Exhibit 10.1
 
FOURTH AMENDMENT TO CREDIT AGREEMENT
 
This FOURTH AMENDMENT TO CREDIT AGREEMENT (this “Amendment”), dated as of March
30, 2009, is entered into among (1) PHYSICIANS FORMULA, INC., a New York
corporation (the “Borrower”), (2) the several banks and other lenders from time
to time parties to this Amendment (the “Lenders”) and (3) UNION BANK, N.A.
(formerly known as Union Bank of California, N.A.), as administrative agent for
the Lenders (in such capacity, the “Agent”).
 
RECITALS
 
A.           The Borrower, the Lenders and the Agent entered into that certain
Credit Agreement dated as of November 14, 2006, as amended by that certain First
Amendment to Credit Agreement dated as of July 8, 2008, that certain Second
Amendment to Credit Agreement dated as of September 9, 2008 and that certain
Third Amendment to Credit Agreement dated as of December 5, 2008 (as so amended,
the “Credit Agreement”).  Capitalized terms used herein and not defined shall
have the meanings ascribed to them in the Credit Agreement.
 
B.           Pursuant to the Credit Agreement, the Lenders have made available
to the Borrower a term loan facility in the initial aggregate principal amount
of $15,000,000 (of which $10,500,000 in principal amount is outstanding as of
the date hereof, prior to the principal repayment contemplated by Section 2(h)
of this Amendment), and a revolving loan facility in the aggregate maximum
principal amount of $25,000,000, including a letter of credit sublimit of
$2,500,000.  There are no Letters of Credit outstanding.
 
C.           The Borrower has requested that the Lenders restructure the credit
facilities under the Credit Agreement as a single revolving loan facility having
a maximum commitment in the aggregate principal amount of $27,500,000.  The
Lenders have agreed to such restructuring, subject to the terms and conditions
set forth herein.
 
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, the parties hereto hereby agree as follows:
 
SECTION 1. Amendments to Credit Agreement.  The Credit Agreement is hereby
amended as follows, effective as of the Fourth Amendment Effective Date:
 
(a)    Each of the following definitions is added to Section 1.1, in appropriate
alphabetical order or, if already existing in such Section, is deemed amended in
its entirety to read as follows:
 
    “Accounts”:  all “accounts,” as such term is defined in the UCC, now owned
or hereafter acquired by any Borrowing Base Party, including (a) all accounts
receivable, other receivables, book debts and other forms of obligations (other
than forms of obligations evidenced by “chattel paper,” “documents” or
“instruments” (as such terms are defined in the UCC)), whether arising out of
goods sold or services rendered by it or from any other transaction (including
any such obligations that may be characterized as an account or contract right
under the UCC), (b) all purchase orders or receipts for goods or services,
(c) all rights to any goods represented by any of the foregoing (including
 
 
 

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unpaid sellers’ rights of rescission, replevin, reclamation and stoppage in
transit and rights to returned, reclaimed or repossessed goods), (d) all monies
due or to become due to such Borrowing Base Party under all purchase orders and
contracts for the sale of goods or the performance of services or both by such
Borrowing Base Party or in connection with any other transaction (whether or not
yet earned by performance on the part of such Borrowing Base Party) now or
hereafter in existence, including the right to receive the proceeds of said
purchase orders and contracts, and (e) all collateral security and guaranties of
any kind, now or hereafter in existence, given by any Person with respect to any
of the foregoing.
 
“Borrowing Base”:  as of any date of determination, an amount determined by the
Agent with reference to the most recent Borrowing Base Certificate to be equal
to the sum of (a) the Eligible Accounts Component, plus (b) the Eligible
Inventory Component, plus (c) the Canadian Pledged Account Balance plus (d) the
Eligible Equipment Component; provided that if on such date the most recent
Borrowing Base Certificate is as of a date more than 31 days prior to such date
(other than the Borrowing Base Certificates for February 2009 and March 2009),
the Borrowing Base shall mean such amount as may be determined by the Agent in
its sole discretion.
 
“Borrowing Base Certificate”:  a certificate, duly executed by a Responsible
Officer, substantially in the form of Exhibit I hereto.
 
“Borrowing Base Parties”:  collectively, the Borrower and its Domestic
Subsidiaries (provided that each such Subsidiary is also a Guarantor).
 
“Canadian Blocked Accounts”:  as defined in the definition of Canadian Pledged
Accounts.
 
“Canadian Disbursement Account”:  as defined in the definition of Canadian
Pledged Accounts.
 
“Canadian Pledged Accounts”:  collectively, the Borrower’s foreign currency
deposit account, foreign currency time deposit account (collectively, the
“Canadian Blocked Accounts”) and foreign currency disbursement account (the
“Canadian Disbursement Account”), each denominated in Canadian dollars, held by
the Agent and bearing the account name “Physicians Formula, Inc. Collateral
Account Union Bank, N.A. Trustee” or similar designation.
 
“Canadian Pledged Account Balance”:  as of any date of determination, the
available balance on deposit in the Canadian Blocked Accounts, expressed in
Dollars using such currency conversion rate as the Agent may reasonably
determine.
 
“Dilution Items”:  with respect to the Accounts of the Borrowing Base Parties,
returns, rebates, discounts, credits and allowances with respect thereto.
 
“Eligible Account”:  as of any date of determination, an Account of a Borrowing
Base Party:
 
 
 
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(a) that has been the subject of an invoice sent to the account debtor within
five days of shipment of the related goods;
 
(b) that conforms to all of the representations and warranties pertaining to
Accounts set forth in this Agreement or any other Loan Document;
 
(c) (i) that arises from the sale of goods of such Borrowing Base Party in the
ordinary course of its business and (ii) that is subject to a valid, perfected
and continuing first-priority Lien (other than non-consentual Liens described in
Section 6.3(b), so long as such Liens remain inchoate and no such Lien has
matured into a claim by the relevant taxing authority) remain in favor of the
Agent for the benefit of itself and the Lenders and is owned by such Borrowing
Base Party free and clear of any Liens other than Liens in favor of the Agent
(and other than non-consentual Liens described in Section 6.3(b), so long as
such Liens remain inchoate and no such Lien has matured into a claim by the
relevant taxing authority);
 
(d) that (i) is a valid and enforceable obligation of the applicable account
debtor upon which such Borrowing Base Party’s right to receive payment is
absolute and not contingent upon the fulfillment of any condition whatsoever
(other than an account debtor’s customary right of inspection), (ii) does not
arise with respect to (A) goods that are placed on consignment, guaranteed sale,
sale or return or sale on approval or delivered on a bill-and-hold or
cash-on-delivery basis or (B) goods that have been returned, rejected or
repossessed;
 
(e) with respect to which the applicable account debtor has not asserted any
defense, counterclaim or dispute (provided that, as to any account as to which
the account debtor disputes only a portion of the applicable invoice, the
remaining balance of such account shall not be ineligible by reason of this
clause), and such Account is not a “contra” Account;
 
(f) with respect to which the applicable account debtor is not (i) a federal,
state or local governmental entity or agency (unless, if the account debtor is
the United States of America, or any department, agency or instrumentality
thereof, the Borrower has complied with the Federal Assignment of Claims Act of
1940 with respect to such account and has delivered to the Agent evidence
thereof in form and substance satisfactory to the Agent), (ii) an Affiliate, a
Subsidiary or an employee of such Borrowing Base Party or (iii)  located outside
the United States of America (such account, a “Foreign Account”) (unless such
Foreign Account is (x) an account of an account debtor located in Australia or
the United Kingdom with respect to which the account debtor has delivered to the
applicable Borrowing Base Party an original irrevocable letter of credit, which
has been delivered to the Agent, along with an amendment to such Letter of
Credit designating the Agent as beneficiary, in each case in form and substance
and on terms acceptable to the Agent, and issued by a U.S. financial institution
acceptable to the Agent, in each case in the Agent’s sole discretion, covering
such account or (y) a Permitted Canadian Account).
 
 
 
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(g) with respect to which the applicable account debtor is not subject to any
event of the type described in Section 7(g);
 
(h) the collection of which, in the Agent’s reasonable discretion (determined
from the perspective of a secured lender), is not doubtful by reason of the
applicable account debtor’s financial condition or otherwise;
 
(i) that is not evidenced by any chattel paper, instrument or judgment;
 
(j) to the extent that the total unpaid amount of such Account, when added
together with all other Accounts due to the Borrowing Base Parties from the
applicable account debtor, does not exceed 25% of all Accounts of the Borrowing
Base Parties (provided that, in the case of Rite Aid Corporation or any
Subsidiary thereof, such percentage shall not exceed 10%);
 
(k) that is payable only in Dollars or, in the case of Permitted Canadian
Accounts, Canadian dollars;
 
(l) that is not in default (an Account shall be deemed to be in default under
this clause (l) if (i) such Account is not paid within the earlier of 60 days
following its due date or 90 days following its original invoice date or
(ii) such Account is an obligation of an account debtor with respect to which
more than 25% of all Accounts due to the Borrowing Base Parties from such
account debtor are not otherwise eligible under the other criteria set forth in
this clause (l)); and
 
(m) that is otherwise acceptable to the Agent in its reasonable discretion (from
the perspective of a secured lender).
 
“Eligible Accounts Component”:  with respect to the computation of the Borrowing
Base, 65% of the aggregate book value of the Borrowing Base Parties’ then
existing Eligible Accounts.  Such advance rate may be reduced from time to time
in the exercise of the Agent’s reasonable discretion (from the perspective of a
secured lender), including as a result of audits, appraisals and examinations.
 
“Eligible Equipment”:  as of any date of determination, Equipment of the
Borrowing Base Parties:
 
(a) that (i) is subject to a valid, perfected and continuing first-priority Lien
in favor of the Agent for the benefit of the Lenders, and (ii) is owned by such
Borrowing Base Party free and clear of any Liens of any Person other than Liens
in favor of the Agent for the benefit of the Lenders (other than, in each case,
non-consentual Liens described in (x) Section 6.3(b), so long as such Liens
remain inchoate and no such Lien has matured into a claim by the relevant taxing
authority and (y) Section 6.3 which are not overdue);
 
(b) that is (i) located on premises owned, leased or operated by such Borrowing
Base Party or (ii) stored on premises owned or operated by a bailee,
warehouseman, processor or similar Person, in each case with respect to which
any
 
 
 
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applicable landlord, bailee, warehouseman, processor or similar Person shall
have executed and delivered to the Agent, a landlord waiver, bailee letter or
similar document, in each case, in form and substance acceptable to the Agent;
 
(c) that conforms to all of the representations or warranties pertaining to
Equipment set forth in this Agreement or any other Loan Document;
 
(d) that is covered by property and casualty insurance in compliance with
Section 5.5; and
 
(e) that is otherwise acceptable to the Agent in its reasonable discretion (from
the perspective of a secured lender).
 
“Eligible Equipment Component”:  with respect to the computation of the
Borrowing Base, the orderly liquidation value of Eligible Equipment as
determined by the Agent, provided that the Eligible Equipment Component shall
not exceed $1,000,000 at any time.
 
“Eligible Inventory”:  as of any date of determination, Inventory of the
Borrowing Base Parties:
 
(a) that (i) consists of first quality finished goods held for sale, and
Eligible Raw Materials held for manufacture, in the ordinary course of such
Borrowing Base Party’s business, (ii) is subject to a valid, perfected and
continuing first-priority Lien in favor of the Agent for the benefit of the
Lenders, and (iii) is owned by such Borrowing Base Party free and clear of any
Liens of any Person other than Liens in favor of the Agent for the benefit of
the Lenders (other than, with respect to clauses (ii) and (iii), non-consentual
Liens described in (x) Section 6.3(b), so long as such Liens remain inchoate and
no such Lien has matured into a claim by the relevant taxing authority and (y)
Section 6.3 which are not overdue);
 
(b) that is (i) located on premises owned, leased or operated by such Borrowing
Base Party or (ii) stored on premises owned or operated by a bailee,
warehouseman, processor or similar Person, in each case with respect to which
any applicable landlord, bailee, warehouseman, processor or similar Person shall
have executed and delivered to the Agent, a landlord waiver, bailee letter or
similar document (it being agreed that Inventory located at the premises
referred to in Section 5.15(a) or (b) shall not be ineligible, during the period
referred to in such Sections 5.15(a) and (b), solely as a result of the fact
that the landlord consents and warehouse letters referred to therein have not
been delivered to the Agent), in each case, in form and substance acceptable to
the Agent;
 
(c) that conforms to all of the representations or warranties pertaining to
Inventory set forth in this Agreement or any other Loan Document;
 
(d) that is not (i) placed on consignment or (ii) in transit;
 
 
 
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(e) that does not consist of packaging or shipping materials, pallets, bags,
labels, boxes, capitalized depot freight and handling costs, manufacturing
supplies or replacement parts;
 
(f) that does not constitute obsolete, slow-moving, shopworn, unmerchantable,
unsalable, damaged, returned, excess, unusable or unworkable goods or goods
unfit for further processing (it being agreed that, for the purposes of
calculating ineligible Inventory, returned Inventory shall mean that amount for
which the Borrower has established a return recovery reserve, which reserve may
be adjusted by the Borrower from time to time);
 
(g) that is covered by property and casualty insurance in compliance with
Section 5.5;
 
(h) that is only covered by non-negotiable documents of title unless the
negotiable document representing such Inventory has been delivered to the Agent,
for the benefit of itself and the Lenders; and
 
(i) that is otherwise acceptable to the Agent in its reasonable discretion (from
the perspective of a secured lender).
 
“Eligible Inventory Component”:  with respect to the computation of the
Borrowing Base, the lesser of (a) 15% of the Eligible Inventory of the Borrowing
Base Parties (provided that, for the period from the Fourth Amendment Effective
Date to and including June 30, 2009, such percentage shall be 25%), as
determined by the Agent, and (b) $5,000,000 (provided that, for the period from
the Fourth Amendment Effective Date to and including June 30, 2009, such amount
shall be $8,000,000); provided that in no event shall Eligible Raw Materials
exceed 60% of the Eligible Inventory Component.  Such advance rate may be
reduced from time to time in the exercise of the Agent’s reasonable discretion
(from the perspective of a secured lender), including as a result of audits,
appraisals and examinations.
 
“Eligible Raw Materials”:  raw materials Inventory, other than printed
components including any component printed with any Loan Party’s name or
trademark.
 
“Equipment”:  equipment in good working order, owned by a Borrowing Base Party
and of a type described in that certain asset appraisal performed by Great
American Group and delivered to the Agent on or about the Fourth Amendment
Effective Date.
 
“Fourth Amendment”:  that certain Fourth Amendment to Credit Agreement dated as
of March 30, 2009, amending this Agreement.
 
“Fourth Amendment Effective Date”:  the date on which the conditions precedent
set forth in Section 2 of the Fourth Amendment are satisfied, and the Fourth
Amendment becomes effective.
 
 
 
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“Interest Coverage Ratio”:  for the Borrower and its Subsidiaries on a
consolidated basis, for the fiscal quarter most recently ended and the
immediately preceding three fiscal quarters, the ratio of Adjusted EBITDA to
Interest Expense.
 
“Permitted Canadian Accounts”:  those Accounts of the Borrowing Base Parties
with respect to which the account debtors are located in Canada.
 
“Revolving Loan Commitment Expiration Date”:  March 31, 2010, or such earlier
date as the Revolving Loan Commitments shall expire in accordance with the terms
hereof (whether by acceleration or otherwise).
 
“UCC”:  the Uniform Commercial Code, as enacted and as in effect from time to
time in the State of California.
 
(b) The definition of “Adjusted EBITDA” contained in Section 1.1 is revised as
follows:  (1) the introductory clauses reading: “for the Borrower and its
Subsidiaries on a consolidated basis, for the fiscal quarter most recently ended
and the immediately preceding three fiscal quarters,” is changed to: “for the
Borrower and its Subsidiaries on a consolidated basis, for any period,” and (2)
clause (i) is amended in its entirety to read as follows:  “(i) all one-time
costs incurred by the Borrower in connection with the Fourth Amendment
(including the $75,000 amendment fee and all legal, diligence, appraisal, audit
and similar fees and expenses paid by the Borrower in connection with the
closing of the Fourth Amendment) in an aggregate amount up to $300,000.
 
(c) The outstanding Term Loans are hereby converted to outstanding Revolving
Loans in the same principal amount.  On and after the Fourth Amendment Effective
Date, no Term Loans shall be outstanding, and each reference in the Loan
Documents to Term Loans, Term Loan Lenders, Term Notes and other terms relating
solely to the Term Loan facility shall be deemed amended to reflect such fact.
 
(d) The Revolving Loan Commitment amount of Union Bank, N.A. listed on the
signature pages to the Credit Agreement is hereby increased from “$25,000,000”
to “$27,500,000.”
 
(e) Section 2.1(a) is amended in its entirety to read as follows:
 
(a)   Subject to the terms and conditions hereof, each Revolving Loan Lender
severally agrees to make loans on a revolving credit basis through its
Applicable Lending Office to the Borrower from time to time from and including
the Closing Date to but excluding the Revolving Loan Commitment Expiration Date
(each a “Revolving Loan”, and collectively, the “Revolving Loans”) in accordance
with the terms of this Agreement; provided, however, subject to Section 2.5(a),
that the aggregate principal amount of all Revolving Loans outstanding shall not
exceed the Aggregate Revolving Loan Commitment or the Borrowing Base at any
time.  Within the limits of each Revolving Loan Lender’s Revolving Loan
Commitment, the Borrower may borrow, prepay and reborrow Revolving Loans.
 
 
 
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With respect to each Revolving Loan Lender, the principal amount of each
Revolving Loan to be made by such Revolving Loan Lender shall be in an amount
equal to the product of (i) such Revolving Loan Lender’s Revolving Loan
Commitment Percentage (expressed as a fraction) and (ii) the total amount of the
Revolving Loan(s) requested; provided that in no event shall any Revolving Loan
Lender be obligated to make a Revolving Loan if after giving effect to such
Revolving Loan the sum of such Revolving Loan Lender’s Revolving Loans
outstanding would exceed its Revolving Loan Commitment or if the amount of such
requested Revolving Loan is in excess of such Revolving Loan Lender’s Available
Revolving Loan Commitment.
 
Notwithstanding any provision in this Agreement to the contrary, the Aggregate
Revolving Loan Commitment shall be permanently and automatically reduced to
$25,000,000 on June 30, 2009.  Such reduction shall automatically effect a
reduction of the Revolving Loan Commitment of each Revolving Loan Lender to an
amount equal to the product of (i) the Aggregate Revolving Loan Commitment of
all Revolving Loan Lenders, as so reduced and (ii) the Revolving Loan Commitment
Percentage of such Revolving Loan Lender.  Upon such reduction, the Borrower
shall prepay the amount, if any, by which the aggregate unpaid principal amount
of the Revolving Loans exceeds the amount of the Aggregate Revolving Loan
Commitment as so reduced, together with accrued interest on the amount being
prepaid to the date of such prepayment.
 
(f) Section 2.1(b) is amended in its entirety to read as follows:
 
(b)  All Revolving Loans shall be Base Rate Loans.  Each Revolving Loan Lender
may make or maintain its Revolving Loans to the Borrower or participate in
Letters of Credit to or for the account of the Borrower by or through any
Applicable Lending Office.
 
For the avoidance of doubt, on and after the Fourth Amendment Effective Date,
LIBOR Loans shall no longer be available under the Credit Agreement, and each
reference in the Loan Documents to LIBOR, LIBOR Loans, Interest Period and other
terms relating solely to LIBOR Loans shall be deemed amended to reflect such
fact.
 
(g) Section 2.5(a) is amended in its entirety to read as follows:
 
(a)  If at any time the aggregate principal amount of all Revolving Loans
outstanding exceeds the Aggregate Revolving Loan Commitment or the Borrowing
Base, then the Borrower shall, within five Business Days after any Responsible
Officer shall have knowledge of such overadvance, without notice or request by
the Agent, prepay the Revolving Loans in an aggregate amount equal to such
excess.
 
(h) Section 2.8(a) is amended in its entirety to read as follows:
 
(a)  Each Revolving Loan shall bear interest at a rate per annum equal to (i)
during the period from the Fourth Amendment Closing Date to and including June
30, 2009, the Base Rate plus 3.50% and (ii) thereafter, the Base Rate plus
3.00%.
 
(i) The first sentence of Section 2.9 is amended in its entirety to read as
follows:
 
 
 
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  Interest on the Loans and all other Obligations shall be calculated on the
basis of a year of 365 or 366 days, as applicable, for the actual days elapsed;
provided that the unused commitment fee set forth in Section 2.17 shall be
calculated on the basis of a 360-day year, for the actual days elapsed.
 
(j) In Section 2.17, the reference to “0.25%” is changed to “0.50%”.
 
(k) Section 3.14(a) is amended in its entirety to read as follows:
 
(a)  The proceeds of the Revolving Loans are intended to be and shall be used by
the Borrower as follows:  (i) to refinance the outstanding Term Loans, as
contemplated by the Fourth Amendment, (ii) for working capital and general
corporate purposes of the Borrower and its Subsidiaries and (ii) to pay fees and
expenses in connection with preparation and negotiation of the Fourth Amendment.
 
(l) In Section 5.2, (1) the word “and” is deleted from the end of clause (g),
(2) clause (h) is redesignated clause (i) and (3) a new clause (h) is added to
read as follows:
 
(h)  within 30 days after the end of each month, the Borrower shall deliver to
the Agent, (i) a Borrowing Base Certificate and (ii) an accounts receivable
aging report, accounts payable aging report and inventory report, in each case
as of the end of such month and in form reasonably satisfactory to the Agent;
provided that the Borrowing Base Certificate and such reports (x) with respect
to February 2009 shall be due on April 15, 2009 and (y) with respect to March
2009 shall be due on April 30, 2009; and
 
(m) The last sentence of Section 5.6 is amended in its entirety to read as
follows:
 
In addition, the Agent shall be permitted to conduct collateral audits of (which
may include audits of the books and records of) the Borrower and the
Subsidiaries up to four times during the period from the Fourth Amendment
Effective Date to the Revolving Loan Expiration Date (or as frequently as the
Agent reasonably deems necessary if a Default has occurred and is continuing).
 
(n) Section 5.14 is amended in its entirety to read as follows:
 
5.14  Canadian Pledged Accounts.  The Borrower shall at all times maintain the
Canadian Pledged Accounts with the Agent.  Each Canadian Pledged Account is
pledged to the Agent, for the benefit of the Agent and the Lenders, under the
Security Agreement and is subject to the terms thereof.  The Borrower shall not
be permitted to make withdrawals from the Canadian Blocked Accounts at any time,
and all interest and increases, if any, accrued thereon shall remain in such
accounts.  The Borrower shall at all times cause any and all revenue received by
the Borrower or its Subsidiaries in Canadian dollars to be promptly deposited in
the Canadian Blocked Accounts.  So long as no Default has occurred and is
continuing and the Borrower has delivered to Agent a Borrowing Base Certificate
demonstrating availability under the Borrowing Base of at least $1,500,000 (on a
pro forma basis assuming the transfer requested below had been made, and based
on the Borrowing Base Certificate most recently delivered to the Agent under
Section 5.2, but updated to reflect outstanding
 
 
 
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Loans as of the current date), the Borrower may request in writing on a monthly
basis, on or about the first Business Day of each month, that the Agent transfer
amounts from the Canadian Blocked Accounts to the Canadian Disbursement Account
in an aggregate amount that will not cause the balance of the Canadian
Disbursement Account to exceed CN$500,000.  In addition, so long as no Default
has occurred and in continuing, the Borrower may from time to time, without the
prior consent of the Agent, use funds in the Canadian Disbursement Account to
pay amounts due to its Canadian vendors in the ordinary course of
business.  Notwithstanding the foregoing, the Borrower may, at any time, request
that amounts on deposit in the Canadian Blocked Accounts be applied by the Agent
to prepay outstanding Loans, such prepayment to be made in accordance with
Section 2.4.
 
(o) A new Section 5.15 is added to read as follows:
 
5.15  Post-Closing Covenants.  The Borrower shall deliver the following to the
Agent:
 
(i) within 90 days after the Fourth Amendment Effective Date, with respect to
the Borrower’s premises located in Azusa, California, Covina, California and
LaVerne, California, for which no Landlord Consent or warehouse letter, as
applicable, was previously delivered to the Agent, a Landlord Consent or
warehouse letter in form acceptable to the Agent;
 
(ii) within 90 days after the Fourth Amendment Effective Date, with respect to
the Borrower’s warehouse in London, Ontario, Canada, a warehouse letter executed
by the new warehouse owner/manager, in substantially the form of the letter
previously executed for such location;
 
(iii) within one Business Day after the Fourth Amendment Effective Date, the
Borrower’s audited financial statements for fiscal year 2008, as required by
Section 5.1(a) (including the certificate of the Accountants described therein);
and
 
(iv) within 30 days after the Fourth Amendment Effective Date, an updated
Schedule B (Copyrights, Patents and Marks) to each of the Security Agreement and
the Guarantor Security Agreement.
 
The Agent and the Lenders agree that the failure by the Borrower to deliver the
Landlord Consents and warehouse letters contemplated by clauses (i) and (ii)
above shall not constitute an Event of Default, so long as the Borrower has
demonstrated to the Agent’s reasonable satisfaction that it has used
commercially reasonable efforts to obtain such documents.  (Nothing in the
foregoing sentence shall change the effect failure to obtain such documents may
have on calculation of the Borrowing Base.)
 
(p) Section 6.1(a) is amended in its entirety to read as follows:
 
(a)  Interest Coverage Ratio.  Permit the Interest Coverage Ratio, as of the end
of any fiscal quarter set forth below, to be less than the ratio set forth
opposite such period:
 
 
 
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Quarter                                                                                                     Ratio
 
January 1, 2009 to and including                        3.85:1
March 31, 2009

April 1, 2009 to and including                             5.00:1
June 30, 2009

July 1, 2009 to and including                               3.25:1
September 30, 2009

October 1, 2009 and thereafter                        4.25:1

(q) Section 6.1(b) is deleted and replaced with the following:
 
(b)  Minimum EBITDA.  Permit Adjusted EBITDA, as of the end of any fiscal
quarter set forth below, to be less than the amount set forth opposite such
quarter:
 
             Period                                       Quarter
 
Fiscal quarter ended March 31, 2009                         $(1,900,000)

Fiscal quarter ended June 30, 2009                            $     800,000

Fiscal quarter ended September 30, 2009                          $1,200,000

Four-quarter period ended December 31, 2009            $4,500,000

(r) Section 6.1(c) is amended in its entirety to read as follows:
 
(c)  Minimum Tangible Net Worth.  Permit Tangible Net Worth of the Borrower and
its Subsidiaries, on a consolidated basis, as of the end of any fiscal quarter,
to be less than the amount set forth below opposite such period:
 
Quarter                                                                                     
Amount
 
January 1, 2009 to and
including                                                                        $6,000,000
March 31, 2009

April 1, 2009 to and
including                                                                           
 $7,000,000
September 30, 2009

October 1, 2009 and
thereafter                                                                          
 $9,500,000

(s) Section 6.1(d) is amended in its entirety as follows:
 
(d)  Capital Expenditures.  Permit Capital Expenditures of the Borrower and its
Subsidiaries on a consolidated basis for any fiscal year to be more than
$2,000,000.

 
 
-11-

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

 

(t) Section 6.2(h) is deleted and replaced with “[Intentionally Omitted]”.
 
(u) Sections 6.6 is amended as follows:  (1) in clause (ii), the reference to
$500,000 is changed to $300,000 and (2) clauses (iii) and (iv) are each deleted
and replaced with “[Intentionally Omitted]”.
 
(v) Section 6.7(d) is deleted and replaced with “[Intentionally Omitted]”.
 
(w) In Section 7.1(c), the reference to “or 5.14” is changed to “, 5.14 or
5.15”.
 
(x) The Schedules to the Credit Agreement are hereby deleted and replaced with
the Schedules attached hereto as Exhibit A.
 
(y) Exhibit F (Form of Covenant Compliance Certificate) is deleted and replaced
with Exhibit F attached hereto.
 
(z) A new Exhibit I (Form of Borrowing Base Certificate) is added to the Credit
Agreement, in the form of Exhibit I attached hereto.
 
SECTION 2. Conditions Precedent.  This Amendment shall become effective as of
the date first set forth above upon receipt by the Agent of the following, in
each case in form and substance satisfactory to the Agent:
 
(a) this Amendment, duly executed by the Borrower and the Lenders;
 
(b) a consent to this Amendment, substantially in the form of Exhibit A hereto;
 
(c) a Revolving Note, duly executed by the Borrower in favor of UBOC, in form
and substance acceptable to the Agent and reflecting UBOC’s increased Revolving
Loan Commitment;
 
(d) resolutions of the board of directors, or similar authorizing body, of the
Borrower, authorizing this Amendment, certified by an appropriate officer of the
Borrower;
 
(e) a Borrowing Base Certificate as of the Closing Date (provided that Eligible
Accounts Receivable, Eligible Inventory and Eligible Equipment shall be as of
January 31, 2009), in form and substance satisfactory to the Agent and
reflecting a Borrowing Base of at least $2,000,000;
 
(f) evidence that the Canadian Pledged Accounts shall have been established at
Union Bank, N.A. in accordance with the terms of the Loan Documents, and that
the balance thereof shall be at least C$5,300,000;
 
(g) (i) the $750,000 Term Reduction Installment contemplated by Section 2.2(d)
and (ii) amounts due under Section 2.15, as notified by the Agent to the
Borrower, as a result of consummation of the transactions contemplated by this
Amendment, in each case in immediately available funds;
 
 
 
-12-

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

 

(h) an inventory appraisal and a fixed asset appraisal, in each case
satisfactory to the Agent;
 
(i) receipt by the Agent of an amendment fee in the amount of $75,000, in
immediately available funds (it being agreed that such fee shall be deemed
earned in full upon execution of this Amendment by the Lenders and shall be
nonrefundable, notwithstanding any subsequent termination of the Agreement or
otherwise);
 
(j) payment to the Agent of its costs and expenses incurred in connection with
the negotiation and preparation of this Amendment and its due diligence fees
related thereto, including but not limited to its attorneys’ fees and expenses,
and the fees and expenses of performing the audits and appraisals referred to
herein;
 
(k) updated Schedules to the Credit Agreement and the other Loan Documents, as
needed; and
 
(l) such other approvals, opinions, evidence and documents as any Lender,
through the Agent, may reasonably request; and the Agent’s reasonable
satisfaction as to all legal matters incident to this Amendment.
 
SECTION 3. Reference to and Effect on the Credit Agreement and the Other Loan
Documents.

(a) Upon the effectiveness of this Amendment, each reference in the Credit
Agreement to “this Agreement,” “hereunder,” “hereof,” “herein” or words of like
import referring to the Credit Agreement, and each reference in the other Loan
Documents to “the Credit Agreement,” “thereunder,” “thereof,” “therein” or words
of like import referring to the Credit Agreement, shall mean and be a reference
to the Credit Agreement, as amended hereby.
 
(b) Except as specifically amended herein, the Credit Agreement and all other
Loan Documents are and shall continue to be in full force and effect and are
hereby in all respects ratified and confirmed.
 
(c) The execution, delivery and effectiveness of this Amendment shall not
operate as a waiver of any right, power or remedy of the Agent or the Lenders
under the Credit Agreement or any other Loan Documents, nor constitute a waiver
of any provision of the Credit Agreement or any other Loan Documents, each of
which is hereby reaffirmed.
 
SECTION 4. Representations and Warranties.  The Borrower represents and
warrants, for the benefit of the Lenders and the Agent, as follows:  (i) it has
all requisite power and authority under applicable law and under its Organic
Documents to execute, deliver and perform this Amendment, and to perform the
Credit Agreement as amended hereby; (ii) all actions, waivers and consents
(corporate, regulatory and otherwise) necessary or appropriate for it to
execute, deliver and perform this Amendment, and to perform the Credit Agreement
as amended hereby, have been taken and/or received; (iii) this Amendment, and
the Credit Agreement, as amended by this Amendment, constitute the legal, valid
and binding obligation of it enforceable against it in accordance with the terms
hereof, except as may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws relating to or limiting creditors’ rights
 
 
 
-13-

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

 

generally or by equitable principles relating to enforceability; (iv) the
execution, delivery and performance of this Amendment, and the performance of
the Credit Agreement, as amended hereby, will not (a) violate or contravene any
Requirement of Law, (b) result in any material breach or violation of, or
constitute a material default under, any agreement or instrument by which it or
any of its property may be bound or (c) result in or require the creation of any
Lien upon or with respect to any of its properties, whether such properties are
now owned or hereafter acquired, except such as are permitted under the Credit
Agreement; (v) the representations and warranties contained in the Credit
Agreement and the other Loan Documents are correct in all material respects on
and as of the date of this Amendment as though made on and as of such date,
except to the extent that such representations and warranties specifically
relate to an earlier date, in which case, such representations and warranties
were true, correct and complete on and as of such earlier date; (vi) no Default
has occurred and is continuing and (vii) neither the Borrower nor any Subsidiary
owns any equipment that are fixtures with a book value in excess of $300,000.
 
SECTION 5. Execution in Counterparts.
 
  This Amendment may be executed in any number of counterparts and by different
parties hereto in separate counterparts, each of which when so executed and
delivered shall be deemed to be an original and all of which taken together
shall constitute but one and the same agreement.  Delivery of an executed
counterpart of a signature page to this Amendment by telecopier shall be
effective as delivery of a manually executed counterpart of this Amendment.
 
SECTION 6. Governing Law.
 
  This Amendment and the rights and obligations of the parties under this
Amendment shall be governed by, and construed and interpreted in accordance
with, the law of the State of California (without reference to its choice of law
rules).
 

 
[Signature page follows.]
 
 
 
-14-

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

 

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly
executed and delivered by their proper and duly authorized officers as of the
day and year first above written.
 
 

  PHYSICIANS FORMULA, INC., a New York corporation          
 
By:
/s/ Joseph J. Jaeger     Name: Joseph J. Jaeger     Title: Chief Financial
Officer          

 
 

  UNION BANK, N.A., as Agent and as sole Lender          
 
By:
/s/ Myra Juetten     Name: Myra Juetten     Title: Senior Relationship
Manager/Vice President          

 
 
 
 

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

 

EXHIBIT A
 
GUARANTORS’ CONSENT
 
Each of the undersigned is a “Guarantor” under that certain Pledgor Guarantee
dated as of November 14, 2006 or that certain Subsidiary Guarantee dated as of
November 14, 2006 (each a “Guarantee”) made by the undersigned in favor of Union
Bank, N.A. (formerly known as Union Bank of California, N.A.), as administrative
agent (the “Agent”) for the lenders from time to time party to that certain
Credit Agreement dated as of November 14, 2006 among PHYSICIANS FORMULA, INC., a
New York corporation (the “Borrower”), such lenders and the Agent, as amended by
that certain First Amendment to Credit Agreement dated as of July 8, 2008, by
that certain Second Amendment to Credit Agreement dated as of September 9, 2008
and by that certain Third Amendment to Credit Agreement dated as of December 5,
2008 (as so amended, the “Credit Agreement”).
 
In connection herewith, the Credit Agreement is being amended by that certain
Fourth Amendment to Credit Agreement dated as of even date herewith (the
“Amendment”).  Each Guarantor hereby acknowledges that it has received a copy of
the Amendment.  Each Guarantor hereby consents to the Amendment, and hereby
confirms and agrees that the Guarantee to which it is a party is and shall
continue to be in full force and effect and is hereby ratified and confirmed in
all respects except that, on and after the effective date of the Amendment, each
reference in such Guarantee to “the Credit Agreement,” “thereunder,” “thereof,”
“therein” or words of like import referring to the Credit Agreement shall mean
and be a reference to the Credit Agreement, as amended by the Amendment.
 
Dated:  March 30, 2009
 
 

  PHYSICIANS FORMULA HOLDINGS, INC.,     a Delaware corporation          
 
By:
/s/      Name:       Title:            

 

  PHYSICIANS FORMULA COSMETICS, INC.,     a Delaware corporation          
 
By:
/s/      Name:       Title:      

 
 
 
 

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

 
 

  PHYSICIANS FORMULA DRTV, LLC,     a Delaware corporation          
 
By:
/s/      Name:       Title:            

 
 
 
 

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

 

EXHIBIT A
 
REPLACEMENT SCHEDULES TO CREDIT AGREEMENT
 
SCHEDULE 3.2
QUALIFICATION JURISDICTIONS

Entity
Jurisdictions of Qualification
Physicians Formula Cosmetics, Inc.
California
Physicians Formula, Inc.
California
Physicians Formula DRTV, LLC
California, Michigan

 
 
 

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

 

SCHEDULE 3.5
LITIGATION
None.

 
 

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

 

SCHEDULE 3.6
LEGAL AND OPERATING NAMES

None.

 
 

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

 
 
SCHEDULE 3.7
ENVIRONMENTAL MATTERS

1.
All matters set forth as “Potentially Significant Findings” in Section II.B and
as “Noteworthy Issues” in Section II.C of that certain ENVIRON International
Corporation report entitled “Environmental Review of Physicians Formula
Cosmetics, Inc., City of Industry, California and dated as of October 2, 2003.

 
 
 

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

 

SCHEDULE 3.8
INTELLECTUAL PROPERTY MATTERS

None.

 
 

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

 

SCHEDULE 3.13
SUBSIDIARIES

Borrower owns 100% of Physicians Formula Cosmetics, Inc. and Physicians Formula
DRTV, LLC.

 
 

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

 

SCHEDULE 3.16
REAL PROPERTY

1.  
Leased Real Property

 
(a)  
1055 W. Eighth Street, Azusa, California

 
(b)  
230 South Ninth Avenue, City of Industry, California

 
(c)  
250 South Ninth Avenue, City of Industry, California

 
(d)  
753-755 Arrow Grand Circle Way, Covina, California

 
2.  
Other Locations (Collateral in the possession of Third Parties)

 
(a)  
Agility, 3886 Commerce Road, London, Ontario N6N 1P6, Canada

 
(b)  
Scholl’s, 435 Park Court, Lino Lakes, Minnesota 55014

 
(c)  
Jet, 2169 Wright Ave., La Verne CA 91750

 
 
 

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

 

SCHEDULE 3.19
CAPITAL STRUCTURE AND EQUITY OWNERSHIP (PRE-IPO)

Issuer
Name of Holder
Number of Shares
Par Value
Percentage of Shares of Common Stock
Physicians Formula, Inc.
Physicians Formula Holdings, Inc.
100
$1.00
100%
Physicians Formula Cosmetics, Inc.
Physicians Formula, Inc.
1000
$0.01
100%
Physicians Formula DRTV, LLC
Physicians Formula, Inc.
1000
N/A
100%

 
Physicians Formula Holdings, Inc.
Capitalization Table
 
Equityholder
 
% of Common Stock owned by Officers/Directors
 
Shares of Preferred Stock
 
Shares of Common Stock
 
Time Vesting Options to acquire Common Stock
 
Performance Vesting Options to acquire shares of Common Stock
 
Forfeited Options
 
Shares of Common Stock on a fully diluted basis
   Initial Principal Amount of Subordinated Promissory Notes                    
                 
Summit Ventures V, L.P.
     
0.000
 
1,419,000
             
1,419,000
     
Summit V Companion Fund, L.P.
     
0.000
 
962,500
             
962,500
     
Summit V Advisors (QP) Fund, L.P.
     
0.000
 
136,470
             
136,470
     
Summit V Advisors Fund, L.P.
     
0.000
 
41,700
             
41,700
     
Summit Ventures VI-A, L.P.
     
0.000
 
3,463,490
             
3,463,490
     
Summit Ventures VI-B, L.P.
     
0.000
 
1,444,420
             
1,444,420
     
Summit VI Advisors Fund, L.P.
     
0.000
 
72,030
             
72,030
     
Summit VI Entrepreneurs Fund, L.P.
     
0.000
 
110,590
             
110,590
     
Summit Investors VI, L.P.
     
0.000
 
28,790
             
28,790
 
$36,884
 
Summit Subordinated Debt Fund II, L.P.
     
0.000
 
321,010
             
321,010
 
$9,767,767
 
COFILANCE SA*
     
0.000
 
1,800,000
             
1,800,000
 
$2,451,163
 
Claude Gros
Director
1.92%
 
0.000
 
200,000
             
200,000
     
Ingrid Jackel-Marken
Officer
1.64%
 
0.000
 
171,416
 
166,667
 
291,667
     
629,750
 
 
$5,810
Exercised 166,666 Shares on 1/26/2006
Jeff Rogers
Officer
1.78%
 
0.000
 
185,000
 
167,333
 
291,667
     
644,000
 
 
$23,241
Exercised 166,000 Shares on 1/5/2006
André Pieters
Officer/Director
0.22%
 
0.000
 
28,000
 
0
         
28,000
   
Exercised Shares on 4/1/2005 - Resigned 3/31/2005
Mike Carter
     
0.000
 
0
 
5,000
         
5,000
     
Vivian Dura
     
0.000
 
0
 
5,000
         
5,000
     
Kevin Jacobson
     
0.000
 
0
 
10,000
 
10,000
     
20,000
     
Debra Green
     
0.000
 
0
 
5,000
         
5,000
     
Debbie Johnson
     
0.000
 
0
 
5,000
         
5,000
     
Rae Kearney
     
0.000
 
0
 
5,000
         
5,000
     
Rick Kirchhoff
Officer
0.00%
 
0.000
 
0
 
25,000
 
25,000
     
50,000
     
JoEllen Scasino
     
0.000
 
0
 
10,000
 
10,000
     
20,000
     
Manuel Scates
     
0.000
 
0
 
5,000
         
5,000
     
Jennifer Sharp
     
0.000
 
0
 
10,000
 
10,000
     
20,000
     
Joseph J. Jaeger
Officer
0.00%
 
0.000
 
37,500
 
37,500
 
75,000
     
150,000
   
Exercised 18,750 Shares on 1/5/2006 & 18,750 in March 2006.
Leslie H. Keegan
             
5,000
         
5,000
     
Louis T. Lembo
             
5,000
         
5,000
     
Martha Everhart
             
5,000
         
5,000
     
Vida Naranjo
             
5,000
         
5,000
     
Melisa K. Firedl
             
5,000
         
5,000
     
Barbara Ocampo-Victorio
             
4,000
     
(3,000)
 
1,000
   
Resigned 1/27/06, thus forfeiting unvested portion of shares
Khristen A. Nicholas
             
4,000
         
4,000
     
Delphine F. Bodin
             
4,000
         
4,000
                                         
Shares Remaining under Stock Option Plan (2,500,000 shares in aggregate)
                         
898,000
     
Other
                         
476,250
     
TOTAL
     
0.000
 
10,421,916
 
493,500
 
713,334
 
(3,000)
 
13,000,000
 
$12,284,865
                                     
* Transferred from Pierre Fabre Dermo-Cosmetique, S.A. as of December 12, 2003
                         

 
 
 

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

 

SCHEDULE 6.7
ACQUISITIONS, INVESTMENTS, LOANS AND ADVANCES

None.

 
 

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

 
 
SCHEDULE 6.8
AFFILIATE TRANSACTIONS

  1.
Stock Subscription Agreement between PFI Acquisition Corp. and Physicians
Formula Holdings, Inc., a Delaware corporation formerly known as PFI Holdings
Corp., dated November 3, 2003.
2.
Stock Purchase Agreement dated as of November 3, 2003 among PFI Acquisition
Corp., Pierre Fabre Dermo-Cosmetique S.A., a French societe anonyme, Pierre
Fabre, Inc., a New York corporation, the Physicians Formula Holdings, Inc., a
Delaware corporation formerly known as PFI Holdings Corp. and Pierre Fabre,
S.A., a French societe anonyme, as amended, modified, supplemented or restated.
3.
Galenic side letter by and among Pierre Fabre Dermo-Cosmetique, a French societe
anonyme and Pierre Fabre, Inc. dated November 3, 2003.
4.
Stockholders Agreement, by and among Physicians Formula Holdings, Inc., a
Delaware corporation formerly known as PFI Holdings Corp., the Summit
Stockholders (as defined therein) and the PFDC Stockholders (as defined
therein), dated November 3, 2003.
5.
Employment Agreements between Pierre Fabre, Inc. and each of the following
executives of Pierre Fabre, Inc.
  (a)   Ingrid Jackel-Marken   (b)   Jeff Rogers 6.
Protection of Trade Secrets, Nonsolicitation and Confidentiality Agreements
between Pierre Fabre, Inc. and each of the following executives of Pierre Fabre,
Inc.
  (a)   Ingrid Jackel-Marken   (b)   Jeff Rogers 7.
Employment Agreement and Nonsolicitation and Confidentiality Agreement, between
Physicians Formula, Inc. and Joseph J. Jaeger, dated March 8, 2004.
8.
Custodial arrangement in connection with the distribution referenced in Section
6.7(i) of the Credit Agreement.

 
 
 

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

 
 
EXHIBIT F
 
FORM OF COVENANT COMPLIANCE CERTIFICATE
 
PHYSICIANS FORMULA INC., a New York corporation (the “Borrower”), refers to that
certain Credit Agreement dated as of November 14, 2006 among (1) the Borrower,
(2) the Lenders parties thereto (the “Lenders”) and (3) UNION BANK, N.A., as
administrative agent for the Lenders (formerly known as Union Bank of
California, N.A.) (in such capacity, the “Agent”) (as it may be amended,
modified, restated or supplemented from time to time, the “Credit Agreement”;
capitalized terms used herein and not defined shall have the meanings assigned
to them in the Credit Agreement) and certifies as to the accuracy of the
following as of ___________________, ____ (the “Compliance Date”):
 
1.  Interest Coverage Ratio
                                             
a.
Adjusted EBITDA
                                                 
i.
EBITDA of the Borrower and its Subsidiaries on a consolidated basis
                                               
(a)
Net Income
       
$
                                       
(b)
non-recurring loss reflected in Net Income
       
$
                                       
(c)
non-recurring gain (excluding any gain received from sale of Inventory in the
ordinary course of business, provided such sales is not in connection with a
winding up or liquidation of the Borrower or any Subsidiary) reflected in Net
Income
     
 
 
 
$
                                       
(d)
Interest Expense of the Borrower and its Subsidiaries (only to the extent
reflected in Net Income)
                                                                       
(i)
interest, fees, charges and related expenses paid or payable (without
duplication) to a lender in connection with borrowed money (including any
obligation for fees, charges and related expenses payable to the issuer of any
letter of credit) or the deferred purchase price of assets that are considered
"interest expense" under GAAP
                                                                               
                 
 
                      $                                                        
             
 
rent paid or payable (without duplication) under Capital Lease Obligations that
should be treated as interest in accordance with Financial Accounting Standards
Board Statement No. 13
                       (ii)                                                  
$
                                             
(iii)
(i) + (ii)
       
$
    
                                     
 
the aggregate amount of each of the following:  federal and state taxes,
property taxes and sales taxes (whether or not payable during that period) (only
to the extent reflected in Net Income)
                    (e)                                                  
$
                                       
(f)
depreciation and amortization expense of Borrower and its Subsidiaries (only to
the extent reflected in Net Income)
                           
$
                                       
(g)
all other non-cash charges (including all non-cash stock compensation expenses)
of Borrower and its Subsidiaries (only to the extent reflected in Net Income)
                                                 
$
                                       
 
all other non-recurring expense of Borrower and its Subsidiaries acceptable to
the Agent (only to the extent reflected in Net Income)
                   
(h)
                           
$
                                       
 
all one-time costs in connection with the Fourth Amendment, including the
$75,000 amendment fee and all legal, diligence, appraisal, audit and similar
fees and expenses paid by the Borrower in connection with the closing of the
Fourth Amendment up to $300,000 (only to the extent reflected in Net Income)
                    (i)                                                        
                                     
$
                                       
(j)
(a) + (b) - (c) + (d) + (e) + (f) + (g) + (h) + (i)
       
$
               -
                                                           
b.
Interest Expense
                                               
i.
all interest, fees, charges and related expenses paid or payable (without
duplication) in connection with borrowed money (including any obligation for
fees, charges and related expenses payable to the issuer of any letter of
credit) or the deferred purchase price of assets that are considered "interest
expense" under GAAP
                                                                               
                                           
$
                                       
ii.
rent paid or payable (without duplication) under Capital Lease Obligations that
should be treated as interest in accordance with Financial Accounting Standards
Board Statement No. 13
                                                               
$
                                       
iii.
(i) + (ii)
           
$
         
                               
c.
Ratio of a. to b.
           
 
(1)
                             
(1) Section 6.1(a) of the Credit Agreement requires that Interest Coverage
Ratio, as of the end of any fiscal quarter indicated, not be less than (i) as of
January 1, 2009 to and including March 31, 2009, 3.85 : 1; (ii) as of April 1,
2009 to and including June 30, 2009, 5.00 : 1; (iii) as of July 1, 2009 to and
including September 30, 2009, 3.25 : 1; and (iv) as of October 1, 2009 and
thereafter, 4.25 : 1.
                                                                               
                               
2.  Minimum EBITDA
                                                  Adjusted EBITDA (see 1.a.
above)                
a.
       
$
  (2)                              
(2) Section 6.1(b) of the Credit Agreement requires that Adjusted EBITDA of the
Borrower and its Subsidiaries on a consolidated basis as of the end of any
fiscal quarter not be less than the following amounts for the quarters
indicated: (i) as of March 31, 2009, $1,900,000; (ii) as of June 30, 2009,
$800,000; (iii) as of September 30, 2009, $1,200,000; and (iv) as of December
31, 2009, $4,500,000.
                                                                               
                               
3.  Minimum Tangible Net Worth
                                             
     Tangible Net Worth
                                               
a.
net worth
   
$
                                     
b.
intangible assets (including goodwill)
   
$
                                     
c.
accumulated amortization
   
$
                                     
d.
a. - b. - c.
           
$
               
(3)                              
(3) Section 6.1(c) of the Credit Agreement requires that Tangible Net Worth of
the Borrower and its Subsidiaries on a consolidated basis as of the end of any
fiscal quarter not be less than the following amounts for the quarters
indicated: (i) as of January 1, 2009 to and including March 31, 2009,
$6,000,000; (ii) as of April 1, 2009 to and including September 30, 2009,
$7,000,000; and (iii) as of October 1, 2009 and thereafter, $9,500,000.
                                                                               
                               
4.  Capital Expenditures
                                             
 
aggregate of all expenditures (whether paid in cash or accrued as liabilities)
for property, plant or equipment and which would be reflected as additions to
property, plant or equipment on a balance sheet, including all Capitalized Lease
Obligations.
               
  a.
 
                                                           
$
  (4)                              
(4) Section 6.1(d) of the Credit Agreement requires that Capital Expenditures of
the Borrower and its Subsidiaries on a consolidated basis as of the end of any
fiscal year not be greater than $2,000,000.
                                                                               
   
5.  Funds Subject to Mandatory Prepayment - Asset Dispositions
                                           
a.
Asset Dispositions during the current fiscal year
       
$
  (5)                               
(5) Asset Dispositions under Section 6.5 of the Credit Agreement cannot, when
aggregated with the consideration for all previous Asset Dispositions during the
same fiscal year, exceed $1,000,000.  Under Section 2.5(b) of the Credit
Agreement, so long as no Event of Default has occurred and is continuing, no
prepayment shall be required with respect to and Asset Disposition to the extent
that, within 90 days following such disposition, such net Proceeds are used to
invest in assets of the same or similar type and use as those disposed of and
provided that the Agent shall have a first-priority Lien thereon (subject to
Section 6.3 of the Credit Agreement).
                                                                               
                                                           
6.  Funds Subject to Mandatory Prepayment - Insurance and Condemnation Proceeds
                                       
a.
insurance proceeds aggregating more than $200,000 (or in any amount after the
occurrence and during the continuance of an Event of Default) after the Closing
Date with respect to any Property which are not fully applied (or contractually
committed and approved by the Agent if such proceeds equal or exceed $500,000)
toward repair or replacement of such damaged Property by the earlier of (i) 90
days after the receipt thereof and (ii) the occurrence of a Default
                                                                               
                                                     
$
                                 
 
condemnation proceeds aggregating more than $200,000 (or in any amount after the
occurrence and during the continuance of an Event of Default) after the Closing
Date with respect to any Property which are not fully applied (or contractually
committed and approved by the Agent if such proceeds equal or exceed $500,000)
toward repair or replacement of such condemned Property by the earlier of (i) 90
days after the receipt thereof and (ii) the occurrence of Default
                            b.                                                  
                                                                               
   
$
                                              c.
[Borrower to insert language describing any insurance proceeds or condemnation
proceeds that it has received, including the date of receipt, the amount of such
proceeds received and a description of the affected properties.]
                                                                               
                     

 
As of the Compliance Date, the undersigned represents and warrants to the Agent
and the Lenders as follows:
 
a.           The calculations made and the information contained herein are
derived from the financial statements and books and records of the Borrower and
its Subsidiaries and each and every calculation contained herein correctly
reflects in all material respects those financial statements and books and
records.
 
b.           The representations and warranties contained in the Credit
Agreement and in each other Loan Document and certificate or other writing
delivered to the Agent or any Lender prior to, on or after the Closing Date are
correct on and as of the date hereof in all material respects as though made on
and as of the date hereof except to the extent that such representations and
warranties expressly relate to an earlier date; and
 
c.           No Default has occurred and is continuing.
 
d.           No event has occurred and is continuing, or condition exists, which
reasonably could have a Material Adverse Effect.
 
 
IN WITNESS WHEREOF, THE UNDERSIGNED HAS HEREUNTO SIGNED HIS/HER RESPECTIVE NAME
AS OF THIS _____ DAY OF __________, ____:
 

  PHYSICIANS FORMULA INC.,     a New York corporation          
 
By:
      Name:       Title:            

 
 
 

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EXHIBIT I
 
FORM OF BORROWING BASE CERTIFICATE
 

 
 

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Union Bank, N.A.
                           
 Borrowing Base Certificate
                                                  A.    
ACCOUNTS RECEIVABLE ACTIVITY
                            1  
Accounts Receivable Balance as of ______________
                               
(From Line 11 of Previous Month Certificate)
                            2  
ADD - Gross Sales
                            3  
LESS - Credits
                            4  
NET SALES (Line 2 - Line 3)
                            5  
LESS - Net Collections
                            6  
LESS - Returns and Allowances
                            7  
LESS - Miscellaneous Adjustments
                            8  
LESS - Discounts Allowed
                            9  
GROSS COLLECTIONS (Lines 5+6+7+8)
                            10  
PLUS OR MINUS - Net Miscellaneous Adjustments
                            11  
GROSS ACCOUNTS RECEIVABLE as of
                0                
(Line 1+ Line 4 - Line 9 +/- Line 10)
                              12  
LESS - Ineligible Accounts as of
                0             13  
ELIGIBLE ACCOUNTS RECEIVABLE (Line 11 - Line 12)
                0             14  
GROSS ACCOUNTS RECEIVABLE AVAILABILITY
                0                
(Line 13 X 65% Advance Rate)
                      B.    
INVENTORY
                              15  
INVENTORY PER STOCK STATUS REPORT DATED ______________
    0                     16  
Less Ineligible Inventory:
                                17  
Printed Components
    0                             18  
Work in Process
    0                             19  
Promotional Inventory
    0                             20  
Returns
    0                             21  
Inventory in Transit
    0                             22  
Raw materials in excess of 60%
    0                             23  
Other (Describe)
    0                             24  
Total Ineligible Inventory
            0                        
(Line 15- Sum of Lines 17-23)
                                  25  
Net Eligible Inventory
            0                        
(Line 15- Line 24)
                                  26  
Inventory Availability (Line 25 x 25% or 15% Advance Rate or Sublimit Whichever
is Less)
      0     C    
EQUIPMENT
                                  27  
ORDERLY LIQUIDATION VALUE AS OF March 2009
                    0     D    
CANADIAN PLEDGED ACCOUNTS
                                  28  
FOREIGN CURRENCY DEMAND ACCOUNT
            0                     29  
FOREIGN CURRENCY TIME DEPOSIT
            0                     30  
CONVERSION RATE AS OF ______________
    0                             31  
CANADIAN PLEDGED ACCOUNT BALANCE
                    0     E    
BORROWING BASE
                    0                
(Sum of Line 14, 26, 27 and 31)
                                  32  
 LOAN BALANCE as of   _____________
                    0             33  
NET AVAILABILITY (Lesser of Borrowing Base or Commitment Amount Minus Line 32)
      0                                          
The undersigned represents and warrants that the foregoing information is true,
complete, and correct, and the receivables
 
and inventory reflected herein comply with the representations and warranties
set forth in the security agreement and
 
supplements or amendments, if any, thereto between the undersigned and Union
Bank, N.A.
                                                                               
                                                         
By: _____________________________________
                               
(Signature and Title)
                                                               
Date: __________________
                       

 
 
 

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