shall be given in the manner and with
the effect provided in the Purchase Agreement.  The Secured Party shall not be
obligated to preserve any rights the Debtor may have against prior parties, to
realize on the Patents and Trademarks at all or in any particular manner or
order, or to apply any cash proceeds of Patents and Trademarks in any particular
order of application.  This Agreement shall be binding upon and inure to the
benefit of the Debtor and the Secured Party and their respective participants,
successors and assigns and shall take effect when signed by the Debtor and
delivered to the Secured Party, and the Debtor waives notice of the Secured
Party’s acceptance hereof.  The Secured Party may execute this Agreement if
appropriate for the purpose of filing, but the failure of the Secured Party to
execute this Agreement shall not affect or impair the validity or effectiveness
of this Agreement.  A carbon, photographic or other reproduction of this
Agreement or of any financing statement signed by the Debtor shall have the same
force and effect as the original for all purposes of a financing
statement.  This Agreement shall be governed by and construed in accordance with
the substantive laws (other than conflict laws)of the State of New York.  Any
provision of this Agreement which is prohibited or unenforceable shall be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining terms of this Agreement.  All representations and
warranties contained in this Agreement shall survive the execution, delivery and
performance of this Agreement and the creation and payment of the Obligations.

9.              Arbitration.  The parties hereto agree, upon demand by any
party, to submit to binding arbitration all claims, disputes and controversies
between or among them (and their respective employees, officers, directors,
attorneys, and other agents), whether in tort, contract or otherwise arising out
of or relating to in any way this Agreement and its negotiation, execution,
collateralization, administration, repayment, modification, extension,
substitution, formation, inducement, enforcement, default or termination.

(a)            Governing Rules.  Any arbitration proceeding will (i) proceed in
a location in New York, New York selected by the American Arbitration
Association (“AAA”); (ii) be governed by the Federal Arbitration Act (Title 9 of
the United States Code), notwithstanding any conflicting choice of law provision
in any of the documents between the parties; and (iii) be conducted by the AAA,
or such other administrator as the parties shall mutually agree upon, in
accordance with the AAA’s commercial dispute resolution procedures, unless the
claim or counterclaim is at least $1,000,000.00 exclusive of claimed interest,
arbitration fees and costs in which case the arbitration shall be conducted in
accordance with the AAA’s optional procedures for large, complex commercial
disputes (the commercial dispute resolution procedures or the optional
procedures for large, complex commercial disputes to be referred to, as
applicable, as the “Rules”).  If there is any inconsistency between the terms
hereof and the Rules, the terms and procedures set forth herein shall
control.  Any party who fails or refuses to submit to arbitration following a
demand by any other party shall bear all costs and expenses incurred by such
other party in compelling arbitration of any dispute.  Nothing contained herein
shall be deemed to be a waiver by any party that is a bank of the protections
afforded to it under 12 U.S.C. §91 or any similar applicable state law.

 

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(b)            No Waiver of Provisional Remedies; Self-Help and
Foreclosure.  The arbitration requirement does not limit the right of any party
(if not otherwise restricted by the terms and conditions of this Agreement) to
(i) foreclose against real or personal property collateral; (ii) exercise
self-help remedies relating to collateral or proceeds of collateral such as
setoff or repossession; or (iii) obtain provisional or ancillary remedies such
as replevin, injunctive relief, attachment or the appointment of a receiver,
before during or after the pendency of any arbitration proceeding.  This
exclusion does not constitute a waiver of the right or obligation of any party
to submit any dispute to arbitration or reference hereunder, including those
arising from the exercise of the actions detailed in sections (i), (ii) and
(iii) of this paragraph.

(c)            Arbitrator Qualifications and Powers.  Any arbitration proceeding
in which the amount in controversy is $5,000,000.00 or less will be decided by a
single arbitrator selected according to the Rules, and who shall not render an
award of greater than $5,000,000.00.  Any dispute in which the amount in
controversy exceeds $5,000,000.00 shall be decided by majority vote of a panel
of three arbitrators; provided however, that all three arbitrators must actively
participate in all hearings and deliberations.  The arbitrator will be a neutral
attorney licensed in the State of New York or a neutral retired judge of the
state or federal judiciary of New York, in either case with a minimum of ten
years experience in the substantive law applicable to the subject matter of the
dispute to be arbitrated.  The arbitrator will determine whether or not an issue
is arbitratable and will give effect to the statutes of limitation in
determining any claim.  In any arbitration proceeding the arbitrator will decide
(by documents only or with a hearing at the arbitrator's discretion) any
pre-hearing motions which are similar to motions to dismiss for failure to state
a claim or motions for summary adjudication.  The arbitrator shall resolve all
disputes in accordance with the substantive law of New York and may grant any
remedy or relief that a court of such state could order or grant within the
scope hereof and such ancillary relief as is necessary to make effective any
award.  The arbitrator shall also have the power to award recovery of all costs
and fees, to impose sanctions and to take such other action as the arbitrator
deems necessary to the same extent a judge could pursuant to the Federal Rules
of Civil Procedure, the New York Rules of Civil Procedure or other applicable
law.  Judgment upon the award rendered by the arbitrator may be entered in any
court having jurisdiction.  The institution and maintenance of an action for
judicial relief or pursuit of a provisional or ancillary remedy shall not
constitute a waiver of the right of any party, including the plaintiff, to
submit the controversy or claim to arbitration if any other party contests such
action for judicial relief.

 

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(d)            Discovery.  In any arbitration proceeding discovery will be
permitted in accordance with the Rules.  All discovery shall be expressly
limited to matters directly relevant to the dispute being arbitrated and must be
completed no later than 20 days before the hearing date and within 180 days of
the filing of the dispute with the AAA.  Any requests for an extension of the
discovery periods, or any discovery disputes, will be subject to final
determination by the arbitrator upon a showing that the request for discovery is
essential for the party's presentation and that no alternative means for
obtaining information is available.

(e)            Class Proceedings and Consolidations.  The resolution of any
dispute arising pursuant to the terms of this Agreement shall be determined by a
separate arbitration proceeding and such dispute shall not be consolidated with
other disputes or included in any class proceeding.

(f)             Payment of Arbitration Costs and Fees.  The arbitrator shall
award all costs and expenses of the arbitration proceeding.

(g)            Miscellaneous.  To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the dispute with the
AAA.  No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business or by applicable law or
regulation.  If more than one agreement for arbitration by or between the
parties potentially applies to a dispute, the arbitration provision most
directly related to the Operative Documents or the subject matter of the dispute
shall control.  This arbitration provision shall survive termination, amendment
or expiration of any of the Operative Documents or any relationship between the
parties.

[Signatures on next page]

 

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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
written above.

[______________________]
[___________________________]
1055 West 8th Street
   
Azusa, California 91702
By:
 
Attention: Jeff Berry
Name:
   
Title:
       
Mill Road Capital, L.P.
MILL ROAD CAPITAL, L.P.
Two Sound View Drive
By:
 
Greenwich, CT 06830
Name:
 
Fax:  203-621-3280
Title:
 
Attention:  Thomas Lynch, Managing Director
   

 
[Signature Page to Patent and Trademark Security Agreement]

 

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STATE OF
)

)
COUNTY OF
)

On this ____ day of November 2009, before me, _______________________, Notary
Public, personally appeared _______________________________, who proved to me on
the basis of satisfactory evidence to be the person whose name is subscribed to
the within instrument and acknowledged to me that he executed the same in his
authorized capacity, and that by his signature on the instrument, the person, or
the entity on behalf of which the person acted, executed this instrument. I
certify under penalty of perjury under the laws of the State of
_________________ that the foregoing is true and correct.

 
Witness my hand and official seal
   

 

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STATE OF
)

)
COUNTY OF
)

On this ____ day of _______________ 2009, before me, _______________________,
Notary Public, personally appeared _______________________________, who proved
to me on the basis of satisfactory evidence to be the person whose name is
subscribed to the within instrument and acknowledged to me that he executed the
same in his authorized capacity, and that by his signature on the instrument,
the person, or the entity on behalf of which the person acted, executed this
instrument. I certify under penalty of perjury under the laws of the State of
__________________ that the foregoing is true and correct.

 
Witness my hand and official seal
   

 

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EXHIBIT A

UNITED STATES PATENT APPLICATIONS

[______________]

UNITED STATES ISSUED PATENTS

[______________]

FOREIGN PATENTS OWNED

[______________]

UNITED STATES PATENT APPLICATIONS

[______________]

 

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EXHIBIT B
UNITED STATES TRADEMARKS AND SERVICE MARKS

REGISTRATIONS

[______________]

APPLICATIONS

[______________]

FOREIGN TRADEMARKS PENDING

[______________]

FOREIGN TRADEMARKS REGISTERED

[______________]

 

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Exhibit D
Form of Collateral Pledge Agreement

See Attached

 

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THE RIGHTS OF THE BENEFICIARY OF THIS INSTRUMENT ARE SUBORDINATE IN THE MANNER
AND TO THE EXTENT SET FORTH IN THAT CERTAIN INTERCREDITOR AGREEMENT (THE
“INTERCREDITOR AGREEMENT”) DATED AS OF NOVEMBER 6, 2009 BY AND AMONG WELLS FARGO
BANK, NATIONAL ASSOCIATION ACTING THROUGH ITS WELLS FARGO BUSINESS CREDIT
OPERATING DIVISION, MILL ROAD CAPITAL, L.P. AND PHYSICIANS FORMULA, INC.

FORM OF COLLATERAL PLEDGE AGREEMENT

Date:  November 6, 2009

DEBTOR:
[_________________]

1055 West 8th Street
Azusa, California 91702
Attn: Jeff Berry, CFO

SECURED PARTY:
Mill Road Capital, L.P. (the “Secured Party”)

Two Sound View Drive
Greenwich, CT 06830
Attn: Thomas Lynch, Managing Director

1.              Security Interest and Collateral.  To secure the payment and
performance of the Obligations (defined below) which the Debtor may now or at
any time hereafter owe to the Secured Party pursuant to that certain Senior
Subordinated Note Purchase and Security Agreement dated as of even date herewith
by and among the Debtor, the Guarantors party thereto and the Secured Party,
(the “Purchase Agreement”), the Debtor hereby grants the Secured Party a
security interest (herein called the “Security Interest”) in the following
property (collectively, the “Collateral”):  the issued and outstanding capital
stock, equity securities, membership interests or units, and ownership
interests, and rights issued or granted in connection with the foregoing, of
each Person (including, but not limited to, [_____________], a [_________] as
set forth on Schedule 1) that are now or hereafter owned or held of record or
beneficially by Debtor, and the certificates representing such shares,
securities and/or interests; (ii) all other capital stock, equity securities,
warrants, options, membership interests and units, and ownership interests, and
rights issued or granted in connection with the foregoing, issued by such Person
now or hereafter owned or held of record or beneficially by Debtor at any time
(and the certificates or other documents or instruments representing such
shares, securities and/or other interests); (iii) all rights associated with
anything of the foregoing (including any rights under any shareholders
agreements, investor rights agreements, registration rights agreements, and
similar agreements); and (iv) any and all replacements, products and proceeds
of, and dividends, distributions in property or securities, returns of capital
or other distributions made on or with respect to, any of the foregoing;
provided, however, the “Collateral” shall not include shares of capital stock
having voting power in excess of 65% of the voting power of all classes of
capital stock of a first tier controlled foreign corporation (as that term is
defined in the IRC).  Capitalized terms used but not otherwise defined herein
shall have the meanings accorded them in the Purchase Agreement.

 

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“Obligations” shall mean all indebtedness, obligations and liabilities of the
Borrower and/or the Guarantors to any of the Holders, individually or
collectively, whether existing on the date of the Purchase Agreement or arising
thereafter, direct or indirect, joint or several, absolute or contingent,
matured or unmatured, liquidated or unliquidated, secured or unsecured, arising
by contract, operation of law or otherwise, arising or incurred or owing under
the Purchase Agreement, the Notes or any of the other Operative Documents or in
respect of any of the Notes or other instruments, agreements or documents at any
time evidencing any of the foregoing, in each case whether on account of
principal, interest, premium, reimbursement obligations, fees, indemnities,
costs, expenses or otherwise (including all interest, fees and other amounts
that, but for the filing of a petition in bankruptcy, would otherwise accrue
(whether or not a claim for post-filing or post-petition interest is allowed in
such proceeding), and including all fees and disbursements of counsel that are
required to be paid by the Borrower or any Guarantor pursuant to any of the
Operative Documents), and including obligations to perform acts and refrain from
taking actions as well as obligations to pay money.

2.              Representations, Warranties and Covenants.  The Debtor
represents, warrants and covenants that:

2.1            The Debtor will duly endorse, in blank, each and every instrument
constituting Collateral by signing on said instrument or by signing a separate
document of assignment or transfer, if reasonably required by the Secured Party.

2.2            The Debtor is the owner of the Collateral free and clear of all
liens, encumbrances and security interests, except the Security Interest and any
restrictive legend appearing on any instrument constituting Collateral and
except for Permitted Liens.

2.3            The Debtor will keep the Collateral free and clear of all liens,
encumbrances and security interests, except the Security Interest and any
restrictive legend appearing on any instrument constituting Collateral and
except for Permitted Liens.

2.4            The Debtor will pay, when due, all taxes and other governmental
charges levied or assessed upon or against any Collateral in the same manner as
required under Section 7.13 of the Purchase Agreement.

2.5            At any time, upon the reasonable request by the Secured Party,
the Debtor will deliver to the Secured Party all notices, financial statements,
reports or other communications received by the Debtor as an owner or holder of
the Collateral.

2.6            The Debtor will promptly upon receipt deliver (and in any event,
within five (5) Business Days thereof) to the Secured Party in pledge as
additional Collateral all securities distributed on account of the Collateral
such as stock dividends and securities resulting from stock splits,
reorganizations and recapitalizations.

With respect to any provision in this Agreement which requires the Debtor to
deliver possession or control of any negotiable document, instrument,
certificated securities, promissory notes, deposit accounts, security accounts,
commodity accounts, and letter of credit rights or other Collateral requiring
possession or control thereof in order to perfect the security interest of the
Secured Party therein under the UCC, no such delivery or giving of control to
the Secured Party shall be required to the extent such Collateral is required to
be delivered to or control is required to be given to the Senior Lender in
accordance with the Senior Credit Agreement, it being understood that the Senior
Lender is acting as agent and bailee for the benefit of the Secured Party
pursuant to the terms of the Intercreditor Agreement.

 

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3.              Rights of the Secured Party.  The Debtor agrees that the Secured
Party may at any time, upon the occurrence and during the continuance of an
Event of Default and without notice or demand of any kind, (i) notify the
obligor on or issuer of any Collateral to make payment to the Secured Party of
any amounts due or distributable thereon; (ii) in the Debtor’s name or the
Secured Party’s name, enforce collection of any Collateral by suit or otherwise,
or surrender, release or exchange all or any part of it, or compromise, extend
or renew for any period any obligation evidenced by the Collateral; (iii)
receive all proceeds of the Collateral; and (iv) hold any increase or profits
received from the Collateral as additional security for the Obligations, except
that any money received from the Collateral shall, at the Secured Party’s
option, be applied in reduction of the Indebtedness, in such order of
application as the Secured Party may determine, unless otherwise provided in the
Purchase Agreement, or be remitted to the Debtor.

4.              Events of Default.  Each of the following occurrences shall
constitute an event of default under this Agreement (herein called “Event of
Default”):  (i) the Debtor shall fail to pay any or all of the Obligations when
due or (if payable on demand) on demand, or the Debtor shall fail to observe or
perform any covenant or agreement herein; (ii) any “Event of Default” shall
occur under the Purchase Agreement; (iii) any representation or warranty made,
or deemed made, by the Debtor shall prove false or misleading in any material
respect; or (iv) an Event of Default, as defined in any credit agreement or
other instrument or agreement evidencing or governing any or all of the
Obligations, shall occur and be continuing.

5.              Remedies upon Event of Default.  Upon the occurrence and during
the continuance of an Event of Default, the Secured Party may exercise any one
or more of the following rights or remedies:  (i) declare all unmatured
Obligations to be immediately due and payable, and the same shall thereupon be
immediately due and payable, without presentment or other notice or demand;
(ii)  exercise all voting and other rights as a holder of the Collateral; (iii)
exercise and enforce any or all rights and remedies available upon default to a
secured party under the Uniform Commercial Code as in effect from time to time
in the State of New York, including the right to offer and sell the Collateral
privately to purchasers who will agree to take the Collateral for investment and
not with a view to distribution and who will agree to the imposition of
restrictive legends on the certificates representing the Collateral, and the
right to arrange for a sale which would otherwise qualify as exempt from
registration under the Securities Act of 1933; and if notice to the Debtor of
any intended disposition of the Collateral or any other intended action is
required by law in a particular instance, such notice shall be deemed
commercially reasonable if given at least 10 calendar days prior to the date of
intended disposition or other action; and/or (iv) exercise or enforce any or all
other rights or remedies available to the Secured Party by law or agreement,
including against the Collateral or against the Debtor.

 

--------------------------------------------------------------------------------

 

6.              Miscellaneous.  Any disposition of the Collateral in the manner
provided in Section 0 shall be deemed commercially reasonable.  This Agreement
can be waived, modified, amended, terminated or discharged, and the Security
Interest can be released, only explicitly in a writing signed by the Secured
Party or upon the payment in full of the Obligations other than contingent
indemnification obligations for which no claim has been asserted.  A waiver
signed by the Secured Party shall be effective only in the specific instance and
for the specific purpose given.  Mere delay or failure to act shall not preclude
the exercise or enforcement of any of the Secured Party’s rights or
remedies.  All rights and remedies of the Secured Party shall be cumulative and
may be exercised singularly or concurrently, at the Secured Party’s option, and
the exercise or enforcement of any one such right or remedy shall neither be a
condition to nor bar the exercise or enforcement of any other.  All notices to
be given to the Debtor shall be deemed sufficiently given if delivered or mailed
by registered or certified mail, postage prepaid, or by telecopier to the Debtor
at its address or telecopier number, as the case may be, set forth above or at
the most recent address or telecopier number shown on the Secured Party’s
records.  All requests under Section 9-210 of the Uniform Commercial Code (i)
shall be made in a writing signed by a person duly authorized by Debtor, (ii)
shall be personally delivered, sent by registered or certified mail, return
receipt requested, or by overnight courier of national reputation, (iii) shall
be deemed to be sent when received by the Secured Party, and (iv) shall
otherwise comply with the requirements of Section 9-210.  The Debtor requests
that the Secured Party respond to all such requests which on their face appear
to come from an authorized individual and releases the Secured Party from any
liability for so responding.  The Debtor shall pay Secured Party the maximum
amount allowed by law for responding to such requests.  The Secured Party’s duty
of care with respect to Collateral in its possession (as imposed by law) shall
be deemed fulfilled if the Secured Party exercises reasonable care in physically
safekeeping such Collateral or, in the case of Collateral in the custody or
possession of a bailee or other third person, exercises reasonable care in the
selection of the bailee or other third person, and the Secured Party need not
otherwise preserve, protect, insure or care for any Collateral.  The Secured
Party shall not be obligated to preserve any rights the Debtor may have against
prior parties, to exercise at all or in any particular manner any voting rights
which may be available with respect to any Collateral, to realize on the
Collateral at all or in any particular manner or order, or to apply any cash
proceeds of Collateral in any particular order of application.  The Debtor will
reimburse the Secured Party for all expenses (including reasonable attorneys’
fees and legal expenses) incurred by the Secured Party in the protection,
defense or enforcement of the Security Interest, including expenses incurred in
any litigation or bankruptcy or insolvency proceedings.  This Agreement shall be
binding upon and inure to the benefit of the Debtor and the Secured Party and
their respective heirs, representatives, successors and assigns and shall take
effect when signed by the Debtor and delivered to the Secured Party, and the
Debtor waives notice of the Secured Party’s acceptance hereof.  If any provision
or application of this Agreement is held unlawful or unenforceable in any
respect, such illegality or unenforceability shall not affect other provisions
or applications which can be given effect, and this Agreement shall be construed
as if the unlawful or unenforceable provision or application had never been
contained herein or prescribed hereby.  All representations and warranties
contained in this Agreement shall survive the execution, delivery and
performance of this Agreement and the creation and payment of the
Obligations.  This Agreement shall be governed by the internal laws (other than
conflict laws) of the State of New York and, unless the context otherwise
requires, all terms used herein which are defined in Articles 1 and 9 of the
Uniform Commercial Code, as in effect in New York, shall have the meanings
therein stated.  Each party consents to the personal jurisdiction of the state
and federal courts located in the State of New York in connection with any
controversy related to this Agreement, waives any argument that venue in any
such forum is not convenient, and agrees that any litigation initiated by any of
them in connection with this Agreement may be venued in either the state and
federal courts located in New York County, New York.

 

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7.              Arbitration.

7.1            Arbitration.  The parties hereto agree, upon demand by any party
(or by Secured Party, who shall be considered a “party” for purposes of this
Section 7), to submit to binding arbitration all claims, disputes and
controversies between or among them (and their respective employees, officers,
directors, attorneys, and other agents), whether in tort, contract or otherwise
arising out of or relating to in any way the Indebtedness which are the subject
of this Agreement and its negotiation, execution, collateralization,
administration, repayment, modification, extension, substitution, formation,
inducement, enforcement, default or termination.

7.2            Governing Rules.  Any arbitration proceeding will (i) proceed in
a location in New York, New York selected by the American Arbitration
Association (“AAA”); (ii) be governed by the Federal Arbitration Act (Title 9 of
the United States Code), notwithstanding any conflicting choice of law provision
in any of the documents between the parties; and (iii) be conducted by the AAA,
or such other administrator as the parties shall mutually agree upon, in
accordance with the AAA’s commercial dispute resolution procedures, unless the
claim or counterclaim is at least $1,000,000.00 exclusive of claimed interest,
arbitration fees and costs in which case the arbitration shall be conducted in
accordance with the AAA’s optional procedures for large, complex commercial
disputes (the commercial dispute resolution procedures or the optional
procedures for large, complex commercial disputes to be referred to, as
applicable, as the “Rules”).  If there is any inconsistency between the terms
hereof and the Rules, the terms and procedures set forth herein shall
control.  Any party who fails or refuses to submit to arbitration following a
demand by any other party shall bear all costs and expenses incurred by such
other party in compelling arbitration of any dispute.  Nothing contained herein
shall be deemed to be a waiver by any party that is a bank of the protections
afforded to it under 12 U.S.C. §91 or any similar applicable state law.

7.3            No Waiver of Provisional Remedies, Self-Help and
Foreclosure.  The arbitration requirement does not limit the right of any party
(if not otherwise restricted by the terms and conditions of this Agreement) to
(i) foreclose against real or personal property collateral; (ii) exercise
self-help remedies relating to collateral or proceeds of collateral such as
setoff or repossession; or (iii) obtain provisional or ancillary remedies such
as replevin, injunctive relief, attachment or the appointment of a receiver,
before, during or after the pendency of any arbitration proceeding.  This
exclusion does not constitute a waiver of the right or obligation of any party
to submit any dispute to arbitration or reference hereunder, including those
arising from the exercise of the actions detailed in sections (i), (ii) and
(iii) of this paragraph.

7.4            Arbitrator Qualifications and Powers.  Any arbitration proceeding
in which the amount in controversy is $5,000,000.00 or less will be decided by a
single arbitrator selected according to the Rules, and who shall not render an
award of greater than $5,000,000.00.  Any dispute in which the amount in
controversy exceeds $5,000,000.00 shall be decided by majority vote of a panel
of three arbitrators; provided however, that all three arbitrators must actively
participate in all hearings and deliberations.  The arbitrator will be a neutral
attorney licensed in the State of New York or a neutral retired judge of the
state or federal judiciary of New York, in either case with a minimum of ten
years experience in the substantive law applicable to the subject matter of the
dispute to be arbitrated.  The arbitrator will determine whether or not an issue
is arbitratable and will give effect to the statutes of limitation in
determining any claim.  In any arbitration proceeding the arbitrator will decide
(by documents only or with a hearing at the arbitrator's discretion) any
pre-hearing motions which are similar to motions to dismiss for failure to state
a claim or motions for summary adjudication.  The arbitrator shall resolve all
disputes in accordance with the substantive law of New York and may grant any
remedy or relief that a court of such state could order or grant within the
scope hereof and such ancillary relief as is necessary to make effective any
award.  The arbitrator shall also have the power to award recovery of all costs
and fees, to impose sanctions and to take such other action as the arbitrator
deems necessary to the same extent a judge could pursuant to the Federal Rules
of Civil Procedure, the New York Rules of Civil Procedure or other applicable
law.  Judgment upon the award rendered by the arbitrator may be entered in any
court having jurisdiction.  The institution and maintenance of an action for
judicial relief or pursuit of a provisional or ancillary remedy shall not
constitute a waiver of the right of any party, including the plaintiff, to
submit the controversy or claim to arbitration if any other party contests such
action for judicial relief.

 

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7.5            Discovery.  In any arbitration proceeding discovery will be
permitted in accordance with the Rules.  All discovery shall be expressly
limited to matters directly relevant to the dispute being arbitrated and must be
completed no later than 20 days before the hearing date and within 180 days of
the filing of the dispute with the AAA.  Any requests for an extension of the
discovery periods, or any discovery disputes, will be subject to final
determination by the arbitrator upon a showing that the request for discovery is
essential for the party's presentation and that no alternative means for
obtaining information is available.

7.6            Class Proceedings and Consolidations.  The resolution of any
dispute arising pursuant to the terms of this Agreement shall be determined by a
separate arbitration proceeding and such dispute shall not be consolidated with
other disputes or included in any class proceeding.

7.7            Payment Of Arbitration Costs And Fees.  The arbitrator shall
award all costs and expenses of the arbitration proceeding.

7.8            Real Property Collateral; Judicial Reference.  Notwithstanding
anything herein to the contrary, no dispute shall be submitted to arbitration if
the dispute concerns indebtedness secured directly or indirectly, in whole or in
part, by any real property unless the holder of the mortgage, lien or security
interest specifically elects in writing to proceed with the arbitration.

 

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7.9            Miscellaneous.  To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the dispute with the
AAA.  No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business or by applicable law or
regulation.  If more than one agreement for arbitration by or between the
parties potentially applies to a dispute, the arbitration provision most
directly related to the Operative Documents or the subject matter of the dispute
shall control.  This arbitration provision shall survive termination, amendment
or expiration of any of the Operative Documents or any relationship between the
parties.

[signature on next page]

 

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, the undersigned has executed this Collateral Pledge
Agreement as of the date and year first above written.

 
[____________________]
       
By:
   
Print Name: 
   
Title:
 

 
[Signature Page to Collateral Pledge Agreement]

 

--------------------------------------------------------------------------------

 

SCHEDULE 1

PLEDGED INTERESTS

Pledged Interest
 
Certificate No.
 
No. of Shares
 
Percentage Interest in Issuer
 
Other Classes of Shares

 

--------------------------------------------------------------------------------

 

Exhibit E
Compliance Certificate

See Attached

 

--------------------------------------------------------------------------------

 

Exhibit E

COMPLIANCE CERTIFICATE
 
To:
Mill Road Capital, L.P.

Date:
[__________________, 200_]

Subject:
Financial Statements

 
In accordance with our Senior Subordinated Note Purchase and Security Agreement
dated November 6, 2009 (as amended from time to time, the “Purchase Agreement”),
attached are the financial statements of Physicians Formula, Inc. (the
“Borrower”) dated [______________], 200_ (the “Reporting Date”) and the
year-to-date period then ended (the “Current Financials”).  All terms used in
this certificate have the meanings given in the Purchase Agreement.

A.            Preparation and Accuracy of Financial Statements.  I certify, on
behalf of the Borrower and not in any individual capacity, that the Current
Financials have been prepared in accordance with GAAP, subject to year-end audit
adjustments and the absence of footnotes, and fairly present all material
respects Borrower’s financial condition as of the Reporting Date.

B.             Name of Borrower; Merger and Consolidation.  I certify, on behalf
of the Borrower and not in any individual capacity, that:

(Check one)

 
¨
Borrower has not, since the date of the Purchase Agreement, changed its name or
jurisdiction of organization, nor has it consolidated or merged with another
Person.

 
¨
Borrower has, since the date of the Purchase Agreement, either changed its name
or jurisdiction of organization, or both, or has consolidated or merged with
another Person, which change, consolidation or merger was consented to in
advance by the Holder Representative in an Authenticated Record or otherwise
permitted under the Purchase Agreement, and/or is more fully described in the
statement of facts attached to this Certificate.

C.             Events of Default.  I certify, on behalf of the Borrower and not
in any individual capacity, that:

(Check one)

 
¨
I have no knowledge of the occurrence of an Event of Default under the Purchase
Agreement, except as previously reported to the Holder Representative in a
Record.

 
¨
I have knowledge of an Event of Default under the Purchase Agreement not
previously reported to the Holder Representative in a Record, as more fully
described in the statement of facts attached to this Certificate, and further, I
acknowledge that the Holder Representative may under the terms of the Purchase
Agreement impose the Default Rate at any time during the resulting Default
Period.

 

--------------------------------------------------------------------------------

 

D.             Litigation Matters.  I certify, on behalf of the Borrower and not
in any individual capacity, that:

(Check one)

 
¨
I have no knowledge of any litigation required to be reported under Section
7.1(g) of the Purchase Agreement.

 
¨
I have knowledge of litigation required to be reported under Section 7.1(g) of
the Purchase Agreement and not previously disclosed to the Holder
Representative, as more fully described in the statement of facts attached to
this Certificate.

 
E.           Deposits.  I certify, on behalf of the Borrower and not in any
individual capacity, that:

 
¨
Borrower has not made any deposits exceeding $50,000 of the type described in
Section 7.6(h).

 
¨
Borrower has made one or more deposits exceeding $50,000, the terms of which are
described in the statement of facts attached to this Certificate

F.             Financial Covenants.  I further certify, on behalf of the
Borrower and not in any individual capacity, that:

(Check and complete each of the following)

1.             Minimum Book Net Worth.  Pursuant to Section  7.2(a) of the
Purchase Agreement, as of the Reporting Date, Borrower’s Book Net Worth was
$[___________], which ¨ satisfies ¨ does not satisfy the requirement that such
amount be not less than the applicable amount set forth in Section 7.2(a).

2.             Minimum EBITDA.  Pursuant to Section 7.2(b) of the Purchase
Agreement, as of the Reporting Date, Borrower’s EBITDA was $[___________], which
¨ satisfies ¨ does not satisfy the requirement that EBITDA be not less than the
amount set forth in Section 7.2(b).

3.             Capital Expenditures.  Pursuant to Section 7.2(c) of the Purchase
Agreement, for the year-to-date period ending on the Reporting Date, Borrower
has expended or contracted to expend during the fiscal year ended
[______________], 200_ for Capital Expenditures, $__________________, which ¨
satisfies ¨ does not satisfy the requirement that such expenditures not exceed
the amount set forth in Section 7.2(c).

 

--------------------------------------------------------------------------------

 

Attached are statements of all relevant facts and computations in reasonable
detail sufficient to evidence Borrower’s compliance with the financial covenants
referred to above, which computations were made in accordance with GAAP
consistently applied.

 
PHYSICIANS FORMULA, INC.
           
By:
     
Its:
Responsible Officer
                 
PHYSICIANS FORMULA HOLDINGS, INC.
           
By:
     
Its:
Responsible Officer

 

--------------------------------------------------------------------------------

 

Exhibit F
Additional Guarantor Supplement

See Attached

 

--------------------------------------------------------------------------------

 

Exhibit F

Additional Guarantor Supplement

______________, 20___

To the Holders under
the Agreement
described below

Ladies and Gentlemen:

Reference is made to the Senior Subordinated Note Purchase and Security
Agreement dated as of November 6, 2009 by and among Physicians Formula, Inc., as
Borrower, the Guarantors referred to therein and Mill Road Capital, L.P. (the
“Agreement”).  Terms not defined herein which are defined in the Agreement shall
have for the purposes hereof the meaning provided therein.

The undersigned, [name of Guarantor], a [jurisdiction of incorporation or
organization] hereby elects to be a “Guarantor” for all purposes of the
Agreement, effective from the date hereof.  The undersigned confirms that the
representations and warranties set forth in Section 5 of the Agreement are true
and correct as to the undersigned as of the date hereof and the undersigned
shall comply with each of the covenants set forth in Section 7 of the Agreement
applicable to it.

Without limiting the generality of the foregoing, the undersigned hereby agrees
to perform all the obligations of a Guarantor under, and to be bound in all
respects by the terms of, the Agreement, including without limitation Article IX
thereof, to the same extent and with the same force and effect as if the
undersigned were a signatory party thereto.

The undersigned acknowledges that this Agreement shall be effective upon its
execution and delivery by the undersigned to the Holders, and it shall not be
necessary for the Holders, or any of their affiliates entitled to the benefits
hereof, to execute this Agreement or any other acceptance hereof.  This
Agreement shall be construed in accordance with and governed by the internal
laws of the State of New York.

 
Very truly yours,
           
[Name of Guarantor]
                   
By
        Name 
 
      Title
 
 

 

--------------------------------------------------------------------------------

 

Schedule 2.4
Premises

1055 West 8th Street Azusa
Azusa, California 91702

Location
 
1055 W. 8th Street
Azusa, CA 91702
     
1425 Max Brose Drive #8
London, Ontario   N6N 0A2
Canada
     
435 Park Court
Lino Lakes, MN 55014
 
230 South Ninth Avenue
City of Industry, CA 91746
 
250 South Ninth Avenue
City of Industry, CA 91746
 
753-755 Arrow Grand Circle Way
Covina, CA 91722
 
2169 Wright Ave.
La Verne, CA 91750
 

PREMISES

The Premises referred to in the Senior Subordinated Note Purchase and  Security
Agreement have an address of 1753 Arrow Grand Circle Way Covina, CA 91722, and
are legally described as follows:

Tract No:  41841

Abbreviated Description:  TR=41841 LOTS 28 THRU 30 AND E 60 FT OF LOT 27 AND E
104-22 FT OF LOT 31

City/Muni/Twp:  REGION/CLUSTER:  27/27609

The Premises referred to in the Senior Subordinated Note Purchase and  Security
Agreement have an address of 230 South Ninth Avenue, City of Industry, CA 91746,
and are legally described as follows:

The southwesterly 132 feet of the northeasterly 396 feet of Lot 5 in Block 2 of
Tract No. 1343, in the City of Industry, in the County of Los Angeles, State of
California, as per map recorded in Book 20 Pages 10 and 11 on Maps, in the
office of the County Recorder of said County.

 

--------------------------------------------------------------------------------

 

EXCEPT therefrom the precious ores and metals thereof, as excepted in the
partition between William Workman and John Rowland, Sr., in the partition deed
recorded in Book 10 Page 39 of Deeds.

ALSO EXCEPTING and reserving all the oil and mineral rights of said land with
the right to enter thereon for the purposes of extracting the same, subject to
any damage to said purchaser resulting from such entry upon said land, as
excepted and reserved by Cross Land Company, a corporation, be deed recorded
January 29, 1920 in Book 7028 Pages 286, of Deeds.

By an instrument dated August 12, 1966, recorded August 29, 1966 said Cedars of
Lebanon Hospital relinquished all rights to enter upon the surface of said land.

The Premises referred to in the Senior Subordinated Note Purchase and  Security
Agreement have an address of 250 South Ninth Avenue, City of Industry, CA 91746,
and are legally described as follows:

The northeast 132 feet of the southwest 264 feet of Lot 5 in Block 2 of Tract
No. 1343, in the City if Industry, County of Los Angeles, State of California,
as per map recorded in Book 20 pages 10 and 11 of Maps, in the office of the
county recorder of said county.

Except all the oil and mineral rights of said land with the right to enter
thereon for the purpose of extracting the same, subject to any damage in said
purchaser resulting from such entry upon said land, as excepted and reserved by
Cross Land Company, a corporation, by deed recorded January 24, 1920 in Book
7028 page 286 of deeds.

All right, title and interest in and to the surface of said land for the purpose
of exploring for and extracting any minerals, oil, gas and other hydrocarbons
was quitclaimed to the record owners by deed recorded November 4, 1964, in Book
D-2686 page 628, Official Records.

The Premises referred to in the Senior Subordinated Note Purchase and  Security
Agreement have an address of 1055 W. Eighth Street, Azusa, CA 91702 and are
legally described as follows:

The southerly approximately 82,800 square feet of a free standing
industrial/warehouse/distribution building located at 1055 W. Eighth St. Azusa
California as further shown on Annex I attached hereto.

In the event of any conflict between the address and the legal description, the
legal description shall control.

 

--------------------------------------------------------------------------------

 

Schedule 5.1
Names, Address and Locations

Chief Executive Office/Principal Place of Business:

1055 West 8th Street Azusa
Azusa, California 91702

Other Inventory and Equipment Locations:

Location
 
1055 W. 8th Street
Azusa, CA 91702
     
1425 Max Brose Drive #8
London, Ontario   N6N 0A2
Canada
     
435 Park Court
Lino Lakes, MN 55014
 
230 South Ninth Avenue
City of Industry, CA 91746
 
250 South Ninth Avenue
City of Industry, CA 91746
 
753-755 Arrow Grand Circle Way
Covina, CA 91722
 
2169 Wright Ave.
La Verne, CA 91750
 

Physicians Formula, Inc.
FEIN: 13-3015258
Org ID: N/A for New York entities

 

--------------------------------------------------------------------------------

 

Schedule 5.2
Capitalization

Capitalization Chart
Holder
Type of Rights/Stock
No. of Shares (after exercise of all rights to acquire shares)
% Interest (on a fully diluted basis)
Physicians Formula Holdings, Inc.
Holder of Common Stock in Physicians Formula, Inc.
100
100%
Physicians Formula, Inc.
Holder of Common Stock in Physicians Formula Cosmetics, Inc.
1,000
100%
Physicians Formula, Inc.
Holder of Common Units in Physicians Formula DRTV, LLC
1,000
100%

Organizational Chart

SEE ANNEX A

 

--------------------------------------------------------------------------------

 

10/23/2009

Physicians Formula Corporate Structure
 
 
Image [ex10_19image.jpg]

 
 

--------------------------------------------------------------------------------

 

Schedule 5.5
Subsidiaries

Physicians Formula Cosmetics, Inc.
Physicians Formula DRTV, LLC

 

--------------------------------------------------------------------------------

 

Schedule 5.8
Intellectual Property

Physicians Formula, Inc. - Intellectual Property

Owned Intellectual Property

U.S. Trademarks Registered
Registration No.
Actiplump
3,496,856
Artist's Eraser
3,262,868
Baked Berries
3,169,240
Baked Berry
3,127,457
Baked Butter
3,189,776
Baked Cocoa
3,146,080
Baked Ginger
3,146,079
Baked Gingersnap
3,112,495
Baked Oatmeal
3,189,775
Baked Pyramid
3,382,889
Baked Sands
3,189,777
Baked Smokes
3,169,239
Baked Spices
3,189,774
Baked Sugar
3,197,148
Baked Sweets
3,107,413
Baked to Perfection
3,235,191
Blemish Rx
3,402,746
Bronze Gems
3,332,539
Brow-Tweez
3,446,275
Circle RX & Design
3,419,413
Cliniclear Technology
3,586,902
Conceal RX & Mortar & Pestle Design
3,325,455
Cover 2 Go
3,235,257
Covertoxten50
3,277,212
Derm@Home
3,170,157
Durascreen
1,695,175
Eco-Olive
3,446,345
Ecoblend
3,423,809
Eurobuffer
3,295,301
Exerc’Eyes
3,064,200
Face Aid
3,202,539
F.L.A.T.
3,346,200
How Green is Your Makeup?
3,544,638
Illuminating Veil
3,402,750
Line Erase RX & Design
3,641,110
Magic Mosaic
3,098,670

 

--------------------------------------------------------------------------------

 
 
Mineral Bronzebrightener
3,644,714
Mineral Wear
3,104,495
Mineral Wear
3,164,117
Mineral Wear
3,373,540
Mineral Wear
3,595,401
Mineral Wear
3,554,909
My Secret Formula
3,577,246
Organic Wear
3,454,574
Organisoy
3,423,808
Painter's Palette
3,331,759
Painter's Tube
3,320,750
PF
3,277,282
PF & Palette Design
3,294,477
Physicians Formula & Design (Line)
3,494,604
Plump Potion
3,341,830
Plump Potion
3,455,125
Pro-Cover
3,276,953
Revined
3,074,104
Silipcone
3,419,412
The Once-A-Day, All Day Sunscreen
2,021,117
Wanderful Brow Wand
3,407,243

California Trademarks Registered
Registration No.
Physicians Formula
112615
Physicians Formula & Line Design
112616

 

--------------------------------------------------------------------------------

 
 
Trademarks Pending
Application No.
Bamboo Wear
77/677,128
Bambuki
77/773,439
Bronze Booster & Sun Design
77/569,242
Brow Designer
77/136,836
Mineral Cheekbrightener
77/677,070
DHA+ Infusion
77/555,910
Eco-Aroma Therapy
77/617,381
Eye-Tech
77/639,786
Happy Wear
77/814,994
Healthy Wear
77/691,778
How Green is Your Makeup Remover?
77/663,154
How Green is Your Skincare?
77/663,162
Line Erase Rx & Design
77/569,244
Organiblend
77/276,037
Mineral Cheekbrightener
77/677,070
Mineral Shimmer Gem
77/726,090
Organic Glow
77/087,977
Time Proof
77/136,799
True Organic
77/087,988
Your Beauty. Our Passion. We promise.
77/594,530

Intellectual Property Rights Licensed from Others.
None.

Infringement.
None.

 

--------------------------------------------------------------------------------

 

Schedule 5.15
Employee Benefits

None.

 

--------------------------------------------------------------------------------

 

Schedule 5.16
Environmental Matters

(a)            Hazardous Substances on Premises.

None.

(b)            Disposal of Hazardous Substances.

Company was named in the late 1990s as a de minimis PRP for the cleanup of the
Operating Industries, Inc. Superfund site (landfill) in Monterey Park,
California for generating a small volume of non-hazardous wastes disposed at the
landfill.  Company, one of hundreds of PRPs, settled the matter by paying a de
minimis settlement sum.

(c)            Claims and Proceedings with Respect to Environmental Law
Compliance.

Company was named in the late 1990s as a de minimis PRP for the cleanup of the
Operating Industries, Inc. Superfund site (landfill) in Monterey Park,
California for generating a small volume of non-hazardous wastes disposed at the
landfill.  Company, one of hundreds of PRPs, settled the matter by paying a de
minimis settlement sum.

Company has been the subject of numerous alleged Occupational Safety and Health
Administration (“OSHA”) violations, all of which have been fully abated.

In 1999 Company, along with dozens of other manufacturers and distributors of
dandruff shampoos, was named a defendant in a Proposition 65 lawsuit, Gottesfeld
v. Alva-Amco, Inc., et al., for manufacturing and distributing without a
Proposition 65 warning a dandruff shampoo containing coal tar.  Company settled
the lawsuit in 1999 for a de minimis sum.

Company recalled 16,300 bottles of eye makeup remover lotion distributed between
March 14 and May 28, 2001 due to alleged contamination with bacteria.  Company
does not expect to incur any additional liabilities as a result of this matter.

(d)            Compliance with Environmental Law; Permits and Authorizations.

Company was named in the late 1990s as a de minimis PRP for the cleanup of the
Operating Industries, Inc. Superfund site (landfill) in Monterey Park,
California for generating a small volume of non-hazardous wastes disposed at the
landfill.  Company, one of hundreds of PRPs, settled the matter by paying a de
minimis settlement sum.

Company has been the subject of numerous alleged Occupational Safety and Health
Administration (“OSHA”) violations, all of which have been fully abated.

 

--------------------------------------------------------------------------------

 

In 1999 Company, along with dozens of other manufacturers and distributors of
dandruff shampoos, was named a defendant in a Proposition 65 lawsuit, Gottesfeld
v. Alva-Amco, Inc., et al., for manufacturing and distributing without a
Proposition 65 warning a dandruff shampoo containing coal tar.  Company settled
the lawsuit in 1999 for a de minimis sum.

Company recalled 16,300 bottles of eye makeup remover lotion distributed between
March 14 and May 28, 2001 due to alleged contamination with bacteria.  Company
does not expect to incur any additional liabilities as a result of this matter.

(e)            Status of Premises.

None.

 

--------------------------------------------------------------------------------

 

Schedule 7.3
Permitted Liens

Creditor
Collateral
Jurisdiction
Filing Date
Filing No.
U.S. District Court, California Central District*
 
CA
02/04/2009
2:09-CV-0866-ABC-FMO
Liens in favor of the Senior Lender
       

* This judgment lien has been discharged.

 

--------------------------------------------------------------------------------

 

Schedule 7.4

Indebtedness

None.

 

--------------------------------------------------------------------------------

 

Schedule 7.5
Guaranties

None.

 

--------------------------------------------------------------------------------

 

Annex A-1
 
Schedule 7.6

Investments

None.

 

--------------------------------------------------------------------------------

 

ANNEX A

MEZZANINE FINANCING

If Holdings Stockholder approval is obtained, then the terms of the Operative
Documents shall be modified as follows and Holdings shall issue warrants to MRC
under the terms set forth below.  The parties will execute and deliver
documentation to effect the below changes.

SENIOR SUBORDINATED NOTES MODIFICATIONS

Maturity:
5 years from the Closing Date of the existing Senior Subordinated Notes Purchase
and Security Agreement.
   
Coupon:
10.0% per annum payable in cash and 4.0% per annum payable-in-kind
 
Cash interest payable monthly by automatic bank draft in arrears on a 360 day
basis and actual days elapsed; PIK accrued annually and added to the principal
balance of the Senior Subordinated Notes
   
Fees:
No additional fees; provided, that, whether closing occurs or not, all
reasonable out-of-pocket expenses, including legal expenses, will be reimbursed.
   
Security:
The same as set forth in the existing Senior Subordinated Notes Purchase and
Security Agreement and the other Operative Documents, except that there shall be
no cap on MRC’s lien.
   
Optional Redemption:
The Senior Subordinated Notes will be redeemable at the option of the Company,
in whole or in part, at any time prior to maturity, at the following redemption
prices (expressed as a percentage of principal amount), together, in each case,
with accrued and unpaid interest, if any, to the date of redemption:

 

--------------------------------------------------------------------------------

 
 

   
Percentage
 
5 years prior to Maturity Date
105%
 
4 years prior to Maturity Date
104%
 
3 years prior to Maturity Date
102%
 
2 years prior to Maturity Date
101%
 
1 year prior to Maturity Date
100%

Closing Conditions:
As set forth for the initial closing of the existing Senior Subordinated Notes
Purchase and Security Agreement plus the following:
       
·
Approval by the Issuer’s shareholders of the transaction as set forth in this
Term Sheet, all in accordance with Section 203 of the Delaware General
Corporation Law and the Nasdaq Rules.

WARRANTS

Issuer:
Physicians Formula Holdings, Inc. (“Holdings”)
   
Amount:
700,000 warrants assuming share price at closing is $2.028
   
Formula:
Formula for number of warrants is function of 30-day average closing price
 
·
Share price ratchet formula: ($2.028 / 30-day average closing price) * 700,000 =
number of warrants
   
Strike Price:
$0.25
   
Maturity:
Seven (7) Years

 

--------------------------------------------------------------------------------

 
 
Registration Rights:
Holdings agrees, at its expense,  (1) to file a registration statement on Form
S-3 (or on Form S-1 if the filing has not been made on or prior to April 30,
2010) providing for the resale of the shares of Common Stock underlying the
warrants within 30 days of the closing date of the mezzanine financing (i.e. the
closing date of the amendment of the Senior Subordinated Notes) and (2) to use
its reasonable efforts to cause the registration statement to be declared
effective within 120 days of the closing date; provided that Holdings shall use
reasonable efforts to cause the registration statement to be declared effective
promptly, but in any event, within five days after the SEC reaches a no comment
position with respect to the registration statement.  Holdings shall pay
liquidated damages in the amount of 0.5% of the invested amount per month for up
to 6 months and 1.0% for the following 6 months if it fails to file on time or
fails to cause the registration statement to become effective on time.  In
addition, MRC will have piggyback rights to participate in any underwritten
offerings by Holdings, subject to customary underwriter cut backs. The agreement
covering MRC’s registration rights shall cover additional terms usual and
customary in transactions such as this, including required periods of
effectiveness and penalties for lapse.
 
In the event Holdings is not currently S-3 eligible, Holdings may delay the
initial filing of the registration statement until April 30, 2010 without
penalty.

 

--------------------------------------------------------------------------------

 

Annex A-1
 
FIRST AMENDMENT TO

SENIOR SUBORDINATED NOTE PURCHASE AND SECURITY AGREEMENT
 

--------------------------------------------------------------------------------

 
THIS FIRST AMENDMENT TO SENIOR SUBORDINATED NOTE PURCHASE AND SECURITY AGREEMENT
dated as of ________, 20__ (the “Amendment”) amends the Senior Subordinated Note
Purchase and Security Agreement dated as of November 6, 2009 (the “Original
Agreement”), by and among Mill Road Capital, L.P., a Delaware limited
partnership (the “Holder”), Physicians Formula, Inc., a New York corporation
(the “Borrower”), Physicians Formula Holdings, Inc., a Delaware corporation
(“Holdings”) and the Guarantors party to the Original Agreement.

WHEREAS, the Holder, the Borrower, Holdings and the Guarantors desire to amend
the Original Agreement to change the terms of the Notes sold under the Original
Agreement and to permit the issuance and sale by Holdings of warrants to the
Holder; and

WHEREAS, the Holder holds Notes representing at least a majority of the
aggregate principal amount of the Notes outstanding on the date hereof;

NOW, THEREFORE, in consideration of the premises and the mutual covenants and
agreements herein contained, the receipt and sufficiency of which are hereby
acknowledged, the parties to this Amendment hereby agree as follows:

1.             Defined Terms

 Capitalized terms used herein, unless specified otherwise, shall have the same
meanings and/or references as contained in the Original Agreement.

2.             Original Agreement Modifications

(a)            Section 1.1(a) of the Original Agreement is hereby amended and
restated in its entirety as follows:

“(a)          The Borrower has authorized the issuance and sale of its amended
and restated Senior Subordinated Notes due November 6, 2014 in the aggregate
original principal amount of eight million dollars ($8,000,000) in the form set
forth as Exhibit A attached hereto (referred to herein individually as a “Note”
and collectively as the “Notes”, which terms shall also include any notes
delivered in exchange therefor or replacement thereof).  Commencing on the First
Amendment Effective Date, the Notes will accrue interest on the unpaid principal
amount thereof at an interest rate per annum (the “Interest Rate”) consisting of
(i) ten percent (10.00%) per annum in cash interest plus (ii) four percent
(4.00%) per annum to be added automatically to the unpaid principal amount of
the Notes (“PIK Interest”) on each Interest Payment Date.”

(b)            The third sentence of Section 1.1(b) of the Original Agreement is
hereby amended by amending and restating such sentence in its entirety as
follows:

 

--------------------------------------------------------------------------------

 

“All accrued PIK Interest shall be compounded annually on the first day of each
calendar year.”

(c)            Section 1.4(a) of the Original Agreement is hereby amended by
deleting the reference to “May 6, 2013” in the first sentence of such section
and replacing it with “November 6, 2014”.

(d)            Section 1.4(d) of the Original Agreement is amended and restated
in its entirety as follows:

“(d)          Prepayment Premium.  In the event of any prepayment or repurchase
of the Notes prior to the Maturity Date pursuant to clauses (b) or (c) above,
the Borrower shall pay to the Holder Representative (on behalf of the Holders)
the prepayment premium indicated below corresponding to the time period in which
such prepayment or repurchase occurs or is required to occur (the “Prepayment
Premium”) (which prepayment premium shall be paid to the Holder Representative
(on behalf of the Holders) as liquidated damages and compensation for the costs
of making funds available with respect to the loans evidenced by the Notes):

Period
Prepayment Premium
(% of the aggregate principal amount of the Notes prepaid or repurchased)
   
Closing Date through November 5, 2010
5%
November 6, 2010 through November 5, 2011
4%
November 6, 2011 through November 5, 2012
2%
November 6, 2012 through November 5, 2013
1%
November 6, 2013 and thereafter
0%

”

(e)            Section 1.8 of the Original Agreement is amended and restated in
its entirety as follows:

“1.8          Transfer and Exchange of Notes and Warrants.  The Borrower shall
keep a register in which it shall provide for the registration of the Notes and
the Warrants and the registration of transfers of Notes and the Warrants.  The
Holder of any Note or Warrant may, prior to maturity, prepayment or repurchase
of such Note or the expiration of such Warrant, surrender such Note or Warrant
at the principal office of the Borrower for transfer or exchange.  Any Holder
desiring to transfer or exchange any Note or Warrant (including, but not limited
to, any assignment of a Note or Notes or a Warrant or Warrants contemplated by
Section 11.5 hereof) shall first notify the Borrower in writing at least ten
(10) Business Days in advance of such transfer or exchange.  Promptly, but in
any event within ten (10) Business Days after such notice to the Borrower from
the Holder Representative (on behalf of a Holder of one or more Notes) of  a
Holder’s intention to make such an exchange of such Holder’s Note(s) and without
expense (other than transfer taxes, if any) to such Holder, the Borrower shall
issue in exchange therefor another Note or Notes in the same aggregate principal
amount, as of the date of such issuance, as the unpaid principal amount of the
Note so surrendered and having the same maturity and rate of interest,
containing the same provisions and subject to the same terms and conditions as
the Note so surrendered (provided that no minimum shall apply to a liquidating
distribution of Notes to investors in a Holder and any Notes so distributed may
be subsequently transferred by such investor and its successors in the original
denomination thereof without further restriction).  Each new Note shall be made
payable to such Person or Persons, or assigns, as the Holder of such surrendered
Note may designate, and such transfer or exchange shall be made in such a manner
that no gain or loss of principal or interest shall result therefrom.  The
Borrower shall have no obligation or liability under any Note to any Person
other than the registered Holder of each such Note.  Assignments and transfers
of Notes by the Holders shall be made in compliance with Section 11.5
hereof.  Assignments, transfers and exchanges of Warrants shall be made in
compliance with the terms set forth in the Warrants.

 

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(f)             Section 2.10 of the Original Agreement is hereby deleted in its
entirety.

(g)            The Original Agreement is hereby amended by inserting the
following new Article IIA as follows:

ARTICLE IIA
ISSUANCE OF THE WARRANTS

2A.1         The Warrants.  Holdings has authorized the issuance and sale of
warrants for the purchase of up to an aggregate of [_______]1 shares of Common
Stock, on a fully diluted basis (the “Warrant Shares”) (subject to adjustment as
provided therein) in the form set forth as Exhibit G attached hereto (referred
to herein individually as a “Warrant” and collectively as the “Warrants”, which
terms shall also include any warrants delivered in exchange therefor or
replacement thereof).  The Warrants shall be exercisable at a purchase price
equal to $0.25 per Warrant Share (subject to adjustment as provided in the
Warrants).

2A.2        Purchase and Sale of the Warrants.  For no additional consideration,
Holdings agrees to issue to the Purchaser on the First Amendment Effective Date,
the Warrant.

2A.3        Registration Rights.  The Purchaser and its successors and assigns
shall have the registration rights with respect to the Common Stock purchasable
under the Warrants as set forth in the Registration Rights Agreement.

2A.4        Representations and Warranties of the Purchaser regarding the
Warrants.

The Purchaser hereby represents and warrants, which representations and
warranties shall survive the First Amendment Effective Date, that:
 
__________________________ 
1 The formula to calculate the number of shares is a function of the 30-day
average closing price.  The formula is ($2.028 / 30-day average closing price) *
700,000.  The 30-day average closing price is calculated as of the close of
business on November 5, 2009 (the “First Calculation Date”); provided, however,
that, if Holder would receive a greater number of shares calculating the 30-day
average closing price as of the closing date of the First Amendment to the
Senior Subordinated Note Purchase and Security Agreement (the “Second
Calculation Date”), then the Holder shall be entitled to such number of
additional shares that is equal to the difference between the calculations on
the First Calculation Date and the Second Calculation Date.
 

 

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(a)            It is the present intention of the Purchaser to acquire its
Warrant and the Warrant Shares for its own account, and not as nominee or agent.

(b)            The Warrants and the Warrant Shares are being and will be
acquired for the purpose of investment and not with a view to distribution or
resale thereof in violation of the securities laws; subject, nevertheless, to
the condition that, except as otherwise provided herein and subject to
compliance with applicable securities laws, the disposition of the property of
the Purchaser shall at all times be within its control.  The Purchaser was not
formed solely for the purpose of making an investment in the Borrower.  The
Purchaser is an “accredited investor” as that term is defined in Regulation D
promulgated under the Securities Act with such knowledge and experience in
financial and business matters as are necessary in order to evaluate the merits
and risks of an investment in the Warrants and Warrant Shares.  In making its
decision to acquire the Warrant, the Purchaser has relied upon independent
investigations made by the Purchaser and the Purchaser’s representatives,
including the Purchaser’s own professional, tax and other advisors.  The
Purchaser and its representatives have been given the opportunity to ask
questions of, and to receive answers from, the Borrower concerning the terms and
conditions of the acquisition of the Warrant.  The Purchaser has reviewed, or
has had the opportunity to review, all information it deems necessary and
appropriate for the Purchaser to evaluate the financial risks inherent in the
acquisition of the Warrant.  The Purchaser understands that its acquisition of
the Warrant involves a high degree of risk and that no governmental authority
has passed on or made any recommendation or endorsement of the Warrant.

(c)            The Purchaser understands that it must bear the economic risk of
its investment for an indefinite period of time because the Warrants and the
Warrant Shares are not, and will not be, registered under the Securities Act or
any applicable state securities laws and may not be resold unless subsequently
registered under the Securities Act and such other laws or unless an exemption
from such registration is available.  The Purchaser acknowledges that, in
issuing the Purchaser’s Warrant and the Warrant Shares, the Borrower is relying
on the representations and warranties of the Purchaser in this Section 2A.4.

(d)            The Purchaser hereby acknowledges that its Warrant and each
certificate, if any, representing Warrant Shares (unless no longer required in
the written opinion of counsel delivered to the Borrower, which opinion and
counsel shall be reasonably satisfactory to the Borrower and its legal counsel,
it being agreed that Foley Hoag LLP shall be satisfactory counsel) shall bear a
legend substantially in the following form (in addition to any other legend
required by the Operative Documents):

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES
LAWS AND THE SECURITIES MAY NOT BE SOLD OR TRANSFERRED WITHOUT COMPLIANCE WITH
THE REGISTRATION OR QUALIFICATION PROVISIONS OF APPLICABLE FEDERAL AND STATE
SECURITIES LAWS OR APPLICABLE EXEMPTIONS THEREFROM.

The acquisition by the Purchaser of the its Warrant Shares shall constitute a
confirmation by it of the foregoing representations.

 

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2A.5        Representations and Warranties of Holdings regarding the Warrants.

Holdings hereby represents and warrants, which representations and warranties
shall survive the First Amendment Effective Date, that:

(a)            Authority; No Conflicts.

(i)             The execution, delivery and performance of the Operative
Documents and the transactions contemplated thereby by Holdings (including the
issuance of the Warrants and the issuance of the Warrant Shares upon exercise of
the Warrants) are within the power and authority of Holdings and have been
authorized by all corporate or other organizational proceedings of Holdings and
its stockholders and do not and will not (i) contravene any provision of the
certificate of incorporation or bylaws or any other organizational documents of
Holdings or any law, rule or regulation applicable to Holdings, (ii) contravene
any provision of, or constitute an event of default or event that, but for the
requirement that time elapse or notice be given, or both, would constitute an
event of default under, any order, agreement, lease, mortgage, note, bond,
indenture, license, or other instrument or undertaking to which Holdings is a
party or by which any of its properties are bound, or (iii) result in or require
the imposition of any Lien on any of the properties, assets or rights of
Holdings, except in favor of the Holders.

(ii)            The Warrants being purchased hereunder and the Warrant Shares
issuable upon exercise of the Warrants, when issued, delivered and paid for in
the manner set forth in this Agreement or, in the case of the Warrant Shares,
when issued, delivered and paid for in the manner set forth in the Warrant, will
be duly authorized and validly issued and outstanding.  No preemptive rights or
other rights of any Person to subscribe for or purchase, and no anti-dilution
adjustment or similar rights of any Person, exist or will be triggered with
respect to the issuance and sale of the Warrants or the issuance of the Warrant
Shares upon the exercise of the Warrants.  Holdings will at all times hereafter
keep available, solely for issuance and delivery upon exercise of the Warrants,
such number of shares of Common Stock as from time to time shall be issuable
upon exercise of the Warrants.

(b)            Securities Act.  Neither Holdings, nor anyone acting on its
behalf has offered or will offer to sell Warrants, Common Stock or other
securities to, or has solicited or will solicit offers with respect thereto
from, or has entered into or will enter into any preliminary conversations or
negotiations relating thereto with, any Person, so as to bring the issuance and
sale of the Warrants, or the issuance of the Warrant Shares issuable upon
exercise of the Warrants, under the registration provisions of the Securities
Act or the registration provisions of any securities or Blue Sky laws of any
applicable jurisdiction.  Assuming the accuracy of the representations and
warranties of the Purchaser set forth herein, neither the issuance of the
Warrants, nor the issuance of the Warrant Shares upon exercise of the Warrants,
is required to be registered under the Securities Act or any applicable state
securities laws, and such issuances shall be in compliance with all applicable
federal and state securities laws.

(h)            Section 3.1 of the Original Agreement is hereby amended by
amending and restating the following definitions therein:

 

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“Holder” or “Holders” shall mean the Purchaser (so long as it holds one or more
Notes or one or more Warrants, as the context requires) and any other holder or
holders from time to time of one or more Notes and/or one or more Warrants, as
the context requires.

“Maturity Date” shall be November 6, 2014.

“Operative Documents” means this Agreement, the Notes, the Guaranties, the
Security Documents, the Intercreditor Agreement, the Warrants, the Registration
Rights Agreement and each other agreement, instrument or document now or
hereafter executed and pursuant to or in connection with any of the foregoing.

(i)             Section 3.1 of the Original Agreement is hereby further amended
by inserting the following definitions therein in appropriate alphabetical
order:

“Common Stock” is the common stock, par value $0.01 per share, of Holdings.

“First Amendment Effective Date” is ________, 20__.

“Registration Rights Agreement” means that certain Registration Rights Agreement
dated as of the First Amendment Effective Date among Purchaser, Holdings and the
other Persons party thereto in the form attached hereto as Exhibit H.

“Warrant” or “Warrants” shall have the meaning given to such term in Section
2A.1 hereof.

“Warrant Shares” shall have the meaning given to such term in Section 2A.1
hereof.

(j)             The third sentence of Section 3.2 of the Original Agreement is
hereby amended by amending and restating such sentence in its entirety as
follows:

“The words “party” or “parties” when used with reference to this Agreement shall
include each party to this Agreement and, by their acceptance of a Note or
Warrant, each Holder.”

(k)            Section 8.1 of the Original Agreement is hereby amended by
inserting the following new sentence at the end thereof as follows:

“Without in any way limiting the rights of the Holders, Holdings hereby agrees
that the Holders of the Warrants or the Warrant Shares would have no adequate
remedy at law, for monetary compensation or otherwise, for the damages that
would be suffered if Holdings or the Borrower were to fail to comply with its
obligations under Article IIA and/or Article VII hereof, and that Holdings
therefore agrees that the Holders of the Warrants and the Warrant Shares shall
be entitled to obtain specific performance of the Holdings’ obligations under
Article IIA and/or Article VII hereof.”

(l)             Article X of the Original Agreement is hereby amended by
deleting the references to the clause “Each Holder, by acceptance of any Note(s)
held by it,” throughout such Article and replacing it with the clause “Each
Holder, by acceptance of any Note(s) or Warrant(s) held by it,”.

 

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(m)           Section 10.8 of the Original Agreement is hereby amended by
deleting the references to the clause “with respect to its Note” throughout such
Section and replacing it with the clause “with respect to its Note and its
Warrant”.

(n)           Section 11.2 of the Original Agreement is hereby amended and
restated in its entirety as follows:

“11.2        Amendments, Waivers and Consents.  Any provision in this Agreement,
the Notes or the other Operative Documents (other than the Warrants) to the
contrary notwithstanding, changes in or additions to this Agreement and the
other Operative Documents may be made, and compliance with any covenant or
provision set forth herein or therein may be omitted or waived, if the Borrower
shall obtain consent thereto in writing from the Required Holders, and shall, in
any case, deliver copies of such consent in writing to all other Holders of
Notes and/or Warrants; provided that (i) without the consent of all Holders of
Notes, no such consent or waiver shall be effective to reduce the amount of, to
postpone the date fixed for the payment of, the principal of (including any
required redemption) or interest or Prepayment Premium payable on any Note, to
decrease the Interest Rate or the Prepayment Premium, to decrease or postpone
any prepayments or redemptions, to increase the proportion of interest payable
as PIK Interest rather than as cash interest, to alter, amend or waive
compliance with Section 8.1(a), to alter or amend the consent mechanism provided
for under Section 8.3 or this Section 11.2, or to release any material Guarantor
from its guaranty hereunder or any Guaranty, and (ii) without the consent of the
Holder Representative, no such consent or waiver shall be effective to alter the
rights or obligations of the Holder Representative.  The provisions of the
Warrants may be amended or waived in the manner provided, and with the consent
of the Persons required, under Section 12 of the Warrants.  If the Required
Holders vote to alter, amend or waive compliance with the Intercreditor
Agreement or any subordination or intercreditor agreement relating to any
Subordinated Debt, then all Holders shall be bound by such vote and agree to
sign such consent or other document as may be necessary to effectuate such
alteration, amendment or waiver.  Any waiver or consent may be given subject to
satisfaction of conditions stated therein and any waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.  Written notice of any waiver or consent effected under this subsection
shall promptly be delivered by the Borrower to any Holders who did not execute
the same.”

(o)            The last sentence of Section 11.4(a) of the Original Agreement is
hereby amended by amending and restating such sentence in its entirety as
follows:

“In addition, the Borrower agrees to pay the expenses of preparing Notes and
Warrants from time to time in connection with exchanges and transfers of Notes
and/or Warrants and the expenses of delivering copies of Operative Documents to
Holders, and the Borrower agrees to indemnify, pay and hold each Holder harmless
from and against any and all liabilities with respect to or resulting from any
delay in paying or omission to pay taxes (other than transfer taxes) and filing
fees with respect to such transfer.”

(p)            Section 11.4(c) of the Original Agreement is hereby amended and
restated in its entirety as follows:

 

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“(c)          The provisions of this Section 11.4 shall survive the payment in
full of all amounts due under this Agreement, the Notes and the other Operative
Documents, the exercise in full or termination of the Warrants, and the
termination of this Agreement and the other Operative Documents.”

(q)            Section 11.5 of the Original Agreement is hereby amended by
inserting the following new sentence at the end thereof as follows:

“Any holder of one or more Warrants may assign its Warrants in compliance with
the terms set forth in the Warrants.”

(r)            Section 11.7 of the Original Agreement is hereby amended and
restated in its entirety as follows:

“11.7        Payments in Respect of Warrants.  The Holders of the Warrants, by
their acceptance thereof, agree that, with respect to the sale to, or repurchase
by, Holdings or any Person directly or indirectly affiliated with Holdings or
any of its managers, directors, officers, members or other equityholders, of the
Warrants, equitable adjustment will be made among them so that, in effect, all
such sums shall be shared ratably by all of the Holders of the Warrants in
proportion to their respective holdings of Warrants.  If any Holder of one or
more Warrants receives any such sum in respect of its Warrants in excess of its
pro rata portion, then such Holder receiving such excess payment shall purchase
for cash from the other Holders of Warrants an interest in their Warrants in
such amount as shall result in a ratable participation by all of the Holders of
the Warrants in the aggregate of all Warrants then outstanding.”

(s)            Clause (ii) of Section 11.8 of the Original Agreement is hereby
amended and restated in its entirety as follows:

“(ii) the Holders’ agreement to purchase the Notes and Warrants, or the use or
intended use of the proceeds of the Notes and Warrants hereunder,”

(t)             The last sentence of Section 11.8 of the Original Agreement is
hereby amended by amending and restating such sentence in its entirety as
follows:

“This indemnification shall survive the payment and satisfaction of all
Obligations, the exercise in full or termination of the Warrants, and the
termination of this Agreement and the other Operative Documents, and shall
remain in force beyond the expiration of any applicable statute of limitations
and payment or satisfaction in full of any single claim under this
indemnification.”

(u)            The parenthetical in the first sentence of Section 11.14 of the
Original Agreement is hereby amended by amending and restating such
parenthetical in its entirety as follows:

“(BY ACCEPTANCE OF ANY NOTE(S) OR WARRANT(S) HELD BY IT)”

(v)            Section 11.20 of the Original Agreement is hereby amended and
restated in its entirety as follows:

 

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“11.20      Specific Performance.  Upon breach or default by the Borrower or any
Guarantor with respect to any obligation hereunder under the Notes, the Warrants
(or the Warrant Shares) or under any other Operative Document, each Holder shall
be entitled to protect and enforce its rights at law, or in equity or by other
appropriate proceedings for specific performance of such obligation, or for an
injunction against such breach or default, or in aid of the exercise of any
power or remedy granted hereby or thereby or by law.”

(w)            The parenthetical in the first sentence of Section 11.22 of the
Original Agreement is hereby amended by amending and restating such
parenthetical in its entirety as follows:

“(by the acceptance of any Note(s) or Warrant(s) held by it)”

(x)            Clause (f)(A) of Section 11.22 of the Original Agreement is
hereby amended and restated in its entirety as follows:

“(A) any assignee of or participant in, or any prospective assignee of or
participant in, any of its rights or obligations under this Agreement, any
Note(s) or any Warrant(s) or”

3.             Amendments to Exhibits

The Exhibits to the Credit Agreement are amended (i) by replacing Exhibit A,
with the form of Amended and Restated Senior Subordinated Note attached hereto
as Annex B and (ii) by adding the following new Exhibit G (Warrant), attached
hereto as Annex C, and Exhibit H (Registration Rights Agreement), attached
hereto as Annex D.

4.             Amendment to Operative Documents; Consistent Changes

References to the “Purchase Agreement” or the “Note Purchase Agreement” in the
Operative Documents shall be deemed to be references to the Original Agreement
as amended by this Amendment.  Furthermore, the Operative Documents are hereby
amended wherever necessary to reflect the changes described herein.

5.             Confirmation of Certain Terms and Other Matters

Each of the Borrower, Holdings, the Guarantors and the Holder hereby ratify and
confirm all terms and provisions of the Operative Documents and all other
documents, instruments, or agreements executed in connection therewith and agree
that, except as expressly amended herein, all of such terms and provisions
remain in full force and effect.  The Borrower , Holdings, the Guarantors and
the Holder hereby confirm and acknowledge that the obligations of the Borrower,
Holdings and the Guarantors under the Original Agreement include all obligations
and liabilities of the Borrower, Holdings and the Guarantors under the Original
Agreement, as amended from time to time including, but not limited to, this
Amendment.  Each of the Borrower, Holdings and the Guarantors also confirm and
acknowledge that this Amendment and the documents, instruments or agreements
executed in connection therewith shall constitute Operative Documents.  Except
as expressly provided herein, this Amendment shall not be deemed a waiver of any
term or condition of any Operative Document and shall not be deemed to prejudice
any right or rights which the Holder may now have or may have in the future
under or in connection with any Operative Document or any of the instruments or
agreements referred to therein, as the same may be amended from time to time.

 

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6.             Collateral Security

Each of the Borrower, Holdings and the Guarantors further acknowledge and agree
that the Security Documents continue to secure the Borrower’ prompt, punctual
and faithful payment and performance of (i) the Original Agreement, as amended
by this Amendment and any further extensions, renewals, substitutions,
modifications, amendments or replacements thereof; (ii) the Notes and any
further extensions, renewals, substitutions, modifications, amendments or
replacements of any thereof; (iii) any and all liabilities of the Borrower to
the Holders (including, without limitation, those arising under the Operative
Documents and this Amendment); (iv) any and all liabilities, debts and
obligations, whether now existing or hereafter arising, or at any time owing by
the Borrower to the Holders, including without limitation, costs, costs of
collection, attorneys’ reasonable fees and all court and litigation costs and
expenses, and (v) all sums, bearing interest at the rate provided in the
Original Agreement, as modified, advanced to or on behalf of the Borrower by the
Holders for any purposes, whether dependent or independent of this transaction,
all of which shall be equally secured with and have the same priority as the
original advances under the Notes.

7.             Representations and Warranties

Each of the Borrower, Holdings and the Guarantors hereby represent and warrant
that except as otherwise disclosed on the list of “Exceptions to
Representations” annexed hereto as Annex A: (a) they have complied and are now
in compliance with, all of the terms and provisions set forth in the Operative
Documents, as amended, on their part to be observed and performed; (b) no Event
of Default specified in Section 8.1 of the Original Agreement has occurred or is
continuing or would occur as a result of the transactions contemplated by this
Amendment (including the issuance of the Warrants); and (c) the execution,
delivery and performance of this Amendment (including the issuance of the
Warrants): (i) has been duly authorized by all requisite corporation action,
including approval by the stockholders of Holdings, (ii) will not violate either
(x) any provision of law applicable to the Borrower, Holdings or any Guarantor,
any governmental regulation, or its charter documents, or (y) any order of any
court or other agency of government binding on the Borrower, Holdings or any
Guarantor or any indenture, agreement, or other instrument to which the
Borrower, Holdings or any Guarantor is a party, or by which they or any of its
property is bound, and (iii) will not be in conflict with, result in a breach
of, or constitute (with due notice and/or lapse of time) a default under, any
such indenture, agreement, or other instrument.

8.             Conditions to Holder’s Obligations

The willingness of the Holder to consent to and enter into this Amendment is
subject to the satisfaction of the following conditions concurrently with the
execution and delivery of this Amendment:

(a)            The Holder shall have received approving resolutions of the Board
of Directors (or other appropriate governing body) and the shareholders or
members of each of the Borrower, Holdings and the Guarantors, certified as of
the date hereof by the Secretary of the Borrower, Holdings and the Guarantors
authorizing the execution and delivery by the Borrower, Holdings and the
Guarantors of this Amendment and all documents referenced herein.

 

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(b)            The Borrower, Holdings and the Guarantors shall have executed and
delivered to the Holder, as applicable, (i) this Amendment, (ii) the Amended and
Restated Senior Subordinated Note attached hereto as Annex B, (iii) the Warrant
attached hereto as Annex C, and (iv) the Registration Rights Agreement attached
hereto as Annex D.

(c)            The Holder shall have received a certificate of a Responsible
Officer of each of the Borrower and Holdings as to the accuracy of the
Borrower’s and Holdings’ representations and warranties in the Original Note
Purchase Agreement in all material respects and in this Amendment and as to such
other matters as the Holder may reasonably request.

(d)            The Holder shall have received the favorable written opinion of
Kirkland & Ellis LLP, counsel to the Borrower and the Guarantors regarding,
among other things, the issuance of the warrants, in form and substance
reasonably satisfactory to the Holder.

(e)            This Amendment and all documents referenced herein or to be
delivered in connection herewith shall be on terms reasonably satisfactory to
Holder’s tax counsel.

(f)             The Borrower shall have paid to the Holder all outstanding legal
and other out of pocket fees and expenses incurred relative to the Holder’s
relationship with the Borrower and all costs and fees associated with this
Amendment.

(g)            The Holder shall have received such other documents,
certificates, instruments, and agreements from the Borrower as the Holder may
reasonably request.

9.             Miscellaneous

(a)            This Amendment shall be governed by, and construed and enforced
in accordance with, the substantive laws of the State of New York, without
regard to its principles of conflicts of laws.

(b)            This Amendment may be executed in two or more counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.

(c)            Each of the Borrower, Holdings and the Guarantors shall, from
time to time, at its expense, execute and deliver to the Holder all such other
and further instruments, agreements and documents and take or cause to be taken
all such other and future action as the Holder shall reasonably request in order
to effect and confirm or vest more securely all rights contemplated by this
Amendment, the Original Agreement or any Operative Document.

<The remainder of this page is intentionally left blank>

 

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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly
executed as of the date first above written.

 
BORROWER:
   
PHYSICIANS FORMULA, INC.,
   
a New York Corporation
                   
By:
       
Name:
     
Title:
                   
GUARANTORS:
   
PHYSICIANS FORMULA HOLDINGS, INC.,
   
a Delaware Corporation
                   
By:
       
Name:
     
Title:
                   
PHYSICIANS FORMULA COSMETICS, INC.,
   
a Delaware Corporation
   
By:
       
Name:
     
Title:
                   
PHYSICIANS FORMULA DRTV, LLC,
   
a Delaware Limited Liability Company
           
By:
       
Name:
     
Title:
 

 
Signature Page to First Amendment to Senior Subordinated Note Purchase and
Security Agreement

 

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HOLDER:
           
MILL ROAD CAPITAL, L.P.,
   
a Delaware Limited Partnership
                   
By:
       
Name:
     
Title:
 

 
Signature Page to First Amendment to Senior Subordinated Note Purchase and
Security Agreement

 

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Annex A

Exceptions to Representations

[Borrower to complete]
 
Signature Page to First Amendment to Senior Subordinated Note Purchase and
Security Agreement

 

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Annex A-2

THIS INSTRUMENT AND THE RIGHTS AND OBLIGATIONS EVIDENCED HEREBY ARE SUBORDINATE
IN THE MANNER AND TO THE EXTENT SET FORTH IN THAT CERTAIN INTERCREDITOR
AGREEMENT (THE “INTERCREDITOR AGREEMENT”) DATED AS OF NOVEMBER 6, 2009 BY AND
AMONG WELLS FARGO BANK, NATIONAL ASSOCIATION ACTING THROUGH ITS WELLS FARGO
BUSINESS CREDIT OPERATING DIVISION, MILL ROAD CAPITAL, L.P. AND PHYSICIANS
FORMULA, INC.; AND EACH HOLDER OF THIS INSTRUMENT, BY ITS ACCEPTANCE HEREOF,
IRREVOCABLY AGREES TO BE BOUND BY THE PROVISIONS OF THE INTERCREDITOR AGREEMENT.

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD OR TRANSFERRED
WITHOUT COMPLIANCE WITH THE REGISTRATION OR QUALIFICATION PROVISIONS OF
APPLICABLE FEDERAL AND STATE SECURITIES LAWS OR APPLICABLE EXEMPTIONS THEREFROM.

THIS NOTE HAS BEEN ISSUED WITH ORIGINAL ISSUE DISCOUNT FOR U.S. FEDERAL INCOME
TAX PURPOSES.  FOR FURTHER INFORMATION REGARDING THE ISSUE PRICE, AMOUNT OF OID,
ISSUE DATE, THE YIELD TO MATURITY OF THIS NOTE AND ANY OTHER INFORMATION
REQUIRED UNDER TREASURY REGULATIONS SECTION 1.275-3(b)(1)(i), THE HOLDER OF THIS
NOTE SHOULD CONTACT THE OFFICE OF THE CHIEF FINANCIAL OFFICER OF PHYSICIANS
FORMULA INC. AT 1055 WEST 8TH STREET, AZUSA, CA 91702, TEL NO. (626) 334-3395 AT
ANY TIME BEGINNING 10 DAYS AFTER THE DATE OF ISSUANCE.

PHYSICIANS FORMULA, INC.

AMENDED AND RESTATED SENIOR SUBORDINATED NOTE

$8,000,000.00
[_________], 20__

FOR VALUE RECEIVED, Physicians Formula, Inc., a New York corporation (the
“Maker”), hereby promises to pay to the order of Mill Road Capital, L.P., a
Delaware limited partnership (“MRC”), or its registered assigns and transferees
(collectively, the “Payee”) the principal sum of Eight Million Dollars
($8,000,000.00), plus the aggregate amount of accrued interest from time to time
capitalized thereon, less the aggregate amount of principal prepaid or repaid
from time to time, in each case, pursuant to the terms and conditions of and at
the times provided in the Purchase Agreement (as defined below).

1.              Notes.  This Senior Subordinated Note (this “Note”) is issued
pursuant to, and is subject to the terms and entitled to the benefits of, the
Senior Subordinated Note Purchase and Security Agreement dated as of November 6,
2009 among the Maker, MRC and the Guarantors (as defined therein), as amended,
restated, supplemented or otherwise modified from time to time, including by
that certain First Amendment to Senior Subordinated Note Purchase and Security
Agreement dated as of [______], 20__, in accordance with its terms (the
“Purchase Agreement”).  The Payee is entitled to enjoy the benefits of and to
enforce the provisions of the Purchase Agreement as a Holder and is subject to
the obligations thereunder of Holder.  Terms used herein and not otherwise
defined herein shall have the meanings ascribed thereto in the Purchase
Agreement.

2.              Interest.  Commencing on the date of issuance, this Note will
accrue interest on the unpaid principal amount thereof at the Interest Rate
specified in, and subject to adjustment as provided in, the Purchase
Agreement.  Interest on this Note shall be computed based on a 360-day year and
actual days elapsed, and all PIK Interest on this Note shall be compounded
annually on the first day of each calendar year.  Cash interest on this Note
shall be payable monthly in arrears on each Interest Payment Date commencing on
[___________] by wire transfer of immediately available funds to one or more
accounts designated by the Payee.  The records of the Payee shall, absent
manifest error, be conclusive evidence of the outstanding principal balance of
this Note, including all PIK Interest added to the principal amount thereof and
the compounding thereof, but any failure of the Payee to record, or any error in
so recording, any such amount on the Payee’s records shall not limit or
otherwise affect the obligations of the Maker under this Note to make all
payments of principal of and interest thereon when due.

 

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If an Event of Default has occurred and is continuing, from and after the date
such Event of Default has occurred the entire outstanding unpaid principal
balance of this Note and any unpaid interest from time to time in default shall
(both before and after acceleration and entry of judgment) bear interest,
payable in cash on demand, at a rate per annum equal to the Interest Rate
payable pursuant to Section 1.1 of the Purchase Agreement plus three percent
(3%); provided, however, that upon the cessation or cure of such Event of
Default, if no other Event of Default is then continuing, this Note shall again
bear interest at the applicable Interest Rate as set forth in Section 1.1 of the
Purchase Agreement.

The obligations of the Maker to pay interest under this Note are subject in all
events to the provisions of Section 1.6 of the Purchase Agreement relating to
Excess Interest and the Maximum Rate.

3.              Maturity; Required Redemption.  Unless the maturity of this Note
is accelerated pursuant to Article VIII of the Purchase Agreement, this Note
shall mature and be redeemed by the Maker in one installment which shall be paid
on November 6, 2014.  On the stated or accelerated maturity date of the Notes,
the Maker will pay in cash the principal amount of the Notes then outstanding
together with all accrued and unpaid interest thereon, including, without
limitation, all PIK interest.

4.              Optional Prepayments.  The Maker may voluntarily prepay this
Note, in whole or in part, at any time.  Optional prepayments permitted pursuant
to the Purchase Agreement may only be made upon payment to the Payee of an
amount equal to the sum of the principal amount to be prepaid, together with all
accrued and unpaid interest (including PIK Interest) on the amount so prepaid
through the date of prepayment, plus the Prepayment Premium, if any, as provided
in the Purchase Agreement.

5.              Repurchase upon a Change of Control.  The Maker is obligated
upon the occurrence of a Change of Control to repurchase this Note in whole on
the terms and conditions set forth in Section 1.4(c) of the Purchase Agreement.

6.              Prepayment Premium.  In the event of any prepayment of this Note
prior to the Maturity Date pursuant to Sections 1.4(b) and (c) of the Purchase
Agreement, the Maker shall pay to the Payee the Prepayment Premium indicated in
the Purchase Agreement corresponding to the time period in which such prepayment
occurs or is required to occur.

 

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7.              Guaranty and Security.  The payment and performance of this Note
is and shall at all times be guaranteed (the “Guaranty”) by each Guarantor
pursuant to Article IX of the Purchase Agreement.  This Note is secured pursuant
to the terms of (a) the security interest granted by the Borrower under Article
II of the Purchase Agreement, (b) the Guarantor Security Agreement dated as of
November 6, 2009 among the Guarantors and the Payee and (c) the other Security
Documents.  The Payee is entitled to the benefits of the Guaranty, the Guarantor
Security Agreement, the other Security Documents and the other Operative
Documents, and may enforce the agreements of the Maker contained therein, and
the Payee may exercise the remedies provided for thereby or otherwise available
in respect thereof, all in accordance with the terms thereof.

8.              Remedies on Default. Etc.  Reference is made to the Purchase
Agreement for the remedies available to the Payee upon the occurrence of an
Event of Default as described in the Purchase Agreement.  The Maker hereby
agrees to pay on demand all reasonable costs and expenses, including without
limitation attorneys’ fees and costs of collection, incurred or paid by the
holder of this Note in enforcing this Note in accordance with the Purchase
Agreement.

9.              No Impairment.  No provision of the Purchase Agreement or this
Note shall alter or impair the obligation of the Maker, which is absolute and
unconditional, to pay the principal and interest on this Note at the times,
places and rates, and in the currency, provided.

10.            Waivers; Amendments.  The Maker and each endorser and guarantor
hereby waives presentment, demand, protest and notice of any kind.  No failure
or delay on the part of the Maker or the Payee or holder hereof in exercising
any right, power, privilege or remedy hereunder or under the Purchase Agreement
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such right, power, privilege or remedy preclude any other or further
exercise thereof or the exercise of any other right, power, privilege or
remedy.  The remedies provided for herein and in the Purchase Agreement are
cumulative and are not exclusive of any remedies that may be available to the
Maker or the Payee at law or in equity or otherwise.  This Note may not be
amended and the provisions hereof may not be waived, except in accordance with
the terms of the Purchase Agreement.

11.            Lost Notes, etc.  If this Note is mutilated, destroyed, lost or
stolen, upon receipt of evidence satisfactory to the Maker of such loss, theft,
destruction or mutilation of this Note and, if requested in the case of any such
loss, theft or destruction, upon delivery of an indemnity agreement reasonably
satisfactory to the Maker, or, in the case of any such mutilation, upon
surrender and cancellation of this Note, the Maker shall issue a new Note of
like tenor and amount and dated the date to which interest has been paid, in
lieu of this Note; provided, however, if Payee, its nominee, or any of its
partners or members is the holder of this Note and this Note is lost, stolen or
destroyed, the affidavit of an authorized partner, member or officer of such
holder setting forth the circumstances with respect to such loss, theft or
destruction shall be accepted as satisfactory evidence thereof, and no
indemnification shall be required as a condition to the execution and delivery
by the Maker of a new Note in replacement of this Note other than the holder’s
written agreement to indemnify the Maker.

12.            Waiver of Jury Trial.  EACH OF THE MAKER, EACH GUARANTOR AND THE
PAYEE HEREBY WAIVES ITS RIGHT TO JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM
ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THE PURCHASE AGREEMENT, THIS NOTE
OR ANY OF THE OTHER OPERATIVE DOCUMENTS, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR
THEREUNDER OR THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS OR ANY COURSE OF
CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS
OF ANY PARTY, INCLUDING , WITHOUT LIMITATION, ANY COURSE OF CONDUCT, COURSE OF
DEALINGS, STATEMENTS OR ACTIONS OF THE PAYEE RELATING TO THE ADMINISTRATION OR
ENFORCEMENT OF THE NOTES AND THE OPERATIVE DOCUMENTS, AND AGREES THAT IT WILL
NOT SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY
TRIAL CANNOT BE OR HAS NOT BEEN WAIVED.  EXCEPT AS PROHIBITED BY LAW, EACH OF
THE MAKER, EACH GUARANTOR AND THE PAYEE HEREBY WAIVES ANY RIGHT IT MAY HAVE TO
CLAIM OR RECOVER IN ANY LITIGATION REFERRED TO IN THE PRECEDING SENTENCE ANY
SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN,
OR IN ADDITION TO, ACTUAL DAMAGES.  EACH OF THE MAKER, EACH GUARANTOR AND THE
PAYEE (a) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER OF
SUCH PERSONS HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT  SUCH PERSON WOULD
NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS AND (b)
ACKNOWLEDGES THAT EACH OTHER SUCH PERSON HAS BEEN INDUCED TO ENTER INTO THE
PURCHASE AGREEMENT AND THE OTHER OPERATIVE DOCUMENTS TO WHICH IT IS A PARTY
BECAUSE OF, AMONG OTHER THINGS, THE WAIVERS AND CERTIFICATIONS CONTAINED
THEREIN.

 

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13.            Governing Law; Jurisdiction; Venue.  THIS NOTE AND EACH OF THE
OTHER OPERATIVE DOCUMENTS ARE CONTRACTS UNDER THE LAWS OF THE STATE OF NEW YORK
AND SHALL FOR ALL PURPOSES BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF SAID STATE (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF
LAW).  THE MAKER AND EACH GUARANTOR CONSENT TO THE JURISDICTION OF THE FEDERAL
AND STATE COURTS LOCATED IN NEW YORK COUNTY IN THE STATE OF NEW YORK IN
CONNECTION WITH ANY SUIT TO ENFORCE THE RIGHTS OF THE PAYEE UNDER THIS NOTE OR
ANY OF THE OTHER OPERATIVE DOCUMENTS AND CONSENT TO SERVICE OF PROCESS IN ANY
SUCH SUIT BEING MADE UPON THE MAKER OR ANY SUCH GUARANTOR, AS THE CASE MAY BE,
BY MAIL AT THE MAKER’S OR SUCH GUARANTOR’S ADDRESS SET FORTH IN THE PURCHASE
AGREEMENT.  THE MAKER AND EACH GUARANTOR IRREVOCABLY WAIVES ANY OBJECTION WHICH
IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH ACTION BROUGHT
IN THE COURTS REFERRED TO IN THIS SECTION AND IRREVOCABLY WAIVES AND AGREES NOT
TO PLEAD OR CLAIM IN ANY SUCH ACTION THAT SUCH ACTION HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM.  ANY SUIT OR JUDICIAL PROCEEDING BY THE MAKER OR ANY
GUARANTOR AGAINST THE PAYEE INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY
WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH THIS NOTE OR ANY OTHER
OPERATIVE DOCUMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THE OPERATIVE
DOCUMENTS SHALL BE BROUGHT ONLY IN A FEDERAL OR STATE COURT LOCATED IN NEW YORK
COUNTY IN THE STATE OF NEW YORK.

 

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14.            This Note amends and restates and is substituted for that certain
promissory note dated November 6, 2009 in the original principal amount of
$8,000,000 made by Borrower in favor of Payee (the “Prior Note”) and this Note
is in substitution for (but not in payment of) the Prior Note.

[The remainder of this page has been left blank intentionally.]

 

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IN WITNESS WHEREOF, the Maker has caused this Amended and Restated Senior
Subordinated Note to be duly executed under seal on the date set forth above by
a duly authorized representative of the Maker.

 
PHYSICIANS FORMULA, INC.
       
By:
     
Name:
   
Title:

 
Signature Page to Amended and Restated Senior Subordinated Note

 

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Annex A-3

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE
SECURITIES LAWS AND THE SECURITIES MAY NOT BE SOLD OR TRANSFERRED WITHOUT
COMPLIANCE WITH THE REGISTRATION OR QUALIFICATION PROVISIONS OF APPLICABLE
FEDERAL AND STATE SECURITIES LAWS OR APPLICABLE EXEMPTIONS THEREFROM.

Warrant No. [20__] - #__
 
 
Void After [____, 20___]
Right to Purchase [_______] (subject to the
qualifications and adjustments set forth herein)
shares of  Common Stock of Physicians
Formula Holdings, Inc.

PHYSICIANS FORMULA HOLDINGS, INC.

Common Stock Purchase Warrant

[________, [20___]

Physicians Formula Holdings, Inc., a Delaware corporation (the “Company”),
hereby certifies that for good and valuable consideration, MILL ROAD CAPITAL,
L.P., and its successors and assigns (the “Holder”), is entitled to subscribe
for and purchase from the Company an aggregate of __________ (________)2 validly
issued, fully paid and nonassessable shares of Common Stock, par value $0.01 per
share, of the Company (“Common Stock”) at a purchase price per share equal to
$0.25 (the “Exercise Price”), all subject to the terms, conditions and
adjustments as hereinafter provided.  The Exercise Price shall be subject to
adjustment from time to time pursuant to the provisions of Section 6 hereof.

This Warrant is issued pursuant to, and in accordance with, the Senior
Subordinated Note Purchase and Security Agreement dated as of November 6, 2009
by and among the Company, Physicians Formula, Inc. (a wholly-owned subsidiary of
the Company), the Guarantors party thereto and Holder, as amended on the date
hereof (the “Purchase Agreement”) and is subject to the terms thereof.

Section 1.               Definitions.  Unless otherwise defined herein,
capitalized terms shall have the meaning given to them in the Purchase
Agreement.  As used herein, the following terms shall have the following
meanings, unless the context otherwise requires:
 
__________________________ 
2 The formula to calculate the number of shares is a function of the 30-day
average closing price.  The formula is ($2.028 / 30-day average closing price) *
700,000.  The 30-day average closing price is calculated as of the close of
business on November 5, 2009 (the “First Calculation Date”); provided, however,
that, if Holder would receive a greater number of shares calculating the 30-day
average closing price as of the closing date of the First Amendment to the
Senior Subordinated Note Purchase and Security Agreement (the “Second
Calculation Date”), then the Holder shall be entitled to such number of
additional shares that is equal to the difference between the calculations on
the First Calculation Date and the Second Calculation Date.

 

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Annex A-3

(a)            “Fair Market Value” shall mean, as of the date of determination:
(i) if the Common Stock is listed on a national securities exchange, the Fair
Market Value shall be the last reported sale price of the Common Stock on such
exchange or market system on the last Business Day prior to the date of exercise
of this Warrant or, if no such sale is made on such day, the average closing bid
and asked price for such day on such exchange or market system; (ii) if the
Common Stock is not listed, the Fair Market Value shall be the mean of the last
reported bid and asked prices reported by OTC Bulletin Board or other similar
over-the-counter quotation service on the last Business Day prior to the date of
exercise of this Warrant or (iii) if the Common Stock is not so listed and bid
and asked prices are not so reported, the Fair Market Value shall be an amount
determined mutually by (x) a majority of the members of the Board of Directors
of the Company, and (y) the Holder.  If the Board of Directors and the Holder
are unable to agree on the Fair Market Value within five (5) Business Days, the
Fair Market Value shall be determined by an Independent Appraiser (as defined
below) selected by agreement of the Board of Directors and the Holder. If the
parties cannot agree upon an Independent Appraiser within five (5) Business
Days, then, within a further five (5) Business Days, the parties shall each
select one Independent Appraiser and the two Independent Appraisers shall,
within a further five (5) Business Days, select a third Independent Appraiser
who shall determine the Fair Market Value.  “Independent Appraiser” shall mean
any nationally recognized independent auditing firm or investment banking firm
that does not provide services directly to either party.  Any determination of
the Fair Market Value by an Independent Appraiser shall be based on a valuation
of the Company as an entirety without regard to any discount for minority
interests or disparate voting rights among classes of Capital Stock.

(b)            “Warrant Expiration Date” shall mean 5:00 p.m., Pacific Time, on
the seventh anniversary of the date of this Warrant; provided, that, if such
date is not a Business Day, the next Business Day immediately thereafter.

Section 2.               Transfers; Negotiability.  This Warrant and the shares
of Common Stock issuable upon exercise of this Warrant may not be transferred or
assigned in whole or in part without compliance with applicable federal and
state securities laws by the transferor and the transferee.  Subject to
compliance with any applicable securities laws, this Warrant and all rights
hereunder are transferable, in whole or in part, upon surrender of this Warrant
at the principal office of the Company, together with a written assignment of
this Warrant duly executed by the Holder or its agent or attorney and funds
sufficient to pay any transfer taxes payable upon the making of such
transfer.  Upon such surrender and, if required, such payment, the Company shall
execute and deliver a new Warrant or Warrants in the name of the assignee or
assignees and in the denomination or denominations specified in such instrument
of assignment, and this Warrant shall promptly be cancelled.  Until this Warrant
is transferred on the books of the Company, the Company may treat the registered
holder hereof as the absolute owner hereof for all purposes, notwithstanding any
notice to the contrary.

Section 3.               Exercise of Warrant.

3.1           Manner of Exercise.  Subject to the terms and conditions set forth
herein, this Warrant may be exercised, in whole or in part (but not as to a
fractional share of Common Stock), by the Holder at any time or from time to
time, on any Business Day on or prior to the Warrant Expiration Date by (i) the
delivery of a duly executed exercise form in the form attached as Exhibit A
hereto (an “Exercise Form”) to the Company at its office at 1055 West 8th
Street, Azusa, California 91702, or at such other office as the Company may
designate by notice in writing, and (ii) the delivery of payment to the Company
by cash, check made payable to the order of the Company, wire transfer of funds
to a bank account designated by the Company or any other means approved by the
Company, an amount equal to the aggregate Exercise Price for all shares of
Common Stock as to which this Warrant is exercised.  In lieu of payment of the
aggregate Exercise Price, the Holder may from time to time convert this Warrant,
in whole or in part, into a number of shares of Common Stock determined by using
the following net issuance formula:

 

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Annex A-3

X=((P)(A-B))/A

where

 
X =
the number of shares of Common Stock to be issued to the holder for the portion
of this Warrant being exercised;

 
P =
the number of shares of common stock purchasable under this Warrant or, if only
a portion of the Warrant is being exercised, the portion of the Warrant being
exercised, at the date of calculation;

 
A =
the Fair Market Value of one share of Common Stock as of the exercise date; and

 
B =
the Exercise Price as in effect on the exercise date.

3.2           Issuance of Common Stock.

(a)            Upon receipt of the documents and payments described in Section
3.1 hereof, the Company shall, within five (5) Business Days, (x) if a
registration statement relating to the shares of Common Stock issuable upon
exercise of this Warrant is effective, and the Company’s transfer agent for its
Common Stock (the “Transfer Agent”) is participating in The Depository Trust
Company (“DTC”) Fast Automated Securities Transfer Program, upon the request of
the Holder, cause to be credited such aggregate number of shares of Common Stock
to which the Holder is entitled pursuant to such exercise to the Holder’s or its
designee’s balance account with DTC through its Deposit Withdrawal Agent
Commission system, or (y) issue and deliver to the address as specified in the
Exercise Form, a certificate, registered in the name of the Holder or its
designee, for the number of shares of Common Stock to which the Holder is
entitled pursuant to such exercise, together with an amount in cash in lieu of
any fraction of a share, as hereinafter provided.  The credit or stock
certificate or certificates so delivered shall be in the denomination specified
in the Exercise Form and shall be registered in the name of the Holder or its
permitted designee (as specified in the Exercise Form).  This Warrant shall be
deemed to have been exercised and a certificate or certificates for shares of
Common Stock shall be deemed to have been issued, and the Holder or its
permitted designee (as specified in the Exercise Form) shall be deemed to have
become a holder of such shares for all purposes as of the close of business on
the date on which the Exercise Form and payments described in Section 3.1
hereof, are received by the Company as aforesaid.  The Holder of the Warrant
shall tender this Warrant to the Company within a reasonable period of time
after exercise pursuant to Section 3.1, but in any event within five (5)
Business Days.  Upon receipt of the tendered Warrant, unless this Warrant has
expired or all of the purchase rights represented hereby have been exercised,
the Company shall deliver to the Holder or its permitted designee (as specified
in the Exercise Form) a new Warrant evidencing the rights of such holder to
purchase the unpurchased shares of Common Stock called for by this Warrant,
which new Warrant shall in all other respects be identical with this
Warrant.  The tender and exchange of this Warrant when partially exercised and
the delivery by the Company of a replacement Warrant pursuant to the preceding
sentence, shall not be required for the Holder to exercise this Warrant to
purchase any unpurchased shares of Common Stock called for by this Warrant.  The
Company shall pay any documentary or issue stamp taxes attributable to the
issuance of this Warrant, a replacement Warrant or the shares of Common Stock
issuable upon exercise of this Warrant.

 

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Annex A-3

(b)           Upon any exercise of this Warrant, the Company may require
customary representations from the Holder that the Holder is an “accredited
investor” as defined in 501(a) under the Securities Act, to assure that the
issuance of the Common Stock hereunder shall not require registration or
qualification under the Securities Act of 1933, as amended (the “Securities
Act”), or any state securities laws.

3.3            Fractional Shares.  No fractional Shares shall be issuable upon
exercise of the Warrant and the number of shares of Common Stock to be issued
upon exercise of the Warrant shall be rounded down to the nearest whole share of
Common Stock.  If a fractional share interest arises upon any exercise of the
Warrant, the Company shall eliminate such fractional share interest by paying
Holder the amount computed by multiplying the fractional interest by the Fair
Market Value of a whole share of Common Stock as of the exercise date over the
Exercise Price for such fractional share.

Section 4.               Mutilated or Missing Warrant.  In case this Warrant
shall be mutilated, lost, stolen, or destroyed, the Company shall issue in
exchange and substitution of and upon cancellation of the mutilated Warrant, or
in lieu of and substitution for the Warrant lost, stolen or destroyed, a new
Warrant of like tenor and for the purchase of a like number of shares of Common
Stock, but only upon receipt of a written statement reasonably satisfactory to
the Company of such loss, theft or destruction of the Warrant, and with respect
to a lost, stolen or destroyed Warrant, indemnity reasonably satisfactory to the
Company with respect thereto.

Section 5.               Reservation of Common Stock.  The Company hereby
represents and warrants that there have been reserved, and the Company shall at
all applicable times keep reserved until issued (if necessary) as contemplated
by this Section 5, out of the authorized and unissued shares of Common Stock,
100% of the number of shares issuable upon exercise of the rights of purchase
represented by this Warrant.  The Company agrees that all shares of Common Stock
issued upon due exercise of the Warrant shall be, at the time of delivery of the
certificates for such shares of Common Stock, duly authorized, validly issued,
fully paid and non-assessable shares of Common Stock of the Company.

Section 6.               Adjustments.  Subject and pursuant to the provisions of
this Section 6, the Exercise Price and number of shares of Common Stock subject
to this Warrant shall be subject to adjustment from time to time as set forth
hereinafter.

 

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Annex A-3

6.1           Dividend, Subdivision or Combination of Common Stock.  If the
Company at any time or from time to time, after the issuance of this Warrant but
prior to the exercise thereof subdivides (by any stock split, stock dividend,
recapitalization or otherwise) its outstanding shares of Common Stock into a
greater number of shares, the Exercise Price in effect immediately prior to such
subdivision shall be proportionately reduced and the aggregate number of shares
of Common Stock for which this Warrant is exercisable (the “Warrant Share
Number”) shall be proportionately increased.  If the Company at any time
combines (by reverse stock split, recapitalization or otherwise) its outstanding
shares of Common Stock into a smaller number of shares, the Exercise Price in
effect immediately prior to such combination shall be proportionately increased
and the Warrant Share Number shall be proportionately decreased.  An adjustment
made pursuant to this Section 6.1 shall become effective retroactively (x) in
the case of any such dividend or distribution, to a date immediately following
the close of business on the record date for the determination of holders of
shares of Common Stock entitled to receive such dividend or distribution or (y)
in the case of any such subdivision, combination or reclassification, to the
close of business on the day upon which such corporate action becomes effective.

6.2           Certain Distributions.  In case the Company shall at any time or
from time to time, after the issuance of this Warrant but prior to the exercise
hereof, distribute to all holders of shares of Common Stock (including any such
distribution made in connection with a merger or consolidation in which the
Company is the resulting or surviving entity and shares of Common Stock are not
changed or exchanged) cash, evidences of indebtedness of the Company or another
issuer, securities of the Company or another issuer or other assets (excluding
dividends or distributions payable in shares of Common Stock for which
adjustment is made under Section 6.1) or rights or warrants to subscribe for or
purchase any of the foregoing, then, and in each such case, (i) the Exercise
Price then in effect shall be adjusted (and any other appropriate actions shall
be taken by the Company) by being multiplied by a fraction (x) the numerator of
which shall be the Fair Market Value of Common Stock immediately prior to the
date of distribution less the then fair market value (in the case of
distributions other than cash, as determined by a majority of the members of the
Board of Directors of the Company) of the portion of the cash, evidences of
indebtedness, securities, other assets or rights so distributed or of such
rights or warrants applicable to one share of Common Stock and (y) the
denominator of which shall be the Fair Market Value of the Common Stock
immediately prior to the date of distribution (but such fraction shall not be
greater than one) and (ii) the Warrant Share Number shall be increased by being
multiplied by a fraction (x) the numerator of which shall be the Fair Market
Value of one share of Common Stock immediately prior to the record date for the
distribution of such cash, evidences of indebtedness, securities, other assets
or rights or warrants and (y) the denominator of which shall be the Fair Market
Value of one share of Common Stock immediately prior to such record date less
the fair market value (in the case of distributions other than cash, as
determined by a majority of the members of the Board of Directors of the
Company) of the portion of such cash, evidences of indebtedness, securities,
other assets or rights or warrants so distributed.  Such adjustment shall be
made whenever any such distribution is made and shall become effective
retroactively to a date immediately following the close of business on the
record date for the determination of stockholders entitled to receive such
distribution.

 

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Annex A-3

6.3           Consolidation, Merger, etc.  If any (i) capital reorganization,
(ii) reclassification, (iii) consolidation, merger, tender offer or other
business combination of the Company with another entity that involves a transfer
of more than fifty percent (50%) of the voting power of the Company, (iv) the
sale of all or substantially all of the Company’s assets to another entity, or
(v) voluntary sale, conveyance, exchange or transfer of the voting Capital Stock
of the Company that involves the sale, conveyance, exchange or transfer of more
than fifty percent (50%) of the voting power of the Company (each, an
“Extraordinary Event”) shall be effected, then, prior to the consummation of
such Extraordinary Event, the Company shall make appropriate provision,
including providing written notice of the Extraordinary Event to the Holder at
least ten (10) Business Days prior to effecting such Extraordinary Event, to
ensure that the Holder shall thereafter have the right to purchase and receive,
upon exercise hereof and the payment of the Exercise Price, in lieu of the
shares of Common Stock of the Company immediately theretofore purchasable and
receivable upon the exercise of this Warrant, such shares of stock, securities
or property (including cash) as may be issued or payable with respect to or in
exchange for a number of shares of Common Stock of the Company immediately
theretofore purchasable and receivable upon the exercise of this Warrant had
such Extraordinary Event not taken place, and in any such case appropriate
provision shall be made with respect to the rights and interests of the Holder
to the end that the provisions hereof (including, without limitation, provisions
for adjustments of the Exercise Price and of the number of shares purchasable
upon the exercise of this Warrant) shall thereafter be applicable, as nearly as
may be, in relation to any shares of stock, securities or property thereafter
deliverable upon the exercise hereof (without duplication with Sections 6.1 and
6.2 hereof).  The Holder agrees to keep all information it receives regarding
the Extraordinary Event confidential until such time as the Company has
disclosed such information publicly. The foregoing provisions shall similarly
apply to successive Extraordinary Events.

6.4           Other Changes.  In case the Company at any time or from time to
time, after the issuance of this Warrant but prior to the exercise hereof, shall
take any action affecting its Common Stock similar to or having an effect
similar to any of the actions described in any of Sections 6.1, 6.2 or 6.3 (but
not including any action described in any such Section) and it would be
equitable in the circumstances to adjust the Exercise Price and Warrant Share
Number as a result of such action, then, and in each such case, the Exercise
Price and Warrant Share Number shall be adjusted in such manner and at such time
as a majority of the Board of Directors and the Holder in good faith determine
would be equitable in the circumstances.

6.5           No Impairment.  The Company shall not, by amendment of its
Certificate of Incorporation or through a reorganization, transfer of assets,
consolidation, merger, dissolution, issue, or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed under this Warrant by the Company, but
shall at all times in good faith assist in carrying out of all the provisions of
this Warrant and in taking all such action as may be necessary or appropriate to
protect Holder’s rights against impairment.

6.6           Certificate as to Adjustments.  Upon each adjustment of the
Exercise Price, and/or number of shares of Common Stock, the Company shall
promptly notify Holder in writing, and, at the Company’s expense, promptly
compute such adjustment, and furnish Holder with a certificate of its Chief
Financial Officer setting forth such adjustment and the facts upon which such
adjustment is based. The Company shall, upon written request, furnish Holder a
certificate setting forth the Exercise Price and number of shares of Common
Stock in effect upon the date thereof and the series of adjustments leading to
such Exercise Price and number of shares of Common Stock.

 

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Annex A-3

Section 7.               Notices.  Unless otherwise provided, any notice
required or permitted under this Warrant shall be given in writing and shall be
deemed effectively given as hereinafter described (i) if given by personal
delivery, then such notice shall be deemed given upon such delivery, (ii) if
given by telex or facsimile, then such notice shall be deemed given upon receipt
of confirmation of complete transmittal, (iii) if given by mail, then such
notice shall be deemed given upon the earlier of (A) receipt of such notice by
the recipient or (B) five days after such notice is deposited in first class
mail, postage prepaid, and (iv) if given by an internationally recognized
overnight air courier, then such notice shall be deemed given one day after
delivery to such carrier.  All notices to Holder shall be addressed to the
Holder’s address set forth on the signature page hereto, or at such other
address as shall have been furnished to the other parties hereto in writing, or
if to the Company at: 1055 West 8th Street, Azusa, California 91702.

Section 8.               Registration Rights.  The initial holder of this
Warrant is entitled to the benefit of certain registration rights with respect
to the shares of Common Stock issuable upon the exercise of this Warrant as
provided in the Registration Rights Agreement dated as of the date hereof, by
and between the Holder and the Company, and any subsequent holder hereof shall
be entitled to such rights to the extent provided in the Registration Rights
Agreement.

Section 9.               Successors.  All the covenants and provisions hereof by
or for the benefit of the Holder shall bind and inure to the benefit of its
respective successors and assigns hereunder.

Section 10.             Governing Law.  This Warrant shall be governed by, and
construed in accordance with, the internal laws of the State of New York,
without regard to the provisions thereof relating to conflict of laws.

Section 11.             No Rights as Shareholder.  Prior to the exercise of this
Warrant, the Holder shall not have or exercise any voting rights or other rights
as a shareholder of the Company by virtue of its ownership of this Warrant.

Section 12.             Amendments.  This Warrant shall not be amended without
the prior written consent of the Company and the Holder; provided, that with the
written consent of the Holder (which consent shall not be unreasonably withheld)
the Company may amend this Warrant in a manner not adverse to the Holder to
effect any adjustments required to comply with the Company’s obligations
hereunder as described in Section 6.3.

Section 13.             Section Headings.  The section headings in this Warrant
are for the convenience of the Company and the Holder and in no way alter,
modify, amend, limit or restrict the provisions hereof.

[remainder of this page intentionally left blank]

 

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Annex A-3

IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed, as
of the ___ day of [_______, [20___].

 
PHYSICIANS FORMULA HOLDINGS, INC.
                   
By:
     
Name:
     
Title:
   

HOLDER

MILL ROAD CAPITAL, L.P.

By: Mill Road Capital GP LLC,
       its General Partner

By: __________________________
Name:
Title:
Address:
Two Sound View Drive, Suite 300

Greenwich, Connecticut 06830
 
[Signature Page to Warrant]

 

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Annex A-3

APPENDIX A
PHYSICIANS FORMULA HOLDINGS, INC.
WARRANT EXERCISE FORM

To: PHYSICIANS FORMULA HOLDINGS, INC.

The undersigned hereby irrevocably elects to exercise the right of purchase
represented by the within Warrant (“Warrant”) for, and to purchase thereunder by
the payment of the Exercise Price and surrender of the Warrant, _______________
shares of Common Stock (“Warrant Shares”) provided for therein, and requests
that certificates for the Warrant Shares be issued as follows:

       
Name
         
Address
               
Federal Tax ID or Social Security No.
 

and delivered by

 
q
certified mail to the above address, or

 
q
electronically (provide DWAC Instructions:___________________),

or
 
q
other (specify: __________________________________________).

and, if the number of Warrant Shares shall not be all the Warrant Shares
purchasable upon exercise of the Warrant, that a new Warrant for the balance of
the Warrant Shares purchasable upon exercise of this Warrant be registered in
the name of the undersigned Holder or the undersigned’s Assignee as below
indicated and delivered to the address stated below.

Dated: ___________________, ____
 

  Signature: 
 
         
Name (please print)
               
Address:
               
Assignee:
                   

 
A-1

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APPENDIX B
PHYSICIANS FORMULA HOLDINGS, INC.
NET ISSUE ELECTION NOTICE

To: PHYSICIANS FORMULA HOLDINGS, INC.

Date:_________________________

The undersigned hereby elects under Section 3.1 of the Warrant to surrender the
right to purchase ____________ shares of Common Stock pursuant to this Warrant
and hereby requests the issuance of _____________ shares of Common Stock.  The
certificate(s) for the shares issuable upon such net issue election shall be
issued in the name of the undersigned or as otherwise indicated below.

       
Signature
               
Name for Registration
               
Mailing Address
 

 
B-1

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Annex A-4

PHYSICIANS FORMULA HOLDINGS, INC.

REGISTRATION RIGHTS AGREEMENT

This Registration Rights Agreement (the “Agreement”) is made and entered into as
of this ___ day of _________, 20__ by and among (i) PHYSICIANS FORMULA HOLDINGS,
INC., a Delaware corporation (the “Company”), (ii) MILL ROAD CAPITAL, L.P., a
Delaware limited partnership (“MRC”), and (iii) each person or entity that
subsequently becomes a party to this Agreement pursuant to, and in accordance
with, the provisions of Section 7(c) hereof.

WHEREAS, the Company has agreed to issue and sell to MRC, and MRC has agreed to
purchase from the Company, a warrant to purchase up to [______] shares (the
“Warrant”) of the Company’s common stock, $0.01 par value per share ( “Common
Stock”), upon the terms and conditions set forth in that certain Senior
Subordinated Note Purchase and Security Agreement, dated November 6, 2009 and as
amended on the date hereof, by and among the Company, Physicians Formula, Inc.
(a wholly-owned subsidiary of the Company), the Guarantors party thereto and MRC
(the “Purchase Agreement”); and

WHEREAS, the terms of the Purchase Agreement provide for the execution and
delivery of this Agreement by the Company and MRC, if certain conditions,
including approval by the Company’s stockholders of issuance of the Warrants,
are met.

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

1) 
Certain Definitions.  Capitalized terms used herein have the respective meanings
ascribed thereto in the Purchase Agreement unless otherwise defined herein.  As
used in this Agreement, the following terms shall have the following meanings:

 
a)
“Allowed Delay” shall have the meaning ascribed thereto in Section 2(c).

 
b)
“Availability Date” shall have the meaning ascribed thereto in Section 3(i).

 
c)
“Blue Sky Application” shall have the meaning ascribed thereto in Section 6(a).

 
d)
“Cut Back Shares” shall have the meaning ascribed thereto in Section 2(d).

 
e)
“Effectiveness Period” shall have the meaning ascribed thereto in Section 3(a).

 
f)
“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder.

 
g)
“Filing Deadline” shall have the meaning ascribed thereto in Section 2(a).

 
h)
“Investors” means, unless the context otherwise indicates, MRC and any affiliate
or permitted transferee of MRC who is a subsequent holder of the Registrable
Securities and who agrees to become bound by the provisions of this Agreement in
accordance with Section 7(c).

 

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FH draft dated November 5, 2009

 
i)
“Liquidated Damages Amount” of each Investor shall equal (i) during the first
180-day period following the particular Liquidated Damages Measurement Date,
$40,000 per 30-day period multiplied by the number of Registrable Securities
held by such Investor on the applicable Liquidated Damages Measurement Date,
divided by the total initial number of shares of Registrable Securities
outstanding on the Warrant Closing Date (appropriately adjusted, if applicable,
for stock splits, stock dividends, combinations or similar recapitalizations);
and (ii) during the second 180-day period following the particular Liquidated
Damages Measurement Date, $80,000 per 30-day period multiplied by the number of
Registrable Securities held by such Investor on the applicable Liquidated
Damages Measurement Date, divided by the total initial number of shares of
Registrable Securities outstanding on the Warrant Closing Date (appropriately
adjusted, if applicable, for stock splits, stock dividends, combinations or
similar recapitalizations).

 
j)
“Liquidated Damages Measurement Date” shall have the meaning ascribed thereto in
Section 2(c).

 
k)
“Piggyback Registration” shall have the meaning ascribed thereto in Section
2(e).

 
l)
“Prospectus” means the prospectus included in any Registration Statement, as
amended or supplemented by any prospectus supplement, with respect to the terms
of the offering of any portion of the Registrable Securities covered by such
Registration Statement and by all other amendments and supplements to the
prospectus, including post-effective amendments and all material incorporated by
reference in such prospectus.

 
m)
“Register,” “registered” and “registration” refer to a registration made by
preparing and filing a Registration Statement or similar document in compliance
with the Securities Act (as defined below), and the declaration or ordering of
effectiveness of such Registration Statement or document.

 
n)
“Registrable Securities” means shares of Common Stock issued or issuable (i)
upon exercise of the Warrant (as defined in the Purchase Agreement) and (ii) any
other securities issued or issuable with respect to or in exchange for
Registrable Securities; provided, that, a security shall cease to be a
Registrable Security when (a) such securities have been sold pursuant to a
Registration Statement or Rule 144 under the Securities Act; (b) such securities
have otherwise by transferred by the Investor and new certificates for such
securities not bearing a legend restricting further transfer shall have been
delivered by the Company or its transfer agent and subsequent disposition of
such securities shall not require registration under the Securities Act; or (c)
such securities have been issued upon exercise of the Warrant and shall have
ceased to be outstanding.

 
o)
“Registration Statement” means the Resale Registration Statement and any
registration statement of the Company filed under the Securities Act that covers
the resale of any of the Registrable Securities in a Piggyback Registration
pursuant to this Agreement, amendments and supplements to such Registration
Statement, including post-effective amendments, all exhibits and all material
incorporated by reference in such Registration Statement.

 

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FH draft dated November 5, 2009

 
p)
“Required Investors” means the Investors holding a majority of the Registrable
Securities.

 
q)
“SEC” means the U.S. Securities and Exchange Commission.

 
r)
“SEC Restrictions” shall have the meaning ascribed thereto in Section 2(d).

 
s)
“Securities Act” means the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.

 
t)
“Warrant Closing Date” means the date of this Agreement.

2) 
Registration.

 
a)
Resale Registration Statements.  The Company agrees to file with the SEC, as
promptly as practicable following the Warrant Closing Date, but no later than 30
days after the Warrant Closing Date (the “Filing Deadline”) (i) one or more
registration statements on Form S-3 (or, if the Company shall not then be
eligible to use Form S-3, on such other form as the Company shall then be
eligible to use) pursuant to Rule 415 under the Securities Act covering the
resale by the Investors of the Registrable Securities (the “Resale Registration
Statement”) or (ii) one or more prospectus supplements or other materials under
Rule 430B promulgated under the Securities Act to include in a prospectus that
is part of an effective registration statement such information as shall be
necessary to identify the Investors as selling security holders and to permit
the resale by the Investors of the Registrable Securities; provided, however,
that in the event the Company is not S-3 eligible prior to the Filing Deadline,
the Filing Deadline shall be extended to the earlier of (i) 30 days after the
Company is S-3 eligible, and (ii) April 30, 2010.  If a Resale Registration
Statement covering all of the Registrable Securities is not filed with the SEC
on or prior to Filing Deadline, as extended pursuant to the terms of this
paragraph, then the Company will make payments to each Investor, as liquidated
damages and not as a penalty, in an amount equal to such Investor’s Liquidated
Damages Amount for each 30-day period (or pro rata for any portion thereof)
following the Filing Date until the earlier of (i) the date on which the Company
files a Resale Registration Statement covering all of the Registrable Securities
with the SEC, and (ii) the date on which Liquidated Damages begin to accrue
under Section 2(c).  Subject to any SEC comments, each Resale Registration
Statement filed pursuant to this Section 2(a) shall include the plan of
distribution attached hereto as Exhibit A; provided, however, that no Investor
shall be named as an “underwriter” in a Resale Registration Statement without
the Investor’s prior written consent.  Each Resale Registration Statement shall
cover, to the extent allowable under the Securities Act and the rules
promulgated thereunder (including Rule 416), such indeterminate number of
additional shares of Common Stock resulting from stock splits, stock dividends
or similar transactions with respect to the Registrable Securities.  Any Resale
Registration Statement which covers the resale of Registrable Securities shall
not cover transactions in shares of Common Stock or other securities for the
account of any holder other than the Investors without the prior written consent
of the Required Investors.  Each Resale Registration Statement (and each
amendment or supplement thereto, and each request for acceleration of
effectiveness thereof) shall be provided in accordance with Section 3(c) to the
Investors and their counsel prior to its filing or other submission.

 

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FH draft dated November 5, 2009

 
b)
Expenses.  The Company will pay all expenses associated with each registration,
including filing and printing fees, the Company’s counsel and accounting fees
and expenses, costs associated with clearing the Registrable Securities for sale
under applicable state securities laws, listing fees, fees and expenses of one
counsel to the Investors (not to exceed $30,000 in the aggregate) and the
Investors’ reasonable expenses in connection with the registration, but
excluding discounts, commissions, fees of underwriters, selling brokers, dealer
managers or similar securities industry professionals with respect to the
Registrable Securities being sold.

 
c)
Effectiveness.

 
i)
The Company shall use reasonable efforts to have a Resale Registration Statement
declared effective as soon as practicable, but, in any event, no later than 120
days after the Warrant Closing Date.  The Company shall notify the Investors by
facsimile or e-mail as promptly as practicable, and in any event, within
twenty-four (24) hours, after any Resale Registration Statement is declared
effective and shall simultaneously provide the Investors with copies of any
related Prospectus to be used in connection with the sale or other disposition
of the securities covered thereby.  If (A) a Resale Registration Statement
covering all of the Registrable Securities is not declared effective by the SEC
prior to the earliest of (i) five (5) Business Days after the SEC shall have
informed the Company that no review of the Resale Registration Statement will be
made or that the SEC has no further comments on the Resale Registration
Statement or (ii) the 120 days after the Warrant Closing Date (or, if pursuant
to Section 2(a) such Resale Registration Statement was timely filed later than
the 60th day after the Warrant Closing Date because the Company was not S-3
eligible prior to the Filing Deadline, the 60th day after the date that such
Registration Statement was filed) or (B) after a Resale Registration Statement
has been declared effective by the SEC, sales cannot be made pursuant to such
Resale Registration Statement for any reason (including without limitation by
reason of a stop order, or the Company’s failure to update the Resale
Registration Statement), but excluding any Allowed Delay (as defined below),
then the Company will make payments to each Investor, as liquidated damages and
not as a penalty, in an amount equal to such Investor’s Liquidated Damages
Amount for each 30-day period (or pro rata for any portion thereof) following
the date by which such Resale Registration Statement should have been effective
until the earlier of the date on which the Resale Registration Statement is
declared effective and end of the Effectiveness Period.  The amounts payable as
liquidated damages, pursuant to this paragraph or Section 2(a), shall be paid in
arrears within three (3) Business Days of the last day of each 30-day period
following the date of commencement of the accrual of Liquidated Damages (each a
“Liquidated Damages Measurement Date”) and continuing until such time as
Liquidated Damages cease to accrue, as determined pursuant to this paragraph or
Section 2(a), as the case may be.  Such payments shall be made to each Investor
in cash.

 

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FH draft dated November 5, 2009

 
ii)
For not more than thirty (30) consecutive days, and for not more than an
aggregate of sixty (60) days in any twelve (12) month period, the Company may
suspend the use of any Prospectus included in any Resale Registration Statement
contemplated by this Section in the event that the Company determines in good
faith that such suspension is necessary (A) to delay the disclosure of material
non-public information concerning the Company, the disclosure of which at the
time would be, in the good faith opinion of the Company, materially detrimental
to the Company or (B) to amend or supplement the affected Resale Registration
Statement or the related Prospectus so that such Resale Registration Statement
or Prospectus shall not include an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in the case of the Prospectus in light of the circumstances
under which they were made, not misleading (an “Allowed Delay”); provided, that
the Company shall promptly (a) notify each Investor in writing of the
commencement of and the reasons for an Allowed Delay, but shall not (without the
prior written consent of an Investor) disclose to such Investor any material
non-public information giving rise to an Allowed Delay, (b) advise the Investors
in writing to cease all sales under the Resale Registration Statement until the
end of the Allowed Delay and (c) use reasonable efforts to terminate an Allowed
Delay as promptly as practicable.

 
d)
Rule 415; Cutback  If at any time the SEC takes the position that the offering
of some or all of the Registrable Securities in a Resale Registration Statement
is not eligible to be made on a delayed or continuous basis under the provisions
of Rule 415 under the Securities Act or requires any Investor to be named as an
“underwriter”, the Company shall use its reasonable efforts to persuade the SEC
that the offering contemplated by the Resale Registration Statement is a valid
secondary offering and not an offering “by or on behalf of the issuer” as
defined in Rule 415 and that none of the Investors is an “underwriter”.  The
Investors shall have the right to participate or to have their counsel
participate in any meetings or discussions with the SEC regarding the SEC’s
position and to comment or have their counsel comment on any written submission
made to the SEC with respect thereto.  No such written submission shall be made
to the SEC to which the Investors’ counsel reasonably objects.  In the event
that, despite the Company’s reasonable efforts and compliance with the terms of
this Section 2(d), the SEC refuses to alter its position, the Company shall (i)
remove from the Resale Registration Statement such portion of the Registrable
Securities (the “Cut Back Shares”) and/or (ii) agree to such restrictions and
limitations on the registration and resale of the Registrable Securities as the
SEC may require to assure the Company’s compliance with the requirements of Rule
415 (collectively, the “SEC Restrictions”); provided, however, that the Company
shall not agree to name any Investor as an “underwriter” in such Resale
Registration Statement without the prior written consent of such Investor;
provided, further, that the Company shall not be obligated to register the
Registrable Securities of any Investor that does not provide such consent if the
SEC requires such Investor to be named as an “underwriter” and after the
Company’s best efforts to comply with the terms of Section 2(d) (including (i)
and (ii) above) hereof the SEC refuses to alter its position, and the Investor’s
refusal to consent prevents the Company from having the Resale Registration
Statement declared effective by the applicable deadline, and, in such event, the
Liquidated Damages Amount shall not accrue with respect to Registrable
Securities held by an Investor that does not consent to be so named.  Any
cut-back imposed on the Investors pursuant to this Section 2(d) shall be
allocated among the Investors on a pro rata basis, unless the SEC Restrictions
otherwise require or provide.  No liquidated damages shall accrue as to any Cut
Back Shares until such date as the Company is able to effect the registration of
such Cut Back Shares in accordance with any SEC Restrictions (such date, the
“Restriction Termination Date” of such Cut Back Shares).  For the avoidance of
doubt, all of the provisions of this Section 2 (including the liquidated damages
provisions) shall be applicable to such Cut Back Shares; provided, however, that
(i) the Filing Deadline for the Resale Registration Statement including such Cut
Back Shares shall be ten (10) Business Days after the Restriction Termination
Date, and (ii) the date by which the Company is required to obtain effectiveness
with respect to such Cut Back Shares under Section 2(c) shall be tolled for a
period equal to the number of days elapsed from the date the Resale Registration
Statement initially including such Cut Back Shares was first filed with the SEC
and the Restriction Termination Date applicable to such Cut Back Shares.

 

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FH draft dated November 5, 2009

 
e)
Right to Piggyback Registration.

 
i)
If at any time following the date of this Agreement any Registrable Securities
remain outstanding and the Company proposes for any reason to register any
shares of Common Stock under the Securities Act (other than pursuant to a
registration statement on Form S-4 or Form S-8 (or a similar or successor form))
with respect to an offering of Common Stock by the Company for its own account
or for the account of any of its shareholders, it shall at each such time
promptly give written notice to the holders of the Registrable Securities of its
intention to do so (but in any event within one (1) Business Day after the
initial filing date) and, to the extent permitted under the provisions of Rule
415 under the Securities Act, include in such registration all Registrable
Securities with respect to which the Company has received written requests for
inclusion therein within ten (10) Business Days after receipt of the Company’s
notice (a “Piggyback Registration”).  Such notice shall offer the holders of the
Registrable Securities the opportunity to register such number of shares of
Registrable Securities as each such holder may request and shall indicate the
intended method of distribution of such Registrable Securities.

 
ii)
Notwithstanding the foregoing, (A) if such registration involves an underwritten
public offering, the Investors must sell their Registrable Securities to, if
applicable, the underwriter(s) at the same price and subject to the same
underwriting discounts and commissions that apply to the other securities sold
in such offering (it being acknowledged that the Company shall be responsible
for other expenses as set forth in Section 2(b)) and subject to the Investors
entering into customary underwriting documentation for selling shareholders in
an underwritten public offering, and (B) if, at any time after giving written
notice of its intention to register any Registrable Securities pursuant to
Section 2(e)(i) and prior to the effective date of the registration statement
filed in connection with such Piggyback Registration, the Company shall
determine for any reason not to cause such registration statement to become
effective under the Securities Act, the Company shall deliver written notice to
the Investors and, thereupon, shall be relieved of its obligation to register
any Registrable Securities in connection with such registration; provided,
however, that nothing contained in this Section 2(e)(ii) shall limit the
Company’s liabilities and/or obligations under this Agreement, including,
without limitation, the obligation to pay liquidated damages under this Section
2.  If such registration involves an underwritten public offering and the
underwriters determine that less than all of the Registrable Securities
requested to be registered can be included in such offering, then the
Registrable Securities that are included in such offering shall be allocated
among the Investors in proportion (as nearly as practicable) to the number of
Registrable Securities owned by each Investor or in such other proportions as
shall mutually be agreed to by all such selling Investors.  Notwithstanding the
foregoing, in no event shall (i) the number of Registrable Securities included
in the offering be reduced unless all other securities (other than securities to
be sold by the Company) are first entirely excluded from the offering, or (ii)
the number of Registrable Securities included in the offering be reduced below
twenty percent (20%) of the total number of securities included in such
offering.

 

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FH draft dated November 5, 2009

 
iii)
Each Investor participating in a Piggyback Registration relating to an
underwritten public offering agrees, if and to the extent requested by the
managing underwriter of such underwritten public offering, to enter into a
customary lock-up agreement with the underwriters, on terms no less favorable
than the lock-up terms of other participants in the offering.

3)
Company Obligations.  The Company will use reasonable efforts to effect the
registration of the Registrable Securities in accordance with the terms hereof,
and pursuant thereto the Company will, as expeditiously as possible:

 
a)
use reasonable efforts to cause such Resale Registration Statement to become
effective and to remain continuously effective for a period that will terminate
on the earlier of: (1) the date on which all Registrable Securities covered by
such Registration Statement as amended from time to time have been sold, (2) the
date on which no Registrable Securities are held by any Investor and (3) the
date that is six months after the expiration of the Warrant (the “Effectiveness
Period”) and advise the Investors in writing when the Effectiveness Period has
expired;

 
b)
prepare and file with the SEC such amendments and post-effective amendments to
the Resale Registration Statement and the Prospectus as may be necessary to keep
the Resale Registration Statement effective for the Effectiveness Period and to
comply with the provisions of the Securities Act and the Exchange Act with
respect to the distribution of all of the Registrable Securities covered
thereby;

 

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FH draft dated November 5, 2009

 
c)
provide copies to and permit counsel designated by the Investors a reasonable
opportunity to review each Registration Statement and all amendments and
supplements thereto prior to their filing with the SEC and not file any document
to which such counsel reasonably objects;

 
d)
furnish to the Investors and their legal counsel (i) promptly after the same is
prepared and publicly distributed, filed with the SEC, or received by the
Company (but not later than two (2) Business Days after the filing date, receipt
date or sending date, as the case may be) one (1) copy of any Registration
Statement and any amendment thereto, each preliminary prospectus and Prospectus
and each amendment or supplement thereto, and each letter written by or on
behalf of the Company to the SEC or the staff of the SEC, and each item of
correspondence from the SEC or the staff of the SEC, in each case relating to
such Registration Statement (other than any portion of any thereof which
contains information for which the Company has sought confidential treatment),
and (ii) such number of copies of a Prospectus, including a preliminary
prospectus, and all amendments and supplements thereto and such other documents
as each Investor may reasonably request in order to facilitate the disposition
of the Registrable Securities owned by such Investor that are covered by the
related Registration Statement;

 
e)
use reasonable efforts to (i) prevent the issuance of any stop order or other
suspension of effectiveness and, (ii) if such order is issued, obtain the
withdrawal of any such order at the earliest possible moment;

 
f)
prior to any public offering of Registrable Securities, use reasonable efforts
to register or qualify or cooperate with the Investors and their counsel in
connection with the registration or qualification of such Registrable Securities
for offer and sale under the securities or blue sky laws of such jurisdictions
requested by the Investors and do any and all other commercially reasonable acts
or things necessary or advisable to enable the distribution in such
jurisdictions of the Registrable Securities covered by the Registration
Statement; provided, however, that the Company shall not be required in
connection therewith or as a condition thereto to (i) qualify to do business in
any jurisdiction where it would not otherwise be required to qualify but for
this Section 3(f), (ii) subject itself to general taxation in any jurisdiction
where it would not otherwise be so subject but for this Section 3(f), or (iii)
file a general consent to service of process in any such jurisdiction;

 
g)
use reasonable efforts to cause all Registrable Securities covered by a
Registration Statement to be listed on each securities exchange, interdealer
quotation system or other market on which similar securities issued by the
Company are then listed;

 
h)
immediately notify the Investors, at any time prior to the end of the
Effectiveness Period, upon discovery that, or upon the happening of any event as
a result of which, the Prospectus includes an untrue statement of a material
fact or omits to state any material fact required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances then existing, and promptly prepare, file with the SEC and furnish
to such holder a supplement to or an amendment of such Prospectus as may be
necessary so that such Prospectus shall not include an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances then existing; and

 

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FH draft dated November 5, 2009

 
i)
otherwise use reasonable efforts to comply with all applicable rules and
regulations of the SEC under the Securities Act and the Exchange Act, including,
without limitation, Rule 172 under the Securities Act, file any final
Prospectus, including any supplement or amendment thereof, with the SEC pursuant
to Rule 424 under the Securities Act, promptly inform the Investors in writing
if, at any time during the Effectiveness Period, the Company does not satisfy
the conditions specified in Rule 172 and, as a result thereof, the Investors are
required to deliver a Prospectus in connection with any disposition of
Registrable Securities and take such other actions as may be reasonably
necessary to facilitate the registration of the Registrable Securities
hereunder; and make available to its security holders, at their request, as soon
as reasonably practicable, but not later than the Availability Date (as defined
below), an earnings statement covering a period of at least twelve (12) months,
beginning after the effective date of each Registration Statement, which
earnings statement shall satisfy the provisions of Section 11(a) of the
Securities Act, including Rule 158 promulgated thereunder (for the purpose of
this Section 3(i), “Availability Date” means the 45th day following the end of
the fourth fiscal quarter after the quarter that includes the effective date of
such Registration Statement, except that, if such fourth fiscal quarter is the
last quarter of the Company’s fiscal year, “Availability Date” means the 90th
day after the end of such fourth fiscal quarter).

 
j)
With a view to making available to the Investors the benefits of Rule 144 (or
its successor rule) and any other rule or regulation of the SEC that may at any
time permit the Investors to sell shares of Common Stock to the public without
registration, the Company covenants and agrees to:  (i) make and keep public
information available, as those terms are understood and defined in Rule 144,
until such date as all of the Registrable Securities shall have been resold;
(ii) file with the SEC in a timely manner all reports and other documents
required of the Company under the Exchange Act; and (iii) furnish to each
Investor upon request, as long as such Investor owns any Registrable Securities,
(A) a written statement by the Company that it has complied with the reporting
requirements of the Exchange Act, (B) a copy of the Company’s most recent Annual
Report on Form 10-K or Quarterly Report on Form 10-Q, and (C) such other
information as may be reasonably requested in order to avail such Investor of
any rule or regulation of the SEC that permits the selling of any such
Registrable Securities without registration.

4)
Due Diligence Review; Information.  The Company shall make available, during
normal business hours, for inspection and review by the Investors, advisors to
and representatives of the Investors (who may or may not be affiliated with the
Investors and who are reasonably acceptable to the Company), all financial and
other records, all filings with the SEC and all other corporate documents and
properties of the Company as may be reasonably necessary for the purpose of such
review, and cause the Company’s officers, directors and employees, within a
reasonable time period, to supply all such information reasonably requested by
the Investors or any such representative, advisor or underwriter in connection
with such Registration Statement (including, without limitation, in response to
all questions and other inquiries reasonably made or submitted by any of them),
prior to and from time to time after the filing and effectiveness of the
Registration Statement for the sole purpose of enabling the Investors and such
representatives, advisors and underwriters and their respective accountants and
attorneys to conduct initial and ongoing due diligence with respect to the
Company and the accuracy of such Registration Statement.  The Company shall not
disclose material nonpublic information to the Investors, or to advisors to or
representatives of the Investors, unless prior to disclosure of such information
the Company identifies such information as being material nonpublic information
and provides the Investors, such advisors and representatives with the
opportunity to accept or refuse to accept such material nonpublic information
for review and any Investor wishing to obtain such information enters into an
appropriate confidentiality agreement with the Company with respect thereto.

 

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FH draft dated November 5, 2009

5)
Obligations of the Investors.

 
a)
Each Investor shall furnish in writing to the Company such information regarding
itself, the Registrable Securities held by it and the intended method of
disposition of the Registrable Securities held by it, as shall be reasonably
required to effect the registration of such Registrable Securities and shall
execute such documents in connection with such registration as the Company may
reasonably request.  At least five (5) Business Days prior to the first
anticipated filing date of any Registration Statement, the Company shall notify
each Investor of the information the Company requires from such Investor in
connection with the filing of the Registration Statement.  The Company shall be
obligated to include as a selling stockholder in such Registration Statement
each Investor that provides such information to the Company at least two (2)
Business Days prior to the first anticipated filing date of such Registration
Statement and the Company shall not be obligated to register the Registrable
Securities of any Investor that does not provide such information by such date.

 
b)
Each Investor, by its acceptance of the Registrable Securities agrees to
cooperate with the Company as reasonably requested by the Company in connection
with the preparation and filing of a Registration Statement hereunder, unless
such Investor has notified the Company in writing of its election to exclude all
of its Registrable Securities from such Registration Statement.

 
c)
Each Investor agrees that, upon receipt of any notice from the Company of either
(i) the commencement of an Allowed Delay pursuant to Section 2(c)(ii) or (ii)
the happening of an event pursuant to Section 3(h) hereof, such Investor will
immediately discontinue disposition of Registrable Securities pursuant to the
Registration Statement covering such Registrable Securities, until the Investor
is advised by the Company that such dispositions may again be made.

6)
Indemnification.

 

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FH draft dated November 5, 2009

 
a)
Indemnification by the Company.  The Company will indemnify and hold harmless
each Investor and its officers, directors, members, employees and agents, the
successors and assigns of any of the foregoing, and each other person, if any,
who controls such Investor within the meaning of the Securities Act, against any
losses, claims, damages, liabilities or expenses (including reasonable
attorney’s fees), joint or several, to which they may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities or expenses (or actions in respect thereof) arise out of or are
based upon: (i) any untrue statement or alleged untrue statement of any material
fact contained in any Registration Statement, any preliminary Prospectus or
final Prospectus, or any amendment or supplement thereof, or the omission or
alleged omission to state a material fact required to be stated or necessary to
make the statements therein not misleading; or (ii) any violation by the Company
or its agents of any rule or regulation promulgated under the Securities Act
applicable to the Company or its agents and relating to action or inaction
required of the Company in connection with such registration, and will reimburse
such Investor, and each such officer, director, member, employee and agent, all
successors and assigns of any of the foregoing, and each such controlling person
for any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the Company will not be liable in any such case if and
to the extent that any such loss, claim, damage, liability or expense arises out
of or is based upon an untrue statement or alleged untrue statement or omission
or alleged omission so made in conformity with information furnished by such
Investor or any such controlling person in writing specifically for use in such
Registration Statement or Prospectus.

 
b)
Indemnification by the Investors.  Each Investor agrees, severally but not
jointly, to indemnify and hold harmless, the Company, its directors, officers,
employees and stockholders and each person who controls the Company (within the
meaning of the Securities Act) against any losses, claims, damages, liabilities
and expense (including reasonable attorneys’ fees) resulting from: (i) any
untrue statement or alleged untrue statement of any material fact in the
Registration Statement or Prospectus or preliminary Prospectus or amendment or
supplement thereto, or the omission or alleged omission to state a fact required
to be stated or necessary to make the statements therein not misleading, to the
extent, but only to the extent, that any such untrue statement or omission is
contained in any information furnished in writing by such Investor to the
Company specifically for inclusion in such Registration Statement or Prospectus
or amendment or supplement thereto; and (ii) any violation by the Investor or
its agents of any rule or regulation promulgated under the Securities Act
applicable to the Investor or its agents and relating to action or inaction
required of the Investor in connection with such registration.  In no event
shall the liability of an Investor be greater in amount than the dollar amount
of the proceeds (net of all expense paid by such Investor in connection with any
claim relating to this Section 6, and the amount of any damages such Investor
has otherwise been required to pay by reason of such untrue statement or
omission and any underwriting discounts and commissions) received by such
Investor upon the sale of the Registrable Securities included in the
Registration Statement giving rise to such indemnification obligation.

 

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FH draft dated November 5, 2009

 
c)
Conduct of Indemnification Proceedings.  Any person entitled to indemnification
hereunder shall (i) give prompt notice to the indemnifying party of any claim
with respect to which it seeks indemnification and (ii) permit such indemnifying
party to assume the defense of such claim with counsel reasonably satisfactory
to the indemnified party; provided that any person entitled to indemnification
hereunder shall have the right to employ separate counsel and to participate in
the defense of such claim, but the fees and expenses of such counsel shall be at
the expense of such person unless (a) the indemnifying party has agreed to pay
such fees or expenses, or (b) the indemnifying party shall have failed to assume
the defense of such claim and employ counsel reasonably satisfactory to such
person or (c) in the reasonable judgment of any such person, based upon advice
of its counsel, a conflict of interest exists between such person and the
indemnifying party with respect to such claims (in which case, if the person
notifies the indemnifying party in writing that such person elects to employ
separate counsel at the expense of the indemnifying party, the indemnifying
party shall not have the right to assume the defense of such claim on behalf of
such person); and provided, further, that the failure of any indemnified party
to give notice as provided herein shall not relieve the indemnifying party of
its obligations hereunder, except to the extent that such failure to give notice
shall materially adversely affect the indemnifying party in the defense of any
such claim or litigation.  It is understood that the indemnifying party shall
not, in connection with any single proceeding in the same jurisdiction, be
liable for fees or expenses of more than one separate firm of attorneys at any
time for all indemnified parties.  No indemnifying party will, except with the
consent of the indemnified party, consent to entry of any judgment or enter into
any settlement that does not include as an unconditional term thereof the giving
by the claimant or plaintiff to such indemnified party of a release from all
liability in respect of such claim or litigation.

 
d)
Contribution.  If for any reason the indemnification provided for in the
preceding paragraphs (a) and (b) is unavailable to an indemnified party or
insufficient to hold it harmless, other than as expressly specified therein,
then the indemnifying party shall contribute to the amount paid or payable by
the indemnified party as a result of such loss, claim, damage, liability or
expense in such proportion as is appropriate to reflect the relative fault of
the indemnified party and the indemnifying party, as well as any other relevant
equitable considerations.  No person guilty of fraudulent misrepresentation
within the meaning of Section 11(f) of the Securities Act shall be entitled to
contribution from any person not guilty of such fraudulent
misrepresentation.  In no event shall the contribution obligation of a holder of
Registrable Securities be greater in amount than the dollar amount of the
proceeds (net of all expenses paid by such holder in connection with any claim
relating to this Section 6, the amount of any damages such holder has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission and any underwriter discounts and commissions)
received by it upon the sale of the Registrable Securities giving rise to such
contribution obligation.

7)
Miscellaneous.

 

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FH draft dated November 5, 2009

 
a)
Amendments and Waivers.  This Agreement may be amended only by a writing signed
by the Company and the Required Investors.  The Company may take any action
herein prohibited, or omit to perform any act herein required to be performed by
it, only if the Company shall have obtained the written consent to such
amendment, action or omission to act, of the Required Investors.

 
b)
Notices.  All notices and other communications provided for or permitted
hereunder shall be made in writing by hand delivery, first-class mail, facsimile
transmission or air courier which guarantees overnight delivery:

If to the Company:

Physicians Formula Holdings, Inc.
1055 West 8th Street
Azusa, CA 91702
Attention:  Jeff Berry, Chief Financial Officer
Telephone: 626-334-3395
Fax: 626-812-9462

With a copy (delivery of which alone shall not constitute notice) to:

Kirkland & Ellis LLP
300 N. LaSalle Street, Suite 3200
Chicago, IL 60654
Attention: James S. Rowe, Esq.
                   Elisabeth M. Martin
Telephone: 312-862-2000
Fax: 312-862-2200

If to the initial Investor:

Mill Road Capital, L.P.
Two Sound View Drive
Greenwich, CT 06830
Attention: Thomas Lynch, Managing Director
Telephone: 203-987-3501
Fax: 203-621-3280

With a copy (delivery of which alone shall not constitute notice) to:

Foley Hoag LLP
155 Seaport Boulevard
Boston, MA  02210
Attention:  Peter M. Rosenblum, Esq.
Telephone: 617-832-1000
Fax: 617-832-7000

 

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FH draft dated November 5, 2009

If to any other Investor, at such Investor’s address as it appears in the
records of the Company (unless otherwise indicated by any such Investor).

All such notices and communications shall be deemed to have been duly given: at
the time delivered by hand, if personally delivered; three (3) Business Days
after being deposited in the mail, postage prepaid, if mailed; when receipt is
acknowledged by the recipient’s facsimile machine operator, if sent by facsimile
transmission and; on the day delivered, if sent by overnight air courier
guaranteeing next day delivery.

 
c)
Assignments and Transfers by Investors.  The provisions of this Agreement shall
be binding upon and inure to the benefit of the Investors and their respective
successors and assigns.  An Investor may transfer or assign, in whole or from
time to time in part, to one or more persons its rights hereunder in connection
with the transfer of Registrable Securities by such Investor to such person,
provided that (i) such Investor complies with all laws applicable thereto and
provides written notice of assignment to the Company promptly after such
assignment is effected, which written notice shall state the name and address of
such transferee or assignee and the number of Registrable Securities with
respect to which such registration rights are being transferred or assigned, and
(ii) the transferee or assignee agrees in writing with the Company to be bound
by all of the provisions contained herein.

 
d)
Assignments and Transfers by the Company.  This Agreement may not be assigned by
the Company (whether by operation of law or otherwise) without the prior written
consent of the Required Investors, provided, however, that the Company may
assign its rights and delegate its duties hereunder to any surviving or
successor corporation in connection with a merger or consolidation of the
Company with another corporation, or a sale, transfer or other disposition of
all or substantially all of the Company’s assets to another corporation, without
the prior written consent of the Required Investors, after notice duly given by
the Company to each Investor.

 
e)
Benefits of the Agreement.  The terms and conditions of this Agreement shall
inure to the benefit of and be binding upon the respective permitted successors
and assigns of the parties.  Nothing in this Agreement, express or implied, is
intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.

 
f)
Counterparts; Faxes.  This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.  This Agreement may also
be executed via facsimile, which shall be deemed an original.

 
g)
Titles and Subtitles.  The titles and subtitles used in this Agreement are used
for convenience only and are not to be considered in construing or interpreting
this Agreement.

 

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FH draft dated November 5, 2009

 
h)
Severability.  Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof but shall be interpreted as if it were written so as
to be enforceable to the maximum extent permitted by applicable law, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.  To the extent
permitted by applicable law, the parties hereby waive any provision of law which
renders any provisions hereof prohibited or unenforceable in any respect.

 
i)
Further Assurances.  The parties shall execute and deliver all such further
instruments and documents and take all such other actions as may reasonably be
required to carry out the transactions contemplated hereby and to evidence the
fulfillment of the agreements herein contained.

 
j)
Entire Agreement.  This Agreement is intended by the parties as a final
expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein.  This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter.

 
k)
Governing Law; Consent to Jurisdiction; Waiver of Jury Trial.  THIS AGREEMENT
SHALL BE CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
NEW YORK WITHOUT REFERENCE TO ITS PRINCIPLES OF CONFLICTS OF LAWS THAT WOULD
APPLY THE LAW OF ANY OTHER JURISDICTION.  MRC AND THE COMPANY HEREBY CONSENT TO
THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND THE FEDERAL COURTS
LOCATED IN THE CITY OF NEW YORK WITH RESPECT TO ANY ACTION, SUIT OR PROCEEDING
BROUGHT TO ENFORCE ANY PROVISION OF THIS AGREEMENT OR TO DETERMINE THE RIGHTS OF
ANY PARTY HERETO. EACH OF THE PARTIES HERETO WAIVES ANY RIGHT TO REQUEST A TRIAL
BY JURY IN ANY LITIGATION WITH RESPECT TO THIS AGREEMENT AND REPRESENTS THAT
COUNSEL HAS BEEN CONSULTED SPECIFICALLY AS TO THIS WAIVER.

[remainder of this page intentionally left blank]

 

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Annex A-4

IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement
or caused their duly authorized officers to execute this Registration Rights
Agreement as of the date first above written.

THE COMPANY:
PHYSICIANS FORMULA HOLDINGS, INC.
                 
By:
     
Name:
     
Title:
                   
INVESTOR:
MILL ROAD CAPITAL, L.P.
         
By: Mill Road Capital GP LLC,
 
       its General Partner
                 
By:
     
Name:
     
Title:
     
Address:
Two Sound View Drive, Suite 300
     
Greenwich, Connecticut 06830
 

 
[Signature Page to Registration Rights Agreement]

 

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Annex A-4

Exhibit A

Plan of Distribution

The selling stockholders, which as used herein includes donees, pledgees,
transferees or other successors-in-interest selling shares of common stock or
interests in shares of common stock received after the date of this prospectus
from a selling stockholder as a gift, pledge, partnership distribution or other
transfer, may, from time to time, sell, transfer or otherwise dispose of any or
all of their shares of common stock or interests in shares of common stock on
any stock exchange, market or trading facility on which the shares are traded or
in private transactions.  These dispositions may be at fixed prices, at
prevailing market prices at the time of sale, at prices related to the
prevailing market price, at varying prices determined at the time of sale, or at
negotiated prices.

The selling stockholders may use any one or more of the following methods when
disposing of shares or interests therein:

- ordinary brokerage transactions and transactions in which the broker-dealer
solicits purchasers;

- block trades in which the broker-dealer will attempt to sell the shares as
agent, but may position and resell a portion of the block as principal to
facilitate the transaction;

- purchases by a broker-dealer as principal and resale by the broker-dealer for
its account;

- an exchange or over-the-counter distribution in accordance with the rules of
the applicable exchange or other market;

- privately negotiated transactions;

- short sales effected after the date the registration statement of which this
Prospectus is a part is declared effective by the SEC;

- through the writing or settlement of options or other hedging transactions,
whether through an options exchange or otherwise;

- broker-dealers may agree with the selling stockholders to sell a specified
number of such shares at a stipulated price per share;

- a combination of any such methods of sale; and

- any other method permitted by applicable law.

The selling stockholders may, from time to time, pledge or grant a security
interest in some or all of the shares of common stock owned by them and, if they
default in the performance of their secured obligations, the pledgees or secured
parties may offer and sell the shares of common stock, from time to time, under
this prospectus, or under an amendment to this prospectus under Rule 424(b)(3)
or other applicable provision of the Securities Act amending the list of selling
stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus.  The selling stockholders also
may transfer the shares of common stock in other circumstances, in which case
the transferees, pledgees or other successors in interest will be the selling
beneficial owners for purposes of this prospectus.

 

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Annex A-4

In connection with the sale of our common stock or interests therein, the
selling stockholders may enter into hedging transactions with broker-dealers or
other financial institutions, which may in turn engage in short sales of the
common stock in the course of hedging the positions they assume.  The selling
stockholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities.  The selling
stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).

The aggregate proceeds to the selling stockholders from the sale of the common
stock offered by them will be the purchase price of the common stock less
discounts or commissions, if any.  Each of the selling stockholders reserves the
right to accept and, together with their agents from time to time, to reject, in
whole or in part, any proposed purchase of common stock to be made directly or
through agents.  We will not receive any of the proceeds from this offering.

The selling stockholders also may resell all or a portion of the shares in open
market transactions in reliance upon Rule 144 under the Securities Act of 1933,
provided that they meet the criteria and conform to the requirements of that
rule.

Any underwriters, broker-dealers or agents that participate in the sale of the
common stock or interests therein may be "underwriters" within the meaning of
Section 2(11) of the Securities Act.  Any discounts, commissions, concessions or
profit they earn on any resale of the shares may be underwriting discounts and
commissions under the Securities Act.  Selling stockholders who are
"underwriters" within the meaning of Section 2(11) of the Securities Act will be
subject to the prospectus delivery requirements of the Securities Act.

To the extent required, the shares of our common stock to be sold, the names of
the selling stockholders, the respective purchase prices and public offering
prices, the names of any agents, dealer or underwriter, any applicable
commissions or discounts with respect to a particular offer will be set forth in
an accompanying prospectus supplement or, if appropriate, a post-effective
amendment to the registration statement that includes this prospectus.

In order to comply with the securities laws of some states, if applicable, the
common stock may be sold in these jurisdictions only through registered or
licensed brokers or dealers.  In addition, in some states the common stock may
not be sold unless it has been registered or qualified for sale or an exemption
from registration or qualification requirements is available and is complied
with.

 

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Annex A-4

The anti-manipulation rules of Regulation M under the Exchange Act may apply to
sales of shares in the market and to the activities of the selling stockholders
and their affiliates.  In addition, to the extent applicable we will make copies
of this prospectus (as it may be supplemented or amended from time to time)
available to the selling stockholders for the purpose of satisfying the
prospectus delivery requirements of the Securities Act.  The selling
stockholders may indemnify any broker-dealer that participates in transactions
involving the sale of the shares against certain liabilities, including
liabilities arising under the Securities Act.

We have agreed to indemnify the selling stockholders against liabilities,
including liabilities under the Securities Act and state securities laws,
relating to the registration of the shares offered by this prospectus.

We have agreed with the selling stockholders to keep the registration statement
of which this prospectus constitutes a part effective the earlier of: (1) such
time as all of the shares covered by this prospectus have been disposed of
pursuant to and in accordance with the registration statement and (2) six months
after the expiration of the Warrant.
 
 
 

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