exhibit10_10.htm


    
      
        

      

    

    EXHIBIT
10.10

     

    WELLS
FARGO BUSINESS CREDIT

    CREDIT
AND SECURITY AGREEMENT

    
       

      THIS CREDIT AND SECURITY
AGREEMENT (the “Agreement”) is dated November 6, 2009 and is entered into
between Physicians Formula, Inc., a New York corporation (“Company”), and Wells Fargo Bank, National
Association (as more fully defined in Exhibit A,
“Wells Fargo”), acting through its Wells Fargo Business Credit operating
division.

       

      RECITALS

       

      Company
has asked Wells Fargo to provide it with a $25,000,000 revolving line of credit
(the “Line of Credit”) for general corporate purposes in the ordinary course of
business, the repayment of existing indebtedness, and to facilitate the issuance
of letters of credit.  Wells Fargo is agreeable to meeting Company’s
request, provided that Company agrees to the terms and conditions of this
Agreement.

       

      For
purposes of this Agreement, capitalized terms not otherwise defined in the
Agreement shall have the meaning given them in Exhibit A.

       

      
        	
                1.

              	
                AMOUNT
      AND TERMS OF THE LINE OF CREDIT

              


      

       

      1.1           Line of Credit; Limitations on
Borrowings; Termination Date; Use of Proceeds.

       

      (a)           Line of Credit and
Limitations on Borrowing.  Wells Fargo shall make Advances to
Company under the Line of Credit that, together with the L/C Amount, shall not
at any time exceed in the aggregate the lesser of (i) $25,000,000 (the
“Maximum Line Amount”), or (ii) the Borrowing Base set forth in Section 1.2.  Within
these limits, Company may periodically borrow, prepay in whole or in part, and
reborrow.  Wells Fargo has no obligation to make an Advance during a
Default Period or at any time Wells Fargo believes that an Advance would result
in an Event of Default.

       

      (b)           Maturity and Termination
Dates.  Company may request Advances from the date that the
conditions set forth in Section 3 are satisfied until
the earliest of (i) November 6, 2012 (the “Maturity Date”), (ii) the
date Company terminates the Line of Credit in full, or (iii) the date Wells
Fargo terminates the Line of Credit following an Event of Default (the earliest
of such dates, the “Termination Date”).

       

      (c)           Use of Line of Credit
Proceeds.  Company shall use the proceeds of each Advance and
each Letter of Credit to repay borrowings to Union Bank, N.A. (“Existing
Lender”) and for general corporate purposes in the ordinary course of
business.

       

      (d)           Revolving
Note.  Company’s obligation to repay the Advances under the
Line of Credit, regardless of how initiated under Section 1.3, shall be
evidenced by a revolving promissory note (as renewed, amended, substituted or
replaced from time to time, the “Revolving Note”).

       

      
        
           


        

        
           


          
            

          

        

        
           


        

      

      


      
        	
                 
      

              	
                1.2

              	
                Borrowing
      Base; Mandatory Prepayment.

              


      

       

      (a)           Borrowing
Base.  The borrowing base (the “Borrowing Base”) is an amount
equal to:

       

      (i)           65%
or such lesser percentage of Eligible Accounts as Wells Fargo in its Permitted
Discretion may deem appropriate; provided that this rate may be (x) reduced
at any time by Wells Fargo in its Permitted Discretion by one percent (1%) for
each percentage point by which Dilution on the date of determination is in
excess of twenty-five percent (25%) or (y) increased at any time by Wells
Fargo in its Permitted Discretion by one percent (1%) for each percentage point
by which Dilution on the date of determination is less than twenty-five percent
(25%), plus

       

      
        	
                 
      

              	
                (ii)

              	
                the
      least
      of:

              


      

       

      
        	
                 
      

              	
                (1)

              	
                $14,000,000;

              


      

       

      
        	
                 
      

              	
                (2)

              	
                the
      sum of (without duplication):

              


      

       

      (i)           the
product of (x) the lesser of 85% of the Net Orderly Liquidation Value Percentage
or 65% (or such lesser percentage as Wells Fargo in its Permitted Discretion may
deem appropriate), and (y) Eligible Inventory consisting of finished goods that
are fully packaged, labeled, and ready for shipping, plus

       

      (ii)           the
product of (x) the lesser of 85% of the Net Orderly Liquidation Value Percentage
or 50% (or such lesser percentage as Wells Fargo in its Permitted Discretion may
deem appropriate), and (y) Eligible Inventory consisting of semi-finished goods
which are ready for packaging and shipping, not to exceed $4,000,000, plus

       

      (iii)           the
product of (x) the lesser of 85% of the Net Orderly Liquidation Value Percentage
or 15% (or such lesser percentage as Wells Fargo in its Permitted Discretion may
deem appropriate), and (y) Eligible Inventory consisting of raw materials, not
to exceed $1,500,000, plus

       

      (iv)           the
product of (x) the lesser of 85% of the Net Orderly Liquidation Value Percentage
or 15% (or such lesser percentage as Wells Fargo in its Permitted Discretion may
deem appropriate), and (y) Eligible Inventory consisting of Blank Components,
not to exceed $1,000,000, plus

       

      
        
           


        

        
          2

          
            

          

        

        
           


        

      

      


      (v)           the
product of (x) the lesser of 85% of the Net Orderly Liquidation Value Percentage
or 50% (or such lesser percentage as Wells Fargo in its Permitted Discretion may
deem appropriate), and (y) of Eligible Inventory consisting of Returned Items,
not to exceed $750,000, plus

       

      (iii)           an
amount equal to the United States Dollar equivalent (as determined by Wells
Fargo) of the Canadian Cash Balance, less

       

      (iv)           the
sum of (without duplication) (x) the Working Capital Reserve plus
(y) the Borrowing Base Reserve, less

       

      (v)           Indebtedness
that is not otherwise described in Section 1, including
Indebtedness that Wells Fargo in its sole discretion finds on the date of
determination to be equal to Wells Fargo’s net credit exposure with respect to
any Rate Hedge Agreement, derivative, foreign exchange, deposit, treasury
management or similar transaction or arrangement extended to Company by Wells
Fargo and any Indebtedness owed by Company to Wells Fargo Merchant Services,
L.L.C.

       

      (b)           Mandatory Prepayment;
Overadvances.  If unreimbursed Advances under the Line of
Credit evidenced by the Revolving Note plus the L/C Amount exceed the Borrowing
Base or the Maximum Line Amount at any time, then Company shall immediately
prepay the Revolving Note in an amount sufficient to eliminate the excess, and
if payment in full of the Revolving Note is insufficient to eliminate this
excess and the L/C Amount continues to exceed the Borrowing Base, then Company
shall deliver cash to Wells Fargo in an amount equal to the remaining excess for
deposit to the Special Account, unless in each case, Wells Fargo has delivered
to Company an Authenticated Record consenting to the Overadvance prior to its
occurrence, in which event the Overadvance shall be temporarily permitted on
such terms and conditions as Wells Fargo in its sole discretion may deem
appropriate, including the payment of additional fees or interest, or
both.

       

      
        	
                 
      

              	
                1.3

              	
                Procedures
      for Line of Credit Advances.

              


      

       

      (a)           Advances Credited to
Operating Account.  All Advances, whether accruing interest at
the Floating Rate (“Floating Rate Advances”) or at the Fixed Rate (“Fixed Rate
Advances”), shall be credited to Company’s demand deposit account maintained
with Wells Fargo (the “Operating Account”), unless the parties agree in an
Authenticated Record to disburse to another account.

       

      (b)           Advances upon Company’s
Request.  Company may request one or more Advances on any
Business Day.  Each request shall be deemed a request for a Floating
Rate Advance unless Company specifically requests that an Advance be funded as a
Fixed Rate Advance as provided in Section 1.5.  No
request for an Advance will be deemed received until Wells Fargo acknowledges
receipt, and Company, if requested by Wells Fargo, confirms the request in an
Authenticated Record.  Company shall repay all Advances, even if the
Person requesting the Advance on behalf of Company lacked
authorization.

       

      
        
           


        

        
          3

          
            

          

        

        
           


        

      

      


      (c)           Advances through Loan
Manager.  If Wells Fargo has separately agreed that Company may
use the Wells Fargo Loan Manager service (“Loan Manager”), Line of Credit
Advances will be initiated by Wells Fargo and credited to the Operating Account
as Floating Rate Advances as of the end of each Business Day in an amount
sufficient to maintain an agreed upon ledger balance in the Operating Account,
subject only to Line of Credit availability as provided in Section 1.1(a).  If
Wells Fargo terminates Company’s access to Loan Manager, Company may continue to
request Line of Credit Advances as provided in Section 1.3(b).  Wells
Fargo shall have no obligation to make an Advance through Loan Manager during a
Default Period, or in an amount in excess of Line of Credit availability, and
may terminate Loan Manager at any time in its sole
discretion.  Advances through Loan Manager shall not be made as Fixed
Rate Advances.

       

      (d)           Protective Advances;
Advances to Pay Indebtedness Due.  Wells Fargo may initiate a
Floating Rate Advance on the Line of Credit in its sole discretion for any
reason at any time, without Company’s compliance with any of the conditions of
this Agreement, and (i) disburse the proceeds directly to third Persons in
order to protect Wells Fargo’s interest in Collateral or to perform any of
Company’s obligations under this Agreement, or (ii) apply the proceeds to
the amount of any Indebtedness then due and payable to Wells Fargo.

       

      1.4           Floating Rate
Advances.  Company may request an Advance at the Floating Rate
no later than 9:00 a.m. Pasadena, California Time on the Business Day on which
Company wants the Floating Rate Advance to be funded.  Rate Hedges may
not be used with respect to any Advance that utilizes the Floating
Rate.

       

      
        	
                 
      

              	
                1.5

              	
                Fixed
      Rate Advances and Rate Hedges.

              


      

       

      (a)           Fixed Rates for Fixed Rate
Interest Periods; Quotation of Rates.  Wells Fargo will quote
Company a fixed interest rate based on LIBOR as defined in Section 1.7 (a “Fixed Rate”)
for a three (3) month term (each a “Fixed Rate Interest Period”, as more fully
defined in Exhibit A),
which Fixed Rate Interest Period will commence on the Business Day on which the
Advance is to be funded, provided that the request is received by Wells Fargo no
later than 9:00 a.m. Pasadena, California Time three (3) Business Days prior to
the Business Day that the Advance is to be funded.  If Company does
not promptly accept the quoted Fixed Rate, then the quote shall expire and any
subsequent request for a quote shall be subject to redetermination by Wells
Fargo.

       

      (b)           Procedure for Requesting and
Renewing Fixed Rate Advances.  Company may request a Fixed Rate
Advance, or convert a Floating Rate Advance to a Fixed Rate Advance, or renew an
existing Fixed Rate Advance, provided that Wells Fargo receives the request no
later than 9:00 a.m. Pasadena, California Time three (3) Business Days prior to
the Business Day that will be the first day of the new Fixed Rate Interest
Period.  Each request shall specify the principal amount to be
advanced at the Fixed Rate, or to be converted from the Floating Rate, or to be
renewed, and shall be confirmed in an Authenticated Record if requested by Wells
Fargo.  Each Fixed Rate Advance shall be in multiples of $500,000 and
in the minimum amount of at least $500,000.  No more than four (4)
separate Fixed Rate Advances may be outstanding at any time.

       

      
        
           


        

        
          4

          
            

          

        

        
           


        

      

      


      (c)           Expiration of Fixed Rate
Advances.  Unless a Fixed Rate Advance is subject to a Rate
Hedge, or is renewed, paid, or prepaid on or before the expiration of the
related Fixed Rate Interest Period, each Fixed Rate Advance shall automatically
be converted to the Floating Rate upon the expiration of the Fixed Rate Interest
Period.  An expiring Fixed Rate Advance may not be renewed for a new
Fixed Rate Interest Period if a Default Period is in effect, unless a Rate Hedge
applies to the Fixed Rate Advance.

       

      (d)           Fixed Rate Advances Subject
to a Rate Hedge; Interest Rate Floors.  Any Fixed Rate Advance
may be made subject to a Rate Hedge pursuant to the separate agreement of
Company and Wells Fargo.  Any Fixed Rate Advance subject to a Rate
Hedge shall automatically and continuously renew for successive Fixed Rate
Interest Periods until the earlier of the Termination Date or the termination of
the Rate Hedge for any reason, after which time the Advance will accrue interest
at the Floating Rate, and subject to the Default Rate, if
applicable.  If the Floating Rate, which determines Fixed Rate Advance
pricing, is subject to a minimum interest rate floor, the interest rate floor
will not apply to the calculation of interest accruing with respect to any Fixed
Rate Advance at any time that a Rate Hedge is currently in
effect.  Upon termination of any Rate Hedge, the minimum interest rate
floor shall resume application to Fixed Rate Advance borrowings that were
formerly subject to such Rate Hedge.

       

      (e)           Taxes and Regulatory
Costs.  Company shall also pay Wells Fargo with respect to any
Fixed Rate Advance based on LIBOR, all (i) withholdings, interest
equalization taxes, stamp taxes or other taxes (except income and franchise
taxes) imposed by any domestic or foreign governmental authority that are
related to LIBOR, and (ii) future, supplemental, emergency or other changes
in the LIBOR Reserve Percentage, the assessment rates imposed by the Federal
Deposit Insurance Corporation, or similar costs imposed by any domestic or
foreign governmental authority or resulting from compliance by Wells Fargo with
any request or directive (whether or not having the force of law) from any
central bank or other governmental authority that are related to LIBOR but not
otherwise included in the calculation of LIBOR.  In determining which
of these amounts are attributable to an existing Fixed Rate Advance that is
based on LIBOR, any reasonable allocation made by Wells Fargo among its
operations shall be deemed conclusive and binding.

       

      1.6           Collection
of Accounts and Application to Revolving Note.

       

      (a)           The Collection
Account.  Company has granted a security interest to Wells
Fargo in the Collateral, including without limitation, all
Accounts.  Except as otherwise agreed by both parties in an
Authenticated Record, all Proceeds of Accounts and other Collateral (other than
the Separate Collateral Bank Account, so long as no Event of Default has
occurred), upon receipt or collection, shall be deposited each Business Day into
the Collection Account (including, but not limited to, (i) all payments required
to be remitted to Wells Fargo in accordance with the payoff letter executed by
Union Bank, N.A., and (ii) any payments or funds received from Union Bank, N.A.
in connection with the closing of Company’s deposit accounts maintained at Union
Bank, N.A. or as a result of the exercise of any rights or remedies by Wells
Fargo under any control agreements that pertain to Company’s deposit accounts
maintained at Union Bank, N.A.); provided, however, that:

       

      
        
           


        

        
          5

          
            

          

        

        
           


        

      

      


      (i)           Company
shall arrange for all Proceeds of Accounts and other Collateral arising from
Company’s Canadian operations to be paid directly to a lockbox maintained by the
Royal Bank of Canada, and the funds that are received in such lockbox shall be
remitted directly to the Canadian Concentration Account (provided that for the
120-day period after the date of this Agreement, such funds may be remitted to a
Canadian Dollar denominated account maintained by Company with Union Bank, N.A.
(“UB Canadian Account”));

       

      (ii)           Funds
held in the Canadian Concentration Account may be maintained in such account
until such time as:

       

      (1)           During
a Default Period, Wells Fargo may (in Wells Fargo’s sole discretion) direct that
such funds be transferred to the Collection Account;

       

      (2)           So
long as no Default Period is existing, Company may from time to time request
that Wells Fargo arrange for such funds to be transferred to either the
Collection Account or to the Canadian Operating Account, provided that funds
transferred to the Canadian Operating Account shall be limited to the amount
necessary to pay costs and expenses incurred in connection with the Company’s
Canadian operations; and

       

      (3)           Notwithstanding,
the immediately preceding clause (2), if the aggregate amount of funds held in
the UB Canadian Account, Canadian Concentration Account and the Canadian
Operating Account exceeds C$2,000,000 at any time, Company shall, within 10 days
after such occurrence, arrange to transfer to the Collection Account an amount
necessary to reduce the aggregate balance in such accounts below
C$2,000,000;

       

      (iii)           Company
may maintain the Canadian Operating Account, so long as Company only maintains
funds in such account as is necessary to pay costs and expenses incurred in
connection with Company’s Canadian operations and Wells Fargo maintains a first
priority perfected Lien on such account and all funds held in such account and
control over such account pursuant to, if applicable, a control agreement in
form and substance acceptable to Wells Fargo.  During a Default
Period, Wells Fargo may (in Wells Fargo’s sole discretion) arrange to transfer
any funds in the Canadian Operating Account to the Collection Account and apply
such funds to the Indebtedness or continue to hold all or any part of such funds
as collateral for the Indebtedness;

       

      (iv)           During
a Default Period, Wells Fargo may in Wells Fargo’s sole discretion demand that
all funds in the UB Canadian Account be transferred to the Collection Account
(or another account designated by Wells Fargo), in which case Company shall
arrange for the immediate transfer of all such funds to the Wells
Fargo-designated account;

       

      (v)           Company
may continue to maintain its California Lockbox with Union Bank, N.A. for up to
120 days after the date of this Agreement, so long as any funds in the
California Lockbox account are transferred each Business Day to the Collection
Account and Company does not have any control rights over such California
Lockbox account;

       

      
        
           


        

        
          6

          
            

          

        

        
           


        

      

      


      (vi)           Company
may continue to maintain an operating account with Union Bank, N.A. for up to
120 days after the date of this Agreement, so long as Wells Fargo maintains a
first priority perfected Lien on such account and all funds held in such account
and control over such account pursuant to a control agreement in form and
substance acceptable to Wells Fargo; and

       

      (vii)           Company
may continue to maintain the UB Canadian Account for up to 120 days after the
date of this Agreement.

       

      Funds
deposited in the Collection Account (“Account Funds”) may only be withdrawn from
the Collection Account by Wells Fargo.

       

      (b)           Payment of Accounts by
Company’s Account Debtors.  Company shall instruct all account
debtors to make payments either directly to the Lockbox for deposit by Wells
Fargo directly to the Collection Account, or instruct them to deliver such
payments to Wells Fargo by wire transfer, ACH, or other means as Wells Fargo may
direct for deposit to the Collection Account or for direct application to the
Line of Credit; provided that (i) proceeds of Accounts and other Collateral
arising from Company’s Canadian operations may be paid directly to a lockbox
maintained by the Royal Bank of Canada as provided in Section 1.6(a), and
(ii) Company may continue to maintain its California Lockbox with Union Bank,
N.A. for up to 120 days after the date of this Agreement in accordance with
Section
1.6(a).  If Company receives a payment or the Proceeds of
Collateral directly, Company will promptly deposit the payment or Proceeds into
the Collection Account or, if such payment is a Canadian Dollar payment, into
the Canadian Concentration Account.  Until deposited, it will hold all
such payments and Proceeds in trust for Wells Fargo without commingling with
other funds or property.  All deposits held in the Collection Account
or the Canadian Concentration Account shall constitute Proceeds of Collateral
and shall not constitute the payment of Indebtedness.

       

      (c)           Application of Payments to
Revolving Note.  Wells Fargo will withdraw Account Funds
deposited to the Collection Account and pay down borrowings on the Line of
Credit by applying them to the Revolving Note on the first Business Day
following the Business Day of deposit to the Collection Account, or, if payments
are received by Wells Fargo that are not first deposited to the Collection
Account pursuant to any treasury management service provided to Company by Wells
Fargo, such payments shall be applied to the Revolving Note as provided in the
Master Agreement for Treasury Management Services and the relevant service
description.  All payments shall be applied first to any unpaid
Floating Rate Advances, and once paid, to outstanding Fixed Rate
Advances.  If more than one Fixed Rate Advance is outstanding, the
payments shall be applied to such Fixed Rate Advances in the order and in the
amounts as Wells Fargo may deem appropriate, unless Company specifies at the
time of payment how such payments are to be applied.

       

      
        	
                 
      

              	
                1.7

              	
                Interest
      and Interest Related Matters.

              


      

       

      (a)           Interest Rates Applicable to
Line of Credit.  Except as otherwise provided in this
Agreement, the unpaid principal amount of each Line of Credit Advance evidenced
by the Revolving Note shall accrue interest at an annual interest rate
calculated as follows:

       

      
        
           


        

        
          7

          
            

          

        

        
           


        

      

      


      Floating
Rate Pricing

       

      The
“Floating Rate” for Advances under the Line of Credit = An interest rate equal
to Daily Three Month LIBOR plus three and one-half percent (3.50%) per annum,
which interest rate shall change whenever Daily Three Month LIBOR
changes;

       

      Or

       

      Fixed
Rate Pricing

       

      The
“Fixed Rate” for Advances under the Line of Credit = An interest rate equal
to the Floating Rate in effect on the first Business Day of the Fixed Rate
Interest Period (inclusive of the margin applicable to the Floating Rate, and
subject to the minimum interest rate, if applicable, unless a Rate Hedge applies
to the Fixed Rate Advance);

       

      Multiple
Advances under the Line of Credit may simultaneously accrue interest at both the
Floating Rate and at the Fixed Rate, subject to the limitations of Section 1.5(b).

       

      (b)           Minimum Interest
Charge.  Notwithstanding the other terms of Section 1.7 to the contrary,
and except as limited by the usury savings provision of Section 1.7(e), Company shall
pay Wells Fargo at least $25,000 of interest, in arrears, on the first day of
each calendar month (the “Minimum Interest Charge”) during the term of this
Agreement, and Company shall pay any deficiency between the Minimum Interest
Charge and the amount of interest otherwise payable on the first day of each
month and on the Termination Date.  When calculating this deficiency,
the Default Rate set forth in Section 1.7(c), if
applicable, shall be disregarded.

       

      (c)           Default Interest
Rate.  Commencing on the day an Event of Default occurs,
through and including the date identified by Wells Fargo in a Record as the date
that the Event of Default has been cured or waived (each such period a “Default
Period”), or during a time period specified in Section 1.10, or at any time
following the Termination Date, in Wells Fargo’s sole discretion and without
waiving any of its other rights or remedies, the principal amount of the
Revolving Note shall bear interest at a rate that is three percent (3.0%) above
the contractual rate set forth in Section 1.7(a) (the “Default
Rate”), or any lesser rate that Wells Fargo may deem appropriate, starting on
the first day of the month in which the Default Period begins through the last
day of that Default Period, or any shorter time period to which Wells Fargo may
agree in an Authenticated Record.

       

      (d)           Interest Accrual on Payments
Applied to Revolving Note.  Payments received by Wells Fargo
shall be applied to the Revolving Note as provided in Section 1.6(c), but the
principal amount paid down shall continue to accrue interest through the end of
the first Business Day following the Business Day that the payment was applied
to the Revolving Note.

       

      (e)           Usury.  No
interest rate shall be effective which would result in a rate greater than the
highest rate permitted by law.  Payments in the nature of interest and
other charges made under any Loan Documents or any other document or agreement
described in or related to this Agreement that are later determined to be in
excess of the limits imposed by applicable usury law will be deemed to be a
payment of principal, and the Indebtedness shall be reduced by that amount so
that such payments will not be deemed usurious.

       

      
        
           


        

        
          8

          
            

          

        

        
           


        

      

      


      
        	
                 
      

              	
                1.8

              	
                Fees.

              


      

       

      (a)           Origination
Fee.  Company shall pay Wells Fargo a one-time origination fee
of $250,000, which shall be fully earned and payable upon the execution of this
Agreement.

       

      (b)           Unused Line
Fee.  Company shall pay Wells Fargo an annual unused line fee
of one-half percent (0.5%) of the sum of (the “Unused Amount”) (i) the daily
average of the Maximum Line Amount, less (ii) the daily average aggregate
outstanding Advances, less (iii) the daily average L/C Amount, from the date of
this Agreement to and including the Termination Date, which unused line fee
shall be payable monthly in arrears on the first day of each month and on the
Termination Date.

       

      (c)           Facility
Fee.  [Intentionally Omitted.]

       

      (d)           Collateral
Exam Fees.  Company shall pay Wells
Fargo fees in connection with any collateral exams, audits or inspections
conducted by or on behalf of Wells Fargo at the current rates established from
time to time by Wells Fargo as its collateral exam fees (which fees are
currently $135.00 per hour per collateral examiner), together with all actual
out-of-pocket costs and expenses incurred in conducting any collateral
examination or inspection; provided that Company shall not, with the
exception of fees, costs, and expenses incurred during Default Periods, be
required to reimburse Wells Fargo for more than four such exams, audits, or
inspections per calendar year.

       

      (e)           Collateral Monitoring
Fees.  Company shall pay Wells Fargo a fee at the rates
established from time to time by Wells Fargo as its Collateral monitoring fees
(which fees are currently $1,000 per month), due and payable monthly in advance
on the first day of each month.

       

      (f)           Line of Credit Termination
and/or Reduction Fees.  If (i) Wells Fargo terminates the
Line of Credit during a Default Period, (ii) Company terminates the Line of
Credit on a date prior to the Maturity Date, or (iii) Company and Wells
Fargo agree to reduce the Maximum Line Amount, then Company shall pay Wells
Fargo as liquidated damages a termination or reduction fee in an amount equal to
a percentage of the Maximum Line Amount (or the reduction of the Maximum Line
Amount, as the case may be) calculated as follows:  (A) three
percent (3.0%) if the termination or reduction occurs on or before the first
anniversary of the first Line of Credit Advance; (B) one and one-half
percent (1.5%) if the termination or reduction occurs after the first
anniversary of the first Line of Credit Advance, but on or before the second
anniversary of the first Line of Credit Advance; and (C) one-half percent
(0.5%) if the termination or reduction occurs after the second anniversary of
the first Line of Credit Advance.

       

      (g)           Overadvance
Fees.  [Intentionally Omitted].

       

      
        
           


        

        
          9

          
            

          

        

        
           


        

      

      


      (h)           Treasury Management
Fees.  Company will pay service fees to Wells Fargo for
treasury management services provided pursuant to the Master Agreement for
Treasury Management Services or any other agreement entered into by the parties,
in the amount prescribed in Wells Fargo’s current service fee
schedule.

       

      (i)           Letter of Credit
Fees.  Company shall pay a fee with respect to each Letter of
Credit issued by Wells Fargo of three and one-half percent (3.5%) of the
aggregate undrawn amount of the Letter of Credit (the “Aggregate Face Amount”)
accruing daily from and including the date the Letter of Credit is issued until
the date that it either expires or is returned, which shall be payable monthly
in arrears on the first day of each month and on the date that the Letter of
Credit either expires or is returned; and following an Event of Default, this
fee shall increase to six and one-half percent (6.5%) of the Aggregate Face
Amount, commencing on the first day of the month in which the Default Period
begins and continuing through the last day of such Default Period, or any
shorter time period that Wells Fargo in its sole discretion may deem
appropriate, without waiving any of its other rights and remedies.

       

      (j)           Letter of Credit
Administrative Fees.  Company shall pay all administrative fees
charged by Wells Fargo in connection with the honoring of drafts under any
Letter of Credit, and any amendments to or transfers of any Letter of Credit,
and any other activity with respect to the Letters of Credit at the current
rates published by Wells Fargo for such services rendered on behalf of its
customers generally.

       

      (k)           Other Fees and
Charges.  [Intentionally Omitted].

       

      (l)           Termination and Prepayment
Fees Following Refinance by a Wells Fargo Commercial Banking
Group.  If after May 6, 2011, the Line of Credit is
refinanced in full by a Wells Fargo Commercial Banking Office and this Agreement
is terminated, such refinancing will not be deemed a termination or prepayment
resulting in the payment of termination and/or prepayment fees pursuant to
Section 1.8(f), or Fixed Rate Advance breakage fees, provided that Company
agrees, at the time of such refinancing by a Wells Fargo Commercial Banking
Office, to the payment of comparable termination and/or prepayment fees in an
amount not less than that set forth in this Agreement, in the event that any
facilities extended under such refinancing are terminated early or prepaid after
the refinancing.

       

      (m)           Fixed Rate Advance Breakage
Fees.  Company may prepay any Fixed Rate Advance at any time in
any amount, whether voluntarily or by acceleration; provided, however, that if the
Fixed Rate Advance is prepaid, Company shall pay Wells Fargo upon demand a Fixed
Rate Advance breakage fee equal to the sum of the discounted monthly differences
for each month from the month of prepayment through the month in which the Fixed
Rate Interest Period matures,  calculated as follows for each such
month:

       

      (i)           Determine the amount
of interest that would have accrued each month on the amount prepaid at the
interest rate applicable to such amount had it remained outstanding until the
last day of the applicable Fixed Rate Interest Period.

       

      (ii)           Subtract from the
amount determined in (i) above the amount of interest that would have accrued
for the same month on the amount of principal prepaid for the remaining term of
the Fixed Rate Interest Period at a rate equal to LIBOR in effect on the date of
prepayment for new loans extended at a Fixed Rate for the remainder of the Fixed
Rate Interest Period in a principal amount equal to the amount
prepaid.

       

      
        
           


        

        
          10

          
            

          

        

        
           


        

      

      


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

       

      Company
acknowledges that prepayment of the Revolving Note may result in Wells Fargo
incurring additional costs, expenses or liabilities, and that it is difficult to
ascertain the full extent of such costs, expenses or
liabilities.  Company agrees to pay the above-described Fixed Rate
Advance breakage fee and agrees that this amount represents a reasonable
estimate of the Fixed Rate Advance breakage costs, expenses and/or liabilities
of Wells Fargo.

       

      
        	
                 
      

              	
                1.9

              	
                Interest Accrual; Principal and
      Interest Payments;
Computation.

              


      

       

      (a)           Interest Payments and
Interest Accrual.  Accrued and unpaid interest under the
Revolving Note on Floating Rate Advances shall be due and payable in arrears on
the first day of each month (each an “Interest Payment Date”) and on the
Termination Date, and shall be paid in the manner provided in Section 1.6(c).  Interest
shall accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the date of Advance to the Interest Payment
Date.  Interest accruing on any Fixed Rate Advance shall be due and
payable on the last day of the applicable Fixed Rate Interest Period and on the
Termination Date; provided, however, that if a Fixed Rate Interest Period is in
excess of one month, and is not subject to a Rate Hedge, then interest shall
nevertheless be due and payable monthly on the last day of each month, and on
the last day of the Fixed Rate Interest Period.  Interest payable on
any Fixed Rate Advance subject to a Rate Hedge shall be payable on the earlier
of the last day of the Fixed Rate Interest Period or the Termination
Date.

       

      (b)           Payment of Revolving Note
Principal.  The principal amount of the Revolving Note shall be
paid from time to time as provided in this Agreement, and shall be fully due and
payable on the Termination Date.

       

      (c)           Payments Due on Non Business
Days.  If an Interest Payment Date or the Termination Date
falls on a day which is not a Business Day, payment shall be made on the next
Business Day, and interest shall continue to accrue during that time
period.

       

      (d)           Computation of Interest and
Fees.  Interest accruing on the unpaid principal amount of the
Revolving Note and fees payable under this Agreement shall be computed on the
basis of the actual number of days elapsed in a year of 360 days.

       

      (e)           Liability
Records.  Wells Fargo shall maintain accounting and bookkeeping
records of all Advances and payments under the Line of Credit and all other
Indebtedness due to Wells Fargo in such form and content as Wells Fargo in its
sole discretion deems appropriate.  Wells Fargo’s calculation of
current Indebtedness shall be presumed correct unless proven otherwise by
Company.  Upon Wells Fargo’s request, Company will admit and certify
in a Record the exact principal balance of the Indebtedness that Company then
believes to be outstanding.  Any billing statement or accounting
provided by Wells Fargo shall be conclusive and binding unless Company notifies
Wells Fargo in a detailed Record of its intention to dispute the billing
statement or accounting within 30 days of receipt.

       

      
        
           


        

        
          11

          
            

          

        

        
           


        

      

      


      1.10        Termination, Reduction or Non-Renewal
of Line of Credit by Company; Notice.

       

      (a)           Termination by Company after
Advance Notice.  Company may terminate or reduce the Line of
Credit at any time prior to the Maturity Date, if it (i) delivers an
Authenticated Record notifying Wells Fargo of its intentions at least 30 days
prior to the proposed Termination Date or date upon which such reduction shall
be deemed effective, as applicable, (ii) pays Wells Fargo the termination
fee set forth in Section 1.8(f),
and (iii) pays the Indebtedness in full or down to the reduced Maximum Line
Amount.  Any reduction in the Maximum Line Amount shall be in
multiples of $500,000, with a minimum reduction of at least
$1,000,000.

       

      (b)           Termination by Company
without Advance Notice.  If Company fails to deliver Wells
Fargo timely notice of its intention to terminate the Line of Credit or reduce
the Maximum Line Amount as provided in Section 1.10(a), Company may
nevertheless terminate the Line of Credit or reduce the Maximum Line Amount and
pay the Indebtedness in full or down to the reduced Maximum Line Amount if it
(i) pays the termination fee set forth in Section 1.8(f),
and (ii) pays additional interest for each day that the notice was short of
the required 30 days notice, which interest shall be in an amount that is equal
to the greater of (A) interest calculated at the Default Rate based on
Company’s average borrowings under the Line of Credit for the one month prior to
the date that Wells Fargo receives delivery of an Authenticated Record giving it
actual notice of Company’s intention to terminate or reduce the Line of Credit,
or (B) the unused line fee for the 30 days prior to the date that Wells
Fargo receives delivery of an Authenticated Record giving it actual notice of
Company’s intention to terminate or reduce the Line of Credit, calculated as
provided in Section 1.8(b) of this
Agreement.

       

      (c)           Non-Renewal by Company;
Notice.  [Intentionally Omitted.]

       

      
        	
                 
      

              	
                1.11

              	
                Letters
      of Credit.

              


      

       

      (a)           Issuance of Letters of
Credit; Amount.  Wells Fargo, subject to the terms and
conditions of this Agreement, shall issue, on or after the date that Wells Fargo
is obligated to make its first Advance under this Agreement and prior to the
Termination Date, one or more irrevocable standby or documentary letters of
credit (each, a “Letter of Credit”, and collectively, “Letters of Credit”) for
Company’s account.  Wells Fargo will not issue any Letter of Credit if
the face amount of the Letter of Credit would exceed the least
of:  (i) $1,500,000 less the L/C Amount, (ii) the Borrowing
Base, less an amount equal to aggregate unreimbursed Line of Credit Advances
plus the L/C Amount, or (iii) the Maximum Line Amount less an amount equal to
aggregate unreimbursed Line of Credit Advances plus the L/C Amount.

       

      (b)           Additional Letter of Credit
Documentation.  Prior to requesting issuance of a Letter of
Credit, Company shall first execute and deliver to Wells Fargo a Standby Letter
of Credit Agreement or a Commercial Letter of Credit Agreement, as applicable,
an L/C Application, and any other documents that Wells Fargo may request, which
shall govern the issuance of the Letter of Credit and Company’s obligation to
reimburse Wells Fargo for any related Letter of Credit draws (the “Obligation of
Reimbursement”).

       

      
        
           


        

        
          12

          
            

          

        

        
           


        

      

      


      (c)           Expiration.  No
Letter of Credit shall be issued that has an expiry date that is later than one
(1) year from the date of issuance, or the Maturity Date in effect on the date
of issuance, whichever is earlier.

       

      (d)           Obligation of Reimbursement
During Default Periods.  If Company is unable, due to the
existence of a Default Period or for any other reason, to obtain an Advance to
pay any Obligation of Reimbursement, Company shall pay Wells Fargo on demand and
in immediately available funds, the amount of the Obligation of Reimbursement
together with interest, accrued from the date of presentment of the underlying
draft until reimbursement in full at the Default Rate.  Wells Fargo is
authorized, alternatively and in its sole discretion, to make an Advance in an
amount sufficient to discharge the Obligation of Reimbursement and pay all
accrued but unpaid interest and fees with respect to the Obligation of
Reimbursement.

       

      1.12        Special Account.  If
the Line of Credit is terminated for any reason while a Letter of Credit is
outstanding, or if after prepayment of the Revolving Note the L/C Amount
continues to exceed the Borrowing Base, then Company shall promptly pay Wells
Fargo in immediately available funds for deposit to the Special Account, an
amount equal, as the case may be, to either (a) the L/C Amount plus any
anticipated fees and costs, or (b) the amount by which the L/C Amount
exceeds the Borrowing Base.  If Company fails to pay these amounts
promptly, then Wells Fargo may in its sole discretion make an Advance to pay
these amounts and deposit the proceeds to the Special Account.  The
Special Account shall be an interest bearing account maintained with Wells Fargo
or any other financial institution acceptable to Wells Fargo.  Wells
Fargo may in its sole discretion apply amounts on deposit in the Special Account
to the Indebtedness.  Company may not withdraw amounts deposited to
the Special Account until the Line of Credit has been terminated and all
outstanding Letters of Credit have either been returned to Wells Fargo or have
expired and the Indebtedness has been fully paid.

       

      
        	
                2.

              	
                SECURITY
      INTEREST AND OCCUPANCY OF COMPANY’S
PREMISES

              


      

       

      2.1           Grant of Security
Interest.  Company hereby pledges, collaterally assigns and
grants to Wells Fargo, for the benefit of Wells Fargo and as agent for Wells
Fargo Merchant Services, L.L.C., a Lien and security interest (collectively
referred to as the “Security Interest”) in the Collateral, as security for the
payment and performance of all Indebtedness; 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 Wells Fargo, Company shall grant Wells Fargo, for the benefit of
Wells Fargo and as agent for Wells Fargo Merchant Services, L.L.C., 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.  Wells Fargo 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 Wells Fargo for security and must be paid
directly to Wells Fargo.  Company shall join in giving such notice and
shall Authenticate any Record giving such notice upon Wells Fargo’s
request.  After Company or Wells Fargo gives such notice, Wells Fargo
may, but need not, in Wells Fargo’s or in Company’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.  Wells Fargo may,
in Wells Fargo’s name or in Company’s name, as Company’s agent and
attorney-in-fact, notify the United States Postal Service to change the address
for delivery of Company’s mail to any address designated by Wells Fargo,
otherwise intercept Company’s mail, and receive, open and dispose of Company’s
mail, applying all Collateral as permitted under this Agreement and holding all
other mail for Company’s account or forwarding such mail to Company’s last known
address.

       

      
        
           


        

        
          13

          
            

          

        

        
           


        

      

      


      2.3           Collateral Assignment of
Insurance.  As additional security for the Indebtedness,
Company hereby collaterally assigns to Wells Fargo and to Wells Fargo Merchant
Services, L.L.C., all rights of Company 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 Company hereby directs the issuer of each policy
to pay all such monies directly to Wells Fargo.  At any time, whether
or not a Default Period then exists, Wells Fargo may (but need not), in Wells
Fargo’s or Company’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 Wells Fargo, 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 Wells Fargo and, as determined by Wells Fargo
in its sole discretion, either be applied to prepayment of the Indebtedness or
disbursed to Company under staged payment terms reasonably satisfactory to Wells
Fargo 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

              	
                Company’s
      Premises.

              


      

       

      (a)           Wells Fargo’s Right to
Occupy Company’s Premises.  Company hereby grants to Wells
Fargo the right, at any time during a Default Period and without notice or
consent, to take exclusive possession of all locations where Company conducts
its business or has any rights of possession, including without limitation the
locations described on Exhibit B (the
“Premises”), until the earlier of (i) payment in full and discharge of all
Indebtedness and termination of the Line of Credit, or (ii) final sale or
disposition of all items constituting Collateral and delivery of those items to
purchasers.

       

      (b)           Wells Fargo’s Use of
Company’s Premises.  During any Default Period, Wells Fargo 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 Wells Fargo in good faith.

       

      
        
           


        

        
          14

          
            

          

        

        
           


        

      

      


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

       

      2.5           License.  Without
limiting the generality of any other Security Document, Company hereby grants to
Wells Fargo a non-exclusive, worldwide and royalty-free license during any
Default Period to use or otherwise exploit all Intellectual Property Rights of
Company 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 Company for its own manufacturing and subject to Company’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.  Company authorizes Wells Fargo to file financing
statements describing Collateral to perfect Wells Fargo’s Security Interest in
the Collateral, and Wells Fargo 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 Company and are hereby
re-authorized.  Following the termination of the Line of Credit and
payment of all Indebtedness, Wells Fargo shall, at Company’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.  Wells
Fargo shall, at Company’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 Wells
Fargo’s receipt of the following, in form and content satisfactory to Wells
Fargo: (i) cash payment in full of all Indebtedness and a completed
performance by Company with respect to its other obligations under this
Agreement, (ii) evidence that the commitment of Wells Fargo to make
Advances under the Line of Credit or under any other facility with Company has
been terminated, (iii) a release of all claims against Wells Fargo by
Company relating to Wells Fargo’s performance and obligations under the Loan
Documents, and (iv) an agreement by Company, any Guarantor, and any new
lender to Company to indemnify Wells Fargo for any payments received by Wells
Fargo that are applied to the Indebtedness as a final payoff that may
subsequently be returned or otherwise not paid for any reason.

       

      
        
           


        

        
          15

          
            

          

        

        
           


        

      

      


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

       

      2.8           Collateral Related
Matters.  This Agreement does not contemplate a sale of
Accounts or chattel paper, and, as provided by law, Company is entitled to any
surplus and shall remain liable for any deficiency.  Wells Fargo’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 Wells Fargo need not otherwise preserve, protect,
insure or care for such Collateral.  Wells Fargo shall not be
obligated to preserve rights Company 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.  Wells Fargo has no obligation to clean-up or prepare
Collateral for sale.  Company waives any right it may have to require
Wells Fargo to pursue any third Person for any of the Indebtedness.

       

      2.9           Notices Regarding Disposition of
Collateral.  If notice to Company 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 7.4 at least ten (10)
calendar days before the date of intended disposition or other
action.

       

      
        	
                3.

              	
                CONDITIONS
      PRECEDENT

              


      

       

      3.1           Conditions Precedent to Initial
Advance and Issuance of Initial Letter of Credit.  Wells
Fargo’s obligation to make the initial Advance or issue the first Letter of
Credit shall be subject to the condition that Wells Fargo shall have received
this Agreement and each of the Loan Documents, and any document, agreement, or
other item described in or related to this Agreement, and all fees and
information described in Exhibit C,
executed and in form and content satisfactory to Wells Fargo.

       

      3.2           Additional Conditions Precedent to
All Advances and Letters of Credit.  Wells Fargo’s obligation
to make any Advance (including the initial Advance) or issue any Letter of
Credit shall be subject to the further additional conditions: (a) that the
representations and warranties described in Exhibit D are
correct on the date of the Advance or the issuance of the Letter of Credit,
except to the extent that such representations and warranties relate solely to
an earlier date; and (b) that no event has occurred and is continuing, or
would result from the requested Advance or issuance of the Letter of Credit that
would result in an Event of Default.

       

      
        
           


        

        
          16

          
            

          

        

        
           


        

      

      


      
        	
                4.

              	
                REPRESENTATIONS
      AND WARRANTIES

              


      

       

      To induce
Wells Fargo to enter into this Agreement, Company makes the representations and
warranties described in Exhibit D.  Any
request for an Advance will be deemed a representation by Company that all
representations and warranties described in Exhibit D are
true, correct, and complete as of the time of the request, unless they relate
exclusively to an earlier date.  Company shall promptly deliver a
Record notifying Wells Fargo of any change in circumstance that would affect the
accuracy of any representation or warranty, unless the representation and
warranty specifically relates to an earlier date.

       

      
        	
                5.

              	
                COVENANTS

              


      

       

      So long
as the Indebtedness remains unpaid, or the Line of Credit has not been
terminated, Company shall comply with each of the following covenants, unless
Wells Fargo shall consent otherwise in an Authenticated Record delivered to
Company.

       

      5.1           Reporting
Requirements.  Company shall deliver to Wells Fargo the
following information, compiled where applicable using GAAP consistently
applied, in form and content acceptable to Wells Fargo:

       

      (a)           Annual Financial
Statements.  As soon as available and in any event within 90
days after Company’s fiscal year end, Company’s audited financial statements
prepared by an independent certified public accountant acceptable to Wells
Fargo, which shall include Company’s balance sheet, income statement, and
statement of retained earnings and cash flows prepared, if requested by Wells
Fargo, 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 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.  Each Compliance Certificate
that accompanies an annual financial statement shall also be accompanied by
(i) copies of all management letters prepared by Company’s accountants; and
(ii) a detailed statement, including computations, signed by the accountant
demonstrating whether or not Company is in compliance with the financial
covenants of this Agreement.  In addition, Company shall use
commercially reasonable efforts to obtain and deliver to Wells Fargo 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,

       

      (b)           Monthly Financial
Statements.  As soon as available and in any event within 30
days after the end of each month, a Company 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 Wells Fargo, 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 Wells
Fargo, subject to quarter-end and year-end adjustments and the absence of
footnotes.  The financial statements shall be accompanied by (i) a
Compliance Certificate in the form of Exhibit E that
is signed by a Responsible Officer, and (ii) an account statement detailing the
activity of the Separate Collateral Bank Account.

       

      
        
           


        

        
          17

          
            

          

        

        
           


        

      

      


      (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 Company,
Company’s 10-Q financial reports filed with the Securities and Exchange
Commission.  This requirement may be satisfied by Company by posting a
link to the filing on the Company’s publicly-accessible website.

       

      (d)           Collateral
Reports.  No later than 15 days after each month end (or more
frequently if Wells Fargo shall request it), detailed agings of Company’s
accounts receivable and accounts payable, an accounts receivable reconciliation
report, a detailed inventory report, an inventory certification report, a report
on modifications to the payment terms of any Accounts, and a calculation of
Company’s Accounts, Eligible Accounts, Inventory and Eligible Inventory as of
the end of that month or shorter time period requested by Wells
Fargo.

       

      (e)           Projections.  No
later than 15 days after the beginning of each fiscal year, Company’s projected
balance sheet and income statement and statement of cash flows for each month of
such fiscal year, certified by a Responsible Officer to the effect that (a) such
projections were prepared in good faith by Company, (ii) Company 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)           Supplemental
Reports.  Weekly, Wells Fargo’s standard form of “weekly
collateral report”, together with receivables schedules, collection reports,
copies of credit memos that exceed $250,000, and copies of invoices in excess of
$50,000, and shipment documents and delivery receipts for goods sold to account
debtors in excess of $50,000.

       

      (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 Wells Fargo of any litigation or other proceeding
before any court or governmental agency which seeks a monetary recovery against
Company in excess of $100,000.

       

      (i)           Intellectual
Property.  (i) No later than 30 days after the end of each
fiscal quarter, a Record notifying Wells Fargo of any Intellectual Property
Rights of Company acquired during such fiscal quarter, together with copies of
all registrations and filings with respect to same; (ii) except as
permitted under Section 5.18 and except for
Permitted Liens, no later than five Business Days before it disposes of material
Intellectual Property Rights, a Record notifying Wells Fargo of Company’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 Wells Fargo; and (iii) promptly after a Responsible Officer
obtains actual knowledge thereof (and in any event, within five Business Days),
a Record notifying Wells Fargo of (A) any Infringement by any Person of
material Intellectual Property Rights owned by the Company, (B) any written
material claims that Company is Infringing on another Person’s Intellectual
Property Rights, and (C) except as permitted under Section 5.18, any threatened
cancellation, termination or material limitation of the material Owned
Intellectual Property or Licensed Intellectual Property.

       

      
        
           


        

        
          18

          
            

          

        

        
           


        

      

      


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

       

      (k)           Disputes.  Promptly
upon discovery, a Record notifying Wells Fargo of (i) any disputes or
claims by Company’s customers exceeding $250,000, individually or in the
aggregate, during any fiscal year; (ii) credit memos not previously
reported in Section 5.1(f); and
(iii) any goods returned to or recovered by Company outside of the ordinary
course of business.

       

      (l)           Changes in Officers and
Directors.  Promptly following occurrence, a Record notifying
Wells Fargo of any change in the persons constituting Company’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 Wells Fargo 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 Wells Fargo of any commercial tort claims brought by Company against
any Person, including the name and address of each defendant, a summary of the
facts, an estimate of Company’s damages, copies of any complaint or demand
letter submitted by Company, and such other information as Wells Fargo 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 Company shall have sent to its Owners.

       

      (p)           Tax Returns of
Company.  No later than five days after they are required to be
filed, copies of Company’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 Wells Fargo of Company’s violation of any law,
rule or regulation, the non-compliance with which could have a Material Adverse
Effect on Company.

       

      
        
           


        

        
          19

          
            

          

        

        
           


        

      

      


      (s)           Pension
Plans.  (i) Promptly upon discovery, and in any event
within 30 days after Company knows that any Reportable Event with respect to any
Pension Plan has occurred, a Record authenticated by a Responsible Officer
notifying Wells Fargo of the Reportable Event in detail and the actions which
Company 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 Company
fails to make a required quarterly Pension Plan contribution under
Section 412(m) of the IRC, a Record authenticated by a Responsible Officer
notifying Wells Fargo of the failure in detail and the actions that Company 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 Company 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 notifying Wells Fargo of the details of the event and the actions that
Company proposes to take in response.

       

      (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 Wells Fargo may request.

       

      5.2           Financial
Covenants.  Company 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.  Company 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

              	
                $49,250,000

              
	
                December
      31, 2009

              	
                $46,750,000

              
	
                January
      31, 2010

              	
                $47,000,000

              
	
                February
      28, 2010

              	
                $47,500,000

              
	
                March
      31, 2010

              	
                $48,000,000

              
	
                April
      30, 2010

              	
                $48,500,000

              
	
                May
      31, 2010

              	
                $48,750,000

              
	
                June
      30, 2010

              	
                $48,750,000

              
	
                July
      31, 2010

              	
                $48,250,000

              
	
                August
      31, 2010

              	
                $47,750,000

              
	
                September
      30, 2010

              	
                $47,250,000

              
	
                October
      31, 2010

              	
                $47,250,000

              
	
                November
      30, 2010

              	
                $46,750,000

              
	
                December
      31, 2010

              	
                $46,500,000

              
	
                January
      31, 2011

              	
                $46,500,000

              
	
                February
      28, 2011

              	
                $46,500,000

              


      

       

      
        
           


        

        
          20

          
            

          

        

        
           


        

      

       

      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.  Company shall achieve Adjusted EBITDA each fiscal
quarter, for the twelve-month period then ended, of not less than the amount set
forth below for each such period:

       

      


      
        	
                12-Month Period Ending

              	
                Minimum Adjusted EBITDA

              
	
                December
      31, 2009

              	
                $7,600,000

              
	
                March
      31, 2010

              	
                $12,300,000

              
	
                June
      30, 2010

              	
                $11,850,000

              
	
                September
      30, 2010

              	
                $10,150,000

              
	
                December
      31, 2010

              	
                $8,950,000

              


      

      


       

      (c)           Capital
Expenditures.  Company shall not incur or contract to incur
Capital Expenditures of more than the following:  (i) fiscal year
ending December 31, 2009, $6,000,000; and (ii) fiscal year ending December 31,
2010, $5,500,000. provided, however, in the event Company does not expend the
entire $6,000,000 during the fiscal year ending December 31, 2009, Company may
carry forward to the fiscal year ending December 31, 2010 (but not to subsequent
fiscal years) up to $600,000 of such unutilized portion.  All Capital
Expenditures during fiscal year 2010 shall be applied first to reduce the
$5,500,000 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
5.2(a), (b), and (c), Company and
Wells Fargo agree to negotiate in good faith to establish, no later than April
30, 2010, minimum Book Net Worth, minimum Adjusted EBITDA, and maximum Capital
Expenditures requirements for such future periods through the Maturity
Date.

       

      
        
          
          

        

        
          21

          
            

          

        

        
          
          

        

      

       

      
        	
                 
      

              	
                5.3

              	
                Other
      Liens and Permitted Liens.

              


      

       

      (a)           Other Liens; Permitted
Liens.  Company 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 Company or any Guarantor’s business or
operations; (ii) Liens in existence on the date of this Agreement that are
described in Exhibit F;
(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 $500,000 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 Company or the applicable Guarantor and such
Liens do not have a priority over the Lien of Wells Fargo 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 Company 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 Company 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 Company and the Guarantors; (xiv)
precautionary Liens filed by equipment lessors pursuant to operating leases of
the Company and the Guarantors; provided that no such
Lien covers any property other than the property subject to such lease; (xv)
Liens arising from any judgment against Company or Guarantor not constituting an
Event of Default so long such Liens do not have a priority over the Lien of
Wells Fargo in the Collateral; and (xvi) Liens securing Indebtedness permitted
by Sections 5.4(f) and (g).

       

      (b)           Financing
Statements.  Company shall not authorize the filing of any
financing statement by any Person as Secured Party with respect to any of
Company’s assets, other than by (i) Wells Fargo or (ii) a Person
holding a Permitted Lien (provided such filing shall only cover the assets of
Company in which such Person is allowed to have a Permitted Lien in accordance
with this Section 5.3.  Company
shall not amend any financing statement filed by Wells Fargo as Secured Party
except as permitted by law.

       

      
        
          
          

        

        
          22

          
            

          

        

        
          
          

        

      

       

      5.4           Indebtedness.  Company
shall not incur, create, assume or permit to exist any indebtedness or liability
on account of deposits or letters of credit issued on Company’s behalf, or
advances or any indebtedness for borrowed money of any kind, whether or not
evidenced by an instrument, except:  (a) Indebtedness described
in this Agreement; (b) indebtedness of Company described in Exhibit F, and
any Refinancing Indebtedness in respect of such indebtedness (provided that if
the amount of the Refinancing Indebtedness exceeds $500,000, Company shall
provide Wells Fargo with 10 days prior notice of Company’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 $500,000; (e) Capitalized Lease Obligations in a
principal amount not exceeding $500,000 outstanding at anytime; (f) indebtedness
incurred by Company 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 $1,500,000 outstanding at any time; (g) indebtedness
owed to Subordinated Creditor, so long as such indebtedness remains subject to a
Subordination Agreement; (h) unsecured interest rate hedge agreements or
currency hedge agreements entered into in the ordinary course of Company’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 5.4
in an aggregate principal amount not exceeding $100,000 at any
time.  With respect to any such indebtedness owing to Subordinated
Creditors, Company shall only make payments of such indebtedness to the extent
permitted under the terms of the applicable Subordination Agreement or
Intercreditor Agreement.

       

      5.5           Guaranties.  Company
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 Company 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 in Exhibit F,
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 $100,000 in the aggregate at any time
outstanding.

       

      5.6           Investments and
Subsidiaries.  Company 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 $100,000,000 (which certificates of deposit or
bankers’ acceptances are fully insured by the Federal Deposit Insurance
Corporation) (“Cash Equivalents”);

       

      (b)           Travel
advances or loans to Company’s Officers and employees not exceeding at any one
time an aggregate outstanding balance of $50,000;

       

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

       

      
        
           


        

        
          23

          
            

          

        

        
           


        

      

      


      (d)           Current
investments in those Subsidiaries in existence on the date of this Agreement
which are identified on Exhibit D;

       

      (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 5.6;

       

      (h)           deposits
made in the ordinary course of business securing contractual obligations of
Company to the extent constituting a Permitted Lien; provided that if any such
deposit exceeds $50,000, Company shall promptly notify Wells Fargo of the
materials terms of such deposit;

       

      (i)           Contingent
Obligations expressly permitted hereunder;

       

      (j)           deposit
accounts maintained at Wells Fargo and at Union Bank, N.A. to the extent
permitted by Section
1.6(a);

       

      (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 $250,000 in the
aggregate at any time outstanding.

       

      5.7           Dividends and
Distributions.  Except as set forth in this Agreement, Company
shall not declare or pay any dividends (other than dividends payable solely in
stock of Company) 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 Permitted Indebtedness, to the extent not prohibited by any
intercreditor or subordination agreement to which Wells Fargo is a party
(including the Intercreditor Agreement)) or make any distribution regarding its
stock, either directly or indirectly; provided that (i) Company may make
distributions to Holdings, in amount not to exceed $100,000 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) Company may make distributions to Holdings to the extent
that Holdings pays, on behalf of Company, any taxes owing by
Company;

       

      5.8           Salaries.  [Intentionally
Omitted.]

       

      5.9           Key Person Life
Insurance.  [Intentionally Omitted.]

       

      
        
           


        

        
          24

          
            

          

        

        
           


        

      

      


      
        	
                 
      

              	
                5.10

              	
                Books and Records; Collateral
      Examination; Inspection and
Appraisals.

              


      

       

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

       

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

       

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

       

      (d)           Collateral
Appraisals.  Wells Fargo 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 Company’s expense, an appraisal of Company’s
inventory and other Collateral by an appraiser acceptable to Wells Fargo in its
sole discretion; provided that during a Default Period Wells Fargo may obtain at
any time (and from time to time) in Wells Fargo’s sole discretion such
appraisals of the Company’s inventory and other Collateral at Company’s
expense.

       

      
        	
                 
      

              	
                5.11

              	
                Account Verification; Payment
      of Permitted Liens.

              


      

       

      (a)           Account
Verification.  Wells Fargo or its agents may (i) contact
account debtors and other obligors at any time to verify Company’s Accounts; and
(ii) require Company 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.  Company 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
5.3(a).

       

      
        	
                 
      

              	
                5.12

              	
                Compliance with
      Laws.

              


      

       

      (a)           General Compliance with
Applicable Law; Use of Collateral.  Company 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 federal, state or
local law, statute or ordinance.

       

      
        
           


        

        
          25

          
            

          

        

        
           


        

      

      


      (b)           Compliance with Federal
Regulatory Laws.  Company 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 Line of Credit or any other financial
accommodation extended by Wells Fargo to be used 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.

       

      (c)           Compliance with
Environmental Laws.  Company 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.

       

      5.13           Payment of Taxes and Other
Claims.  Company 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 Company, although Company
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.

       

      
        	
                 
      

              	
                5.14

              	
                Maintenance of Collateral and
      Properties.

              


      

       

      (a)           Company
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 Company may discontinue the operation and
maintenance of any properties if Company believes that such discontinuance is
desirable to the conduct of its business and not disadvantageous in any material
respect to Wells Fargo.  Company shall take all commercially
reasonable steps necessary to protect and maintain its Intellectual Property
Rights.

       

      (b)           Company
shall defend the Collateral against all Liens, claims and demands of all third
Persons claiming any interest in the Collateral.  Company shall keep
all Collateral free and clear of all Liens except Permitted
Liens.  Company 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.

       

      
        
           


        

        
          26

          
            

          

        

        
           


        

      

      


      5.15           Insurance.  Company
shall at all times maintain insurance with insurers acceptable to Wells Fargo,
in such amounts and on such terms (including deductibles) as Wells Fargo 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 Wells Fargo as an additional
insured.

       

      5.16           Preservation of
Existence.  Company 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.

       

      5.17           Delivery of Instruments,
etc.  Upon written request by Wells Fargo, Company shall
promptly deliver to Wells Fargo 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 Company.

       

      5.18           Sale or Transfer of Assets;
Suspension of Business Operations.  Company 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 Company; (v) subject to Section 5.23, 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 Company; and (vi) transfers arising from investments, loans and
advances to the extent permitted under Section 5.6.  Company
shall not liquidate, dissolve or suspend business operations.  Company
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 Company 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 Company
transfers (other than by license) any Intellectual Property Rights for value,
Company shall pay the Proceeds to Wells Fargo for application to the
Indebtedness.  Company shall not license any other Person to use any
of Company’s Intellectual Property Rights, except that Company may grant
licenses in the ordinary course of its business in connection with sales of
Inventory or the provision of services to its customers.

       

      5.19           Consolidation and Merger; Asset
Acquisitions.  Company 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 Company, with Company being the survivor
thereof, and (ii) any merger or consolidation of a Subsidiary into another
Subsidiary.  Company shall not form or acquire any additional
Subsidiary after the date of this Agreement.

       

      
        
           


        

        
          27

          
            

          

        

        
           


        

      

      


      5.20           Sale and
Leaseback.  Company shall not enter into any arrangement,
directly or indirectly, with any other Person pursuant to which Company 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 Company intends to use for substantially the same purpose or
purposes as the property being sold or transferred.

       

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

       

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

       

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

       

      5.24           Pension
Plans.  Except as disclosed to Wells Fargo in a Record prior to
the date of this Agreement, neither Company 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.

       

      5.25           Place of Business;
Name.  Company will not transfer its chief executive office or
principal place of business, or move, relocate, close or sell any business
Premises, unless (i) Wells Fargo has received 30 days advance notice
thereof, (ii) Wells Fargo continuously maintains a perfected Lien on the
Collateral with the priority contemplated by this Agreement, and (iii) Company
exercises commercially reasonable efforts to provide Wells Fargo with a
Collateral Access Agreement no later than the date that such transfer, move, or
relocation occurs; provided that with respect to this clause (iii), Wells
Fargo may establish a Borrowing Base Reserve equal to three-months rent for any
location for which Wells Fargo does not receive a Collateral Access
Agreement.  Company 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.  Company will not change its name or jurisdiction
of organization.

       

      5.26           Constituent
Documents.  Company will not amend its Constituent
Documents.

       

      5.27           Separate Collateral Bank
Account.  After the initial deposit of funds into the Separate
Collateral Bank Account that occurs on or about the date of this Agreement,
Company shall not deposit additional sums into the Separate Collateral Bank
Account, and Company may use the funds in the Separate Collateral Bank Account
for Capital Expenditures and general corporate purposes.  Company
shall close the Separate Collateral Bank Account no later than March 31, 2011,
and any funds remaining in the Separate Collateral Bank Account at the time it
is closed shall be transferred to the Collection Account.

       

      
        
           


        

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

       

      5.29           Wells Fargo Appointed as Company’s
Attorney in Fact.  To facilitate Wells Fargo’s performance or
observance of Company’s obligations under this Agreement, Company hereby
irrevocably appoints Wells Fargo and Wells Fargo’s agents, as Company’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 Company 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 Company in
accordance with the terms of this Agreement.

       

      
        	
                6.

              	
                EVENTS
      OF DEFAULT AND REMEDIES

              


      

       

      
        	
                 
      

              	
                6.1

              	
                Events of
      Default.  An “Event of Default” means any of the
      following:

              


      

       

      (a)           Company
fails to pay any the amount of any Indebtedness on the date that it becomes due
and payable;

       

      (b)           Company
fails to observe or perform (i) any covenant or agreement of Company set forth
in Sections
5.1(f),
(k), (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 Company set forth in Section 5.12 and such failure
shall not be cured within 30 days after the occurrence of such failure,
(iii) any covenant or agreement of Company set forth in Section 5.13; provided that
if such a breach of Section 5.13 relates to a
tax, assessment or charge that is less than $50,000, Company 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 Company in this Agreement (not described
in clauses (i),
(ii), and (iii) of this paragraph (b)), or in
any of the Loan Documents or any Rate Hedge Agreement;

       

      (c)           Any
covenant in Section 5.2 becomes
inapplicable due to the lapse of time, and Company and Wells Fargo fail to come
to an agreement, acceptable to Wells Fargo in its reasonable discretion, to
amend the covenant to apply to future periods;

       

      (d)           An
Overadvance arises as the result of any reduction in the Borrowing Base, or
arises in any manner or on terms not otherwise approved of in advance by Wells
Fargo in a Record that it has Authenticated; provided that if such Overadvance
is less than $100,000 and Company has not experienced an Overadvance on any
previous occasion during the fiscal quarter in which such Overadvance occurs,
such Overadvance shall not constitute an Event of Default unless it is not
eliminated within three (3) Business Days of the occurrence of such
Overadvance;

       

      
        
           


        

        
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      (e)           An
event of default or termination event (however defined) occurs under any Rate
Hedge Agreement, derivative, foreign exchange, or similar transaction or
arrangement entered into between Company and Wells Fargo, except for such a
termination initiated by Company that is accompanied by a concurrent payment in
full by Company of any termination fees and other payments resulting from such
termination;

       

      (f)           A
Change of Control shall occur;

       

      (g)           (i)
Company or any Guarantor becomes insolvent or admits in a Record an inability to
pay debts as they mature, or Company or any Guarantor makes an assignment for
the benefit of creditors; or Company or any Guarantor applies for or consents to
the appointment of any receiver, trustee, or similar officer for the benefit of
Company 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
Company 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 Company or any Guarantor which remains undismissed,
undischarged, unstayed, or unbonded for a period of 60 days or
longer;

       

      (h)           (i)
Company or any Guarantor files a petition under any chapter of the United States
Bankruptcy Code or under the laws of any other jurisdiction naming Company or
such Guarantor as debtor; (ii) any such petition is instituted against Company
or any such Guarantor which remains undismissed or undischarged for a period of
60 days or longer; (iii) Company 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 Company or any such Guarantor
which remains undismissed or undischarged for a period of 60 days or
longer;

       

      (i)           [Intentionally
Omitted];

       

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

       

      (k)           A
final, non-appealable arbitration award, judgment, or decree or order for the
payment of money in an amount in excess of $500,000 (to the extent not insured
or subject to indemnity), is entered against Company which is not stayed or
appealed within 60 days from the entry thereof;

       

      
        
           


        

        
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      (l)           
Company is in default beyond any applicable grace period with respect to (i) any
bond, debenture, note or other evidence of indebtedness issued by Company that
is held by any third Person other than Wells Fargo, 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 $500,000
individually or in the aggregate;

       

      (m)           Company
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)           Company
fails to pay any indebtedness or obligation owed to Wells Fargo which is
unrelated to the Line of Credit or 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)           Company
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 Wells Fargo in Wells
Fargo’s Permitted Discretion;

       

      (r)           (i)
Company 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 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 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 Company is indicted for a felony offence under
state or federal law, or Company 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 Company who has been
convicted of any such felony offense; and/or

       

      (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 Company gives Wells Fargo 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) Company or any ERISA Affiliate files for a
distress termination of any Pension Plan under Title IV of ERISA;
(iii) Company or any ERISA Affiliate fails to make any quarterly Pension
Plan contribution required under Section 412(m) of the IRC, which may,
either by itself or in combination with other failures, result in the imposition
of a Lien on Company’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 Company to the Multiemployer Plan under Title IV of
ERISA.

       

      
        
           


        

        
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      6.2           Rights and
Remedies.  During any Default Period, Wells Fargo may in its
discretion exercise any or all of the following rights and
remedies:

       

      (a)           Wells
Fargo may terminate the Line of Credit and decline to make Advances, and
terminate any services extended to Company under the Master Agreement for
Treasury Management Services;

       

      (b)           Wells
Fargo may declare the Indebtedness to be immediately due and payable and
accelerate payment of the Revolving Note, and all Indebtedness shall immediately
become due and payable, without presentment, notice of dishonor, protest or
further notice of any kind, all of which Company hereby expressly
waives;

       

      (c)           Wells
Fargo may, without notice to Company, apply any money owing by Wells Fargo to
Company to payment of the Indebtedness;

       

      (d)           Wells
Fargo may exercise and enforce any rights and remedies available upon default to
a secured party under the UCC, including the right to take possession of
Collateral (without posting a bond or other form of security, which Company
hereby waives), to proceed with or without judicial process (without a prior
hearing or notice of hearing, which Company hereby waives) and to sell, lease or
otherwise dispose of Collateral for cash or on credit (with or without giving
warranties as to condition, fitness, merchantability or title to Collateral, and
in the event of a credit sale, Indebtedness shall be reduced only to the extent
that payments are actually received), and Company will upon Wells Fargo’s demand
assemble the Collateral and make it available to Wells Fargo at any place
designated by Wells Fargo which is reasonably convenient to both
parties;

       

      (e)           Wells
Fargo may exercise and enforce its rights and remedies under any of the Loan
Documents and any other document or agreement described in or related to this
Agreement;

       

      (f)           Company
will pay Wells Fargo upon demand in immediately available funds an amount equal
to the Aggregate Face Amount plus any anticipated costs and fees for deposit to
the Special Account pursuant to Section 1.10;

       

      (g)           Wells
Fargo may for any reason apply for the appointment of a receiver of the
Collateral (to which appointment Company hereby consents) without the necessity
of posting a bond or other form of security (which Company hereby waives);
and

       

      
        
           


        

        
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      (h)           Wells
Fargo may exercise any other rights and remedies available to it by law or
agreement.

       

      6.3           Immediate Default and
Acceleration.  Following the occurrence of an Event of Default
described in Section 6.1(g) or Section 6.1(h),
the Line of Credit shall immediately terminate and all of Company’s Indebtedness
shall immediately become due and payable without presentment, demand, protest or
notice of any kind.

       

      
        	
                7.

              	
                MISCELLANEOUS

              


      

       

      7.1           No Waiver; Cumulative
Remedies.  No delay or any single or partial exercise by Wells
Fargo of any right, power or remedy under the Loan Documents, or under any other
document or agreement described in or related to this Agreement, shall
constitute a waiver of any other right, power or remedy under the Loan Documents
or granted by Company to Wells Fargo under other agreements or documents that
are unrelated to the Loan Documents.  No notice to or demand on
Company in any circumstance shall entitle Company to any additional notice or
demand in any other circumstances.  The remedies provided in the Loan
Documents or in any other document or agreement described in or related to this
Agreement are cumulative and not exclusive of any remedies provided by
law.  Wells Fargo shall comply with applicable law in connection with
a disposition of Collateral, and such compliance will not be considered to
adversely affect the commercial reasonableness of any sale of the
Collateral.

       

      7.2           Amendments; Consents and Waivers;
Authentication.  No amendment or modification of any Loan
Documents, or any other document or agreement described in or related to this
Agreement, or consent to or waiver of any Event of Default, or consent to or
waiver of the application of any covenant or representation set forth in any of
the Loan Documents, or any other document or agreement described in or related
to this Agreement, or any release of Wells Fargo’s Security Interest in any
Collateral, shall be effective unless it has been
agreed to by Wells Fargo and memorialized in a Record that:
(a) specifically states that it is intended to amend or modify specific
Loan Documents, or any other document or agreement described in or related to
this Agreement, or waive any Event of Default or the application of any covenant
or representation of any terms of specific Loan Documents, or any other document
or agreement described in or related to this Agreement, or is intended to
release Wells Fargo’s Security Interest in specific Collateral; and (b) is
Authenticated by the signature of an authorized employee of both parties, or by
an authorized employee of Wells Fargo with respect to a consent or
waiver.  The terms of an amendment, consent or waiver memorialized in
any Record shall be effective only to the extent, and in the specific instance,
and for the limited purpose to which Wells Fargo has agreed.

       

      7.3           Execution in Counterparts; Delivery
of Counterparts.  This Agreement and all other Loan Documents,
or any other document or agreement described in or related to this Agreement,
and any amendment or modification to them may be Authenticated by the parties in
any number of counterparts, each of which, once authenticated and delivered in
accordance with the terms of this Section 7.3, will be deemed
an original, and all such counterparts, taken together, shall constitute one and
the same instrument.  Delivery by fax or by encrypted e-mail or e-mail
file attachment of any counterpart to any Loan Document Authenticated by an
authorized signature will be deemed the equivalent of the delivery of the
original Authenticated instrument.  Company shall send the original
Authenticated counterpart to Wells Fargo by first class U.S. mail or by
overnight courier, but Company’s failure to deliver a Record in this form shall
not affect the validity, enforceability, and binding effect of this Agreement or
the other Loan Documents, or any other document or agreement described in or
related to this Agreement.

       

      
        
           


        

        
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      7.4           Notices, Requests, and
Communications; Confidentiality.  Except as otherwise expressly
provided in this Agreement:

       

      (a)           Delivery of Notices,
Requests and Communications.  Any notice, request, demand, or
other communication by either party that is required under the Loan Documents,
or any other document or agreement described in or related to this Agreement, to
be in the form of a Record (but excluding any Record containing information
Company must report to Wells Fargo under Section 5.1) may be delivered
(i) in person, (ii) by first class U.S. mail, (iii) by overnight
courier of national reputation, or (iv) by fax, or the Record may be sent
as an Electronic Record and delivered (v) by an encrypted e-mail, or
(vi) through Wells Fargo’s Commercial Electronic Office® (“CEO”) portal or
other secure electronic channel to which the parties have agreed.

       

      (b)           Addresses for
Delivery.  Delivery of any Record under this Section 7.4 shall be made to
the appropriate address set forth on the last page of this Agreement (which
either party may modify by a Record sent to the other party), or through Wells
Fargo’s CEO portal or other secure electronic channel to which the parties have
agreed.

       

      (c)           Date of
Receipt.  Each Record sent pursuant to the terms of this Section 7.4 will be deemed to
have been received on (i) the date of delivery if delivered in person,
(ii) the date deposited in the mail if sent by mail, (iii) the date
delivered to the courier if sent by overnight courier, (iv) the date of
transmission if sent by fax, or (v) the date of transmission, if sent as an
Electronic Record by electronic mail or through Wells Fargo’s CEO portal or
similar secure electronic channel to which the parties have agreed; except that
any request for an Advance or any other notice, request, demand or other
communication from Company required under Section 1, and any request
for an accounting under Section 9-210 of the UCC, will not be deemed to
have been received until actual receipt by Wells Fargo on a Business Day by an
authorized employee of Wells Fargo.

       

      (d)           Confidentiality of
Unencrypted E-mail.  Company acknowledges that if it sends an
Electronic Record to Wells Fargo without encryption or receives an Electronic
Record from Wells Fargo by e-mail or as an e-mail file attachment, there is a
risk that the Electronic Record may be received by unauthorized Persons, and
that by so doing it will be deemed to have accepted this risk and the
consequences of any such unauthorized disclosure.

       

      7.5           Company Information Reporting;
Confidentiality.  Except as otherwise expressly provided in
this Agreement:

       

      (a)           Delivery of Company
Information Records.  Any information that Company is required
to deliver under Section 5.1 in the form of a
Record may be delivered to Wells Fargo (i) in person, or by (ii) first
class U.S. mail, (iii) overnight courier of national reputation, or
(iv) fax, or the Record may be sent as an Electronic Record (v) by
encrypted e-mail, or (vi) through the file upload service of Wells Fargo’s CEO
portal or other secure electronic channel to which the parties have
agreed.

       

      
        
           


        

        
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      (b)           Addresses for
Delivery.  Delivery of any Record to Wells Fargo under this
Section 7.5 shall be made to
the appropriate address set forth on the last page of this Agreement (which
Wells Fargo may modify by a Record sent to Company), or through Wells Fargo’s
CEO portal or other secure electronic channel to which the parties have
agreed.

       

      (c)           Date of
Receipt.  Each Record sent pursuant to this Section will be
deemed to have been received on (i) the date of delivery to an authorized
employee of Wells Fargo, if delivered in person, or by U.S. mail, overnight
courier, fax, or e-mail; or (ii) the date of transmission, if sent as an
Electronic Record through Wells Fargo’s CEO portal or similar secure electronic
channel to which the parties have agreed.

       

      (d)           Authentication of Company
Information Records.  Company shall Authenticate any Record
delivered (i) in person, or by U.S. mail, overnight courier, or fax, by the
signature of the Officer or employee of Company who prepared the Record;
(ii) as an Electronic Record sent via encrypted e-mail, by the signature of
the Officer or employee of Company who prepared the Record by any file format
signature that is acceptable to Wells Fargo, or by a separate certification
signed and sent by fax; or (iii) as an Electronic Record via the file
upload service of Wells Fargo’s CEO portal or similar secure electronic channel
to which the parties have agreed, through such credentialing process as Wells
Fargo and Company may agree to under the CEO agreement.

       

      (e)           Certification of Company
Information Records.  Any Record (including without limitation
any Electronic Record) Authenticated and delivered to Wells Fargo under this
Section 7.5 will be deemed to
have been certified as materially true, correct, and complete by Company and
each Officer or employee of Company who prepared and Authenticated the Record on
behalf of Company, and may be legally relied upon by Wells Fargo without regard
to method of delivery or transmission.

       

      (f)           Confidentiality of Company
Information Records Sent by Unencrypted E-mail.  Company
acknowledges that if it sends an Electronic Record to Wells Fargo without
encryption by e-mail or as an e-mail file attachment, there is a risk that the
Electronic Record may be received by unauthorized Persons, and that by so doing
it will be deemed to have accepted this risk and the consequences of any such
unauthorized disclosure.  Company acknowledges that it may deliver
Electronic Records containing Company information to Wells Fargo by e-mail
pursuant to any encryption tool acceptable to Wells Fargo and Company, or
through Wells Fargo’s CEO portal file upload service without risk of
unauthorized disclosure.

       

      7.6           Further
Documents.  Company will from time to time execute, deliver,
endorse and authorize the filing of any instruments, documents, conveyances,
assignments, security agreements, financing statements, control agreements and
other agreements that Wells Fargo may reasonably request in order to secure,
protect, perfect or enforce the Security Interest or Wells Fargo’s rights under
the Loan Documents, or any other document or agreement described in or related
to this Agreement (but any failure to request or assure that Company executes,
delivers, endorses or authorizes the filing of any such item shall not affect or
impair the validity, sufficiency or enforceability of the Loan Documents, or any
other document or agreement described in or related to this Agreement, and the
Security Interest, regardless of whether any such item was or was not executed,
delivered or endorsed in a similar context or on a prior occasion).

       

      
        
           


        

        
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      7.7           Costs and
Expenses.  Company shall pay on demand all costs and expenses,
including without limitation reasonable attorneys’ fees, incurred by Wells Fargo
in connection with the Indebtedness, this Agreement, the Loan Documents, or any
other document or agreement described in or related to this Agreement, and the
transactions contemplated by this Agreement, including without limitation all
such costs, expenses and fees incurred in connection with the negotiation,
preparation, execution, delivery, amendment, administration, performance,
collection and enforcement of the Indebtedness and all such documents and
agreements and the creation, perfection, protection, satisfaction, foreclosure
or enforcement of the Security Interest.

       

      7.8           Indemnity.  In
addition to its obligation to pay Wells Fargo’s expenses under the terms of this
Agreement, Company shall indemnify, defend and hold harmless Wells Fargo, its
parent Wells Fargo & Company, and any of its affiliates and successors,
and all of their present and future Officers, Directors, employees, attorneys
and agents (each an “Indemnitee”) from and against any of the following
(collectively, “Indemnified Liabilities”):

       

      (a)           Any
and all transfer taxes, documentary taxes, assessments or charges made by any
governmental authority by reason of the execution and delivery of the Loan
Documents, or any other document or agreement described in or related to this
Agreement or the making of the Advances;

       

      (b)           Any
claims, loss or damage to which any Indemnitee may be subjected if any
representation or warranty contained in Exhibit D proves
to be incorrect in any respect or as a result of any violation of the covenants
contained in Section 5.12;
and

       

      (c)           Any
and all other liabilities, losses, damages, penalties, judgments, suits, claims,
costs and expenses of any kind or nature whatsoever (including without
limitation the reasonable fees and disbursements of counsel) in connection with
this Agreement and any other investigative, administrative or judicial
proceedings, whether or not such Indemnitee shall be designated a party to such
proceedings, which may be imposed on, incurred by or asserted against any such
Indemnitee, in any manner related to or arising out of or in connection with the
making of the Advances and the Loan Documents, or any other document or
agreement described in or related to this Agreement, or the use or intended use
of the proceeds of the Advances, with the exception of any Indemnified Liability
caused by the gross negligence or willful misconduct of an
Indemnitee.

       

      If any
investigative, judicial or administrative proceeding described in this Section 7.8 is brought
against any Indemnitee, upon the Indemnitee’s request, Company, or counsel
designated by Company and satisfactory to the Indemnitee, will resist and defend
the action, suit or proceeding to the extent and in the manner directed by the
Indemnitee, at Company’s sole cost and expense.  Each Indemnitee will
use its best efforts to cooperate in the defense of any such action, suit or
proceeding.  If this agreement to indemnify is held to be
unenforceable because it violates any law or public policy, Company shall
nevertheless make the maximum contribution to the payment and satisfaction of
each of the Indemnified Liabilities to the extent permissible under applicable
law.  Company’s obligations under this Section 7.8 shall survive the
termination of this Agreement and the discharge of Company’s other obligations
under this Agreement.

       

      
        
           


        

        
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      7.9           Retention of Company’s
Records.  Wells Fargo shall have no obligation to maintain
Electronic Records or retain any documents, schedules, invoices, agings, or
other Records delivered to Wells Fargo by Company in connection with the Loan
Documents, or any other document or agreement described in or related to this
Agreement for more than 30 days after receipt by Wells Fargo.  If
there is a special need to retain specific Records, Company must notify Wells
Fargo of its need to retain or return such Records with particularity, which
notice must be delivered to Wells Fargo in accordance with the terms of this
Agreement at the time of the initial delivery of the Record to Wells
Fargo.

       

      7.10         Binding Effect; Assignment; Complete
Agreement.  The Loan Documents, or any other document or
agreement described in or related to this Agreement, shall be binding upon and
inure to the benefit of Company and Wells Fargo and their respective successors
and assigns, except that Company shall not have the right to assign its rights
under this Agreement or any interest in this Agreement without Wells Fargo’s
prior consent, which must be confirmed in a Record Authenticated by Wells
Fargo.  To the extent permitted by law, Company waives and will not
assert against any assignee any claims, defenses or set-offs which Company could
assert against Wells Fargo.  This Agreement shall also bind all
Persons who become a party to this Agreement as a borrower.  This
Agreement, together with the Loan Documents, or any other document or agreement
described in or related to this Agreement, comprises the complete and integrated
agreement of the parties on the subject matter of this Agreement and supersedes
all prior agreements, whether oral or evidenced in a Record.  To the
extent that any provision of this Agreement contradicts other provisions of the
Loan Documents other than this Agreement, or any other document or agreement
described in or related to this Agreement, this Agreement shall
control.

       

      7.11         Sharing of
Information.  Wells Fargo shall exercise commercially
reasonable efforts to maintain in confidence, in accordance with its customary
procedures for handling Confidential Information, all Confidential Information,
other than any such Confidential Information that becomes generally available to
the public or becomes available to Wells Fargo from a source other than Company
or Guarantors and that is not known to Wells Fargo to be subject to
confidentiality obligations; provided, that Wells Fargo shall have the right to
disclose Confidential Information to:

       

      (a)           Company,
Holdings, and Subsidiaries;

       

      (b)           Wells
Fargo’s affiliates, including each business unit and line of business within
Wells Fargo and each direct and indirect subsidiary of Wells Fargo &
Company;

       

      (c)           Wells
Fargo’s directors, officers, partners, managers, employees, agents, advisors,
representatives, attorneys, professional consultants, portfolio management
services and rating agencies;

       

      
        
           


        

        
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      (d)           any
successor or assign of Wells Fargo, or any Person to whom Wells Fargo offers, is
considering making an offer, or proposes to offer to sell, assign or transfer
any Indebtedness or any part thereof or any interest or participation
therein;

       

      (e)           any
Person that provides statistical analysis and/or information services to Wells
Fargo or its affiliates;

       

      (f)           any
governmental authority or agency to which Wells Fargo is subject at the request
or pursuant to any requirement of such governmental authority or agency, or in
connection with an examination of Wells Fargo by any such governmental authority
or agency; and

       

      (g)           any
Person (A) to the extent required by applicable law, (B) in response to any
subpoena or other legal process or informal investigative demand, (C) in
connection with any litigation, or (D) in connection with the actual or
potential exercise or enforcement of any right or remedy under any Loan
Document.

       

      Notwithstanding
any provision of any Loan Document, Wells Fargo may (i) disclose a general
description of transactions arising under the Loan Documents for advertising,
marketing or other similar purposes, and (ii) use Company’s, Holdings’, or
Subsidiaries’ names, logos or other indicia germane to such party in connection
with such advertising, marketing or other similar purposes.

      


      Notwithstanding
any termination of this Agreement, the terms of this Section 7.11 shall remain in
full force and effect for one year following any such termination.

      


      7.12           Severability of
Provisions.  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.

       

      7.13           Headings.  Section
and subsection headings in this Agreement are included for convenience of
reference only and shall not constitute a part of this Agreement for any other
purpose.

       

      7.14           Definitional Terms and Rules of
Interpretation.  All accounting terms not otherwise defined in
this Agreement shall have the meanings given them in accordance with
GAAP.  Unless the context clearly requires otherwise, the word “or”
has the inclusive meaning represented by the phrase
“and/or”.  Reference to any agreement (including without limitation
the Loan Documents), document or instrument means the agreement, document or
instrument as amended or supplemented, subject to any restrictions on amendment
contained therein (and, if applicable, in accordance with the terms of this
Agreement and the other Loan Documents).  Unless otherwise specified,
any reference to a statute or regulation means that statute or regulation as
amended or supplemented from time to time, and any corresponding provisions of
successor statutes or regulations.

       

      7.15           Governing Law; Jurisdiction,
Venue.  The Loan Documents (other than real estate related
documents, if any) shall be governed by and construed in accordance with the
substantive laws (other than conflict laws) of the State of
California.   The parties to this Agreement (a) consent to
the personal jurisdiction of the state and federal courts located in the State
of California in connection with any controversy related to this Agreement;
(b) waive any argument that venue in any such forum is not convenient;
(c) agree that any litigation initiated by Wells Fargo or Company in
connection with this Agreement or the other Loan Documents may be venued in
either the state or federal courts located in the County of Los Angeles, State
of California; and (d) 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.

       

      
        
           


        

        
          38

          
            

          

        

        
           


        

      

      


      
        	
                8.

              	
                ARBITRATION.

              


      

       

      8.1           Arbitration.  Wells
Fargo and Company 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 Loan Documents, and
their negotiation, execution, collateralization, administration, repayment,
modification, extension, substitution, formation, inducement, enforcement,
default or termination; or (b) requests for additional credit.

       

      8.2           Governing
Rules.  Any arbitration proceeding will (a) proceed in a
location in Los Angeles, California 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.

       

      8.3           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 8.3.

       

      
        
           


        

        
          39

          
            

          

        

        
           


        

      

      


      8.4           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 California or a neutral retired
judge of the state or federal judiciary of California, 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 California 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 California 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.

       

      8.5           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.  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.

       

      8.6           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 Loan 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.

       

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

       

      
        
           


        

        
          40

          
            

          

        

        
           


        

      

      


      8.8           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 Loan Documents or the subject matter of the dispute
shall control.  This arbitration provision shall survive termination,
amendment or expiration of any of the Loan Documents or any relationship between
the parties.

       

      [signatures
on the next page]


      
        
           


        

        
          41

          
            

          

        

        
           


        

      

      


      COMPANY AND WELLS FARGO have
executed this Agreement through their authorized officers as of the date set
forth above.

       

      
        	
                WELLS
      FARGO BANK,

              	 
      	
                PHYSICIANS
      FORMULA, INC.

              
	
                NATIONAL
      ASSOCIATION

              	 
      	
                a
      New York corporation

              
	 
      	 
      	 
      	 
      	 
      
	
                By:

              	
                /s/ Phillip Goessler

              	 
      	
                By:

              	
                /s/ Ingrid Jackel

              
	
                Print
      Name:

              	
                Phillip Goessler

              	 
      	
                Print
      Name:

              	
                Ingrid Jackel

              
	
                Title:

              	
                Vice President

              	 
      	
                Title:

              	
                Chief Executive Officer

              
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	
                Wells
      Fargo, National Association

              	 
      	
                Physicians
      Formula, Inc.

              
	
                245
      South Los Robles Avenue, Suite 700

              	 
      	
                1055
      West 8th Street

              
	
                Pasadena,
      California 91101

              	 
      	
                Azusa,
      California 91702

              
	
                Fax:
      626.844.9063

              	 
      	
                Fax:
      626.812.6010

              
	
                Attention:
      Relationship Manager – Physicians Formula

              	 
      	
                Attention:
      Jeff Berry, CFO

              
	
                e-mail:
      gary.whitaker@wachovia.com

              	 
      	
                e-mail:
      jeff.berry@physiciansformula.com

              
	 
      	 
      	 
      	
                Federal
      Employer Identification No.

              
	 
      	 
      	 
      	
                13-3015258

              
	 
      	 
      	 
      	
                Organizational
      Identification No.

              


      

       

      
        
           


        

        
          S-1

          
            

          

        

        
           


        

      

      


      Exhibit
A to Credit and Security Agreement

       

      DEFINITIONS

       

      “Account
Funds” is defined in Section 1.6(a).

       

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

       

      “Adjusted
EBITDA” means, determined on a consolidated basis for Company and its
wholly-owned subsidiaries, Company’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, and (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 Company’s inventory
reserves for obsolete, excess, or slow moving inventory.

       

      “Advance”
and “Advances” means an advance or advances under the Line of
Credit.

       

      “Affiliate”
or “Affiliates” means Holdings, Physicians Formula Cosmetics, Inc., Physicians
Formula DRTV, LLC and any other Person controlled by, controlling or under
common control with Company, including without limitation any Subsidiary of
Company.  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.

       

      “Aggregate
Face Amount” means the aggregate amount that may then be drawn under each
outstanding Letter of Credit, assuming compliance with all conditions for
drawing.

       

      “Agreement”
means this Credit and Security Agreement.

       

      “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.

       

      “Availability”
means, as of any date of determination, the sum of  (without
duplication) (i) the lesser of the Maximum Line Amount or the Borrowing Base,
less (ii) the
Working Capital Reserve, less (iii) the
Borrowing Base Reserve, less (iv) the
aggregate outstanding Indebtedness (including Advances) owing to Wells Fargo by
Company, less
(v) the L/C Amount, less (vi) the
aggregate amount of all trade payable older than 60 days from the applicable due
date and book overdrafts.

       

      “Average
Excess Availability” means the average amount of Company’s Availability over the
relevant measurement period.

       

      
        
           


        

        
          A-1

          
            

          

        

        
           


        

      

      


      “Blank
Components” means inventory consisting of (i) powders and lotions ready for
packaging, (ii) product packaging, including compacts, brushes and tubes that
are a permanent part of finished goods, and (iii) packaging which is to be
discarded once a product is purchased, such as blister packs, and packaging used
for shipping such as chips and cartons.

       

      “Book Net
Worth” means the aggregate of the Owners’ equity in Company,
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.

       

      “Borrowing
Base” is defined in Section 1.2(a).

       

      “Borrowing
Base Reserve” means, as of any date of determination, an amount or a percent of
a specified category or item that Wells Fargo establishes in its Permitted
Discretion from time to time to reduce availability under the Borrowing Base
(a) to reflect events, conditions, contingencies or risks which affect the
assets, business or prospects of Company, or the Collateral or its value, or the
enforceability, perfection or priority of Wells Fargo’s Security Interest in the
Collateral, as the term “Collateral” is defined in this Agreement, or
(b) to reflect Wells Fargo’s judgment that any collateral report or
financial information relating to Company and furnished to Wells Fargo may be
incomplete, inaccurate or misleading in any material respect.

       

      “Business
Day” means a day on which the Federal Reserve Bank of New York is open for
business and, if such day relates to a Fixed Rate Advance, a day on which
dealings are carried on in the London interbank eurodollar market.

       

      “California
Lockbox” means the lockbox arrangement and related deposit account number
4960003069 maintained by Company with Union Bank, N.A.

       

      “Canadian
Cash Balance” means the cash balance held in the Canadian Concentration Account,
so long as Wells Fargo has a first priority perfected Lien on such account and
all funds held in such account and exclusive control over such account and funds
pursuant to, if applicable, a control agreement that is in form and substance
acceptable to Wells Fargo in Wells Fargo’s Permitted Discretion.

       

      “Canadian
Concentration Account” means Company’s Canadian Dollar deposit account
maintained with Wells Fargo.

       

      “Canadian
Operating Account” means Company’s Canadian Dollar deposit account maintained
with Wells Fargo.

       

      “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 Company’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.

       

      “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.

       

      
        
           


        

        
          A-2

          
            

          

        

        
           


        

      

      


      “Cash
Equivalents” is defined in Section
5.6.

       

      “CEO” is
defined in Section 7.4(a).

       

      “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
Company on the date of the initial Advance 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
Company;

       

      (b)           During
any consecutive two-year period, individuals who at the beginning of such period
constituted the board of Directors of Company (together with any new Directors
whose election to such board of Directors, or whose nomination for election by
the Owners of Company, 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 Company
then in office;

       

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

       

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

       

      “Collateral”
means all of Company’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 or other
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 Company that come into the possession, custody, or control of Wells Fargo now
or in the future; (g) Proceeds of any of the above Collateral;
(h) books and records of Company, including without limitation all mail or
e-mail addressed to Company; and (i) all of the above Collateral, whether
now owned or existing or acquired now or in the future or in which Company has
rights now or in the future.

       

      
        
           


        

        
          A-3

          
            

          

        

        
           


        

      

      


      “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 Company’s, Holdings’, or a
Subsidiary’s books and records, equipment, or inventory, in each case, in form
and substance satisfactory to Wells Fargo in Wells Fargo’s Permitted
Discretion.

      


      “Collection
Account” means “Collection Account” as defined in the Master Agreement for
Treasury Management Services and related Lockbox and Collection Account Service
Description or Collection Account Service Description, whichever is
applicable.

       

      “Company
Inventory G/L Reserve” means the dollar amount carried in Company’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, Company’s general ledger reserve was
$5,446,000.

       

      “Compliance
Certificate” is defined in Section 5.1(a) and is in the
form of Exhibit E.

       

      “Commercial
Letter of Credit Agreement” means an agreement governing the issuance of
documentary letters of credit entered into between Company as applicant and
Wells Fargo as issuer.

       

      “Confidential
Information” means all non-public, confidential or proprietary information of
Company that is disclosed to Wells Fargo prior to or during the term of this
Agreement by Company or any of its officers, employees, agents or
representatives, and includes, without limitation, any trade secrets, research
and development test results, marketing or business plans, strategies,
forecasts, budgets, projections, customer and supplier information, and any
other analyses, computations or studies prepared by or for Company.

       

      “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.

       

      “Daily
Three Month LIBOR” means, for any day, the rate of interest equal to LIBOR then
in effect for delivery for a three (3) month period.  When interest is
determined in relation to Daily Three Month LIBOR, each change in the interest
rate shall become effective each Business Day that Wells Fargo determines that
Daily Three Month LIBOR has changed.

       

      “December
G/L Adjustment” means an amount equal to the product of (i) $11,484,000 minus
the Company Inventory G/L Reserve as of December 31, 2009, times (ii)
sixty-percent (60%).  The December G/L Adjustment shall reflect
Company’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
Period” is defined in Section 1.7(c).

       

      
        
           


        

        
          A-4

          
            

          

        

        
           


        

      

      


      “Default
Rate” is defined in Section 1.7(c).

       

      “Dilution”
means, as of any date of determination, a percentage, based upon the prior
twelve (12) months, which is the result of dividing (a) actual bad
debt write-downs, discounts, advertising allowances, credits, returned items,
and any other items with respect to the Accounts determined to be dilutive by
Wells Fargo in its sole discretion during this period, by (b) Company’s net
sales during such period (excluding extraordinary items) plus the amount of
clause (a).

       

      “Director”
means a director if Company is a corporation, or a governor or manager if
Company is a limited liability company.

       

      “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.

       

      “Eligible
Accounts” means all unpaid Accounts of Company arising from the sale or lease of
goods or the performance of services, net of any credits, but excluding any
Accounts having any of the following characteristics:

       

      (a)           That
portion of Accounts which is unpaid more than 60 days past the original stated
due date or more than 90 days past the original invoice date;

       

      (b)           That
portion of Accounts related to goods or services with respect to which Company
has received notice of a claim or dispute, which are subject to a claim of
offset or a contra account, or which reflect a reasonable reserve for warranty
claims or returns;

       

      (c)           That
portion of Accounts not yet earned by the final delivery of goods or that
portion of Accounts not yet earned by the final rendition of services by Company
to the account debtor, including with respect to both goods and services,
progress billings, and that portion of Accounts for which an invoice has not
been sent to the applicable account debtor;

       

      (d)           Accounts
constituting (i) Proceeds of copyrightable material unless such
copyrightable material shall have been registered with the United States
Copyright Office, or (ii) Proceeds of patentable inventions unless such
patentable inventions have been registered with the United States Patent and
Trademark Office;

       

      (e)           Accounts
owed by any unit of government, whether foreign or domestic (except that there
shall be included in Eligible Accounts that portion of Accounts owed by such
units of government for which Company has provided evidence satisfactory to
Wells Fargo that (i) Wells Fargo’s Security Interest constitutes a
perfected first priority Lien in such Accounts, and (ii) such Accounts may
be enforced by Wells Fargo directly against such unit of government under all
applicable laws);

       

      (f)           Accounts
denominated in any currency other than United States Dollars or Canadian
Dollars;

       

      
        
           


        

        
          A-5

          
            

          

        

        
           


        

      

      


      (g)           Accounts
owed by an account debtor located outside the United States or Canada which are
not (i) backed by a bank letter of credit naming Wells Fargo as beneficiary
or assigned to Wells Fargo, in Wells Fargo’s possession or control, and with
respect to which a control agreement concerning the letter-of-credit rights is
in effect, and acceptable to Wells Fargo in all respects, in its sole
discretion, or (ii) covered by a foreign receivables insurance policy
acceptable to Wells Fargo in its sole discretion;

       

      (h)           Accounts
owed by an account debtor who is insolvent or is the subject of bankruptcy
proceedings or who has gone out of business;

       

      (i)           Accounts
owed by an Owner, Subsidiary, Affiliate, Officer or employee of
Company;

       

      (j)           Accounts
not subject to the Security Interest or which are subject to any Lien in favor
of any Person other than Wells Fargo or Mill Road Capital, L.P.;

       

      (k)           That
portion of Accounts that has been restructured, extended, amended or modified;
provided that if the payment terms of an Account have been modified or extended,
such Account may still be deemed to be an Eligible Account so long as such
payment terms continue to comply with the requirements of clause (a) of this
definition of “Eligible Account” (as well as each of the other criteria set
forth in this definition of “Eligible Accounts”);

       

      (l)           That
portion of Accounts that constitutes advertising, finance charges, service
charges or sales or excise taxes;

       

      (m)           Accounts
owed by an account debtor, regardless of whether otherwise eligible, to the
extent that the aggregate balance of such Accounts exceeds 15% of the aggregate
amount of all Accounts; provided that such percentage shall be 30% for account
debtor CVS, 35% for account debtor Wal-Mart, and 25% for account debtor
Rite-Aid;

       

      (n)           Accounts
owed by an account debtor, regardless of whether otherwise eligible, if 25% or
more of the total amount of Accounts due from such debtor is ineligible under
clauses (a), (b), or (k) above; and

       

      (o)           Accounts,
or portions of Accounts, otherwise deemed ineligible by Wells Fargo in its
Permitted Discretion.

       

      “Eligible
Inventory” means all Inventory of Company, valued at the lower of cost or market
in accordance with GAAP; but excluding Inventory having any of the following
characteristics:

       

      (a)           Inventory
that is:  in-transit; located at any warehouse, job site or other
premises not approved by Wells Fargo in an Authenticated Record delivered to
Company; not subject to a perfected first priority Lien in Wells Fargo’s favor;
covered by any negotiable or non-negotiable warehouse receipt, bill of lading or
other document of title; on consignment from any consignor; or on consignment to
any consignee or subject to any bailment unless the consignee or bailee has
executed an agreement with Wells Fargo;

       

      
        
           


        

        
          A-6

          
            

          

        

        
           


        

      

      


      (b)           Supplies,
packaging (including, but not limited to, containers and box inventory), printed
materials, labels, parts or sample Inventory, or customer supplied parts or
Inventory; provided that Blank Components shall be Eligible Inventory to the
extent that the other criteria for Eligible Inventory are
satisfied;

       

      (c)           Work-in-process
Inventory (other than semi-finished goods which are ready for packing and
shipping);

       

      (d)           Inventory
that is damaged, defective, tainted, obsolete, slow moving (other than excess
Inventory approved by Wells Fargo in Well’s Fargo’s sole discretion) or not
currently saleable in the normal course of Company’s operations, or the amount
of such Inventory that has been reduced by shrinkage;

       

      (e)           Inventory
that Company has returned, has attempted to return, is in the process of
returning or intends to return to the vendor of the Inventory;

       

      (f)           Inventory
that is perishable or live;

       

      (g)           Inventory
manufactured by Company pursuant to a license unless the applicable licensor has
agreed in a Record that has been Authenticated by licensor to permit Wells Fargo
to exercise its rights and remedies against such Inventory;

       

      (h)           Inventory
that is subject to a Lien in favor of any Person other than Wells Fargo or Mill
Road Capital, L.P.;

       

      (i)           Inventory
with a shelf life that is scheduled to expire within six months;

       

      (j)           Inventory
consisting of raw materials in powder or liquid form that is contained in open
containers;

       

      (k)           Unless
otherwise agreed to by Wells Fargo in an Authenticated Record in Wells Fargo’s
sole discretion, Inventory that is not located at any location for which Wells
Fargo has not received a landlord’s waiver (or equivalent) in form and substance
acceptable to Wells Fargo in Wells Fargo’s sole discretion;

       

      (l)           Inventory
stored at locations holding less than 10% of the aggregate value of Company’s
Eligible Inventory; provided that the following Inventory may be included as
Eligible Inventory to the extent all of the other criteria for all Eligible
Inventory are satisfied:  Inventory stored at (i) up to two (2)
locations with a net orderly liquidation value of at least $450,000 each (as
determined by Wells Fargo in Wells Fargo’s Permitted Discretion), and (ii) the
Scholl’s warehouse so long as the net orderly liquidation value of such
Inventory is at least $300,000 (as determined by Wells Fargo in Wells Fargo’s
Permitted Discretion); and

       

      (m)           Inventory
otherwise deemed ineligible by Wells Fargo in its Permitted
Discretion.

       

      
        
           


        

        
          A-7

          
            

          

        

        
           


        

      

       

      “Excluded
Property” means, collectively, (i) any permit, lease or license or any
contractual obligation entered into by Company (A) that prohibits or requires
the consent of any Person other than Company, Holdings and its Subsidiaries
which has not been obtained as a condition to the creation by Company 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 Company 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 Company 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 Company, 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 Company 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 IRC);
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).

       

      “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 Uniform Commercial Code in effect in
the state whose laws govern this Agreement.

       

      “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 Company and which is treated as a single
employer under Section 414 of the IRC.

       

      “Event of
Default” is defined in Section 6.1.

       

      “Existing
Lender” is defined in Section 1.1(c).

       

      “Fixed
Rate” is defined in Section 1.7(a).

       

      “Fixed
Rate Interest Period” means a three (3) month period that commences on (and
includes) the Business Day on which either a Fixed Rate Advance is made or
continued or on which a Floating Rate Advance is converted to a Fixed Rate
Advance, and ending on (but excluding) the Business Day numerically
corresponding to that date three (3) months thereafter, during which period the
outstanding principal amount of the Fixed Rate Advance shall bear interest at
the Fixed Rate; provided, however,
that:

       

      
        
           


        

        
          A-8

          
            

          

        

        
           


        

      

      


      (a)           If
a Fixed Rate Interest Period would otherwise end on a day which is not a
Business Day, then it shall end on the next Business Day, unless that day is the
first Business Day of a month, in which case the Fixed Rate Interest Period
shall end on the last Business Day of the preceding month;

       

      (b)           No
Fixed Rate Interest Period may have a term that extends beyond the Maturity
Date; and

       

      (c)           No
Fixed Rate Interest Period may be selected if any part of the Fixed Rate Advance
must contractually be prepaid prior to the end of the Fixed Rate Interest
Period.

       

      “Fixed
Rate Advance” is defined in Section 1.3(a).

       

      “Floating
Rate” is defined in Section 1.7(a).

       

      “Floating
Rate Advance” is defined in Section 1.3(a).

       

      “GAAP”
means generally accepted accounting principles, applied on a basis consistent
with the accounting practices applied in the financial statements described on
Exhibit D.

       

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

       

      “Guarantor(s)”
means Holdings, Physicians Formula Cosmetics, Inc., Physicians Formula DRTV, LLC
and any other Person now or in the future guaranteeing any Indebtedness through
the issuance of a Guaranty, as applicable.

       

      “Guaranty”
means an unconditional continuing guaranty executed by a Guarantor in favor of
Wells Fargo (if more than one, the “Guaranties”).

       

      “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.

       

      “Holdings”
means Physicians Formula Holdings, Inc., a Delaware corporation.

       

      “Indebtedness”
is used in its most comprehensive sense and means any debts, obligations and
liabilities of Company to Wells Fargo, whether incurred in the past, present or
future, whether voluntary or involuntary, and however arising, and whether due
or not due, absolute or contingent, liquidated or unliquidated, determined or
undetermined, and including without limitation all obligations arising under any
Rate Hedge Agreement, derivative, foreign exchange, deposit, treasury management
or similar transaction or arrangement however described or defined that Company
may enter into at any time with Wells Fargo or with Wells Fargo Merchant
Services, L.L.C., whether or not Company may be liable individually or jointly
with others, or whether recovery upon such Indebtedness may subsequently become
unenforceable.

       

      
        
           


        

        
          A-9

          
            

          

        

        
           


        

      

      


      “Indemnified
Liabilities” is defined in Section 7.8.

       

      “Indemnitee”
is defined in Section 7.8.

       

      “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 November 6,
2009, by and among Wells Fargo, Mill Road Capital, L.P., and
Company.

       

      “Interest
Payment Date” is defined in Section 1.9(a).

       

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

       

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

       

      “IRC”
shall mean the United States Internal Revenue Code of 1986, as amended, and the
rules and regulations promulgated thereunder.

       

      “L/C
Amount” means the sum of (a) the Aggregate Face Amount of any outstanding
Letters of Credit, plus (b) the amount of each Obligation of Reimbursement
that either remains unreimbursed or has not been paid through an Advance on the
Line of Credit.

       

      “L/C
Application” means an application for the issuance of standby or documentary
Letters of Credit pursuant to the terms of a Standby Letter of Credit Agreement
or Commercial Letter of Credit Agreement, in form acceptable to Wells
Fargo.

       

      “Letter
of Credit” and “Letters of Credit” are each defined in Section 1.11(a).]

       

      “Licensed
Intellectual Property” is defined in Exhibit D.

       

      “LIBOR”
means the rate per annum (rounded upward, if necessary, to the nearest whole
1/8th of one percent (1%)) determined pursuant to the following
formula:

       

      
        	
                LIBOR 
       =     

              	
                Base
      LIBOR

              
	 
      	
                100%
      - LIBOR Reserve Percentage

              


      

       

      (a)           “Base
LIBOR” means the rate per annum for United States dollar deposits quoted by
Wells Fargo (i) for the purpose of calculating the effective Floating Rate
for loans that reference Daily Three Month LIBOR as the Inter-Bank Market
Offered Rate in effect from time to time for three (3) month delivery of funds
in amounts approximately equal to the principal amount of such loans, or
(ii) for the purpose of calculating the effective Fixed Rate for loans
making reference to LIBOR as the Inter-Bank Market Offered Rate on the first day
of a Fixed Rate Interest Period for delivery of funds on said date for a period
of time approximately equal to the number of days in the Fixed Rate Interest
Period and in an amount approximately equal to the principal amount to which the
Fixed Rate Interest Period applies.  Company understands and agrees
that Wells Fargo may base its quotation of the Inter-Bank Market Offered Rate
upon such offers or other market indicators of the Inter-Bank Market as Wells
Fargo in its discretion deems appropriate, including but not limited to the rate
offered for U.S. dollar deposits on the London Inter-Bank Market.

       

      
        
           


        

        
          A-10

          
            

          

        

        
           


        

      

      


      (b)           “LIBOR
Reserve Percentage” means the reserve percentage prescribed by the Board of
Governors of the Federal Reserve System (or any successor) for “Eurocurrency
Liabilities” (as defined in Regulation D of the Federal Reserve Board, as
amended), adjusted by Wells Fargo for expected changes in such reserve
percentage during the applicable term of the Revolving Note.

       

      “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.

       

      “Line of
Credit” is defined in the Recitals.

       

      “Loan
Documents” means this Agreement, the Revolving Note, the Master Agreement for
Treasury Management Services, each Guaranty, the Intercreditor Agreement, each
Subordination Agreement, each Standby Letter of Credit Agreement, each
Commercial Letter of Credit Agreement, any L/C Applications, and the Security
Documents, together with every other agreement, note, document, contract or
instrument to which Company now or in the future may be a party and which may be
required by Wells Fargo in connection with, or as a condition to, the execution
of this Agreement.  Any documents or other agreements entered into
between Company and Wells Fargo that relate to any Rate Hedge Agreement,
derivative, foreign exchange, or similar product or transaction, or which are
entered into with an operating division of Wells Fargo other than Wells Fargo
Business Credit, shall not be included in this definition.

       

      “Loan
Manager” means the treasury management service defined in the Master Agreement
for Treasury Management Services and related Loan Manager Service
Description.

       

      “Lockbox”
means “Lockbox” as defined in the Master Agreement for Treasury Management
Services and related Lockbox and Collection Account Service
Description.

       

      “Master
Agreement for Treasury Management Services” means the Master Agreement for
Treasury Management Services, the related Acceptance of Services, and the
Service Description governing each treasury management service used by
Company.

       

      
        
           


        

        
          A-11

          
            

          

        

        
           


        

      

      


      “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 Company;

       

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

       

      (c)           A
material adverse effect on the ability of Wells Fargo to enforce the
Indebtedness or to realize the intended benefits of the Security Documents,
including without limitation a material adverse effect on the validity or
enforceability of any Loan 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
Indebtedness.

       

      “Maturity
Date” is defined in Section 1.1(b).

       

      “Maximum
Line Amount” is defined in Section 1.1(a).

       

      “Minimum
Interest Charge” is defined in Section 1.7(b).

       

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

       

      “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.

       

      “Net
Orderly Liquidation Value Percentage” means a professional opinion of the
probable Net Cash Proceeds, less (without duplication) any other costs of
liquidation (including those described in any appraisal of the Company’s
Inventory), that could be realized at a properly advertised and professionally
conducted liquidation sale, conducted under orderly sale conditions for an
extended period of time (usually six to nine months), under the economic trends
existing at the time of the appraisal, expressed as a percentage of cost of such
Inventory.

       

      “Obligation
of Reimbursement” is defined in Section 1.11(b).

       

      “OFAC” is
defined in Section 5.12(b).

       

      
        
           


        

        
          A-12

          
            

          

        

        
           


        

      

      


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

       

      “Operating
Account” is defined in Section 1.3(a), and
maintained in accordance with the terms of Wells Fargo’s Commercial Account
Agreement in effect for demand deposit accounts.

       

      “Overadvance”
means the amount, if any, by which the unpaid principal amount of the Revolving
Note, plus the L/C Amount, is in excess of the then-existing Borrowing
Base.

       

      “Owned
Intellectual Property” is defined in Exhibit D.

       

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

       

      “Patent
and Trademark Security Agreement” means each Patent and Trademark Security
Agreement entered into between Company and Wells Fargo.

       

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

       

      “Permitted
Discretion” means a determination made by Wells Fargo from the perspective of a
secured asset-based lender.

       

      “Permitted
Lien” and “Permitted Liens” are defined in Section 5.3(a).

       

      “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.

       

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

       

      “Premises”
is defined in Section 2.4(a).

       

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

       

      “Rate
Hedge” means any interest rate swap or interest rate collar agreement applicable
to borrowings advanced by Wells Fargo under the Line of Credit.

       

      “Rate
Hedge Agreement” is an agreement entered into between Wells Fargo (or any of its
affiliates) and Company for purposes of providing Company with a Rate
Hedge.

       

      “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 Company to Wells Fargo
pursuant to Section 5.1.

       

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

       

      
        
           


        

        
          A-13

          
            

          

        

        
           


        

      

      


      (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 Company,

       

      (c)           if
the indebtedness that is refinanced, renewed, or extended was subordinated in
right of payment to the Indebtedness, then the terms and conditions of the
refinancing, renewal, or extension must include subordination terms and
conditions that are at least as favorable to Wells Fargo (as determined by Wells
Fargo in Wells Fargo’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.

       

      “Responsible
Officer” means the chief executive officer, the president, the chief financial
officer, or any vice president responsible for financial affairs of
Company.

       

      “Returned
Items” means that portion of Company’s Eligible Inventory consisting of finished
goods that have been returned by a customer of Company that are not damaged and
capable of being resold as new goods.

       

      “Revolving
Note” is defined in Section 1.1(d).

       

      “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 Company’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 Company’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 Company'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 Company’s or any Subsidiary’s
leased real property in the City of Industry, California.

       

      
        
           


        

        
          A-14

          
            

          

        

        
           


        

      

      


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

       

      “Security
Documents” means this Agreement, each Collateral Pledge Agreement (described in
Exhibit C), each Security Agreement (described in Exhibit C), any deposit
account control agreement, the Patent and Trademark Security Agreement(s), and
any other document delivered to Wells Fargo 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 Indebtedness.

       

      “Security
Interest” is defined in Section 2.1.

       

      “Separate
Collateral Bank Account” means a deposit account containing a one-time deposit
from the proceeds of the Subordinated Debt in an amount equal to $3,000,000,
such amount to be reduced as such funds are used in accordance with this
Agreement.

       

      “Special
Account” means a specified cash collateral account maintained with Wells Fargo
or another financial institution acceptable to Wells Fargo in connection with
each undrawn Letter of Credit issued by Wells Fargo, as more fully defined in
Section 1.11.

       

      “Standby
Letter of Credit Agreement” means an agreement governing the issuance of standby
letters of credit by Wells Fargo entered into between Company as applicant and
Wells Fargo as issuer.

       

      “Subordinated
Creditor(s)” means Mill Road Capital, L.P. and any other Person now or in the
future subordinating indebtedness of Company held by that Person to the payment
of the Indebtedness.

       

      “Subordinated
Credit Agreement” means that certain Senior Subordinated Note Purchase and
Security Agreement dated as of the date hereof by and among Company, certain
guarantors party thereto, and Mill Road Capital, L.P.

       

      “Subordinated
Debt” means indebtedness due to Company that has been subordinated to Wells
Fargo by a Subordinated Creditor pursuant to a Subordination Agreement or the
Intercreditor Agreement.

       

      “Subordination
Agreement” means a subordination agreement, in form and substance acceptable to
Wells Fargo, executed by a Subordinated Creditor in favor of Wells Fargo (if
more than one, the “Subordination Agreements”).

       

      “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 Company, by Company and one or more
other Subsidiaries, or by one or more other Subsidiaries.

       

      
        
           


        

        
          A-15

          
            

          

        

        
           


        

      

      


      “Termination
Date” is defined in Section 1.1(b).

       

      “UCC”
means the Uniform Commercial Code in effect in the state designated in this
Agreement as the state whose laws shall govern this Agreement, or in any other
state whose laws are held to govern this Agreement or any portion of this
Agreement.

       

      “Unused
Amount” is defined in Section 1.8(b).

       

      “Wells
Fargo” means Wells Fargo Bank, National Association in its broadest and most
comprehensive sense as a legal entity, and is not limited in its meaning to the
Wells Fargo Business Credit operating division, or to any other operating
division of Wells Fargo.

       

      “Working
Capital Reserve” means an amount equal to $1,000,000 as such amount may be
adjusted by Wells Fargo from time to time in Wells Fargo’s Permitted Discretion;
provided, however that the Working Capital Reserve may be eliminated or reduced
in Wells Fargo’s discretion if for any twelve-month consecutive period (ending
on or after September 30, 2010) Company’s Net Income is greater than or equal to
$1,000,000 and Average Excess Availability under the Line of Credit for the last
three months of such twelve-month period is greater than or equal to
$2,000,000.

       

      
        
           


        

        
          A-16

          
            

          

        

        
           


        

      

      


      Exhibit
B to Credit and Security Agreement

       

      PREMISES

       

      The
Premises referred to in the Credit 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 Credit 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 Credit
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.


      
        
           


        

        
          B-1

          
            

          

        

        
           


        

      

      


      The Premises referred to in the Credit
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.


      
        
           


        

        
          B-2

          
            

          

        

        
           


        

      

      


      Exhibit
C to Credit and Security Agreement

       

      CONDITIONS
PRECEDENT

       

      Wells
Fargo’s obligation to make an initial Advance shall be subject to the condition
that Wells Fargo shall have received the following, executed and in form and
content satisfactory to Wells Fargo.  The following descriptions are
limited descriptions for reference purposes only and should not be construed as
limiting in any way the subject matter that Wells Fargo requires each document
to address.

       

      
        	
                A.

              	
                Loan
      Documents to be Executed by
Company:

              


      

       

      (1)           The
Revolving
Note.

       

      (2)           The
Credit and Security
Agreement.

       

      (3)           The
Master Agreement for Treasury
Management Services, the Acceptance of Services, and
the related Service Description for each deposit or treasury management related
product or service that Company will subscribe to, including without limitation
the Lockbox and Collection
Account Service Description.

       

      (4)           The
Patent and Trademark Security
Agreement.

       

      (5)           A
Standby Letter of Credit
Agreement and the Commercial Letter of Credit
Agreement, and a separate L/C Application for each Letter of Credit that
Company has requested that Wells Fargo issue.

       

      (6)           The
Collateral Pledge
Agreement of Company pursuant to which Company grants Wells Fargo a
security interest in the shares of stock more fully described in such Collateral
Pledge Agreement.

       

      (7)           Canadian
form of General Security
Agreement.

       

      
        	
                B.

              	
                Loan
      Documents to be Executed by Third
Parties:

              


      

       

      (1)           The
Guaranty by Corporation
of each of Holdings, Physicians Formula Cosmetics, Inc., and Physicians Formula
DRTV, LLC, pursuant to which such Person unconditionally guarantees the full and
prompt payment of Company’s Indebtedness.

       

      (2)           The
Security Agreement of
each of Holdings, Physicians Formula Cosmetics, Inc., and Physicians Formula
DRTV, LLC, pursuant to which such Person grants Wells Fargo a security interest
in the personal property more fully described in the Security Agreement, as
security for the full and prompt payment of Company’s Indebtedness.

       

      (3)           The
Collateral Pledge
Agreement of Holdings pursuant to which that Person grants Wells Fargo a
security interest in the shares of stock more fully described in the Collateral
Pledge Agreement, together with the stock certificates and stock powers, as
security for the full and prompt payment of Company’s Indebtedness.

       

      
        
           


        

        
          C-1

          
            

          

        

        
           


        

      

      


      (4)           The
Intercreditor
Agreement.

       

      (5)           An
Acknowledgement of
Warehouseman from each warehouse where Company stores Inventory, pursuant
to which the warehouseman waives its Lien in the Inventory.

       

      (6)           A
Landlord’s Disclaimer and
Consent to each lease entered into by Company and that Landlord with
respect to the Premises, pursuant to which the Landlord waives its Lien in any
goods or other Inventory of Company located on the Premises.

       

      (7)           Certificates of Insurance
required under this Agreement, with all hazard insurance containing a lender’s
interest endorsement in Wells Fargo’s favor and with all liability insurance
naming Wells Fargo as additional insured.

       

      
        	
                C.

              	
                Documents
      Related to the Premises

              


      

       

      (1)           Any
leases pursuant to which
Company is leasing the Premises from a lessor.

       

      (2)           Every
bailment or consignment pursuant to which
any property of Company is in the possession of a third Person such as a
consignee or subcontractor, together with, in the case of any goods held by such
Person for resale, UCC
financing statements sufficient to protect Company’s and Wells Fargo’s
interests in such goods.

       

      
        	
                D.

              	
                Federal
      Tax, State Tax, Judgment, UCC and Intellectual Property Lien
      Searches

              


      

       

      (1)           Current searches of Company in
appropriate filing offices showing that (i) no Liens have been filed and
remain in effect against Company and Collateral except Permitted Liens or Liens
held by Persons who have agreed in an Authenticated Record that upon receipt of
proceeds of the initial Advances, they will satisfy, release or terminate such
Liens in a manner satisfactory to Wells Fargo, and (ii) Wells Fargo has
filed all UCC financing statements necessary to perfect the Security Interest,
to the extent the Security Interest is capable of being perfected by
filing.

       

      (2)           Current searches of Third
Persons in appropriate filing offices with respect to any of the
Collateral that is in the possession of a Person other than Company that is held
for resale, showing that (i) UCC financing statements sufficient to protect
Company’s and Wells Fargo’s interests in such Collateral have been filed, and
(ii) no other secured party has filed a financing statement against such
Person and covering property similar to Company’s, other than Company, or if
there exists any such secured party, evidence that each such party has received
notice from Company and Wells Fargo sufficient to protect Company’s and Wells
Fargo’s interests in Company’s goods from any claim by such secured
party.

       

      
        	
                E.

              	
                Constituent
      Documents:

              


      

       

      (1)           The
Certificate of Authority
of Company, which shall
include as part of the Certificate or as exhibits to the Certificate,
(i) the Resolution
of Company’s Directors and, if required, Owners, authorizing the execution,
delivery and performance of those Loan Documents and other documents or
agreements described in or related to this Agreement to which Company is a
party, (ii) an Incumbency
Certificate containing the signatures of Company’s Officers or agents
authorized to execute and deliver those instruments, agreements and certificates
referenced in (i) above, as well as Advance requests, on Company’s behalf,
(iii) Company’s Constituent Documents,
(iv) a current Certificate
of Good Standing or Certificate of Status issued
by the secretary of state or other appropriate authority for Company’s state of
organization, certifying that Company is in good standing and in compliance with
all applicable organizational requirements of the state of organization, and
(v) a Secretary’s
Certificate of Company’s secretary or assistant secretary certifying that
the Certificate of Authority of Company is true, correct and
complete.

       

      
        
           


        

        
          C-2

          
            

          

        

        
           


        

      

      


      (2)           The
Certificate of Authority each
Corporate Guarantor, which shall include as part of the Certificate or as
exhibits to the Certificate, (i) the Resolution of such Guarantor’s
Directors and, if required, Owners, authorizing the execution, delivery and
performance of the Guaranty of Corporation, (ii) an Incumbency Certificate
containing the signatures of such Guarantor’s Officers or agents authorized to
execute and deliver the Guaranty by Corporation on such Guarantor’s behalf,
(iii) such Guarantor’s Constituent Documents,
(iv) a current Certificate
of Good Standing or Certificate of Status issued
by the secretary of state or other appropriate authority for Guarantor’s state
of organization, certifying that Guarantor is in good standing and in compliance
with all applicable organizational requirements of the state of organization,
and (v) a Secretary’s
Certificate of such Guarantor’s secretary or assistant secretary
certifying that the Certificate of Authority of Corporate Guarantor and all
attached exhibits are true, correct and complete.

       

      (3)           Evidence that Company 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.

       

      (4)           An
Officer’s Certificate of
an appropriate Officer of Company confirming, in his or her capacity as an
officer (and not personal capacity), the representations and warranties set
forth in this Agreement.

       

      (5)           A
Customer Identification
Information Form and such other forms and verification as Wells Fargo may
need to comply with the U.S.A. Patriot Act.

       

      
        	
                F.

              	
                Miscellaneous
      Matters or Documents:

              


      

       

      (1)           Payment
of fees and reimbursable costs
and expenses due under this Agreement through the date of initial Advance or
issuance of a Letter of Credit, including without limitation all legal
expenses incurred through the date of the closing of this
Agreement.

       

      (2)           Evidence
that after making the initial Advance and satisfying all obligations owed to
Existing Lender, paying all trade payables older than 60 days from the
applicable due date, establishing the Working Capital Reserve, and paying all
book overdrafts, held checks, and closing costs (including, but not limited to,
payment of the origination fee required under Section 1.8(a)), availability
under the Line of Credit is not less than $4,000,000.

       

      (3)           Any
documents or other agreements entered into by Company and Wells Fargo that
relate to any Rate Hedge Agreement, derivative, foreign exchange, deposit,
treasury management or similar product or transaction extended to Company by
Wells Fargo not already provided pursuant to the requirements of (A)-(E)
above.

       

      
        
           


        

        
          C-3

          
            

          

        

        
           


        

      

      


      (4)           Such
other documents as Wells Fargo in its sole discretion may require.

       

      
        
           


        

        
          C-4

          
            

          

        

        
           


        

      

      


      Exhibit
D to Credit and Security Agreement

       

      REPRESENTATIONS AND
WARRANTIES

       

      Company
represents and warrants to Wells Fargo as follows:

       

      (a)           Existence and Power; Name;
Chief Executive Office; Inventory and Equipment Locations; Federal Employer
Identification Number and Organizational Identification
Number.  Company 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.  Company 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 Loan Documents and
any other documents or agreements that it has entered into with Wells Fargo
related to this Agreement.  During the past five (5) years, Company
has done business solely under the names set forth below in addition to its
correct legal name.  Company’s chief executive office and principal
place of business is located at the address set forth below, and all of
Company’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 below, other than Inventory in-transit
between such locations in the ordinary course of business.  Company’s
name, Federal Employer Identification Number and Organization Identification
Number are correctly set forth at the end of the Agreement next to Company’s
signature.

       

      
        	
                Trade
      Names

              
	
                None

              


      

      


       

      
        	
                Chief
      Executive Office / Principal Place of Business

              
	
                1055
      West 8th Street

                 

                Azusa,
      California 91702

              


      

      


       

      
        	
                Other
      Inventory and Equipment Locations

              
	
                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

              


      

       

      
        
           


        

        
          D-1

          
            

          

        

        
           


        

      


      


      (b)           Capitalization.  The
Capitalization Chart below constitutes a correct and complete list of all
ownership interests of Company 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 below
shows the ownership structure of all Subsidiaries of Company.

       

      
        	
                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

              


      

       

      (c)           Authorization of Borrowing;
No Conflict as to Law or Agreements.  The execution, delivery
and performance by Company of the Loan Documents and any other documents or
agreements described in or related to this Agreement, and all borrowing under
the Line of Credit have been authorized and do not (i) require the consent
or approval of Company’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 Company or of Company’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 Company 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) upon or with respect
to any of the properties now owned or subsequently acquired by
Company.

       


      
        
           


        

        
          D-2

          
            

          

        

        
           


        

      

      


      (d)           Legal
Agreements.  This Agreement, the other Loan Documents, and any
other document or agreement described in or related to this Agreement, will
constitute the legal, valid and binding obligations of Company, enforceable
against Company 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).

       

      (e)           Subsidiaries.  Except
as disclosed below, Company has no Subsidiaries.

       

      
        	
                Subsidiaries

              
	
                Physicians
      Formula Cosmetics, Inc.

                Physicians
      Formula DRTV, LLC

              


      

       

      (f)           Financial Condition; No
Adverse Change.  Company has furnished to Wells Fargo 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 Company’s
financial condition as of those dates and the results of Company’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.

       

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

       

      (h)           Intellectual Property
Rights.

       

      (i)           Owned Intellectual
Property.  Set forth below is a complete list of all registered
patents, applications for patents, trademarks, applications to register
trademarks, service marks, applications to register service marks, registered
copyrights, and applications to register copyrights for which Company is the
owner of record (the “Owned Intellectual Property”).  Except as set
forth below and except for such Owned Intellectual Property that is not material
to Company’s business, (A) Company 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 Company or otherwise,
(B) no Person other than Company owns or has been granted any right in the
Owned Intellectual Property, (C) all Owned Intellectual Property is valid,
subsisting and enforceable, and (D) Company has taken all commercially
reasonable action necessary to maintain and protect the Owned Intellectual
Property.

       

      
        
           


        

        
          D-3

          
            

          

        

        
           


        

      

      


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

       

      (iii)           Intellectual Property Rights
Licensed from Others.  Set forth below is a complete list of
all agreements under which Company 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 Company is obligated to make with respect to Licensed Intellectual
Property.  Except as set forth below, in any other schedule or exhibit
to this Agreement, or in any other Record, copies of which have been given to
Wells Fargo, Company’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 Company or otherwise.  Except as disclosed below,
Company 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 below, the Owned Intellectual Property and the Licensed Intellectual
Property constitute all Intellectual Property Rights used or necessary to
conduct Company’s business as it is presently conducted or as Company reasonably
foresees conducting it and the Company owns, possesses or has the right to use
all such Intellectual Property Rights.

       

      (v)           Infringement.  Except
as disclosed below, Company 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
Company must license or refrain from using the Intellectual Property Rights of
any Person) nor, to Company’s knowledge, is there any threatened claim or any
reasonable basis for any such claim.

       

      
        
           


        

        
          D-4

          
            

          

        

        
           


        

      

       

      
        
          	
                  Intellectual
      Property Disclosures

                


        

         

      

      
        	
                (i)

              	
                Owned
      Intellectual Property

              


      

       

      COPYRIGHTS
- None.

      


      PATENTS
-  None.

      


      TRADEMARKS
–

      


      
        
          	
                  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

                


        

         

        
          
            
            

          

          
            D-5

            
              

            

          

          
            
            

          

        

         

        
          	
                  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

                
	
                  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

                


        

      

      


      
        	
                (iii) 

              	
                Intellectual
      Property Licensed From Others

              


      

       

      NONE

       

      
        	
                (v) 

              	
                Infringement

              


      

       

      NONE


      
        
           


        

        
          D-6

          
            

          

        

        
           


        

      

      


      (i)           Taxes.  Company,
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.  Company, Holdings, and Subsidiaries have filed all
federal, state and local tax returns which to the knowledge of the Officers of
Company, Holdings, and Subsidiaries, as the case may be, are required to be
filed, and Company, 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.

       

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

       

      (k)           No
Defaults.  Company 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.

       

      (l)           Submissions to Wells
Fargo.  All financial and other information provided to Wells
Fargo by or on behalf of Company 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 Wells
Fargo.

       

      (m)           Financing
Statements.  Company 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 such financing
statements are filed, Wells Fargo 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.

       

      (n)           Rights to
Payment.  Except to the extent that Wells Fargo 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.

       

      
        
           


        

        
          D-7

          
            

          

        

        
           


        

      

      


      (o)           Employee Benefit
Plans.

       

      (i)           Maintenance and
Contributions to Plans.  Except as disclosed below, neither
Company 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 IRC, or applicable state
law).

       

      (ii)           Knowledge of Plan
Noncompliance with Applicable Law.  Except as disclosed below,
neither Company nor any ERISA Affiliate has (A) knowledge that Company or the
ERISA Affiliate is not in full compliance with the requirements of ERISA, the
IRC, 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
IRC 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 Company nor any ERISA Affiliate has
liability for any (A) accumulated funding deficiency (as defined in
Section 302 of ERISA and Section 412 of the IRC) 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).

       

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

       

      
        
          
            	
                    Employee
      Benefit Plans

                  


          

           

        

      

      
        	
                 
      

              	
                (i)

              	
                Maintenance
      and Contribution to Plans

              


      

       

      NONE

       

      
        	
                 
      

              	
                (i)

              	
                Knowledge
      of Plan Noncompliance with Applicable
Law

              


      

       

      NONE


      
        
           


        

        
          D-8

          
            

          

        

        
           


        

      

       

      
        	
                 
      

              	
                (p)

              	
                Environmental
      Matters.

              


      

       

      (i)           Hazardous Substances on
Premises.  Except as disclosed below 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 Company or Wells Fargo
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 disclosed below, Company 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 disclosed
below and except for 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 Company, 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
disclosed below, Company (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 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 disclosed below and except with respect to
the San Gabriel Valley Superfund Site, 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.  Company has delivered to Wells
Fargo all environmental assessments, audits, reports, permits, licenses and
other documents describing or relating in any way to the Premises or Company’s
businesses.

       

      
        
           


        

        
          D-9

          
            

          

        

        
           


        

      

       

      
        
          
            
              	
                      Environmental
      Matters

                    


            

             

          

        

      

      
        	
                (i)

              	
                Hazardous
      Substances on Premises

              


      

       

      None

       

      
        	
                (ii)

              	
                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.

       

      
        	
                (iii)

              	
                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.

       

      
        	
                (iv)

              	
                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.

       

      
        	
                (v)

              	
                Status
      of Premises

              


      

       

      None

       

      
        
           


        

        
          D-10

          
            

          

        

        
           


        

      

      


      (q)           Commercial Tort
Claims.  Neither Holdings, nor Company, nor any Subsidiary has
any known commercial tort claims as of the date of this Agreement.

       

      (r)           Margin
Rules.  Neither Holdings, nor Company, nor any Subsidiary owns
or has any present intention of purchasing or carrying, and no portion of the
proceeds of the Advances 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.

       

      (s)           Representation by
Counsel.  Company acknowledges that it has been advised by
counsel in connection with the negotiation, execution and delivery of each Loan
Document.

       

      (t)           Relationship of Parties,
etc.  Company acknowledges and agrees that Wells Fargo does not
have any fiduciary relationship with or duty to Company or its Affiliates
arising out of or in connection with this Agreement or any of the other Loan
Documents.  Company further acknowledges and agrees that no joint
venture exists between Company and/or any of its Affiliates, on the one hand,
and Wells Fargo, on the other hand.

       

      (u)           Brokers.  Except
as disclosed to Wells Fargo in writing, no broker, finder or other intermediary
has brought about the obtaining, making or closing of the transactions
contemplated by the Loan Documents, and Company has no obligation to any Person
in respect of any finder’s or brokerage fees in connection
herewith.

       

      
        
           


        

        
          D-11

          
            

          

        

        
           


        

      

      


      (v)           Foreign Assets Control
Regulations and Anti-Money Laundering.

       

      (i)           Neither
Holdings, nor Company, nor any 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.

       

      (ii)           Holdings,
Company, and each Subsidiary are, to the extent required by law, in compliance,
in all material respects, with the U.S.A. Patriot Act.  No part of the
proceeds of the Advances or Letters of Credit 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.

       

      (w)           Delivery of and Subordinated
Credit Agreement.  Wells Fargo has received complete copies of
the Subordinated Credit Agreement (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 Wells Fargo.

       

      
        
           


        

        
          D-12

          
            

          

        

        
           


        

      

       

      

       

       

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      Exhibit
E to Credit and Security Agreement

       

      COMPLIANCE
CERTIFICATE

       

      
        	
                To:

              	
                Wells
      Fargo Bank, National Association

              


      

      
        	
                Date:

              	
                [__________________,
      20__]

              


      

      
        	
                Subject:

              	
                Financial
      Statements

              


      

       

      In
accordance with our Credit and Security Agreement dated November 6, 2009 (as
amended from time to time, the “Credit Agreement”), attached are the financial
statements of Physicians Formula, Inc. (the “Company”) 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 Credit Agreement.

       

      A.           Preparation and Accuracy of Financial
Statements.  I certify, on behalf of the Company 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 Company’s financial
condition as of the Reporting Date.

       

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

       

      (Check
one)

       

      
        	
                 
      

              	
                 ̈

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

              


      

       

      
        	
                 
      

              	
                 ̈

              	
                Company
      has, since the date of the Credit 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 Wells Fargo in an Authenticated Record or otherwise permitted
      under the Credit 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 Company and not in any
individual capacity, that:

       

      (Check
one)

       

      
        	
                 
      

              	
                 ̈

              	
                I
      have no knowledge of the occurrence of an Event of Default under the
      Credit Agreement, except as previously reported to Wells Fargo in a
      Record.

              


      

       

      
        	
                 
      

              	
                 ̈

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

              


      

       

      
        
           


        

        
          E-1

          
            

          

        

        
           


        

      

      


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

       

      (Check
one)

       

      
        	
                 
      

              	
                 ̈

              	
                I
      have no knowledge of any litigation required to be reported under Section
      5.1(g) of the Credit Agreement.

              


      

       

      
        	
                 
      

              	
                 ̈

              	
                I
      have knowledge of litigation required to be reported under Section 5.1(g)
      of the Credit Agreement and not previously disclosed to Wells Fargo, as
      more fully described in the statement of facts attached to this
      Certificate.

              


      

       

      
        	
                 
      

              	
                E.

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

              


      

       

      
        	
                 
      

              	
                 ̈

              	
                Company
      has not made any deposits exceeding $50,000 of the type described in
      Section 5.6(h).

              


      

       

      
        	
                 
      

              	
                 ̈

              	
                Company
      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 Company and not
in any individual capacity, that:

       

      (Check
and complete each of the following)

       

      1.       
    Minimum
Book Net Worth.  Pursuant to Section 5.2(a) of the Credit
Agreement, as of the Reporting Date, Company’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 5.2(a).

       

       2.           Minimum
EBITDA.  Pursuant to Section 5.2(b) of the Credit
Agreement, as of the Reporting Date, Company’s EBITDA was $[___________], which
 ̈ satisfies  ̈ does not satisfy the
requirement that EBITDA be not less than the amount set forth in Section
5.2(b).

       

      3.           Capital
Expenditures.  Pursuant to Section 5.2(c) of the Credit
Agreement, for the year-to-date period ending on the Reporting Date, Company 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 5.2(c)

       

      Attached
are statements of all relevant facts and computations in reasonable detail
sufficient to evidence Company’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

              


      


      
        
           


        

        
          E-2

          
            

          

        

        
           


        

      

      


      Exhibit
F to Credit and Security Agreement

       

      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 Subordinated Creditor

              	 
      	 
      	 
      	 
      


      

      * This
judgment lien has been discharged.

       

      INDEBTEDNESS

       

      
        	
                Creditor

              	
                Current Principal Amt.

              	
                Maturity Date

              	
                Monthly Payment

              	
                Collateral

              
	
                None.

              	 
      	 
      	 
      	 
      


      

      


       

      GUARANTIES

       

      
        	
                Primary Obligor

              	
                Amount and Description of Obligation
      Guaranteed

              	
                Beneficiary of Guaranty

              
	
                None

              	 
      	 
      


      

       

       

    

      F-1