Exhibit 10.1


 




 





 


CREDIT AGREEMENT


 


among


 


PHYSICIANS FORMULA, INC., a New York corporation


 


THE LENDERS PARTIES HERETO


 


and


 


UNION BANK OF CALIFORNIA, N.A.


 


as Administrative Agent


 


Dated as of November   , 2006


 




 





 

















 


TABLE OF CONTENTS


 


	
   

  	
   

  	
  Page

  
	
   

  	
   

  	
   

  
	
  SECTION 1.

  	
  DEFINITIONS

  	
  1

  
	
  1.1

  	
  Defined Terms

  	
  1

  
	
  1.2

  	
  Other Definitional Provisions

  	
  19

  
	
   

  	
   

  	
   

  
	
  SECTION 2.

  	
  AMOUNT AND TERMS OF LOANS AND
  LETTERS OF CREDIT; COMMITMENT AMOUNTS

  	
  20

  
	
  2.1

  	
  Revolving Loans and Letters of Credit; Revolving
  Loan Commitments

  	
  20

  
	
  2.2

  	
  Term Loans; Term Loan Commitments

  	
  23

  
	
  2.3

  	
  Issuance of Letters of Credit

  	
  24

  
	
  2.4

  	
  Optional Prepayments; Optional Commitment Reductions

  	
  27

  
	
  2.5

  	
  Mandatory Prepayments

  	
  27

  
	
  2.6

  	
  Conversion and Continuation Options

  	
  28

  
	
  2.7

  	
  Minimum Amounts of Tranches; Minimum Borrowings

  	
  29

  
	
  2.8

  	
  Interest Rates and Payment Dates

  	
  29

  
	
  2.9

  	
  Computation of Interest and Fees

  	
  30

  
	
  2.10

  	
  Inability to Determine Interest Rate

  	
  30

  
	
  2.11

  	
  Pro Rata Treatment and Payments

  	
  30

  
	
  2.12

  	
  Illegality

  	
  31

  
	
  2.13

  	
  Increased Costs

  	
  31

  
	
  2.14

  	
  Taxes

  	
  32

  
	
  2.15

  	
  Indemnity

  	
  33

  
	
  2.16

  	
  Mitigation of Costs

  	
  33

  
	
  2.17

  	
  Unused Commitment Fees

  	
  33

  
	
   

  	
   

  	
   

  
	
  SECTION 3.

  	
  REPRESENTATIONS AND WARRANTIES

  	
  33

  
	
  3.1

  	
  Financial Condition

  	
  33

  
	
  3.2

  	
  Corporate Existence; Compliance with Law

  	
  34

  
	
  3.3

  	
  Corporate Power; Authorization; Consents;
  Enforceable Obligations

  	
  34

  
	
  3.4

  	
  No Legal Bar

  	
  35

  
	
  3.5

  	
  No Material Litigation

  	
  35

  
	
  3.6

  	
  Ownership of Property; Liens; Condition of
  Properties

  	
  35

  
	
  3.7

  	
  Environmental Matters

  	
  35

  
	
  3.8

  	
  Intellectual Property

  	
  37

  
	
  3.9

  	
  Taxes

  	
  37

  
	
  3.10

  	
  Federal Regulations

  	
  38

  
	
  3.11

  	
  ERISA Compliance

  	
  38

  
	
  3.12

  	
  Investment Company Act; Public Utility Holding
  Company Act

  	
  38

  
	
  3.13

  	
  Subsidiaries; Etc

  	
  39

  
	
  3.14

  	
  Purpose of Loans and Letters of Credit

  	
  39

  
	
  3.15

  	
  Accuracy and Completeness of Information

  	
  39

  



 


i

















 


	
  3.16

  	
  Real Property Assets

  	
  39

  
	
  3.17

  	
  Permits, Etc

  	
  39

  
	
  3.18

  	
  Nature of Business

  	
  40

  
	
  3.19

  	
  Capital Structure and Equity Ownership

  	
  40

  
	
  3.20

  	
  Insolvency

  	
  40

  
	
  3.21

  	
  Labor Matters

  	
  40

  
	
  3.22

  	
  Condemnation

  	
  40

  
	
  3.23

  	
  Absence of Financing Statements

  	
  40

  
	
  3.24

  	
  Perfection of Security Interest

  	
  40

  
	
   

  	
   

  	
   

  
	
  SECTION 4.

  	
  CONDITIONS PRECEDENT

  	
  41

  
	
  4.1

  	
  Conditions to Closing Date

  	
  41

  
	
  4.2

  	
  Conditions to Each Loan or Letter of Credit

  	
  43

  
	
   

  	
   

  	
   

  
	
  SECTION 5.

  	
  AFFIRMATIVE COVENANTS.

  	
  44

  
	
  5.1

  	
  Financial Statements

  	
  44

  
	
  5.2

  	
  Certificates; Other Information

  	
  44

  
	
  5.3

  	
  Payment of Obligations

  	
  46

  
	
  5.4

  	
  Conduct of Business and Maintenance of Existence

  	
  46

  
	
  5.5

  	
  Maintenance of Property; Insurance

  	
  46

  
	
  5.6

  	
  Inspection of Property; Books and Records;
  Discussions

  	
  47

  
	
  5.7

  	
  Use of Proceeds

  	
  48

  
	
  5.8

  	
  Hedging Obligations

  	
  48

  
	
  5.9

  	
  Acquisition of Real Property

  	
  48

  
	
  5.10

  	
  Lease and License Compliance

  	
  48

  
	
  5.11

  	
  Environmental and Safety Requirements

  	
  48

  
	
  5.12

  	
  Employee Matters

  	
  49

  
	
  5.13

  	
  Covenants Regarding Additional Subsidiaries

  	
  49

  
	
   

  	
   

  	
   

  
	
  SECTION 6.

  	
  NEGATIVE COVENANTS

  	
  50

  
	
  6.1

  	
  Financial Condition Covenants

  	
  50

  
	
  6.2

  	
  Limitation on Indebtedness

  	
  51

  
	
  6.3

  	
  Limitation on Liens

  	
  52

  
	
  6.4

  	
  Limitation on Fundamental Changes

  	
  53

  
	
  6.5

  	
  Limitation on Sale of Assets

  	
  53

  
	
  6.6

  	
  Limitation on Restricted Payments

  	
  53

  
	
  6.7

  	
  Limitation on Acquisitions, Investments, Loans and
  Advances

  	
  53

  
	
  6.8

  	
  Transactions with Affiliates

  	
  54

  
	
  6.9

  	
  Fiscal Year

  	
  54

  
	
  6.10

  	
  Prohibitions on Certain Agreements, Modifications to
  Certain Agreements

  	
  54

  
	
  6.11

  	
  Sale-Leaseback Transactions

  	
  55

  
	
  6.12

  	
  Unfunded Liabilities

  	
  55

  
	
  6.13

  	
  Line of Business

  	
  55

  
	
   

  	
   

  	
   

  
	
  SECTION 7.

  	
  EVENTS OF DEFAULT

  	
  55

  
	
   

  	
   

  	
   

  
	
  SECTION 8.

  	
  THE AGENT

  	
  58

  



 


ii

















 


	
  8.1

  	
  Appointment

  	
  58

  
	
  8.2

  	
  Delegation of Duties

  	
  59

  
	
  8.3

  	
  Exculpatory Provisions

  	
  59

  
	
  8.4

  	
  Reliance by Agent

  	
  59

  
	
  8.5

  	
  Notice of Default

  	
  59

  
	
  8.6

  	
  Non-Reliance on Agent and Other Lenders

  	
  60

  
	
  8.7

  	
  Indemnification

  	
  60

  
	
  8.8

  	
  Agent in Its Individual Capacity

  	
  61

  
	
  8.9

  	
  Successor Agent

  	
  61

  
	
   

  	
   

  	
   

  
	
  SECTION 9.

  	
  MISCELLANEOUS

  	
  61

  
	
  9.1

  	
  Amendments and Waivers

  	
  61

  
	
  9.2

  	
  Notices

  	
  62

  
	
  9.3

  	
  No Waiver; Cumulative Remedies

  	
  63

  
	
  9.4

  	
  Survival of Representations and Warranties

  	
  63

  
	
  9.5

  	
  Payment of Expenses and Taxes

  	
  63

  
	
  9.6

  	
  Successors and Assigns; Participation; Purchasing
  Lenders

  	
  64

  
	
  9.7

  	
  Adjustments; Set-Off

  	
  67

  
	
  9.8

  	
  Counterparts

  	
  68

  
	
  9.9

  	
  Severability

  	
  68

  
	
  9.10

  	
  Integration

  	
  68

  
	
  9.11

  	
  GOVERNING LAW

  	
  68

  
	
  9.12

  	
  Judicial Reference; Consent to Jurisdiction.

  	
  68

  
	
  9.13

  	
  Acknowledgements

  	
  69

  
	
  9.14

  	
  Headings

  	
  69

  
	
  9.15

  	
  Confidentiality

  	
  69

  



 


	
  Exhibits

  	
   

  	
   

  
	
  A-1

  	
  Form of
  Revolving Note

  	
   

  
	
  A-2

  	
  Form of Term
  Note

  	
   

  
	
  B

  	
  Form of No
  Default/Representation Certificate

  	
   

  
	
  C

  	
  Form of
  Continuation Notice

  	
   

  
	
  D

  	
  Form of
  Borrowing Notice

  	
   

  
	
  E

  	
  Form of
  Assignment and Acceptance

  	
   

  
	
  F

  	
  Form of Covenant
  Compliance Certificate

  	
   

  
	
  G-1

  	
  Form of Letter
  of Credit Request (Standby)

  	
   

  
	
  G-2

  	
  Form of Letter
  of Credit Request (Commercial)

  	
   

  
	
  H

  	
  Form of Landlord
  Consent

  	
   

  
	
   

  	
   

  	
   

  
	
  Schedules

  	
   

  	
   

  
	
  3.2

  	
  Qualification Jurisdictions

  	
   

  
	
  3.5

  	
  Litigation

  	
   

  
	
  3.6

  	
  Legal and
  Operating Names

  	
   

  



 


iii

















 


	
  3.7

  	
  Environmental
  Matters

  	
   

  
	
  3.8

  	
  Intellectual
  Property Matters

  	
   

  
	
  3.13

  	
  Subsidiaries

  	
   

  
	
  3.16

  	
  Real Property

  	
   

  
	
  3.19

  	
  Capital Structure and Equity Ownership

  	
   

  
	
  6.7

  	
  Certain Advance of Officers

  	
   

  
	
  6.8

  	
  Affiliate Transactions

  	
   

  



 


iv

















 


CREDIT
AGREEMENT


 


THIS
CREDIT AGREEMENT, dated as of November   , 2006, among PHYSICIANS
FORMULA, INC., a New York corporation (the “Borrower”), the several
banks and other lenders from time to time parties to this Agreement (the “Lenders”)
and UNION BANK OF CALIFORNIA, N.A. (“UBOC”), as administrative agent for
the Lenders (in such capacity, the “Agent”).


 


RECITALS


 


The Borrower has requested
that the Lenders extend to it revolving and term loan facilities for its use in
refinancing certain debt, the payment of fees and expenses relating thereto, for
working capital and general corporate purposes and the payment of fees and
expenses related to the initial public offering of Holdings and for other uses
as set forth therein. The Lenders have agreed to such request, subject
to the terms and conditions set forth herein.


 


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


 


SECTION
1.                                DEFINITIONS


 


1.1                                 Defined
Terms


 


As
used in this Agreement, the following terms shall have the following meanings:


 


“Accountants”:  Deloitte & Touche LLP, or such other firm
of independent certified public accountants of recognized national standing as
shall be selected by the Borrower and reasonably satisfactory to the Agent.


 


“Acquired
Person”:  as defined in the
definition of “Permitted Acquisition” contained in this Section 1.1.


 


“Acquisition”:  any transaction, or any series of related
transactions, consummated after the Closing Date, by which the Borrower and/or
any of its Subsidiaries directly or indirectly (a) acquires any ongoing
business or all or substantially all of the assets of any firm, partnership,
joint venture, limited liability company, corporation or division thereof,
whether through purchase of assets, merger or otherwise, (b) acquires in
one transaction or as the most recent transaction in a series of transactions
control of securities of a Person engaged in an ongoing business representing
more than 50% of the ordinary voting power for the election of directors or
other governing position if the business affairs of such Person are managed by
a board of directors or other governing body or (c) acquires control of
more than 50% of the ownership interest in any partnership, joint venture,
limited liability company, business trust or other Person that is not managed
by a board of directors or other governing body.


 


“Acquisition
Agreement”:  that certain Stock
Purchase Agreement dated as of November 3, 2003 among PFI Acquisition Corp., Pierre
Fabre Dermo-Cosmetique S.A., a French société


 

















 


anonyme, Pierre Fabre, Inc., a New York corporation, the Pledgor and
Pierre Fabre, S.A., a French société anonyme, as amended, modified,
supplemented or restated from time to time.


 


“Adjusted
EBITDA”:  for the Borrower and its
Subsidiaries on a consolidated basis, for the fiscal quarter most recently
ended and the immediately preceding three fiscal quarters, EBITDA plus, only to
the extent reflected in the determination of Net Income for that period and
without duplication, (i) Transaction Costs, (ii) one-time costs in connection
with the initial public offering of equity interests in the Pledgor relating to
compliance with (x) Sarbanes-Oxley Act of 2002 (as amended from time to time)
and the rules and regulations promulgated thereunder and (y) securities laws
and regulations; provided that the aggregate amount of such costs under this
clause (ii) shall not exceed $450,000 during the fiscal year ending December
31, 2006 and $325,000 during the fiscal year ending December 31, 2007, (iii) special
one-time bonus in an amount equal to $270,000 paid to certain members of
management during the fiscal year ending December 31, 2006 and (iv) one-time
non-cash compensation charges in an amount equal to $8,800,000 associated with
the vesting of performance based options during the fiscal year ending December
31, 2006.


 


“Affiliate”:  as to any Person, (a) any other Person
(other than a Subsidiary) which, directly or indirectly, is in control of, is
controlled by, or is under common control with, such Person or (b) any
Person who is a director, officer, shareholder, member or partner (i) of
such Person, (ii) of any Subsidiary of such Person or (iii) of any
Person described in the preceding clause (a). For purposes of this
definition, “control” of a Person means the power, directly or indirectly,
either to (i) vote securities having 10% or more of the ordinary voting
power for the election of directors of such Person or (ii) direct or cause
the direction of the management and policies of such Person whether by contract
or otherwise.


 


“Agent”:  as defined in the preamble hereto.


 


“Aggregate
Revolving Loan Commitment”: the sum of the Revolving Loan Commitments set
forth on the signature pages hereof.


 


“Aggregate
Term Loan Commitment”:  the sum of
the Term Loan Commitments set forth on the signature pages hereof.


 


“Aggregate
Total Commitment”:  the sum of the
Aggregate Revolving Loan Commitment and the Aggregate Term Loan Commitment.


 


“Aggregate
Total Commitment Percentage”: with respect to each Lender, the percentage
equivalent of the ratio which such Lender’s Commitments (or, if any such
Commitment has terminated, its outstanding Term Loans or Revolving Loans,
participations in Letters of Credit and unreimbursed drawings thereunder, as
applicable) bears to the Aggregate Total Commitment (or, with respect to any
terminated Commitment, the outstanding Term Loans or Revolving Loans,
participations in Letters of Credit and unreimbursed drawings thereunder, as
applicable, under such Commitment).


 


“Agreement”:  this Credit Agreement, as amended, waived,
supplemented or otherwise modified from time to time.


 


2

















 


“Applicable
Lending Office”:  for any Lender, its
offices for LIBOR Loans and Base Rate Loans and for participations in Letters
of Credit specified on the signature pages hereof or in the Assignment and
Acceptance pursuant to which it became a party hereto, as the case may be, any
of which offices may, upon 20 days’ prior written notice to the Agent and the
Borrower, be changed by such Lender.


 


“Asset Disposition”:  the sale, sale and leaseback, transfer, conveyance,
exchange, long-term lease accorded sales treatment under GAAP or similar
disposition (including by means of a merger, consolidation, amalgamation, joint
venture or other substantive combination) of any of the Properties, business or
assets (other than Cash Equivalents but, including the assignment of any lease,
license or permit relating to the Properties) of the Borrower or any of its
Subsidiaries to any Person or Persons other than to the Borrower or any of its
Subsidiaries; provided that Asset Dispositions shall not include (i) the sale of
Inventory in the ordinary course of business and otherwise, provided that such sale is not in connection
with a winding up or liquidation of the Borrower or any Subsidiary and (ii)
the sale of obsolete, surplus, uneconomical, or worn-out assets in an aggregate
amount not exceeding $500,000 in any fiscal year of the Borrower.


 


“Assignment and Acceptance”:  an Assignment and Acceptance in the form of
Exhibit E to this Agreement.


 


“Available Revolving Loan Commitment”: with
respect to each Revolving Loan Lender on the date of determination thereof, the
amount by which (a) the Revolving Loan Commitment of such Lender on such
date exceeds (b) the principal sum of such Lender’s (i) Revolving
Loans outstanding, (ii) Revolving Loan Commitment Percentage of the
aggregate Letter of Credit Amount of all Letters of Credit outstanding and
(iii) Revolving Loan Commitment Percentage of the aggregate amount of
unreimbursed drawings under all Letters of Credit on such date.


 


“Base Rate”: 
for any day, a rate per annum (rounded upwards, if necessary, to the
next 1/16 of 1%) equal to the greater of (a) the Reference Rate in effect
on such day and (b) the Federal Funds Effective Rate in effect on such day
plus 1/2 of 1%. “Reference Rate” shall mean the rate of interest per
annum publicly announced from time to time by UBOC as its “reference rate” in
effect at its office in Los Angeles, California. Such rate is a rate set by
UBOC based upon various factors including UBOC’s costs and desired return,
general economic conditions and other factors, and is used as a reference point
for pricing some loans, which may be priced at, above, or below such announced
rate. “Federal Funds Effective Rate” shall mean, for any day, the
weighted average of the rates on overnight federal funds transactions with
members of the Federal Reserve System arranged by federal funds brokers, as
published on the next succeeding Business Day by the Federal Reserve Bank of
New York, or, if such rate is not so published for any day which is a Business
Day, the average of the quotations for the day of such transactions received by
the Agent from three federal funds brokers of recognized standing selected by
it. If, for any reason, the Agent shall have determined (which determination
shall be conclusive absent manifest error) that it is unable to ascertain the
Federal Funds Effective Rate for any reason, including the inability or failure
of the Agent to obtain sufficient quotations in accordance with the terms
hereof, the Base Rate shall be determined without regard to
clause (b) of the first sentence of this definition until the
circumstances giving rise to such inability no longer exist. Any change in the
Base Rate due to a change in the Reference Rate or


 


3

















 


the Federal Funds Effective Rate shall be effective on the effective
date of such change in the Reference Rate or the Federal Funds Effective Rate,
respectively.


 


“Base
Rate Loans”: Loans the rate of interest applicable to which is based upon
the Base Rate.


 


“Borrower”:  as defined in the Recitals to this Agreement.


 


“Borrowing
Notice”:  a notice from the Borrower
to the Agent requesting a borrowing of Loans, substantially in the form of
Exhibit D hereto.


 


“Business
Day”:  a day other than a Saturday,
Sunday or other day on which commercial banks in the State of California are
authorized or required by law to close and which, in the case of a LIBOR Loan,
is a Eurodollar Business Day.


 


“Capital
Expenditures”:  for any period,
collectively, for any Person, the aggregate of all expenditures which are made
during such period (whether paid in cash or accrued as liabilities) by such
Person for property, plant or equipment and which would be reflected as
additions to property, plant or equipment on a balance sheet of such Person
prepared in accordance with GAAP, including all Capitalized Lease Obligations.


 


“Capitalized
Lease Obligations”:  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.


 


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


 


“Cash
Collateral Deposit”:  cash deposits
made by the Borrower to the Agent, to be held by the Agent as Collateral
pursuant to the Security Agreement, for the reimbursement of drawings under
Letters of Credit.


 


“Cash
Equivalents”: investments having a maturity of not greater than 12 months
from the date of acquisition thereof in (a) obligations issued or
unconditionally guaranteed by the United States of America or any agency
thereof, (b) certificates of deposit of any commercial bank organized under the
laws of the United States of America or any state thereof and having combined
capital and surplus of at least $250,000,000, (c) commercial paper with a
rating of at least Prime-1 by Moody’s Investors Service, Inc. or A-1 by
Standard & Poor’s Ratings Group (a division of The McGraw Hill Companies,
Inc.), (d) a readily redeemable “money market mutual fund” sponsored by a bank
described in clause (b) hereof, or a broker or dealer registered under the
Securities Exchange Act of 1934, as amended, and having on the date of the
investment capital of at least $50,000,000, which fund maintains an investment
policy limiting its investments primarily to instruments of the types described
in clauses (a) through (c) hereof and given on the date of such investment a
credit rating of at least AA by Moody’s Investors Service,


 


4

















 


Inc. or AA by Standard & Poor’s Ratings Group (a division of
The McGraw-Hill Companies, Inc.) or (e) other investments agreed to from time
to time between the Borrower and the Agent.


 


“Closing
Date”:  the date on which the
conditions set forth in Sections 4.1 and 4.2 are satisfied and the initial Loans
are made.


 


“Code”:  the Internal Revenue Code of 1986, as amended
from time to time.


 


“Collateral”:  all of the property (tangible or intangible)
purported to be subject to the lien or security interest purported to be
created by any mortgage, deed of trust, security agreement, pledge agreement,
assignment or other security document heretofore or hereafter executed by the
Borrower as security for all or part of the Obligations.


 


“Collateral
Documents”:  the Security Agreement, each
Control Agreement requested by the Agent pursuant to the Security Agreement,
each UCC-1 Financing Statement filed pursuant thereto and any other document or
agreement encumbering the Collateral or evidencing or perfecting a security
interest therein for the benefit of the Agent or any Lender executed by the
Borrower, as the same may be amended or modified from time to time in
accordance with the terms hereof.


 


“Commitment”:  a Revolving Loan Commitment or a Term Loan
Commitment, as applicable.


 


“Commitment
Percentage”:  a Revolving Loan
Commitment Percentage or a Term Loan Commitment Percentage, as applicable.


 


“Commonly
Controlled Entity”:  as to any
Person, an entity, whether or not incorporated, which is under common control
with such Person within the meaning of Section 4001 of ERISA or is part of
a group which includes such Person and which is treated as a single employer
under Section 414 of the Code.


 


“Continuation
Notice”:  a request for continuation
or conversion of a Loan as set forth in Section 2.6, substantially in the form
of Exhibit C.


 


“Contractual
Obligation”:  as to any Person, any
provision of any security issued by such Person or of any agreement, instrument
or other undertaking to which such Person is a party or by which it or any of
its property is bound.


 


“Control
Agreement”:  a control agreement,
restricted account agreement or similar agreement or document, in each case in
form and substance satisfactory to the Agent and entered into for the purpose
of perfecting a security interest in one or more deposit accounts or securities
accounts of the Borrower or its Subsidiaries.


 


“Covenant
Compliance Certificate”:  a
certificate of the Chief Financial Officer of the Borrower (or, at any time
during which the Borrower shall not have a Chief Financial Officer, the
President) substantially in the form of Exhibit F hereto.


 


5

















 


“Default”:  any of the events specified in
Section 7, whether or not any requirement for the giving of notice, the
lapse of time, or both, or any other condition, has been satisfied.


 


“Dollars”
and “$”:  dollars in lawful
currency of the United States.


 


“Domestic
Subsidiary”:  each Subsidiary
organized under the laws of the United States or any state thereof.


 


“EBITDA”:  for
the Borrower and its Subsidiaries on a consolidated basis, with respect to any
period, the sum
of (a) Net Income for that period, plus (b) any non-recurring loss reflected in
such Net Income, minus (c) any non-recurring gain (excluding any gain received
from the sale of Inventory in the ordinary course of business and otherwise, provided that
such sale is not in connection with a winding up or liquidation of the Borrower
or any Subsidiary) reflected in such Net Income, plus (d) Interest Expense of the Borrower
and its Subsidiaries for that period, plus (e) the aggregate amount of
federal and state taxes on or measured by income for that period, the aggregate
amount of property taxes for that period and the aggregate amount of sales
taxes for that period (whether or not payable during that period), plus (f) depreciation and
amortization expense of Borrower and its Subsidiaries for that period, plus (g)
all other non-cash charges of Borrower and its Subsidiaries for that period,
plus (h) all other non-recurring expenses of Borrower and its Subsidiaries for
that period acceptable to the Agent, in each case as determined in accordance
with GAAP, consistently applied and, in the case of items (d), (e), (f), (g)
and (h), only to the extent reflected in the determination of Net Income for
that period.


 


“Environmental
and Safety Requirements”: all federal, state, local and foreign statutes,
regulations, ordinances and other provisions having the force or effect of law,
all judicial and administrative orders and determinations, all contractual
obligations and all common law, in each case concerning public health and
safety, worker health and safety, exposure to hazardous substances or
materials, pollution or protection of the environment, including all those
relating to the presence, use, production, generation, handling, transport, treatment,
storage, disposal, distribution, labeling, testing, processing, discharge,
release, threatened release, control or cleanup of, or exposure to, any
hazardous or otherwise regulated materials, substances or wastes, chemical
substances or mixtures, pesticides, pollutants, contaminants, toxic chemicals,
petroleum products or byproducts, asbestos, polychlorinated biphenyls, noise,
radiation or radon, each as amended and as now or hereafter in effect.


 


“Equityholder
Agreements”  each shareholder agreement,
member agreement, partner agreement, voting agreement, buy-sell agreement,
option, warrant, put, call, right of first refusal, and any other agreement or
instrument with conversion rights into equity of the Borrower or any Subsidiary
either (a) between the Borrower or any Subsidiary and any holder or
prospective holder of any equity interest of the Borrower or any Subsidiary
(including interests convertible into such equity) or (b) otherwise
between any two or more such holders of equity interests.


 


“Equity
Offering”:  the sale or issuance (or
reissuance) by the Borrower, the Pledgor or any Subsidiary of any equity
interests or beneficial interests (common stock, preferred stock, partnership
interests, member interests or otherwise) or any options, warrants, convertible
securities or other rights to purchase such equity interests or beneficial
interests, other than a sale or issuance by (i) any Subsidiary to the Borrower
or (ii) any Subsidiary to another Subsidiary.


 


6

















 


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


 


“ERISA
Affiliate”:  as to any Person, each
trade or business including such Person, whether or not incorporated, which
together with such Person would be treated as a single employer under Section
4001(a)(14) of ERISA.


 


“Eurodollar
Business Day”:  any day on which
banks are open for dealings in Dollar deposits in the London interbank market.


 


“Event
of Default”:  any of the events
specified in Section 7, provided that any requirement for the
giving of notice, the lapse of time, or both, or any other condition, has been
satisfied.


 


“Excluded
Taxes”:  all taxes imposed on or by
reference to the net income of the Agent, or any Lender or its Applicable Lending
Office by any Governmental Authority and all franchise taxes, taxes on doing
business or taxes measured by capital or net worth imposed on the Agent or on
any Lender or its Applicable Lending Office by any Governmental Authority.


 


“Existing
Credit Agreement”:  that certain
Credit Agreement dated as of December 16, 2005 among the Borrower, the Lenders
referred to therein, and UBOC, as agent for such Lenders.


 


“Fee
Letter”:  that certain letter
regarding fees executed between the Borrower and the Agent as of the Closing
Date, as such letter may be amended or modified from time to time.


 


“Financial
Statements”:  as defined in Section
3.1 hereof.


 


“Fixed
Charge Coverage Ratio”:  for the
Borrower and its Subsidiaries on a consolidated basis, the ratio of Free Cash
Flow to Fixed Charges for such period.


 


“Fixed
Charges”:  for the Borrower and its
Subsidiaries on a consolidated basis, for the fiscal quarter most recently
ended and the immediately preceding three fiscal quarters, without duplication,
the sum of (a) Interest Expense (other than (i) Transaction Costs, (ii)
amendment fees and expenses paid in connection with any future amendment of
this Agreement and (iii) unamortized loan fees and legal fees in the amount of
approximately $1,100,000 paid on or about December 16, 2005 in connection with
the Existing Credit Agreement, in each case to the extent constituting Interest
Expense) of the Borrower and its Subsidiaries actually paid or payable, without
duplication, in cash for such period plus (b) the aggregate amount of scheduled
principal payments actually made on Total Funded Debt; provided, however,
with respect to (x) the quarter ending March 31, 2007, Fixed Charges shall be
calculated by multiplying the amount of Fixed Charges for the quarter ending
March 31, 2007 by four, (y) the quarter ending June 30, 2007, Fixed Charges
shall be calculated by multiplying the aggregate amount of Fixed Charges for
the quarters ending March 31, 2007 and June 30, 2007 by two and (z) the quarter
ending September 30, 2007, Fixed Charges shall be calculated by multiplying the
aggregate amount of Fixed Charges for the quarters ending March 31, 2007, June
30, 2007 and September 30, 2007 by 4/3.


 


7

















 


“Foreign
Subsidiary:  any Subsidiary other
than a Domestic Subsidiary.


 


“Free
Cash Flow”:  with respect to any
fiscal period, without duplication, the sum of (a) Adjusted EBITDA for
such fiscal period, minus (b) the aggregate amount of cash income taxes
actually paid by the Borrower and the Subsidiaries during such fiscal period.


 


“GAAP”:  generally accepted accounting principles in
the United States in effect from time to time. If, at any time, GAAP changes in
a manner which will materially affect the calculations determining compliance by
the Borrower with any of its covenants in Section 6.1, such covenants
shall continue to be calculated in accordance with GAAP in effect prior to such
changes in GAAP.


 


“Governmental
Authority”:  any nation or
government, any federal, state or other political subdivision thereof and any
federal, state or local entity exercising executive, legislative, judicial,
regulatory or administrative functions of or pertaining to government.


 


“Guarantee
Obligation”:  as to any Person (the “guaranteeing
person”), any obligation of (a) the guaranteeing person or
(b) another Person (including, without limitation, any bank under any
letter of credit) which Person the guaranteeing person has agreed to reimburse
or indemnify for undertaking such obligation in either case guaranteeing or in
effect guaranteeing any Indebtedness, leases, dividends or other obligations
(the “primary obligations”) of any other third Person (the “primary
obligor”) in any manner, whether directly or indirectly, including, without
limitation, any obligation of the guaranteeing person, whether or not
contingent, (i) to purchase any such primary obligation or any property
constituting direct or indirect security therefor, (ii) to advance or
supply funds for the purchase or payment of any such primary obligation or to
maintain working capital or equity capital of the primary obligor or otherwise
to maintain the net worth or solvency of the primary obligor, (iii) to
purchase property, securities or services primarily for the purpose of assuring
the owner of any such primary obligation of the ability of the primary obligor
to make payment of such primary obligation or (iv) otherwise to assure or
hold harmless the owner of any such primary obligation against loss in respect
thereof; provided, however, that the term Guarantee Obligation
shall not include endorsements of instruments for deposit or collection in the
ordinary course of business. The amount of any Guarantee Obligation of any
guaranteeing person shall be deemed to be the lesser of (a) an amount equal
to the stated or determinable amount of the primary obligation in respect of
which such Guarantee Obligation is made and (b) the maximum amount for
which such guaranteeing person may be liable pursuant to the terms of the
instrument embodying such Guarantee Obligation, unless such primary obligation
and the maximum amount for which such guaranteeing person may be liable are not
stated or determinable, in which case the amount of such Guarantee Obligation
shall be such guaranteeing person’s maximum reasonably anticipated liability in
respect thereof as determined by the Borrower in good faith.


 


“Guarantees”:  the Pledgor Guarantee and the Subsidiary
Guarantee.


 


“Guarantor
Collateral”:  all of the property
(tangible or intangible) purported to be subject to the lien or security
interest purported to be created by any mortgage, deed of trust, security
agreement, pledge agreement, assignment or other security document heretofore
or hereafter executed by any Guarantor as security for all or part of any
Guarantee.


 


8

















 


“Guarantor
Collateral Documents”:  the Guarantor
Security Agreement, the Pledge Agreement, each Control Agreement requested by
the Agent pursuant to the Guarantor Security Agreement, each UCC-1 Financing
Statement filed pursuant to any of the foregoing and any other document or
agreement encumbering the Guarantor Collateral or evidencing or perfecting a
security interest therein for the benefit of the Lenders executed by a
Guarantor, as the same may be amended, modified or supplemented from time to
time in accordance with the terms hereof.


 


“Guarantor
Security Agreement”:  that certain Guarantor
Security Agreement dated as of the Closing Date, in form and substance
acceptable to the Agent, made by Physician’s Formula Cosmetics, Inc. and the
other grantors from time to time becoming party thereto in accordance with the
terms thereof, in favor of the Agent, for the benefit of the Lenders, as the
same may be amended, modified or supplemented in accordance with the terms
hereof.


 


“Guarantors”:  the Pledgor and each
Domestic Subsidiary.


 


“Hazardous
Substance Activity” means any actual, proposed or threatened Release,
storage, use, generation, processing, production, manufacture, treatment,
abatement, removal, repair, cleanup or detoxification, disposition, recycling,
disposal, handling or transportation of any Hazardous Substance from, under,
into or on property.


 


“Hazardous
Substances” means any substance, material product, by-product, waste,
emission, residual or odor that is described as a toxic or hazardous substance,
waste, material, pollutant, contaminant, infectious waste, designated waste or
words of similar meaning or effect, in any of the Environmental and Safety
Requirements, or any other words which are intended to define, list or classify
substances by reason of deleterious properties such as ignitability,
corrosivity, reactivity, carcinogenicity, toxicity, or reproductive toxicity
and includes, without limitation, asbestos, asbestos-containing materials,
lead-based paint, petroleum (including crude oil or any fraction thereof,
natural gas, natural gas liquids, liquefied natural gas, or synthetic gas
usable for fuel, or any mixture thereof), petroleum products, waste oil,
polychlorinated biphenyls, urea formaldehyde, radon gas, radioactive matter,
medical waste and chemicals which may cause cancer or reproductive toxicity.


 


“Hedging
Agreements”:  as defined in the
definition of “Hedging Obligations” in this Section 1.1.


 


“Hedging
Obligations”:  of any Person, any and
all obligations of such Person, whether absolute or contingent and howsoever
and whensoever created, arising, evidenced or acquired (including all renewals,
extensions and modifications thereof and substitutions therefor), under (i) any
and all agreements, devices or arrangements designed to protect at least one of
the parties thereto from the fluctuations of interest rates, commodity prices,
exchange rates or forward rates applicable to such party’s assets, liabilities
or exchange transactions, including dollar-denominated or cross-currency
interest rate exchange agreements, forward currency exchange agreements,
interest rate cap or collar protection agreements, forward rate currency or
interest rate options, puts and warrants or any similar derivative transactions
(“Hedging Agreements”), and (ii) any and all cancellations, buy-backs,
reversals, terminations or assignments of any of the foregoing.


 


9

















 


“Incremental
EBITDA”:  for any fiscal period and
with respect to any Acquired Person which is the subject of a Permitted
Acquisition, that portion of EBITDA for such fiscal period that the Borrower
projects will be generated as a result of the consummation of such Permitted
Acquisition, in each case in accordance with Regulation S-X or as otherwise
approved by the Agent and the Majority Lenders.


 


“Indebtedness”:  as to any Person, (i) all indebtedness
of such Person for borrowed money or for the deferred purchase price of
property or services (excluding all trade payables not overdue for more than 90
days), (ii) all obligations of such Person evidenced by notes, bonds,
debentures or other similar instruments, (iii) all indebtedness created or
arising under any conditional-sale or other title-retention agreement with
respect to property acquired by such Person, (iv) all Capitalized Lease
Obligations of such Person, (v) all Hedging Obligations of such Person,
(vi) all obligations, contingent or otherwise, of such Person under
acceptance, letter of credit or similar facilities, (vii)  all mandatory
redemption, repurchase or dividend obligations of such Person with respect to
Capital Stock, (viii) all liabilities in respect of unfunded vested benefits
under plans covered by Title IV of ERISA and (ix) all Guarantee
Obligations of such Person in respect of, and obligations (contingent or
otherwise) to purchase or otherwise acquire, or otherwise to secure a credit
against loss in respect of, indebtedness or obligations of others of the kinds
referred to in clause (i), (ii), (iii), (iv), (v), (vi), (vii) or (viii) above.


 


“Insolvency”:  with respect to any Multiemployer Plan, the
condition that such Plan is insolvent within the meaning of Section 4245
of ERISA.


 


“Interest
Expense”:  as of any date, with
respect to any Person, for the fiscal quarter most recently ended and the
immediately preceding three fiscal quarters, the sum of (a) all interest,
fees, charges and related expenses (in each case as such expenses are
calculated according to GAAP) paid or payable (without duplication) for such
fiscal period by that Person to a lender in connection with borrowed money
(including any obligations for fees, charges and related expenses payable to
the issuer of any letter of credit) or the deferred purchase price of assets
that are considered “interest expense” under GAAP plus (b) the portion of rent
paid or payable (without duplication) for such fiscal period by that Person
under Capitalized Lease Obligations that should be treated as interest in
accordance with Financial Accounting Standards Board Statement No. 13.


 


“Interest
Payment Date”:  (a) as to any
Base Rate Loan, the last Business Day of each calendar month while any such
Loan is outstanding, (b) as to any LIBOR Loan having an Interest Period of
three months or less, the last day of such Interest Period, (c) as to any
LIBOR Loan having an Interest Period longer than three months, each day which
is at the end of each three month-period within such Interest Period after the
first day of such Interest Period and the last day of such Interest Period and
(d) for each of (a), (b) and (c)  above, the day on which any such
Loan becomes due and payable in full or is paid or prepaid in full.


 


“Interest
Period”:  with respect to any LIBOR
Loan:


 


(a)                                  initially,
the period commencing on the borrowing or conversion date, as the case may be,
with respect to such LIBOR Loan and ending one, two, three or six months
thereafter, or, if available from all of the Lenders and consented to by the
Agent, nine or twelve months


 


10

















 


thereafter, as selected by the Borrower in its notice of borrowing or
its Continuation Notice, as the case may be, given with respect thereto; and


 


(b)                                 thereafter,
each period commencing on the last day of the next preceding Interest Period
applicable to such LIBOR Loan and ending one, two, three or six months
thereafter, or, if  available from all of
the Lenders and consented to by the Agent, nine or twelve months thereafter, as
selected by the Borrower by irrevocable notice to the Agent not less than three
Eurodollar Business Days prior to the last day of the then current Interest
Period with respect thereto;


 


provided that, all of the foregoing
provisions relating to Interest Periods are subject to the following:


 


(i)                                     if
any Interest Period pertaining to a LIBOR Loan would otherwise end on a day
that is not a Business Day, such Interest Period shall be extended to the next
succeeding Business Day unless the result of such extension would be to carry
such Interest Period into another calendar month in which event such Interest
Period shall end on the immediately preceding Business Day;


 


(ii)                                  any
Interest Period for any Loan that would otherwise extend beyond the date final
payment is due on such Loan shall end on the date of such final payment; and


 


(iii)                               any Interest Period
pertaining to a LIBOR Loan that begins on the last Business Day of a calendar
month (or on a day for which there is no numerically corresponding day in the
calendar month at the end of such Interest Period) shall end on the last
Business Day of a calendar month.


 


“Inventory”:  all “inventory,” as such term is defined in
the UCC, now owned or hereafter acquired by any Person, wherever located,
including all goods, merchandise and other personal property held for sale or
lease by any such Person, or which is furnished by such Person under any
contract of service or is held by such Person as raw materials, work or goods
in process, materials and supplies of every nature used or consumed or to be
used or consumed by such Person in the ordinary course of its business, whether
now owned or hereafter acquired by such Person.


 


“Investment
Company Act”:  as defined in
Section 3.12 hereof.


 


“Landlord
Consent”:  each Waiver and Consent
executed by the landlord of the Borrower or any Subsidiary, substantially in
the form of Exhibit H, as such agreements may be amended, restated, modified or
supplemented from time to time in accordance with the terms hereof.


 


“Lenders”:  as defined in the preamble hereto and
Section 8.8 hereof.


 


“Letter
of Credit”:  as defined in
Section 2.1(a).


 


“Letter
of Credit Amount”:  the stated
maximum amount available to be drawn under a particular Letter of Credit, as
such amount may be reduced or reinstated from time to time in accordance with
the terms of such Letter of Credit.


 


11

















 


“Letter
of Credit Request”:  a request by the
Borrower for the issuance of a Letter of Credit, on the Agent’s standard form of
standby letter of credit application and agreement or commercial letter of
credit application and agreement, as applicable, the current forms of which are
attached hereto as Exhibits G -1 and G-2, respectively, and containing terms
and conditions satisfactory to the Agent in its sole discretion.


 


“LIBOR”:  with respect to each day during each Interest
Period pertaining to a LIBOR Loan, the rate of interest determined by the Agent
to be the rate per annum at which deposits in dollars would be offered to the
Agent by leading banks in the London Interbank Market at or about
9:00 a.m., Los Angeles time, two Eurodollar Business Days prior to the
beginning of such Interest Period, for delivery on the first day of such
Interest Period for the number of days comprised therein and in an amount comparable
to the amount of its LIBOR Loan to be outstanding during such Interest Period.


 


“LIBOR
Adjusted Rate”:  with respect to each
day during each Interest Period pertaining to a LIBOR Loan, a rate per annum
determined for such day in accordance with the following formula (rounded
upward to the nearest 1/100th of 1%):


 


	
   

  	
  LIBOR

  	
   

  
	
   

  	
  1.00 - LIBOR Reserve Requirements

  	
   

  



 


“LIBOR
Loans”:  Loans the rate of interest
applicable to which is based upon LIBOR.


 


“LIBOR
Reserve Requirements”:  for any day
as applied to a LIBOR Loan, the aggregate (without duplication) of the maximum
rates (expressed as a decimal fraction) of reserve requirements in effect on
such day (including, without limitation, basic, supplemental, marginal and
emergency reserves under any regulations of the Board of Governors of the
Federal Reserve System or other Governmental Authority having jurisdiction with
respect thereto) dealing with reserve requirements prescribed for eurocurrency
funding (currently referred to as “Eurocurrency Liabilities” in Regulation D of
such Board) maintained by a member bank of such Federal Reserve System.


 


“Lien”:  any mortgage, pledge, charge, hypothecation,
assignment, deposit arrangement, encumbrance, lien (statutory or other),
security interest or other security agreement or preferential arrangement of
any kind or nature whatsoever (including, without limitation, any conditional
sale or other title retention agreement, any Capitalized Lease Obligation
having substantially the same economic effect as any of the foregoing, and the
filing of any financing statement under the Uniform Commercial Code or
comparable law of any jurisdiction in respect of any of the foregoing).


 


“Liquidity
Amount”: as of any date of determination, an amount equal to the sum of Borrower’s
cash on deposit with UBOC or subject to a control agreement in favor of the
Agent, Borrower’s Cash Equivalents and the aggregate Available Revolving Loan
Commitment.


 


“Loan”:  a Revolving Loan or a Term Loan, as
applicable; and “Loans” means the aggregate of all Revolving Loans and
all Term Loans, as applicable, outstanding at any given time.


 


12

















 


“Loan
Documents”:  this Agreement, the
Notes, the Collateral Documents, the Guarantor Collateral Documents, the
Guarantees, each Landlord Consent, any Hedging Agreements to which a Lender (or
an Affiliate thereof) or the Agent is party, the Fee Letter, any Letter of
Credit Requests that are executed by the Borrower, and any other agreement
executed by a Loan Party in connection therewith or herewith including, but not
limited to, UCC-1 Financing Statements, as such agreements and documents may be
amended, supplemented and otherwise modified from time to time in accordance
with the terms hereof.


 


“Loan
Parties”:  without duplication, the
Borrower, each Subsidiary and the Pledgor.


 


“Majority
Lenders”:  subject to Section 2.1(e),
Lenders having Commitments equal to or more than 50.1% of the Aggregate Total
Commitment, or, if any Commitment has terminated, with respect to such Commitment,
Lenders with outstanding Loans and/or participations in Letters of Credit (if
applicable) under such Commitment having an unpaid principal balance equal to
or more than 50.1% of the sum of (i) the unpaid principal balance of all
Loans outstanding, (ii) the aggregate Letter of Credit Amount (if
applicable) and (iii) the aggregate amount of unreimbursed drawings under all
Letters of Credit (if applicable), excluding from such calculation Lenders
which have failed or refused to fund a Loan when required to do so.


 


“Margin
Stock”:  as defined in Regulation U.


 


“Material
Adverse Effect”:  a material adverse
effect on (a) the business, operations, property or condition (financial
or otherwise) of the Borrower and its Subsidiaries, taken as a whole,
(b) the ability of any Loan Party to perform its respective obligations
under the Loan Documents or (c) the validity or enforceability of the Loan
Documents or the rights or remedies of the Agent or the Lenders hereunder or
thereunder.


 


“Multiemployer
Plan”:  a plan which is a
multiemployer plan as defined in Section 4001(a)(3) of ERISA.


 


“Net
Income”:  for the Borrower and its
Subsidiaries on a consolidated basis, net income as determined in accordance
with GAAP.


 


“Net
Proceeds”:  with respect to any Asset
Disposition, the net amount equal to the aggregate amount received in cash
(including any cash received by way of deferred payment pursuant to a note
receivable, other non-cash consideration or otherwise, but only as and when
such cash is so received) in connection with such Asset Disposition minus
the sum of (a) the reasonable fees, commissions and other out-of-pocket
expenses incurred by the Borrower or any of its Subsidiaries in connection with
such Asset Disposition (other than amounts payable to Affiliates of the Person
making such disposition), (b) Indebtedness, other than the Loans, required
to be paid as a result of such Asset Disposition, (c) federal, state and
local taxes incurred in connection with such Asset Disposition and (d) any
reserves required by GAAP to be established in connection with such Asset
Disposition (provided that all amounts, if any, released to the Borrower shall
at such time constitute Net Proceeds subject to prepayment in accordance with
Section 2.5(b)).


 


“Note”:  a Revolving Note or a Term Note; and “Notes”
means the aggregate of all Revolving Notes and all Term Notes.


 


13

















 


“Note
Purchase Agreement”: that certain Senior Subordinated Note Purchase
Agreement dated as of December 16, 2005 among the Borrower, the Noteholders
referred to therein and UnionBanCal Equities, Inc. in its capacity as the Noteholder
Representative.


 


“Obligations”:  the unpaid principal of and interest on
(including, without limitation, interest accruing after the maturity of the
Loans and interest accruing on or after the filing of any petition in
bankruptcy, or the commencement of any insolvency, reorganization or like
proceeding, relating to the Borrower, whether or not a claim for post-filing or
post-petition interest is allowed in such proceeding and whether or not at a
default rate) the Notes, the obligation to reimburse drawings under Letters of
Credit (including the contingent obligation to reimburse any drawings under
outstanding Letters of Credit), and all other obligations and liabilities,
including but not limited to any Hedging Obligations or cash management
services, of the Borrower and its Subsidiaries to the Agent and the Lenders or
any of their Affiliates, whether direct or indirect, absolute or contingent,
due or to become due, or now existing or hereafter incurred, which may arise
under, out of, or in connection with, this Agreement, the Notes, the Letters of
Credit, any other Loan Document and any other document made, delivered or given
in connection herewith or therewith, whether on account of principal, interest,
reimbursement obligations, fees, indemnities, costs, expenses (including,
without limitation, all reasonable fees and disbursements of counsel, and the
allocated reasonable cost of internal counsel, to the Agent or the Lenders that
are required to be paid by the Borrower and its Subsidiaries pursuant to the
terms of this Agreement) or otherwise.


 


“Occupancy
Agreements”:  as defined in Section
5.10.


 


“Organic
Documents”:  with respect to any entity,
in each case to the extent applicable thereto, its certificate and articles of
incorporation or organization, its by-laws or operating agreement, its
partnership agreement, all other formation and/or governing documents, all
Equityholder Agreements, and all other voting agreements and similar
arrangements applicable to any of its authorized shares of capital stock, its
partnership interests or its member interests.


 


“Participant”:  as defined in Section 9.6(b) hereof.


 


“PBGC”:  the Pension Benefit Guaranty Corporation
established pursuant to Subtitle A of Title IV of ERISA or any successor
thereto.


 


“Permitted
Acquisition”:  an Acquisition by the
Borrower or any Domestic Subsidiary of all or substantially all of the assets
of, or all of the Capital Stock of, a Person, or a division of a Person (each,
an “Acquired Person”), provided that (a) the Majority
Lenders have consented to such Acquisition or (b) each of the following
conditions is satisfied with respect to such Acquisition:


 


(i)                                     if
such Acquisition is of all of the Capital Stock of an Acquired Person, such
Acquisition is not opposed by the board of directors or management of the
Acquired Person;


 


(ii)                                  such
Acquisition will not cause the Borrower to violate Section 6.13;


 


14

















 


(iii)                               at the time of such
Acquisition, no Default shall have occurred and be continuing and no Default
would occur as a result thereof on either an actual or pro forma basis
immediately after giving effect to such Acquisition;


 


(iv)                              Borrower
shall have provided to the Agent, no later than 20 Business Days prior to the
date of consummation of the Acquisition, the following information and
documentation pertaining to the Acquisition, in each case in form and substance
satisfactory to the Agent: 
(A) calculations certified by the Borrower’s Chief Financial
Officer (or, at any time during which the Borrower shall not have a Chief
Financial Officer, the President) indicating pro forma compliance by the
Borrower and its Subsidiaries with the covenants contained in Section 6.1
subsequent to the Acquisition, (B) historical financial statements of the
Acquired Person for the three full fiscal years of the Acquired Person
immediately preceding the date of the consummation of the Permitted Acquisition,
(C) consolidated projections of the Borrower and its Subsidiaries, by
fiscal quarter, incorporating the results of operations of the Acquired Person,
and which detail Incremental EBITDA for each relevant fiscal period for the
Acquired Person, (D) a certificate of a Responsible Officer of the
Borrower which sets forth the sources and uses of funds which will be required
to consummate the Acquisition, (E) a certificate of a Responsible Officer
of the Borrower (i) certifying that the Acquisition is a Permitted
Acquisition, (ii) certifying that the Borrower and/or the applicable
Subsidiaries have conducted customary Lien, litigation, environmental and,
where applicable and available, title searches with respect to the Acquired
Person and the material assets to be acquired in the Acquisition in all
relevant jurisdictions and with all relevant Governmental Authorities, and
attaching a summary of the results of such searches and (iii) reaffirming
the representations and warranties contained in Article 3 of this Agreement as
of the date of consummation of the Acquisition giving effect to such
consummation, except for representations and warranties which expressly speak
as of a particular date or are no longer true and correct as a result of a
change which is permitted by this Agreement and (F) such other due
diligence information and documentation as the Agent shall require;


 


(v)                                 the
Borrower shall project that Incremental EBITDA for the first full fiscal
quarter of the Borrower immediately succeeding such Acquisition shall be
greater than $1 with respect to such Acquired Person; and


 


(vi)                              the
purchase price for all Acquisitions consummated on or after the Closing Date
shall not exceed $25,000,000 (excluding any amounts financed with the proceeds
of an equity issuance).


 


“Person”:  any individual, firm, partnership, joint
venture, corporation, limited liability company, association, business
enterprise trust, unincorporated organization, government or department or
agency thereof or other entity, whether acting in an individual, fiduciary or
other capacity.


 


“Plan”:  as to any Person, any plan (other than a
Multiemployer Plan) subject to Title IV of ERISA maintained for employees of
such Person or any ERISA Affiliate of such Person (and any such plan no longer
maintained by such Person or any of such Person’s ERISA Affiliates to which
such Person or any of such Person’s ERISA Affiliates has made or was required
to make any contributions within any of the five preceding years).


 


15

















 


“Pledge
Agreement”:  the Pledge Agreement dated
as of the Closing Date made by the Pledgor in favor of the Agent, for the
benefit of the Lenders, in form and substance satisfactory to the Agent, as it
may be amended, modified or supplemented from time to time in accordance with
the terms hereof.


 


“Pledgor”:  Physicians Formula Holdings, Inc., a Delaware
corporation formerly known as PFI Holdings Corp.


 


“Pledgor
Guarantee”:  the Pledgor Guarantee dated
as of the Closing Date made by the Pledgor in favor of the Agent, for the
benefit of the Lenders, in form and substance satisfactory to the Agent, as it
may be amended, modified or supplemented from time to time in accordance with
the terms hereof.


 


“Properties”:  the collective reference to the real and
personal property owned, leased, used, occupied or operated, under license or
permit, by the Borrower or any of its Subsidiaries.


 


“Purchasing
Lenders”:  as defined in Section
9.6(c) hereof.


 


“Regulation
D”:  Regulation D of the Board of
Governors of the Federal Reserve System, as the same is from time to time in
effect, and all official rulings and interpretations thereunder or thereof and
any successor regulation thereto.


 


“Regulation
U”:  Regulation U of the Board of
Governors of the Federal Reserve System, as the same is from time to time in
effect, and all official rulings and interpretations thereunder or thereof and
any successor regulation thereto.


 


“Related
Fund”:  with respect to any Person,
an Affiliate of such Person, or a fund or account managed by such Person or an
Affiliate of such Person.


 


“Related
Party Assignment”:  as defined in
Section 9.6(c).


 


“Release”
means any spilling, leaking, pumping, pouring, emitting, emptying, fugitive
emission, discharging, injecting, escaping, leaching, dumping or disposing into
the environment, including continuing, active or passive migration, of
Hazardous Substances into, onto or through soil, surface water or groundwater.


 


“Reorganization”:  with respect to any Multiemployer Plan, the
condition that such plan is in reorganization within the meaning of Section
4241 of ERISA.


 


“Reportable
Event”:  any of the events set forth
in Section 4043(b) of ERISA, other than those events as to which the
thirty day notice period is waived under PBGC regulations.


 


“Requirement
of Law”:  as to any Person, its
Organic Documents, and any law, treaty, rule, order, judgment or regulation of
an arbitrator or a court or other Governmental Authority, in each case
applicable to or binding upon such Person or any of its property or to which
such Person or any of its property is subject.


 


16

















 


“Responsible
Officer”:  the chief executive
officer or the president of the applicable Loan Party, or, with respect to
financial matters, the chief financial officer of the applicable Loan Party, as
applicable (provided that, at any time during which the Borrower shall not have
a Chief Financial Officer, the President may serve such function).


 


“Restricted
Payments”:  as defined in Section 6.6.


 


“Revolving
Loan”: as defined in Section 2.1(a).


 


“Revolving
Loan Commitment”: the commitment of a Lender listed on the signature pages
hereof to make Revolving Loans and participate in Letters of Credit hereunder
through its Applicable Lending Office as set forth on the signature pages
hereof, as the same may be adjusted pursuant to the provisions hereof.


 


“Revolving
Loan Commitment Expiration Date”:  November
[   ], 2011, or such earlier date as the Revolving Loan
Commitments shall expire in accordance with the terms hereof (whether by
acceleration or otherwise).


 


“Revolving
Loan Commitment Percentage”: with respect to each Revolving Loan Lender,
the percentage equivalent of the ratio which such Lender’s Revolving Loan
Commitment bears to the Aggregate Revolving Loan Commitment (or if the
Revolving Loan Commitment has terminated, the percentage equivalent of the
ratio which such Lender’s outstanding Revolving Loans and participations in
Letters of Credit bears to the (i) the unpaid principal balance of all
Revolving Loans outstanding, (ii) the aggregate Letter of Credit Amount
and (iii) the aggregate amount of unreimbursed drawings under all Letters of
Credit).


 


“Revolving
Loan Lender”:  each Lender having any
of (i) a Revolving Loan Commitment, (ii) Revolving Loans outstanding or (iii) a
participation in any Letter of Credit.


 


“Revolving
Note”:  as defined in Section 2.1(c).


 


“San
Gabriel Valley Site Liabilities” means any and all losses and obligations
arising from or related to any of the following:  (a) any hazardous substances or other
contamination present at, in, on or under, or that originated at or migrated
from, the Borrower’s or any Subsidiaries’ real property (including their leased
real property in City of Industry, California) on or prior to the Closing Date,
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
(collectively, the “San Gabriel Valley Superfund Site”); and (c) all
pending and any future-asserted personal injury, property or natural resource
damage, toxic tort or other lawsuits or claims related to hazardous substances
or other contaminants within the San Gabriel Valley Superfund Site and/or any
Hazardous Substances or other contamination present at, in, on or under, or
that originated at or migrated from, the Borrower’s or any Subsidiary’s real
property (including their leased real property in the City of Industry,
California) on or prior to the Closing Date, including any contamination-related
claims or lawsuits filed or to be filed by water suppliers located within the
San Gabriel Valley Superfund Site.


 


17

















 


“Security
Agreement”:  the Security Agreement dated
as of the Closing Date made by the Borrower in favor of the Agent, for the
benefit of the Lenders, in form and substance satisfactory to the Agent, as it
may be amended or otherwise modified from time to time in accordance with the
terms hereof.


 


“Single
Employer Plan”:  any Plan which is
covered by Title IV of ERISA, but which is not a Multiemployer Plan.


 


“Solvent”:  when used with respect to any Person, that:


 


(a)                                  the
present fair salable value (on a going concern basis) of such Person’s assets
is in excess of the total amount of the probable liability of such Person’s
debts;


 


(b)                                 such
Person is generally able to pay its debts as they become due; and


 


(c)                                  such
Person does not have unreasonably small capital to carry on such Person’s
business as theretofore operated and all businesses in which such Person is
about to engage.


 


“Subsidiary”:  as to any Person at any time of determination,
a corporation, partnership, limited liability company or other entity of which
shares of stock or other ownership interests having ordinary voting power
(other than stock or such other ownership interests having such power only by
reason of the happening of a contingency) to elect a majority of the board of
directors or other managers of such corporation, partnership or other entity
are at the time owned, or the management of which is otherwise controlled,
directly or indirectly through one or more intermediaries or Subsidiaries, or
both, by such Person. Unless otherwise qualified, all references to a “Subsidiary”
or to “Subsidiaries” in this Agreement shall refer to a Subsidiary or
Subsidiaries of the Borrower.


 


“Subsidiary
Guarantee”:  the Subsidiary Guarantee
dated as of the Closing Date made by Physicians Formula Cosmetics, Inc. and the
other grantors from time to time becoming party thereto in accordance with the
terms thereof, in favor of the Agent, for the benefit of the Lenders, in form
and substance satisfactory to the Agent, as it may be amended, modified or
supplemented from time to time in accordance with the terms of this Agreement.


 


“Tangible
Net Worth”:  as to any Person, net
worth less any intangible assets (including goodwill) plus accumulated
amortization, in each case determined in accordance with GAAP.


 


 “Taxes”:  as defined in Section 2.14 hereof.


 


“Term
Loan”:  as defined in Section 2.2(a).


 


“Term
Loan Commitment”:  the commitment of
a Lender listed on the signature pages hereof to make a Term Loan hereunder
through its Applicable Lending Office as set forth on the signature pages
hereof, as the same may be adjusted pursuant to the provisions hereof.


 


“Term
Loan Commitment Percentage”:  with
respect to each Term Loan Lender, the percentage equivalent of the ratio which
such Lender’s Term Loan Commitment bears to the Aggregate Term Loan Commitment
(or if the Term Loan Commitment has terminated, the


 


18

















 


percentage equivalent of the ratio which such Lender’s outstanding Term
Loans bears to the unpaid principal balance of all Term Loans outstanding).


 


“Term
Loan Lender”:  each Lender having a Term
Loan Commitment or Term Loans outstanding.


 


“Term
Loan Maturity Date”:  November [   ],
2011, or such earlier date as the Term Notes shall become due and payable in
full in accordance with the terms hereof (whether by acceleration or
otherwise).


 


“Term
Note”:  as defined in Section 2.2(c).


 


“Term
Reduction Installment”: as defined in Section 2.2(d) hereof.


 


“Termination
Event”:  (a) a Reportable Event, (b)
the institution of proceedings to terminate a Single Employer Plan by the PBGC
under Section 4042 of ERISA, (c) the appointment by the PBGC of a trustee to
administer any Single Employer Plan or (d) the existence of any other event or
condition that would reasonably be expected to constitute grounds under Section
4042 of ERISA for the termination of, or the appointment by the PBGC of a
trustee to administer, any Single Employer Plan.


 


“Total
Funded Debt”:  as of any date of
determination, without duplication, the sum of all Indebtedness of the Borrower
or any Subsidiary on such date referred to in clauses (i), (ii), (iii), (iv) or
(vii) of the definition of “Indebtedness” contained in Section 1.1 hereof.


 


“Total
Leverage Ratio”:  for the Borrower
and its Subsidiaries on a consolidated basis, the ratio of Total Funded Debt to
Adjusted EBITDA.


 


“Tranche”:  the collective reference to LIBOR Loans the
Interest Periods with respect to all of which begin on the same date and end on
the same later date (whether or not such LIBOR Loans shall originally have been
made on the same day).


 


“Transaction
Costs”:  (i) all legal, accounting,
consulting, diligence, appraisal and similar fees and expenses paid by the
Borrower in connection with the closing of the transactions contemplated by
this Agreement, including all investment banking fees paid in connection
therewith, (ii) the fees paid on the Closing Date pursuant to the Fee Letter
and (iii) all costs and expenses relating to the initial public offering of
equity interests in the Pledgor in an amount not to exceed $3,000,000
(excluding underwriting fees).


 


“Transferee”:  as defined in Section 9.6(f) hereof.


 


“Type”:  as to any Loan, its nature as a Base Rate
Loan or a LIBOR Loan.


 


“UBOC”:  as defined in the Recitals to this Agreement.


 


1.2                                 Other
Definitional Provisions. (a) 
 Unless otherwise specified therein, all terms defined in this
Agreement shall have the defined meanings when used in any other Loan Document
or any certificate or other document made or delivered pursuant hereto or
thereto.


 


19

















 


(b)                                 As
used herein, in any other Loan Document, and in any certificate or other
document made or delivered pursuant hereto or thereto, accounting terms not
defined in Section 1.1 and accounting terms partly defined in Section 1.1, to
the extent not defined, shall have the respective meanings given to them under
GAAP. Unless otherwise provided herein, all financial calculations made with
respect to the Borrower for the purpose of determining compliance with the
terms of this Agreement shall be made on a consolidated basis and in accordance
with GAAP. For the purpose of determining compliance with financial covenants
hereunder for any period, acquisitions, divestitures, and asset sales occurring
during such period will be included in the calculation of such ratio for such
period on a pro forma basis, and will be deemed to have occurred on the first
day of such period.


 


(c)                                  The
words “hereof,” “herein” and “hereunder” and words of similar import when used
in this Agreement shall refer to this Agreement as a whole and not to any
particular provision of this Agreement, and Section, subsection, Schedule and
Exhibit references are to this Agreement unless otherwise specified. The words “include,”
“includes” and “including” shall be deemed to be followed by the phrase “without
limitation”.


 


(d)                                 Any
financial ratios required to be maintained by the Borrower pursuant to this
Agreement shall be calculated by dividing the appropriate component by the
other component, carrying the result to one place more than the number of
places by which such ratio is expressed in this Agreement and rounding the
result up or down to the nearest number (with a round-up if there is no nearest
number) to the number of places by which such ratio is expressed in this
Agreement.


 


(e)                                  The
meanings given to terms defined herein shall be equally applicable to both the
singular and plural forms of such terms.


 


(f)                                    References
to agreements, other contractual instruments and other documents include all
subsequent amendments and other modifications to such agreement and documents,
but only to the extent such amendments and other modifications are not
prohibited by the terms of any Loan Document.


 


SECTION
2.                                AMOUNT
AND TERMS OF LOANS AND LETTERS OF CREDIT; COMMITMENT AMOUNTS


 


2.1                                 Revolving
Loans and Letters of Credit; Revolving Loan Commitments. (a)   Subject to the terms and conditions hereof,
each Revolving Loan Lender severally agrees to (i) make loans on a revolving
credit basis through its Applicable Lending Office to the Borrower from time to
time from and including the Closing Date to but excluding the Revolving Loan
Commitment Expiration Date (each a “Revolving Loan”, and collectively,
the “Revolving Loans”) in accordance with the terms of this Agreement
and (ii) participate through its Applicable Lending Office in letters of
credit issued for the account of the Borrower pursuant to Section 2.3 from
time to time from and including the Closing Date to but excluding the Revolving
Loan Commitment Expiration Date (each a “Letter of Credit” and,
collectively, the “Letters of Credit”); provided, however,
that (A) the sum of (1) the aggregate principal amount of all Revolving Loans
outstanding, (2) the aggregate Letter of Credit Amount of all Letters of Credit
outstanding and (3) the aggregate amount of unreimbursed drawings under all
Letters of


 


20

















 


Credit shall not exceed the Aggregate Revolving Loan Commitment at any
time and (B) the sum of (1) the aggregate Letter of Credit Amount of all
Letters of Credit outstanding and (2) the aggregate amount of unreimbursed
drawings under all Letters of Credit shall not exceed $2,500,000 at any time. Within
the limits of each Revolving Loan Lender’s Revolving Loan Commitment, the
Borrower may borrow, have Letters of Credit issued for the Borrower’s account,
prepay Revolving Loans, reborrow Revolving Loans, and have additional Letters
of Credit issued for the Borrower’s account after the expiration of previously
issued Letters of Credit.


 


With
respect to each Revolving Loan Lender, the principal amount of each (A)
Revolving Loan to be made by such Revolving Loan Lender and (B) participation
of a Revolving Loan Lender in a Letter of Credit shall be in an amount equal to
the product of (i) such Revolving Loan Lender’s Revolving Loan Commitment
Percentage (expressed as a fraction) and (ii) the total amount of the
Revolving Loan(s) and/or Letter(s) of Credit requested; provided  that
in no event shall any Revolving Loan Lender be obligated to make a Revolving
Loan or participate in a Letter of Credit if after giving effect to such
Revolving Loan or such participation the sum of such Revolving Loan Lender’s
(x) Revolving Loans outstanding, (y) Revolving Loan Commitment
Percentage of the aggregate Letter of Credit Amount of all Letters of Credit
outstanding and (z) Revolving Loan Commitment Percentage of the aggregate
amount of unreimbursed drawings under all Letters of Credit would exceed its
Revolving Loan Commitment or if the amount of such requested Revolving Loan or
such Revolving Loan Lender’s Revolving Loan Commitment Percentage of such
requested Letter of Credit is in excess of such Revolving Loan Lender’s
Available Revolving Loan Commitment.


 


(b)                                 Subject
to Sections 2.10, 2.12 and 2.13, the Revolving Loans may from time to time be
(i) LIBOR Loans, (ii) Base Rate Loans or (iii) a combination
thereof, as determined by the Borrower and notified to the Agent in accordance
with either Section 2.1(d) or 2.6. Each Revolving Loan Lender may make or
maintain its Revolving Loans to the Borrower or participate in Letters of
Credit to or for the account of the Borrower by or through any Applicable
Lending Office.


 


(c)                                  The
Revolving Loans made by each Revolving Loan Lender to the Borrower shall be
evidenced by a promissory note of the Borrower, substantially in the form of
Exhibit A-1 (a “Revolving Note”), with appropriate insertions
therein as to payee, date and principal amount, payable to the order of such
Revolving Loan Lender and representing the obligation of the Borrower to pay
the aggregate unpaid principal amount of all Revolving Loans made by such
Revolving Loan Lender to the Borrower pursuant to Section 2.1(a), with
interest thereon as prescribed in Sections 2.8 and 2.9. Each Revolving
Loan Lender is hereby authorized (but not required) to record the date and
amount of each payment or prepayment of principal of its Revolving Loans made
to the Borrower, each continuation thereof, each conversion of all or a portion
thereof to another Type and, in the case of LIBOR Loans, the length of each
Interest Period with respect thereto, in the books and records of such
Revolving Loan Lender, and any such recordation shall constitute prima  facie
evidence of the accuracy of the information so recorded. The failure of any
Revolving Loan Lender to make any such recordation or notation in the books and
records of such Revolving Loan Lender (or any error in such recordation or
notation) shall not affect the obligations of the Borrower hereunder or under
the Revolving Notes. Each Revolving Note shall (i) be dated the Closing Date,
(ii) provide for the payment of


 


21

















 


interest in accordance with the terms of this Agreement and (iii) be
stated to be payable on the Revolving Loan Commitment Expiration Date.


 


(d)                                 The
Borrower shall give the Agent irrevocable written notice, substantially in the
form of a Borrowing Notice (which notice must be received by the Agent prior to
10:00 a.m., Los Angeles time, on the proposed borrowing date or, if all or any
part of the Revolving Loans are requested to be made as LIBOR Loans, three
Eurodollar Business Days prior to the proposed borrowing date) requesting that
the Revolving Loan Lenders make Revolving Loans on the proposed borrowing date
and specifying (i) the aggregate amount of Revolving Loans requested to be
made, (ii) subject to Sections 2.10, 2.12 and 2.13, whether the Revolving
Loans are to be LIBOR Loans, Base Rate Loans or a combination thereof and
(iii) if the Revolving Loans are to be entirely or partly LIBOR Loans, the
respective amounts of each such Type of Revolving Loan and the respective
lengths of the initial Interest Periods therefor. Notwithstanding the
foregoing, such notice may be given by telephone, provided it is promptly
confirmed on the same day in writing by delivery to the Agent of a written
notice, substantially in the form of a Borrowing Notice. Upon receipt of such telephonic
notice, the Agent shall promptly notify each Revolving Loan Lender thereof on
the date of receipt of such notice. On the proposed borrowing date, not later
than 11:00 a.m., Los Angeles time, each Revolving Loan Lender shall make
available to the Agent the amount of such Revolving Loan Lender’s pro rata
share of the aggregate borrowing amount (as determined in accordance with the
second paragraph of Section 2.1(a)) in immediately available funds by
wiring such amount to such account as the Agent shall specify. The Agent may,
in the absence of notification from any Revolving Loan Lender that such
Revolving Loan Lender has not made its pro rata share available to the Agent on
such date, credit the account of the Borrower on the books of the Agent with the
aggregate amount of Revolving Loans.


 


(e)                                  Neither
the Agent nor any Revolving Loan Lender shall be responsible for the
obligations or Revolving Loan Commitments of any other Revolving Loan Lender
hereunder, nor will the failure of any Revolving Loan Lender to comply with the
terms of this Agreement relieve any other Revolving Loan Lender or the Borrower
of its obligations under this Agreement and the Revolving Notes. In the event
that, at any time when the conditions set forth for borrowing in Section 4.2
have been satisfied, a Lender for any reason fails or refuses to fund its
portion of a borrowing hereunder, then, until such time as such Lender has
funded its portion of such borrowing, such non-funding Lender shall not have
the right (i) to vote regarding any issue on which voting is required or
advisable under this Agreement or any other Loan Document, and the amount of
the Commitments and Loans of such Lender shall not be counted as outstanding
for purposes of determining issues requiring the vote or consent of all “Lenders”
or “Majority Lenders” hereunder or (ii) to receive payments of principal,
interest or fees in respect of such Lender’s borrowings.


 


(f)                                    The
Revolving Loan Commitment of each Revolving Loan Lender and the Aggregate
Revolving Loan Commitment shall terminate on the Revolving Loan Commitment
Expiration Date.


 


(g)                                 All
outstanding Revolving Loans shall be due and payable on the Revolving Loan
Commitment Expiration Date.


 


22

















 


2.2                                 Term
Loans; Term Loan Commitments.  (a)  
Subject to the terms and conditions hereof, each Term Loan Lender
severally agrees to make a term loan (each, a “Term Loan” and
collectively the “Term Loans”) to the Borrower on the Closing Date in an
aggregate principal amount equal to the amount of the Term Loan Commitment of
such Term Loan Lender. After the funding of the Term Loans on the Closing Date,
the Term Loan Commitments shall expire.


 


(b)                                 Subject
to Sections 2.10, 2.12 and 2.13, the Term Loans may from time to time be (i)
LIBOR Loans, (ii) Base Rate Loans or (iii) a combination thereof, as determined
by the Borrower and notified to the Agent in accordance with either Section
2.2(e) or 2.6. Each Term Loan Lender may make or maintain its Term Loan to the
Borrower by or through any Applicable Lending Office.


 


(c)                                  The
Term Loan made by each Term Loan Lender to the Borrower shall be evidenced by a
promissory note of the Borrower, substantially in the form of Exhibit A-2
(a “Term Note”). Each Term Note shall include appropriate insertions
therein as to payee, date and principal amount, shall be payable to the order
of the applicable Term Loan Lender and shall represent the obligation of the
Borrower to pay the aggregate unpaid principal amount of the Term Loan made by
such Term Loan Lender to the Borrower pursuant to Section 2.2(a), with interest
thereon as prescribed in Sections 2.8 and 2.9. Each Term Loan Lender is hereby
authorized (but not required) to record the date and amount of each payment or
prepayment of principal of a Term Loan made to the Borrower, each continuation
thereof, each conversion of all or a portion thereof to another Type and, in
the case of LIBOR Loans, the length of each Interest Period with respect
thereto, in the books and records of such Term Loan Lender, and any such
recordation shall constitute prima  facie evidence of the accuracy
of the information so recorded. The failure of any Term Loan Lender to make any
such recordation or notation in the books and records of the Term Loan Lender
(or any error in such recordation or notation) shall not affect the obligations
of the Borrower hereunder or under the Term Notes. Each Term Note shall
(i) be dated the Closing Date, (ii) provide for the payment of
interest in accordance with this Agreement and (iii) be stated to be
payable in installments of principal in accordance with, and subject to the
provisions of, Section 2.2(d).


 


(d)                                 On
each date set forth below, the Borrower shall repay the principal of the Term
Notes in an aggregate amount equal to the corresponding amount set forth below
(each such amount a “Term Reduction Installment”):


 


	
  December 31,
  2006

  	
   

  	
  $

  	
  375,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  March 31, 2007

  	
   

  	
  $

  	
  375,000

  	
   

  
	
  June 30, 2007

  	
   

  	
  $

  	
  375,000

  	
   

  
	
  September 30, 2007

  	
   

  	
  $

  	
  375,000

  	
   

  
	
  December 31, 2007

  	
   

  	
  $

  	
  562,500

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  March 31, 2008

  	
   

  	
  $

  	
  562,500

  	
   

  
	
  June 30, 2008

  	
   

  	
  $

  	
  562,500

  	
   

  
	
  September 30, 2008

  	
   

  	
  $

  	
  562,500

  	
   

  
	
  December 31, 2008

  	
   

  	
  $

  	
  750,000

  	
   

  



 


23

















 


	
  March 31, 2009

  	
   

  	
  $

  	
  750,000

  	
   

  
	
  June 30, 2009

  	
   

  	
  $

  	
  750,000

  	
   

  
	
  September 30, 2009

  	
   

  	
  $

  	
  750,000

  	
   

  
	
  December 31, 2009

  	
   

  	
  $

  	
  937,500

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  March 31, 2010

  	
   

  	
  $

  	
  937,500

  	
   

  
	
  June 30, 2010

  	
   

  	
  $

  	
  937,500

  	
   

  
	
  September 30, 2010

  	
   

  	
  $

  	
  937,500

  	
   

  
	
  December 31, 2010

  	
   

  	
  $

  	
  1,125,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  March 31, 2011

  	
   

  	
  $

  	
  1,125,000

  	
   

  
	
  June 30, 2011

  	
   

  	
  $

  	
  1,125,000

  	
   

  
	
  September 30, 2011

  	
   

  	
  $

  	
  1,125,000

  	
   

  



 


; provided, that any amount outstanding on the
Term Notes after the final Term Reduction Installment shall be paid on the Term
Loan Maturity Date. The aggregate amount payable to any Term Loan Lender on any
Term Loan reduction date set forth in this Section 2.2(d) shall be determined
in accordance with the provisions of Section 2.11.


 


(e)                                  The
Borrower shall give the Agent irrevocable written notice, substantially in the
form of a Borrowing Notice (which notice must be received by the Agent prior to
9:00 a.m., Los Angeles time, one Business Day prior to the Closing Date
or, if all or any part of the Term Loans are requested to be made as LIBOR
Loans, three Eurodollar Business Days prior to the Closing Date) requesting
that the Term Loan Lenders make the Term Loans in accordance with their
respective Term Loan Commitments on the Closing Date. Upon receipt of such
notice the Agent shall promptly notify each Term Loan Lender thereof on the
date of receipt of such notice. Not later than 11:00 a.m., Los Angeles
time, on the Closing Date each Term Loan Lender shall make available to the
Agent the amount of such Term Loan Lender’s Term Loan Commitment in immediately
available funds by wiring such amount to such account as the Agent shall
specify.


 


(f)                                    Neither
the Agent nor any Term Loan Lender shall be responsible for the obligations or Term
Loan Commitment of any other Term Loan Lender hereunder, nor will the failure
of any Term Loan Lender to comply with the terms of this Agreement relieve any
other Term Loan Lender or the Borrower of its obligations under this Agreement
and the Term Notes.


 


2.3                                 Issuance
of Letters of Credit.


 


(a)                                  Subject
to the limitations on Letters of Credit set forth in Section 2.1(a), the
Borrower shall be entitled to request the issuance of standby and commercial Letters
of Credit from time to time from and including the Closing Date to but
excluding the date three Business Days prior to the Revolving Loan Commitment
Expiration Date, by giving the Agent a Letter of Credit Request at least three
Business Days before the requested date of issuance of such Letter of Credit
(which shall be a Business Day). Any Letter of Credit Request received by the
Agent later than 12:00 noon, Los Angeles time, shall be deemed to have
been received on the next Business Day. Each Letter of Credit Request shall be
signed by a Responsible Officer, shall be irrevocable and shall be effective
upon receipt by the Agent. Provided that a valid Letter of Credit Request has
been received by the Agent and upon fulfillment of the other applicable


 


24

















 


conditions set forth in Section 4.2, the Agent will issue the
requested Letter of Credit from its office specified in Section 9.2. Each
Letter of Credit shall have an expiration date as set forth in the Letter of
Credit Request, provided that no Letter of Credit shall in any event have an
expiration date later than the earlier of (i) one year after the issuance
thereof and (ii) two Business Days prior to the Revolving Loan Commitment
Expiration Date.


 


(b)                                 Immediately
upon the issuance of each Letter of Credit, the Agent shall be deemed to have
sold and transferred to each Revolving Loan Lender, and each Revolving Loan
Lender shall be deemed to have purchased and received from the Agent, in each
case irrevocably and without any further action by any party, an undivided
interest and participation in such Letter of Credit, each drawing thereunder
and the obligations of the Borrower under this Agreement in respect thereof in
an amount equal to the product of (i) such Revolving Loan Lender’s
Revolving Loan Commitment Percentage and (ii) the maximum amount available
to be drawn under such Letter of Credit (assuming compliance with all
conditions to drawing).


 


(c)                                  The
payment by the Agent of a draft drawn under any Letter of Credit shall
constitute for all purposes of this Agreement the making by the Agent in its
individual capacity as a Revolving Loan Lender hereunder (in such capacity, the
“Drawing Lender”) of a Base Rate Loan in the amount of such payment (but
without any requirement of compliance with the conditions set forth in
Section 4.2). In the event that any such Loan by the Drawing Lender
resulting from a drawing under any Letter of Credit is not repaid by the
Borrower by 11:00 a.m., Los Angeles time, on the day of payment of such
drawing, the Agent shall promptly notify each other Revolving Loan Lender. Each
Revolving Loan Lender shall, on the day of such notification (or if such
notification is not given by 12:00 noon, Los Angeles time, on such day,
then on the next succeeding Business Day), make a Base Rate Loan, which shall
be used to repay the applicable portion of the Base Rate Loan of the Drawing
Lender with respect to such Letter of Credit drawing, in an amount equal to the
amount of such Revolving Loan Lender’s participation in such drawing for
application to repay the Drawing Lender (but without any requirement of
compliance with the applicable conditions set forth in Section 4.2) and
shall deliver to the Agent for the account of the Drawing Lender, on the day of
such notification (or if such notification is not given by 12:00 noon, Los
Angeles time, on such day, then on the next succeeding Business Day) and in
immediately available funds, the amount of such Base Rate Loan. In the event
that any Revolving Loan Lender fails to make available to the Agent for the
account of the Drawing Lender the amount of such Base Rate Loan, the Drawing
Lender shall be entitled to recover such amount on demand from such Revolving
Loan Lender, together with interest thereon for each day from the date of
non-payment until such amount is paid in full at the Federal Funds Effective
Rate.


 


(d)                                 The
obligations of the Borrower with respect to any Letter of Credit, any Letter of
Credit Request and any other agreement or instrument relating to any Letter of
Credit and any Base Rate Loan made under Section 2.3(c) shall be absolute,
unconditional and irrevocable and shall be paid strictly in accordance with the
terms of the aforementioned documents under all circumstances, including the
following:


 


(i)                                     any
lack of validity or enforceability of any Letter of Credit, this Agreement or
any other Loan Document;


 


25

















 


(ii)                                  the
existence of any claim, setoff, defense or other right that the Borrower may
have at any time against any beneficiary or transferee of any Letter of Credit
(or any Person for whom any such beneficiary or transferee may be acting), the
Agent, any Revolving Loan Lender (other than the defense of payment to a
Revolving Loan Lender in accordance with the terms of this Agreement) or any
other Person, whether in connection with this Agreement, any other Loan
Document, the transactions contemplated hereby or thereby or any unrelated
transaction;


 


(iii)                               any
statement or other document presented under any Letter of Credit proving to be
forged, fraudulent, invalid or insufficient in any respect, or any statement
therein being untrue or inaccurate in any respect whatsoever; provided that
payment by the Agent under such Letter of Credit against presentation of such
draft or document shall not have constituted gross negligence or willful
misconduct; and


 


(iv)                              any
exchange, release or non-perfection of any Collateral, Guarantor Collateral or
other collateral, or any release, amendment or waiver of or consent to
departure from any Guarantee, other Loan Document or other guaranty, for any of
the Obligations of the Borrower in respect of the Letters of Credit.


 


(e)                                  The
Borrower shall pay to the Agent, with respect to each Letter of Credit issued
hereunder, the following fees:


 


(i)                                     with
respect to each standby Letter of Credit, for the account of the Revolving Loan
Lenders, for the period from and including the day such Letter of Credit is
issued to but excluding the day such Letter of Credit expires, a letter of
credit fee equal to the product of (x) 3.500% per annum and (y) the
Letter of Credit Amount of such Letter of Credit from time to time, such letter
of credit fee to be payable in installments quarterly in arrears on the last Business
Day of each March, June, September and December and on the expiration date of
such Letter of Credit;


 


(ii)                                  with
respect to each commercial Letter of Credit, for the account of the Agent,
negotiation, issuance and amendment fees in accordance with the Agent’s
standard internal charge guidelines (as such guidelines may change from time to
time);


 


(iii)                               with
respect to each Letter of Credit issued hereunder, for the account of Agent, a
fronting fee equal to 0.25% of the Letter of Credit Amount of such Letter
of Credit, payable upon issuance of such Letter of Credit; and


 


(iv)                              with
respect to each Letter of Credit issued hereunder, for the account of Agent,
from time to time such additional fees and charges (including cable charges) as
are generally associated with letters of credit, in accordance with the Agent’s
standard internal charge guidelines (as such guidelines may change from time to
time) and the related Letter of Credit Request.


 


(f)                                    The
Borrower agrees to the provisions in the Letter of Credit Request form; provided,
however, that the terms of the Loan Documents shall take precedence if
there is any inconsistency between the terms of the Loan Documents and the
terms of said form.


 


26

















 


(g)                                 The
Borrower assumes all risks of the acts or omissions of any beneficiary or
transferee of any Letter of Credit with respect to its use of such Letter of
Credit. Neither the Agent nor any Lender nor any of their respective officers
or directors shall be liable or responsible for (i) the use that may be
made of any Letter of Credit or any acts or omissions of any beneficiary or
transferee in connection therewith; or (ii) the validity, sufficiency or
genuineness of documents, or of any endorsement thereof, even if such documents
should prove to be in any or all respects invalid, insufficient, fraudulent or
forged (but provided that any payment or non-payment by the Agent under such
Letter of Credit against presentation of such documents shall not have
constituted gross negligence or willful misconduct). Notwithstanding any other
provision of this Section 2.3 to the contrary, the Agent may accept any
document that appears on its face to be in order, without responsibility for
further investigation, regardless of any notice or information to the contrary.


 


2.4                                 Optional
Prepayments; Optional Commitment Reductions. The Borrower may, at any time
and from time to time, subject to Section 2.15, prepay the Loans and/or
permanently reduce the Aggregate Revolving Loan Commitment, in whole or in
part, without premium or penalty, upon at least three Business Days’
irrevocable written notice in the case of LIBOR Loans and upon at least one
Business Day’s irrevocable written notice in the case of Base Rate Loans from
the Borrower to the Agent specifying the date and amount of prepayment and/or
commitment reduction and whether, if a prepayment, the prepayment is of
Revolving Loans or Term Loans or a combination thereof and, if of a combination
thereof, the amount allocable to each and whether the prepayment is of LIBOR
Loans, Base Rate Loans or a combination thereof and, if of a combination
thereof, the amount allocable to each. Upon receipt of any such notice from the
Borrower, the Agent shall promptly notify each Lender thereof. If any such
notice is given, the amount specified in such notice shall be due and payable
by the Borrower on the date specified therein, together with accrued interest
to such date on the amount prepaid. Each prepayment under this Section 2.4 of Term
Loans shall be applied to the remaining Term Reduction Installments on a pro
rata basis; provided that, if an Event of Default has occurred and is
continuing, such prepayment shall be applied in such order and manner as the
Agent shall determine in its sole discretion. No Term Loans prepaid under this
Section 2.4 shall be available for reborrowing. Partial prepayments of Loans
shall be in the aggregate principal amount of $500,000 or an integral multiple
of $250,000 in excess thereof.


 


2.5                                 Mandatory
Prepayments. (a)  If at any time the
sum of (A) the aggregate principal amount of all Revolving Loans
outstanding, (B) the aggregate Letter of Credit Amount of all Letters of
Credit outstanding and (C) the aggregate amount of unreimbursed drawings
under all Letters of Credit exceeds the Aggregate Revolving Loan Commitment,
then the Borrower shall, within two Business Days after any Responsible Officer
shall have knowledge of such overadvance, without notice or request by the
Agent, prepay the Revolving Loans and/or, if one or more Letters of Credit are
outstanding, pledge cash collateral to the Agent to secure reimbursement of
amounts available to be drawn thereunder, in an aggregate amount equal to such
excess.


 


(b)                                 Within
two Business Days after receipt by the Borrower or any of its Subsidiaries of
any Net Proceeds with respect to an Asset Disposition, the Borrower shall
prepay the Loans (and such prepayment shall be applied as specified in Section
2.5(d)) in an amount equal to 100% of such Net Proceeds; provided that, so long
as no Event of Default has occurred and is


 


27

















 


continuing, no prepayment shall be required with respect to an Asset
Disposition to the extent that, within 90 days following such disposition, such
Net Proceeds are used to invest in assets of the same or similar type and use
as those disposed of and provided that the Agent shall have a first-priority
Lien thereon (subject to Section 6.3). On or prior to the date of any Asset
Disposition, the Borrower agrees to provide the Agent with calculations used by
the Borrower in determining the amount of any such prepayment under this
Section 2.5(b).


 


(c)                                  If
the Borrower or any Subsidiary receives insurance proceeds or condemnation
proceeds aggregating more than $200,000 (or in any amount after the occurrence
and during the continuance of an Event of Default) at any time after the
Closing Date with respect to any Property which are not fully applied (or
contractually committed pursuant to contract(s), which contracts must be
reasonably approved by the Agent if such proceeds equal or exceed $500,000)
toward the repair or replacement of such damaged or condemned Property by the
earlier of (i) 90 days after the receipt thereof and (ii) the occurrence of a
Default, the Borrower shall prepay the Loans (and such prepayment shall be
applied as specified in Section 2.5(d)) in an amount equal to the amount of
such proceeds not so applied. The Borrower shall give the Agent prompt written
notice of all insurance and condemnation proceeds received by it or any
Subsidiary on or after the Closing Date in excess of $200,000 per occurrence.


 


(d)                                 Each
prepayment of the Loans pursuant to Section 2.5(b)-(c) shall be applied to the
outstanding principal balance of the Term Loans. Each prepayment shall be
accompanied by payment in full of all accrued interest thereon to and including
the date of such prepayment, together with any additional amounts owing
pursuant to Section 2.15. Each prepayment of the Term Loans pursuant to this
Section 2.5(d) shall be applied to the outstanding principal balance thereof in
inverse order of maturity, and no such amounts shall be available for
reborrowing.


 


2.6                                 Conversion
and Continuation Options. (a)   The
Borrower may elect from time to time to convert LIBOR Loans to Base Rate Loans
by the Borrower giving the Agent at least two Business Days’ prior irrevocable
written notice of such election pursuant to a Continuation Notice, provided
that any such conversion of LIBOR Loans may only be made on the last day of an
Interest Period with respect thereto. Subject to Sections 2.10, 2.12 and 2.13,
the Borrower may elect from time to time to convert Base Rate Loans to LIBOR
Loans by the Borrower giving the Agent at least three Eurodollar Business Days’
prior irrevocable written notice of such election pursuant to a Continuation
Notice. Any such notice of conversion to LIBOR Loans shall specify the length
of the initial Interest Period or Interest Periods therefor. Upon receipt of
any such notice the Agent shall promptly notify each Lender thereof. All or any
part of outstanding LIBOR Loans and, subject to Sections 2.10, 2.12 and 2.13,
Base Rate Loans, may be converted as provided herein, provided that
(i) any such conversion may only be made if, after giving effect thereto,
Section 2.7 shall not have been contravened, (ii) no such Loan may be
converted into a LIBOR Loan after the date that is, (x) with respect to
Revolving Loans, one month prior to the Revolving Loan Commitment Expiration Date
and, (y) with respect to Term Loans, one month prior to the Term Loan Maturity
Date and (iii) the Borrower shall not have the right to elect to continue
at the end of the applicable Interest Period, or to convert to, a LIBOR Loan if
an Event of Default shall have occurred and be continuing.


 


(b)                                 Any
LIBOR Loan may be continued as such upon the expiration of the then current
Interest Period with respect thereto by the Borrower giving notice to the
Agent, in


 


28

















 


accordance with the applicable provisions of the term “Interest Period”
set forth in Section 1.1, of the length of the next Interest Period to be
applicable to such LIBOR Loan, provided that no LIBOR Loan may be
continued as such (i) if, after giving effect thereto, Section 2.7
would be contravened, (ii) after the date that is, (x) with respect to
Revolving Loans, one month prior to the Revolving Loan Commitment Expiration Date
and, (y) with respect to Term Loans, one month prior to the Term Loan Maturity
Date or (iii) if an Event of Default shall have occurred and be continuing;
and provided, further, that if the Borrower shall fail to give
any required notice as described above in this Section or if such continuation
is not permitted pursuant to the preceding proviso, such Loans shall be
automatically converted to Base Rate Loans on the last day of such
then-expiring Interest Period.


 


2.7                                 Minimum
Amounts of Tranches; Minimum Borrowings. All borrowings, conversions and
continuations of LIBOR Loans hereunder and all selections of Interest Periods
hereunder shall be in such amounts and be made pursuant to such elections so
that, after giving effect thereto, the aggregate principal amount of the Loans
comprising each Tranche shall be equal to $1,000,000 or a whole multiple of
$100,000 in excess thereof and, in any case, there shall not be more than 6 Tranches.
All borrowings of Base Rate Loans (except those made pursuant to Section 2.3(c))
shall be in a minimum amount of $500,000 or a whole multiple of $100,000 in
excess thereof.


 


2.8                                 Interest
Rates and Payment Dates.


 


(a)                                  Each
Revolving Loan shall (i) if a LIBOR Loan, bear interest for each day during
each Interest Period with respect thereto at a rate per annum equal to the
LIBOR Adjusted Rate plus 2.00% and (ii) if a Base Rate Loan, bear interest at a
rate per annum equal to the Base Rate plus 0.50%.


 


(b)                                 Each
Term Loan shall (i) if a LIBOR Loan, bear interest for each day during each
Interest Period with respect thereto at a rate per annum equal to the LIBOR Adjusted
Rate plus 2.00% and (ii) if a Base Rate Loan, bear interest at a rate per annum
equal to the Base Rate plus 0.50%.


 


(c)                                  If
any Event of Default shall have occurred and be continuing, all amounts
outstanding hereunder shall, at the election of the Agent or the Majority
Lenders (in the sole discretion of the Agent or the Majority Lenders, as
applicable), bear interest at a rate per annum equal to the rate determined
pursuant to Section 2.8(a) or (b), as applicable, plus 2% per annum, from the
date of the occurrence of such Event of Default until such Event of Default is
no longer continuing (after as well as before judgment).


 


(d)                                 Interest
shall be payable in arrears on each Interest Payment Date; provided, however,
that interest accruing pursuant to paragraph (c) of this Section shall be
payable on demand.


 


2.9                                 Computation
of Interest and Fees. Interest on the Loans and all other Obligations shall
be calculated on the basis of a year of 365 or 366 days, as applicable, for the
actual days elapsed; provided that interest on LIBOR Loans shall be calculated
on the basis of a 360-day year, for the actual days elapsed. Each determination
of an interest rate by the Agent pursuant to


 


29

















 


any provision of this Agreement shall be conclusive and binding on the
Borrower and the Lenders in the absence of manifest error.


 


2.10                           Inability
to Determine Interest Rate. In the event that, prior to the first day of
any Interest Period, (a) the Agent shall have determined (which determination
shall be conclusive and binding upon the Borrower absent manifest error) that,
by reason of circumstances affecting the relevant market, adequate and
reasonable means do not exist for ascertaining the LIBOR Adjusted Rate for such
Interest Period or (b) the Agent shall have received notice from the Majority
Lenders acting in good faith that the LIBOR Adjusted Rate determined or to be
determined for such Interest Period will not adequately and fairly reflect the
cost to such Lenders (as conclusively certified by such Lenders) of making or
maintaining their affected Loans during such Interest Period, the Agent shall
give telecopy or telephonic notice thereof to the Borrower and the Lenders as
soon as practicable thereafter. If such notice is given, (i) any LIBOR
Loans requested to be made on the first day of such Interest Period shall
accrue interest at the Base Rate, (ii) Loans that were to have been
converted on the first day of such Interest Period to LIBOR Loans shall be
continued as Base Rate Loans and (iii) any outstanding LIBOR Loans shall
be converted, on the first day of such Interest Period, to Base Rate Loans. Until
such notice has been withdrawn by the Agent, no further LIBOR Loans shall be
made or continued as such, nor shall the Borrower have the right to convert
Base Rate Loans to LIBOR Loans.


 


2.11                           Pro
Rata Treatment and Payments. Each payment (including each prepayment) by
the Borrower on account of principal of and interest on the Loans shall be made
pro rata according to the respective Revolving Loan Commitment Percentages and Term
Loan Commitment Percentages, as applicable, then held by the Lenders. All
payments (including prepayments) to be made by the Borrower hereunder and under
the Notes, whether on account of principal, interest, fees or otherwise, shall
be made without setoff, deduction or counterclaim and shall be made prior to
11:00 a.m., Los Angeles time, on the due date thereof to the Agent, for the
account of the applicable Lenders, at the Agent’s office specified in Section 9.2,
in Dollars and in immediately available funds. The Agent shall distribute such
payments to the applicable Lenders promptly upon receipt in like funds as
received. If any payment hereunder (other than payments on the LIBOR Loans)
becomes due and payable on a day other than a Business Day, such payment shall
be extended to the next succeeding Business Day, and, with respect to payments
of principal, interest thereon shall be payable at the then applicable rate
during such extension. If any payment on a LIBOR Loan becomes due and payable
on a day other than a Eurodollar Business Day, the maturity thereof shall be
extended to the next succeeding Eurodollar Business Day (and interest shall
continue to accrue thereon at the applicable rate) unless the result of such
extension would be to extend such payment into another calendar month, in which
event such payment shall be made on the immediately preceding Eurodollar
Business Day. The Borrower authorizes the Agent to debit any of its bank
accounts with the Agent or to make a draw of Revolving Loans for the purpose of
effecting payment of principal, interest or other costs and expenses payable by
the Borrower to the Agent or any Lender under this Agreement.


 


2.12                           Illegality.
Notwithstanding any other provision herein, if any change after the Closing
Date in any Requirement of Law or in the interpretation or application thereof
shall make it unlawful for any Lender or Applicable Lending Office to maintain
LIBOR Loans as contemplated by this Agreement, (a) the commitment of such
Lender hereunder to continue


 


30

















 


LIBOR Loans as such and convert Base Rate Loans to LIBOR Loans shall
forthwith be suspended during such period of illegality and (b) the Loans
of such Lender or Applicable Lending Office then outstanding as LIBOR Loans, if
any, shall be converted automatically to Base Rate Loans on the respective last
days of the then current Interest Periods with respect to such Loans or within
such earlier period as required by law. If any such conversion of a LIBOR Loan
occurs on a day which is not the last day of the then current Interest Period
with respect thereto, the Borrower shall pay to such Lender such amounts, if
any, as may be required pursuant to Section 2.15. To the extent that a
Lender’s LIBOR Loans have been converted to Base Rate Loans pursuant to this
Section 2.12, all payments and prepayments of principal that otherwise
would be applied to such Lender’s LIBOR Loans shall be applied instead to its
Base Rate Loans.


 


2.13                           Increased
Costs. (a)   In the event that any
change after the Closing Date in any Requirement of Law or in the
interpretation or application thereof or compliance by any Lender with any
request or directive (whether or not having the force of law but, if not having
the force of law, generally applicable to and complied with by banks and
financial institutions of the same general type as such Lender in the relevant
jurisdiction) from any central bank or other Governmental Authority made
subsequent to the Closing Date:


 


(i)                                     shall
impose, modify or hold applicable any reserve, special deposit, compulsory loan
or similar requirements against assets held by, letters of credit issued by,
deposits or other liabilities in or for the account of, advances, loans or
other extensions of credit by, or any other acquisition of funds by, any office
of such Lender or Applicable Lending Office which is not otherwise included in
the determination of the LIBOR Adjusted Rate hereunder; or


 


(ii)                                  shall
impose on such Lender or Applicable Lending Office any other condition;


 


and the result of any of the foregoing is to increase
the cost to the Agent of issuing any Letter of Credit, increase the cost to any
Lender or any Applicable Lending Office of purchasing or maintaining any
participation in a Letter of Credit, or increase the cost to any Lender or any
Applicable Lending Office of converting into, continuing or maintaining LIBOR
Loans, or to reduce any amount receivable hereunder in respect of any of the
foregoing, in any case by an amount which the Agent or such Lender, as
applicable, deems to be material, then, in any such case, the Borrower
shall pay to the Agent, on behalf of the Agent, such Lender or Applicable
Lending Office, within two Business Days after demand of the Agent, any
additional amounts necessary to compensate the Agent or such Lender, as
applicable, for such increased cost or reduced amount receivable. If the Agent,
any Lender or any Applicable Lending Office becomes entitled to claim any
additional amounts pursuant to this Section, it shall promptly notify the
Borrower, through the Agent, of the event by reason of which it has become so
entitled. A certificate as to any additional amounts payable pursuant to this
Section submitted by the Agent, such Lender or Applicable Lending Office,
through the Agent, to the Borrower, which shall demonstrate in reasonable
detail the computation of such amounts, shall be conclusive evidence of the
accuracy of the information so recorded, absent manifest error. This covenant
shall survive the termination of this Agreement, the expiration of the Letters
of Credit and the payment of the Notes and all other amounts payable hereunder.


 


31

















 


(b)                                 If,
after the date of this Agreement, the introduction of or any change in any
applicable law, rule, regulation or guideline regarding capital adequacy, or
any change in the interpretation or administration thereof by any Governmental
Authority charged with the interpretation or administration thereof, affects
the amount of capital required or expected to be maintained by any Lender or
any corporation controlling any Lender, and such Lender (taking into
consideration such Lender’s or such corporation’s policies with respect to
capital adequacy) determines that the amount of capital maintained by such
Lender or such corporation which is attributable to or based upon the Loans,
the Letters of Credit or this Agreement must be increased as a consequence of
such introduction or change by an amount deemed by such Lender to be material,
then, within two Business Days after demand of the Agent at the request of such
Lender, the Borrower shall pay to the Agent on behalf of such Lender,
additional amounts sufficient to compensate such Lender or such corporation for
the increased costs to such Lender or corporation of such increased capital. Any
such demand shall be accompanied by a certificate of such Lender setting forth
in reasonable detail the computation of any such increased costs, which
certificate shall be conclusive, absent manifest error. This obligation of the
Borrower under this Section 2.13(b) shall survive the termination of this
Agreement, the expiration of the Letters of Credit and the payment of the Notes
and all other amounts payable hereunder.


 


2.14                           Taxes.
All payments made by the Borrower in respect of the Obligations shall be made
free and clear of, and without deduction or withholding for or on account of,
any present or future income, stamp or other taxes, levies, imposts, duties, charges,
fees, deductions or withholdings, now or hereafter imposed, levied, collected,
withheld or assessed by any Governmental Authority or any political subdivision
or taxing authority thereof or therein, other than Excluded Taxes (all such
non-Excluded Taxes being hereinafter called “Taxes”). If any Taxes are
required to be withheld from any amounts payable to the Agent or any Lender in
respect of the Obligations, the amounts so payable to the Agent or such Lender
shall be increased to the extent necessary to yield to the Agent or such Lender
(after payment of all Taxes) interest or any such other amounts payable
hereunder at the rates or in the amounts specified in this Agreement and the
Notes. The Borrower agrees to indemnify the Agent and each Lender for the full
amount of Taxes (including any Taxes imposed or asserted by any Governmental
Authority on amounts payable under this Section) paid by the Agent or such
Lender. Notwithstanding the foregoing, the Borrower shall not be required to
pay any increased amounts to any Lender if such Taxes arise as a result of any
breach by such Lender of any representation or warranty given pursuant to
Section 9.6(h), it being agreed that any loss of an exemption by a Lender as
contemplated by Section 9.6(h)(iii) shall not constitute a breach by such
Lender. Whenever any Taxes are payable by the Borrower, as promptly as possible
thereafter, the Borrower shall send to the Agent, for its own account or for
the account of such Lender, as the case may be, a copy of an original official
receipt received by the Borrower showing payment thereof or such other evidence
of payment reasonably satisfactory to the Agent. If the Borrower fails to pay
any Taxes when due to the appropriate taxing authority or fails to remit to the
Agent the required receipts or other required documentary evidence, the
Borrower shall indemnify the Agent and the Lenders for any incremental taxes,
interest or penalties (and related reasonable fees and expenses of counsel)
that may become payable by the Agent or any Lender as a result of any such
failure. The agreements in this Section shall survive the termination of this
Agreement, the expiration of the Letters of Credit and the payment of the Notes
and all other amounts payable hereunder.


 


32

















 


2.15                           Indemnity.  The
Borrower agrees to indemnify each Lender and to hold each Lender harmless from
and to pay each Lender on demand the amount of any liability, loss or expense
arising from the reemployment of funds obtained by it or from fees payable to
terminate the deposits from which such funds were obtained (including
reasonable fees and expenses of counsel) which such Lender may sustain or incur
as a consequence of (a) default by the Borrower in payment when due of the
principal amount of or interest on any LIBOR Loan, (b) default by the
Borrower in making a borrowing of, conversion into or continuation of LIBOR
Loans after the Borrower has given a notice requesting the same in accordance
with the provisions of this Agreement, (c) default by the Borrower in
making any prepayment after the Borrower has given a notice thereof in
accordance with the provisions of this Agreement or (d) the making by the
Borrower of a prepayment or conversion of LIBOR Loans on a day which is not the
last day of an Interest Period with respect thereto (including any prepayment
required as a result of acceleration of the Loans under Article 7). A Lender’s
certificate as to such liability, loss or expense shall be deemed conclusive,
absent manifest error. This covenant shall survive the termination of this
Agreement, the expiration of the Letters of Credit and the payment of the Notes
and all other amounts payable hereunder.


 


2.16                           Mitigation
of Costs. If any Lender, by changing its Applicable Lending Office or
taking any other reasonable action, so long as making such change or taking
such other action is not disadvantageous to it in any financial, regulatory or
other respect, can mitigate any adverse effect on the Borrower under Section 2.12,
2.13 or 2.14, such Lender shall take such action.


 


2.17                           Unused
Commitment Fees. The Borrower agrees to pay to the Agent, for the account
of the Revolving Loan Lenders, an unused commitment fee to be shared pro rata
among the Revolving Loan Lenders for the period from and including the Closing
Date to but excluding the Revolving Loan Commitment Expiration Date, based on
the aggregate amount, for each day during such period, of the Available
Revolving Loan Commitments, and computed at a rate equal to 0.25% per annum. Such
unused commitment fees shall be payable in installments quarterly in arrears on
the last Business Day of each March, June, September and December and on the
Revolving Loan Commitment Expiration Date.


 


SECTION
3.                                REPRESENTATIONS
AND WARRANTIES


 


To
induce the Lenders to enter into this Agreement and to make the Loans and
participate in the Letters of Credit, and to induce the Agent to issue the
Letters of Credit, the Borrower hereby represents and warrants to the Agent and
each Lender that:


 


3.1                                 Financial
Condition. The (i) audited consolidated financial statements of the Borrower
and its Subsidiaries, audited by the Accountants for the fiscal year ended
December 31, 2005 and (ii) unaudited consolidated financial statements of the
Borrower and its Subsidiaries for the fiscal quarter ended September 30, 2006, copies
of which have heretofore been furnished to the Agent, present, to the best
knowledge of the Borrower, fairly in all material respects the financial
condition of the Borrower and its Subsidiaries. The foregoing financial
statements (the “Financial Statements”), including the related schedules and
notes thereto, have been prepared in accordance with GAAP applied consistently
throughout the periods involved. Neither the Borrower nor any Subsidiary has,
as of such date, any Guarantee Obligation, contingent liability or liability
for taxes, or any long-term lease or unusual forward or long-term


 


33

















 


commitment, including, without limitation, any interest rate or foreign
currency swap or exchange transaction, in an aggregate amount for all such
obligations, liabilities and commitments in excess of $200,000, which is not
reflected in the foregoing statements or in the notes thereto. As of the Closing
Date, since December 31, 2005, there has been no event or condition that could
result in a Material Adverse Effect.


 


3.2                                 Corporate
Existence; Compliance with Law. The Borrower and each Subsidiary (a) is
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its organization, (b) has the corporate, partnership or limited
liability company power, as the case may be, and authority, and the legal
right, to own and operate its Properties, to lease the property it operates as
lessee and to conduct the business in which it is currently engaged and in
which it proposes to be engaged after the Closing Date, (c) is duly qualified
as a foreign entity and in good standing under the laws of each jurisdiction
where its ownership, lease or operation of property or the conduct of its
business requires such qualification, each of which jurisdictions is set forth
on Schedule 3.2 hereto and (d) is in compliance with all Requirements of Law,
except, with respect to clause (c) and (d) above, to the extent that the
failure to comply therewith could not, in the aggregate, have a Material
Adverse Effect.


 


3.3                                 Corporate
Power; Authorization; Consents; Enforceable Obligations. (a)   The
Borrower and each of its Subsidiaries has the corporate, partnership or limited
liability company power, as the case may be, and authority, and the legal
right, to make, deliver and perform the Loan Documents to which it is or will
be a party, and to borrow hereunder (in the case of the Borrower), and the
applicable Loan Party has taken all necessary corporate, partnership or limited
liability company action, as applicable, to authorize (i) the borrowings
on the terms and conditions of this Agreement and the Notes and (ii) the
execution, delivery and performance of the Loan Documents to which it is or
will be a party.


 


(b)                                 No
consent or authorization of, filing with or other act by or in respect of, any
Governmental Authority or any other Person is required (or, with respect to
those transactions and agreements previously entered into, was required) in
connection with the borrowings hereunder or the execution, delivery,
performance, validity or enforceability of this Agreement, the Notes or the
other Loan Documents except for (i) any consent, authorization, filing or other
act which has been made or obtained and is in full force and effect and (ii)
material consents, authorizations, filings or other acts required by the
Borrower in the ordinary course of business none of which it believes will not
be duly given, made or taken as needed in such ordinary course. This Agreement
has been, and each of the other Loan Documents to which the Borrower or any
Subsidiary is or will be a party will be, duly executed and delivered by it. This
Agreement constitutes, and each of the other Loan Documents when executed and
delivered will constitute, a legal, valid and binding obligation of the
Borrower and each Subsidiary (to the extent the Borrower or such Subsidiary is
a party thereto) enforceable against it in accordance with its 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).


 


3.4                                 No
Legal Bar. The execution, delivery and performance of this Agreement and
the other Loan Documents, the borrowings hereunder and the use of the proceeds
thereof will not


 


34

















 


violate any Requirement of Law or material Contractual Obligation of
the Borrower or any Subsidiary, and will not result in, or require, the
creation or imposition of any Lien on any of its properties or revenues
pursuant to any such Requirement of Law or material Contractual Obligation,
except pursuant to the Loan Documents.


 


3.5                                 No
Material Litigation. Except as set forth in Schedule 3.5, no litigation,
investigation or proceeding of or before any arbitrator or Governmental
Authority is pending or, to the knowledge of the Borrower, threatened (a) by or
against the Borrower or any Subsidiary or against any of its or their
properties or revenues or by or against any Affiliate of the Borrower or any
Subsidiary, with respect to this Agreement or the other Loan Documents or any
of the transactions contemplated hereby or thereby or (b) by or against
the Borrower or any Subsidiary or against any of its or their properties or
revenues which could reasonably be expected to have a Material Adverse Effect.


 


3.6                                 Ownership
of Property; Liens; Condition of Properties. The Borrower and each
Subsidiary has good and marketable title to all Properties purported to be
owned thereby, free and clear of any Liens, except those permitted by Section
6.3. The property and assets of the Borrower and its Subsidiaries constitute
all property and assets necessary for the business of the Borrower and its
Subsidiaries, are in good order and repair (ordinary wear and tear and casualty
excepted) and are fully covered by the insurance required under the Loan
Documents. Neither the Borrower nor any Subsidiary has used (or permitted the
filing of any financing statement under) any legal or operating name at any
time during the five years immediately preceding the execution of this
Agreement, except as identified on Schedule 3.6.


 


3.7                                 Environmental
Matters. Except as set forth in Schedule 3.7, and except for the existence
of the San Gabriel Valley Site Liabilities:


 


(a)                                  Each of the Borrower
and its Subsidiaries and any property or facility, or the businesses conducted
at such properties or facilities, owned or operated, or to the knowledge of the
Borrower, previously owned or operated, by the Borrower or its Subsidiaries,
has complied with and is in compliance in all material respects with all Environmental
and Safety Requirements;


 


(b)                                 There are no
conditions of contamination by, nor is there a present or threatened material Release
of, Hazardous Substances at, in, on or under any property or facility owned or
operated, or to the knowledge of the Borrower, previously owned or operated, by
the Borrower and its Subsidiaries nor is there any condition of contamination
or present or threatened material Release of Hazardous Substances on any nearby
real property which could migrate to a property or facility owned or operated,
or to the knowledge of the Borrower previously owned or operated, by the
Borrower and its Subsidiaries;


 


(c)                                  The
Borrower and its Subsidiaries have obtained and complied in all material
respects with, and is in compliance in all material respects with, all material
permits, licenses and other authorizations that are required pursuant to
Environmental and Safety Requirements for the occupation of its facilities and
the operation of its business;


 


35














 


(d)                                 To the knowledge of
the Borrower, and except as disclosed in the Environmental Review of Physicians
Formula Cosmetics, Incorporated dated October 2, 2003 by Environ International
Corporation (the “Environmental Report”), no material Hazardous Substance
Activity has ever occurred at any
property or facility owned or operated, or previously owned or operated, by the
Borrower and its Subsidiaries;


 


(e)                                  No judicial
proceedings or governmental or administrative action is pending or, to the
knowledge of the Borrower or its Subsidiaries, threatened under any
Environmental and Safety Requirement to which it is named as a party with
respect to any property or facility
owned or operated, or previously owned or operated, by the Borrower and its
Subsidiaries or the business conducted at such properties, nor are there
any consent decrees or other decrees, consent orders, administrative orders or
other orders, or other judicial requirements outstanding under any
Environmental and Safety Requirement with respect to such properties or such
business;


 


(f)                                    Neither
the Borrower nor its Subsidiaries has received any written notice, report or
other information regarding any actual or alleged violation of Environmental
and Safety Requirements, or any material liabilities or potential material liabilities
(whether accrued, absolute, contingent, unliquidated or otherwise), including
any investigatory, remedial or corrective obligations, relating to any of them
or its facilities arising under Environmental and Safety Requirements;


 


(g)                                 To the Borrower’s
knowledge, and except as disclosed in the Environmental Report, none of the
following exists at any property or facility owned or operated by the Borrower
or its Subsidiaries: (1) underground storage tanks, (2) asbestos-containing material
in any form or condition, (3) materials or equipment containing polychlorinated
biphenyls, (4) landfills, surface impoundments, or disposal areas; and (5)
mold;


 


(h)                                 To
the Borrower’s knowledge, neither the Borrower nor any of its Subsidiaries has treated,
stored, disposed of, arranged for or permitted the disposal of, transported,
handled, or released any substance, including any Hazardous Substance, or owned
or operated any property or facility (and no such property or facility is
contaminated by any such substance) in a manner that has given or would give
rise to any material liabilities, including any liability for response costs,
corrective action costs, personal injury, property damage, natural resources
damages or attorney fees, or any
investigatory, corrective or remedial obligations, pursuant to any
Environmental and Safety Requirements;


 


(i)                                     To the Borrower’s
knowledge, neither the Borrower nor any of its Subsidiaries has manufactured,
sold, marketed, installed or distributed products containing asbestos, and with
respect to such entities, no basis in law or fact exists to support an
assertion of any material claim, action or obligation with respect to asbestos
liabilities; and


 


(j)                                     To the knowledge of the Borrower, all
contracts and agreements identified or required to be identified on the
Contracts Schedule pursuant to Section 5.12(a) of the Acquisition Agreement
regarding any indemnification provided to or by the Borrower, the Company (as
defined in the Acquisition Agreement) and any of their Subsidiaries with
respect to Environmental and Safety Requirements or any of the San Gabriel
Valley Site Liabilities are, to


 


36

















 


the Borrower’s knowledge, valid, binding and enforceable in accordance with
their respective terms (except to the extent that enforcement may be affected
by laws relating to bankruptcy, reorganization, insolvency and creditor’s
rights) and shall be in full force and effect without penalty in accordance
with their terms upon consummation of the transactions contemplated hereby. To
the Borrower’s knowledge, each of the Borrower, the Company (as defined in the
Acquisition Agreement) and their Subsidiaries has performed all material
obligations required to be performed by it and is not in default under or in
breach of nor in receipt of any claim of default or breach under any such
agreement. To the Borrower’s knowledge, no event has occurred which with the
passage of time or the giving of notice or both would result in a default, breach
or event of noncompliance by the Borrower, Company (as defined in the
Acquisition Agreement) or any of their Subsidiaries under any such agreement. To
the Borrower’s knowledge, there have been no breaches of such agreement by any
of the other parties thereto. To the Borrower’s knowledge, Pierre Fabre
Dermo-Cosmetique S.A., a French société anonyme, has accurately described to
the Borrower the history and current status of the San Gabriel Valley Site
Liabilities through a combination of written documents, responses to due
diligence inquiries and discussions with the Borrower’s counsel and
environmental consultant, the substance of which disclosures is incorporated
herein by reference.


 


This
Section 3.7 sets forth the sole representations and warranties of the Borrower
with respect to environmental, health and safety matters, including without
limitation all matters arising under Environmental and Safety Requirements.


 


3.8                                 Intellectual
Property. The Borrower and each Subsidiary owns, or is licensed to use,
all trademarks, trade names, patents and copyrights necessary for the conduct
of its business as currently conducted (the “Intellectual Property”). Except
as set forth on Schedule 3.8, no claim which could reasonably be expected to have
a Material Adverse Effect has been asserted and is pending by any Person
challenging or questioning the use of any such Intellectual Property or the
validity or effectiveness of any such Intellectual Property, nor does the
Borrower or any Subsidiary know of any valid basis for any such claim. To the
Borrower’s knowledge, the use of such Intellectual Property by the Borrower and
its Subsidiaries does not infringe on the rights of any Person nor, to the
Borrower’s knowledge, does the use by other Persons of such Intellectual Property
infringe on the rights of the Borrower or any Subsidiary. In the event of the
enforcement by the Agent of its rights as a secured creditor under the Loan
Documents, the Agent will not be required to own or otherwise possess the right
to use any patent, trademark or other intellectual property, or any license to
use the same, in order to sell any Inventory of any Loan Party.


 


3.9                                 Taxes. The
Borrower and each Subsidiary has filed or caused to be filed all material tax
returns which are required to be filed and has paid all material taxes shown to
be due and payable on said returns or on any material assessments made against
it or any of its property and all other taxes, fees or other charges imposed on
it or any of its property by any Governmental Authority (other than any not yet
delinquent or the amount or validity of which are currently being contested in
good faith by appropriate proceedings and with respect to which reserves in
conformity with GAAP have been provided on the books of the Borrower or such
Subsidiary, as appropriate); and no tax Lien has been filed, and no claim is
being asserted with respect to any such tax, fee or other charge.


 


37

















 


3.10                           Federal
Regulations. No Loan, no Letter of Credit, and no part of the proceeds
thereof are intended to be or will be used, directly or indirectly, for “purchasing”
or “carrying” any Margin Stock within the respective meanings of each of the
quoted terms under Regulation U or for any purpose which violates the
provisions of the Regulations of the Board of Governors of the Federal Reserve
System. If requested by the Agent, the Borrower will furnish to the Agent a
statement to the foregoing effect in conformity with the requirements of
Form U-1 referred to in Regulation U.


 


3.11                           ERISA
Compliance.


 


(a)                                  The
Borrower and each Subsidiary is in compliance in all respects with all
applicable provisions of ERISA, and all rules, regulations and orders
implementing ERISA, except to the extent that the failure to comply therewith
could not, in the aggregate, have a Material Adverse Effect.


 


(b)                                 Neither
the Borrower, nor any Subsidiary or any ERISA Affiliate thereof maintains or
contributes to (or has maintained or contributed to) any Multiemployer Plan
under which the Borrower, any Subsidiary or any ERISA Affiliate thereof could
have any withdrawal liability.


 


(c)                                  Neither
the Borrower, nor any Subsidiary or any ERISA Affiliate thereof sponsors or
maintains any defined benefit pension plan under which there is an accumulated
funding deficiency within the meaning of Section 412 of the Code, whether or
not waived.


 


(d)                                 The
liability for accrued benefits under each defined benefit pension plan that
will be sponsored or maintained by the Borrower, any Subsidiary or any ERISA Affiliate
thereof (determined on the basis of the actuarial assumptions utilized by the
PBGC) does not exceed the aggregate fair market value of the assets under each
such defined benefit pension plan.


 


(e)                                  The
aggregate liability of the Borrower, each Subsidiary and each ERISA Affiliate
thereof arising out of or relating to a failure of any employee benefit plan
within the meaning of Section 3(2) of ERISA to comply with provisions of ERISA
or the Code could not have a Material Adverse Effect.


 


(f)                                    There
does not exist any unfunded liability (determined on the basis of actuarial
assumptions utilized by the actuary for the plan in preparing the most recent
annual report) of the Borrower, any Subsidiary or any ERISA Affiliate thereof
under any plan, program or arrangement providing post-retirement, life or
health benefits.


 


(g)                                 No
Reportable Event and no Prohibited Transaction (as defined in ERISA) has
occurred or is occurring with respect to any plan with which the Borrower or
any Subsidiary is associated.


 


3.12                           Investment
Company Act; Public Utility Holding Company Act. Neither the Borrower
nor any Subsidiary is (i) an “investment company”, or (ii) a company “controlled”
by an “investment company”, within the meaning of the Investment Company Act of
1940, as amended (the “Investment Company Act”), which is, in the case
of clause (ii), registered or required to be registered under the Investment
Company Act. Neither the Borrower nor any


 


38

















 


Subsidiary is a “holding company,” or an “affiliate” of a “holding
company” or a “subsidiary company” of a “holding company,” within the meaning
of the Public Utility Holding Company Act of 1935, as amended.


 


3.13                           Subsidiaries;
Etc. As of the Closing Date, the Borrower has no Subsidiaries other
than those set forth on Schedule 3.13.


 


3.14                           Purpose
of Loans and Letters of Credit. (a) 
The proceeds of the Revolving Loans are intended to be and shall be used
by the Borrower as follows:  (i) to refinance,
in part, the Loans (as defined in the Existing Credit Agreement), (ii) to
pay fees and expenses in connection with preparation and negotiation of the
Loan Documents and consummation of the transactions contemplated thereby, (iii)
for working capital and general corporate purposes of the Borrower and its
Subsidiaries, (iv) any Permitted Acquisitions; provided that no
Revolving Loans may be used for a Permitted Acquisition if, after such
Permitted Acquisition, the Available Revolving Loan Commitment would be less
than $3,000,000 and (v) to pay costs and expenses relating to the initial
public offering of equity interests in the Pledgor in an amount not to exceed $3,000,000
(excluding underwriting fees).


 


(b)                                 The
proceeds of the Term Loans are intended to be and shall be used by the Borrower
to refinance, in part, the Loans (as defined in the Existing Credit Agreement).


 


(c)                                  The
Letters of Credit shall be used for general corporate purposes of the Borrower
and its Subsidiaries.


 


3.15                           Accuracy
and Completeness of Information. All information (other than
projections and proforma statements) contained in any application, schedule,
report, certificate, or any other document given to the Agent or any Lender by
or on behalf of the Borrower or any Subsidiary in connection with the Loan
Documents or the Existing Credit Agreement is in all material respects true,
accurate and complete as of the date referred to therein, and no such Person
has omitted to state therein (or failed to include in any such document) any
material fact or any fact necessary to make such information not misleading. All
projections given to the Agent or any Lender by or on behalf of the Borrower or
any Subsidiary have been prepared with a reasonable basis and in good faith
making use of such information as was available at the date such projection was
made. The projections and pro forma financial information contained in such
materials are based upon good faith estimates and assumptions believed by the
Borrower to be reasonable at the time made and as of the Closing Date, it being
recognized that such projections as to future events are not to be viewed as
facts and that actual results during the period or periods covered by any such
projections may differ from the projected results.


 


3.16                           Real
Property Assets. Schedule 3.16 sets forth all real property that, as
of the Closing Date, is owned, leased, occupied, used, controlled, managed or
operated by the Borrower and its Subsidiaries.


 


3.17                           Permits,
Etc.. The Borrower and its Subsidiaries have all permits, licenses,
authorizations and approvals required for each of them lawfully to own, lease,
control, manage and operate its Properties and businesses, except for such
permits, licenses, authorizations or approvals for which the failure to obtain
or maintain could not have a Material Adverse Effect.


 


39

















 


To the Borrower’s knowledge, no condition exists or event has occurred
which, in itself or with the giving of notice or lapse of time or both, would
result in the suspension, revocation, impairment, forfeiture or non-renewal of
any such permit, license, authorization or approval.


 


3.18                           Nature
of Business. Neither the Borrower nor any Subsidiary is engaged in any
business other than developing, manufacturing, distributing, packaging, marketing
and selling cosmetics for the consumer market, or for Persons who are, in turn,
selling cosmetics for the consumer market.


 


3.19                           Capital
Structure and Equity Ownership. Schedule 3.19 hereto accurately
and completely discloses, as of the Closing Date, (a) the number and
classes of equity ownership rights and interests in the Pledgor, the Borrower
and each Subsidiary (whether existing as common or preferred stock, general or
limited partnership interests, or limited liability company membership
interests, or warrants, options or other instruments convertible into such
equity, and including, with respect to the Pledgor, each shareholder’s interest
therein on a fully-diluted basis) and (b) the ownership thereof. All such
shares and interests are validly existing, fully paid and non-assessable. As of
the Closing Date, there are no Equityholder Agreements, other than as set forth
on Schedule 3.19.


 


3.20                           Insolvency. After
giving effect to the repayment of all Indebtedness to be repaid on the Closing
Date in accordance with the terms of this Agreement, the funding of Loans and
the issuance of any Letters of Credit on the Closing Date, the application of
the proceeds of such Loans as provided herein and the payment of all estimated
legal, underwriting, investment banking, accounting and other fees related
hereto and thereto, the Borrower and its Subsidiaries, taken as a whole, will
be Solvent as of and on the Closing Date.


 


3.21                           Labor
Matters. There are no strikes or other labor disputes against the Borrower
or any Subsidiary pending, or to the Borrower’s knowledge, threatened against
it or any Subsidiary, in each case which could reasonably be expected to have a
Material Adverse Effect.


 


3.22                           Condemnation.
No taking of any of the Properties or any part thereof through eminent domain,
conveyance in lieu thereof, condemnation or similar proceeding is pending or,
to the knowledge of the Borrower, threatened by any Governmental Authority (a)
on the Closing Date or (b) after the Closing Date with respect to real property
having an aggregate value in excess of $100,000.


 


3.23                           Absence
of Financing Statements. Except with respect to Liens permitted by Section
6.3, there is no financing statement, security agreement, chattel mortgage,
real estate mortgage or other document filed or recorded with any filing
records, registry or other public office that purports to cover, affect or give
notice of any present or possible future Lien on any assets or property of the
Borrower or any of its Subsidiaries or any rights relating thereto.


 


3.24                           Perfection
of Security Interest. All filings, assignments, pledges and deposits of
documents or instruments have been made or are being made concurrently herewith
and all other actions have been taken that are necessary, under applicable law,
to establish and perfect the Agent’s security interest in the Collateral and
the Guarantor Collateral. Subject to Section 6.3 hereof, the Collateral and the
Guarantor Collateral and the Agent’s rights with respect to the


 


40

















 


Collateral and the Guarantor Collateral are not subject to any setoff,
claims, withholdings or other defenses. Each grantor, respectively, under the
Security Agreement, the Guarantor Security Agreement and the Pledge Agreement
is the owner of the Collateral or the Guarantor Collateral, as applicable, free
from any Lien, except for Liens permitted by Section 6.3.


 


SECTION 4.                                CONDITIONS PRECEDENT


 


4.1                                 Conditions
to Closing Date. The agreement of each Lender to make the Loans requested
to be made by it on the Closing Date and to participate in any Letters of
Credit to be issued on the Closing Date and the agreement of the Agent to issue
any Letters of Credit requested to be issued on the Closing Date, in each case
in accordance with the terms hereof, is subject to the satisfaction, in each
case in form and substance reasonably acceptable to the Agent, immediately
prior to or concurrently with the making of such Loans and/or the issuance of
and participation in such Letters of Credit on the Closing Date, of the
following conditions precedent:


 


(a)                                  Credit
Agreement. The Agent shall have received this Agreement, executed and
delivered by an officer of the Borrower, each Lender and the Agent.


 


(b)                                 Other
Loan Documents. The Agent shall have received each Note to be issued on the
Closing Date, the Pledgor Guarantee, the Pledge Agreement, the Subsidiary
Guarantee, the Guarantor Security Agreement, the Fee Letter and each other Loan
Document to be delivered on the Closing Date, in each case dated as of the Closing
Date and executed and delivered by an officer of the relevant Loan Party, as
applicable.


 


(c)                                  Incumbency
Certificate. The Agent shall have received an incumbency certificate of
each Loan Party, each dated the Closing Date, executed by an appropriate officer
thereof.


 


(d)                                 Corporate
Proceedings, Etc. The Agent shall have received a copy of the resolutions
of the Board of Directors, or similar governing body, of each Loan Party authorizing
(i) the Loan Documents to which it is or will be a party and (ii) the
borrowings contemplated hereunder, in each case certified by an appropriate
officer of such Loan Party as of the Closing Date, which certificate states
that the resolutions thereby certified have not been amended, modified, revoked
or rescinded and are in full force and effect.


 


(e)                                  Certain
Agreements. The Agent shall have received copies of (i) the Organic
Documents of each Loan Party, certified as of the Closing Date as complete and
correct copies thereof, and in full force and effect, by an appropriate officer
of such Loan Party, (ii) the employment agreements for Jeff Rogers, Ingrid
Jackel Marken and Joseph Jaeger with the Borrower and (iii) each management
agreement to which the Borrower or any Subsidiary is party, in each case
certified as of the Closing Date as complete and correct copies thereof, and in
full force and effect, by an appropriate officer of such Loan Party (or, with
respect to any document referred to in this Section 4.1(e) which was delivered
in connection with the closing of the Existing Credit Agreement and remains
unchanged, a certificate of such officer to such effect).


 


(f)                                    Costs.
The Agent shall have received payment or evidence of payment by the Borrower of
all costs, expenses and taxes (including, without limitation, those payable
pursuant


 


41

















 


to Section 9.5) accrued and unpaid and otherwise due and payable
on or before the Closing Date by the Borrower pursuant to this Agreement.


 


(g)                                 Fees.
The Agent shall have received the fees to be paid on the Closing Date pursuant
to the Fee Letter.


 


(h)                                 Legal
Opinions. The Agent shall have received, with a counterpart for each
Lender, the following executed legal opinions, each dated as of the Closing
Date:


 


(A)                              the
executed legal opinion of Kirkland & Ellis LLP, counsel to the Loan
Parties, in form and substance satisfactory to the Agent; and


 


(B)                                such
other legal opinions as the Agent may reasonably request.


 


(i)                                     Good
Standing Certificates. The Agent shall have received, with respect to each
Loan Party, a certificate, dated no more than 15 days prior to the Closing Date,
of the Secretary of State (or other relevant state authority) of the state of
formation of such Loan Party and each other jurisdiction where such Loan Party
is required to be qualified to do business under such jurisdiction’s law (each
of which is set forth on Schedule 3.2), certifying as to the existence and good
standing of, and the payment of taxes by, each Loan Party in such state.


 


(j)                                     No
Default/Representations. No Default shall have occurred and be continuing
on the Closing Date or would occur after giving effect to the repayment of all
Indebtedness to be repaid on the Closing Date in accordance with the terms of
this Agreement, the funding of Loans and the issuance of any Letters of Credit
on the Closing Date, the application of the proceeds of such Loans as provided
herein and the payment of all estimated legal, underwriting, investment
banking, accounting and other fees related hereto and thereto, and the
representations and warranties contained in this Agreement and each other Loan
Document, and the representations and warranties contained in each certificate
or other writing delivered to the Agent or the Lenders in satisfaction of the
conditions set forth in this Section 4.1 prior to or on the Closing Date,
except to the extent such representations and warranties expressly relate to an
earlier date, shall be correct in all material respects on and as of the
Closing Date, and the Agent shall have received a certificate of a Responsible
Officer of the Borrower to such effect in the form of Exhibit B, dated as
of the Closing Date.


 


(k)                                  Insurance
Policies. The Agent shall have received evidence that the insurance
policies provided for in Section 5.5 are in full force and effect,
together with appropriate evidence showing the Agent as an additional named
insured, additional beneficiary, assignee or loss payee, as appropriate, for
the benefit of the Lenders.


 


(l)                                     Covenant Compliance Certificate. The Agent shall have received a Covenant
Compliance Certificate with respect to the Total Leverage Ratio, Fixed Charge
Coverage Ratio and its Tangible Net Worth and based on results for the 12-month
period ended October 31, 2006, prepared on a pro forma basis assuming repayment
of all Indebtedness to be repaid on the Closing Date in accordance with the
terms of this Agreement, the funding of Loans and the issuance of any Letters
of Credit on the Closing Date, the application of the proceeds of the Loans as
provided herein and the payment of all estimated legal, underwriting,
investment banking, accounting and other fees related hereto and thereto, and
indicating a Total Leverage


 


42

















 


Ratio not greater than    :1, a Fixed Charge Coverage Ratio
not less than    :1 and Tangible Net Worth of not less than $         .


 


(m)                               Existing
Debt. The Agent shall have received evidence reasonably satisfactory to it
that all Indebtedness and other obligations of the Borrower under the Existing
Credit Agreement and the Note Purchase Agreement have been repaid in full.


 


(n)                                 Initial
Public Offering. The initial public offering of equity interests in the
Pledgor shall have been consummated and the Agent shall have received a
certificate of a Responsible Officer of the Pledgor to such effect.


 


(o)                                 Additional
Proceedings. The Agent shall have received such other approvals, opinions
and documents as any Lender, through the Agent, may reasonably request and all
legal matters incident to the making of such Loans and issuance of such Letters
of Credit shall be reasonably satisfactory to the Agent.


 


4.2                                 Conditions
to Each Loan or Letter of Credit. The agreement of each Lender to make the
Loans requested to be made by it on the Closing Date, the agreement of each
Lender to participate in any Letters of Credit to be issued on the Closing
Date, and the agreement of the Agent to issue any Letters of Credit to be
issued on the Closing Date, and the agreement of each Lender to make each
Revolving Loan, and the agreement of the Agent to issue each Letter of Credit
from time to time requested to be made or issued by it, as applicable, is
subject to the satisfaction, immediately prior to or concurrently with the
making of such Loan or the issuance of such Letter of Credit, of the following
conditions precedent:


 


(a)                                  Representations
and Warranties; No Default. The following statements shall be true and the
Borrower’s acceptance of the proceeds of such Loan or its delivery of an
executed Letter of Credit Request shall be deemed to be a representation and
warranty of the Borrower, on the date of such Loan or as of the date of
issuance of such Letter of Credit, as applicable, that:


 


(i)                                     The
representations and warranties contained in this Agreement, each other Loan
Document and each certificate or other writing delivered to the Agent or the
Lenders in connection herewith are correct on and as of such date in all
material respects as though made on and as of such date except to the extent
that such representations and warranties expressly relate to an earlier date in
which case such representations and warranties are correct on such earlier date
in all material respects; and


 


(ii)                                  No
Default has occurred and is continuing or would result from the making of the
Loan or the issuance of such Letter of Credit to be made or issued on such date;
and


 


(iii)                               No event shall have
occurred and be continuing, or condition exist, which the Majority Lenders
reasonably believe could have a Material Adverse Effect.


 


(b)                                 Legality.
The making of such Loan or the issuance of such Letter of Credit, as
applicable, shall not contravene any law, rule or regulation applicable to any
Lender or the Borrower or any other Loan Party.


 


43

















 


(c)                                  Borrowing
Notice or Letter of Credit Request. The Agent shall have received a
Borrowing Notice or Letter of Credit Request, as applicable, pursuant to the
provisions of this Agreement from the Borrower.


 


SECTION 5.                                AFFIRMATIVE COVENANTS.


 


The
Borrower hereby agrees that from and after the Closing Date, so long as any
Note remains outstanding and unpaid, any Letter of Credit is outstanding or any
other amount is owing to any Lender or the Agent hereunder:


 


5.1                                 Financial
Statements. The Borrower shall furnish to the Agent and the Lenders:


 


(a)                                  as
soon as available, but in any event within 90 days after the end of each
fiscal year of the Borrower, a copy of the audited consolidated balance sheet
of the Borrower and its Subsidiaries as at the end of such year and the related
audited income statement, statement of stockholders’ equity and operating cash
flow statement, reported on without qualification or exception by the
Accountants and accompanied by a certificate signed by such Accountants, at the
time of the completion of the annual audit, (i) stating that the financial
statements fairly present in all material respects the consolidated financial
condition of the Borrower as of the date thereof and for the period covered
thereby and (ii) that, to the knowledge of such Accountants, no Default
exists under Section 6.1, to the extent such Section relates to accounting
matters;


 


(b)                                 as
soon as available, but in any event not later than 45 days after the end of
each fiscal quarter of the Borrower, the unaudited consolidated balance sheet
of the Borrower and its Subsidiaries as at the end of such quarter and the
related unaudited income statement and operating cash flow statement for such
quarter and the portion of the fiscal year through the end of such quarter, and
including (i) a comparison of the results of such period with (A) the budgeted
results set forth in the budget referred to in Section 5.2(b) and (B) the
same period in the prior fiscal year and (ii) a discussion of any significant
events regarding the financial condition of the Borrower or any Subsidiary
during such period (in such form and detail, and accompanied by such supporting
materials as the Agent shall reasonably request), all certified by a
Responsible Officer of the Borrower as being fairly stated in all material
respects (subject to normal year-end audit adjustments and the absence of
footnotes); and


 


(c)                                  as
soon as available, but in any event not later than 30 days after the end of
each of the first two fiscal months of each fiscal quarter of the Borrower, the
unaudited consolidated balance sheet of the Borrower and its Subsidiaries for
such month and the related unaudited income statement and operating cash flow
statement for such month and the portion of the fiscal year through the end of
such month, and including (i) a comparison of the results of such period with
(A) the budgeted results set forth in the budget referred to in
Section 5.2(b) and (B) the same period in the prior fiscal year, all
certified by a Responsible Officer of the Borrower as being fairly stated in
all material respects (subject to normal year-end audit adjustments and the
absence of footnotes);


 


all such financial statements to be complete and
correct in all material respects and to be prepared in reasonable detail and in
accordance with GAAP applied consistently throughout the periods reflected
therein and with prior periods.


 


5.2                                 Certificates;
Other Information. The Borrower shall:


 


44

















 


(a)                                  furnish
to the Agent concurrently with the delivery of the financial statements
referred to in Section 5.1(a) and (b), a Covenant Compliance Certificate with
respect to such quarter or fiscal year, as the case may be;


 


(b)                                 furnish
to the Agent as soon as available, but in any event within 30 days after
the beginning of each fiscal year of the Borrower, a copy of (i) the annual
operating budget for the Borrower and its Subsidiaries for such fiscal year
(broken down into a monthly format as to income statement, balance sheet and
statement of cash flows) and (ii) a complete financial forecast of the results
of the Borrower and its Subsidiaries covering the period up to and including
the latest of the (x) Revolving Loan Commitment Expiration Date and (y) Term
Loan Maturity Date, in each case in form and detail reasonably satisfactory to
the Agent;


 


(c)                                  furnish
to the Agent within five Business Days after the same are filed, copies of all
financial statements, and material reports and notices which the Borrower or
any Subsidiary may make to, or file with, the Securities and Exchange
Commission or any successor or analogous Governmental Authority;


 


(d)                                 furnish
to the Agent promptly but, in any event, within five Business Days after the
Borrower’s receipt thereof, copies of all financial reports (including, without
limitation, management letters), if any, submitted to the Borrower by the
Accountants in connection with any annual or interim audit of the books
thereof;


 


(e)                                  furnish
to the Agent as soon as possible and in any event within five days after a
Responsible Officer has knowledge of the occurrence of a Default or, in the
good faith determination of a Responsible Officer of the Borrower, a Material
Adverse Effect, the written statement by a Responsible Officer of the Borrower,
setting forth the details of such Default, Event of Default or Material Adverse
Effect and the action which the Borrower proposes to take with respect thereto;


 


(f)                                    furnish
to the Agent (i) as soon as possible and in any event within five Business Days
after the Borrower knows or has reason to know that any Termination Event with
respect to any Plan has occurred, a statement of a Responsible Officer of the
Borrower describing such Termination Event and the action, if any, which the
Borrower proposes to take with respect thereto, (ii) promptly and in any event
within five Business Days after receipt thereof by the Borrower, any Subsidiary
or any of its or their ERISA Affiliates from the PBGC, copies of each notice
received by the Borrower, any Subsidiary or any of its or their ERISA
Affiliates of the PBGC’s intention to terminate any Plan or to have a trustee
appointed to administer any Plan, (iii) promptly and in any event within
five days after the filing thereof with the Internal Revenue Service, copies of
each Schedule B (Actuarial Information) to the annual report (Form 5500 Series)
with respect to each Single Employer Plan maintained for or covering employees
of the Borrower or any of its Subsidiaries if the present value of the accrued
benefits under the Plan exceeds its assets by an amount which could cause a
Material Adverse Effect and (iv) promptly and in any event within five Business
Days after receipt thereof by the Borrower, any Subsidiary or any of its or
their ERISA Affiliates from a sponsor of a Multiemployer Plan or from the PBGC,
a copy of each notice received by the Borrower, any Subsidiary or any of its
ERISA Affiliates concerning the imposition or amount of withdrawal liability
under Section 4202 of


 


45

















 


ERISA or indicating that such Multiemployer Plan may enter
reorganization status under Section 4241 of ERISA;


 


(g)                                 furnish
to the Agent promptly after the commencement thereof, but in any event not
later than five days after service of process with respect thereto on, or the
obtaining of knowledge by, a Responsible Officer of the Borrower, notice of
each action, suit or proceeding before any court or governmental authority or
other regulatory body or any arbitrator as to which there is a reasonable
possibility of a determination that could have a Material Adverse Effect; and


 


(h)                                 furnish
to the Agent promptly such additional financial and other information as the
Agent or any Lender may from time to time reasonably request.


 


5.3                                 Payment
of Obligations. The Borrower shall, and shall cause each of its
Subsidiaries to, pay, discharge or otherwise satisfy at or before maturity or
before they become delinquent, as the case may be, all its obligations of
whatever nature, except where the failure to so satisfy such obligations could
not have a Material Adverse Effect or except where the amount or validity
thereof is currently being contested in good faith by appropriate proceedings
and reserves in conformity with GAAP with respect thereto have been provided on
the books of the Borrower or such Subsidiary, as applicable.


 


5.4                                 Conduct
of Business and Maintenance of Existence. The Borrower shall, and shall
cause each of its Subsidiaries to, (i) continue to engage in business of the
same general type described in Section 3.18, (ii) preserve, renew and keep in
full force and effect its corporate or other legal existence, as applicable,
(iii) except where the loss thereof could not, in the aggregate, have a
Material Adverse Effect, take all appropriate action to maintain all rights,
registrations, licenses, privileges and franchises necessary or desirable in
the normal conduct of its business, and (iv) except to the extent that failure
to comply therewith could not, in the aggregate, have a Material Adverse
Effect, comply with all Contractual Obligations and Requirements of Law, such
compliance to include, without limitation, (a) paying before the same become
delinquent all taxes, assessments and governmental charges or levies imposed
upon it or upon its income or profits or upon any of its Properties and (b)
paying all lawful claims which if unpaid might become a Lien upon any of its
Properties.


 


5.5                                 Maintenance
of Property; Insurance. (a) The Borrower shall, and shall cause each
of its Subsidiaries to, keep all property material or necessary to its business
in good working order and condition (ordinary wear and tear and casualty excepted).


 


(b)                                 The
Borrower shall, and shall cause each of its Subsidiaries to, maintain with
financially sound and reputable insurance companies or associations insurance
on such of its property in at least such amounts and against such risks as are
usually insured against in the same general area by companies engaged in the
same or a similar business; and furnish to the Agent, upon request, full
information as to the insurance carried. The Borrower shall also maintain
keyman life insurance on the life of Ingrid Jackel-Marken, in the amount of at
least $3,000,000, and shall at all times cause the Agent to be the assignee of,
beneficiary of or additional insured under, such insurance pursuant to such
assignment agreements and related documentation as the Agent shall request;
provided that, notwithstanding any term contained in any such agreement or


 


46

















 


related documentation or herein to the contrary, the proceeds of such
insurance may be retained by the Borrower and used for working capital (but not
applied as a Restricted Payment). All such policies of insurance shall (i)
designate the Agent, on behalf of the Lenders, as additional insured or loss
payee, as appropriate, and (ii) provide that the insurance companies will give
the Agent at least 30 days’ prior written notice before any such policy or
policies of insurance shall be materially altered or canceled. The Borrower
shall deliver to the Agent insurance certificates certified by the Borrower’s
insurance brokers, as to the existence and effectiveness of each policy of
insurance and evidence of payment of all premiums then due and payable therefor.
In addition, the Borrower shall notify the Agent promptly of any occurrence
causing a material loss of any insured Property and the estimated (or actual,
if available) amount of such loss.


 


(c)                                  Each
policy for liability insurance shall provide for all losses to be paid on
behalf of the Agent and the Borrower, as their respective interests may appear,
and each policy for property damage insurance shall, to the extent applicable
to equipment and inventory, provide for all losses (except for losses of less
than $200,000 per occurrence) to be paid directly to the Agent.


 


(d)                                 Reimbursement
under any liability insurance maintained by the Borrower or any Subsidiary
pursuant to this Section 5.5 may be paid directly to the Person who shall have
incurred liability covered by such insurance. In the case of any loss involving
damage to equipment or inventory as to which Section 5.5(e) is not applicable,
the Borrower will make or cause to be made the necessary repairs to or
replacements of such equipment or inventory, and any proceeds of insurance
maintained by the Borrower pursuant to this Section 5.5 shall be paid by the
Agent to the Borrower, upon presentation of invoices and other evidence of
obligations, as reimbursement for the costs of such repairs or replacements.


 


(e)                                  Upon
the actual or constructive total loss (in excess of $200,000 per occurrence) of
any equipment or inventory during the continuance of a Default, all insurance
proceeds in respect of such equipment or inventory shall be paid to the Agent
and applied in the manner set forth in Section 2.5(d).


 


5.6                                 Inspection
of Property; Books and Records; Discussions. The Borrower shall, and shall
cause each Subsidiary to, keep proper books of records and account in which
full, true and correct entries in conformity with GAAP and all Requirements of
Law shall be made of all material dealings and transactions in relation to its
business and activities; and upon reasonable notice and at such reasonable
times during usual business hours, permit representatives of the Agent and any
Lender to visit and inspect any of its properties and examine and make
abstracts from any of its books and records at any reasonable time and as often
as may reasonably be desired and to discuss the business, operations,
properties and financial and other condition of the Borrower and its
Subsidiaries with officers of the Borrower and its Subsidiaries and with its
Accountants (provided that the Borrower shall be given the opportunity to be
present during any such discussions with its Accountants). In addition, the
Agent shall be permitted to conduct collateral audits of the Borrower and the
Subsidiaries twice during each 12-month period (or more frequently if a Default
has occurred and is continuing).


 


47

















 


5.7                                 Use
of Proceeds. The Borrower will use the Letters of Credit, and the proceeds
of the Loans, as set forth in Section 3.14, and not for the purchasing or
carrying of any Margin Stock.


 


5.8                                 Hedging
Obligations. The Borrower shall not, and shall not permit any of its
Subsidiaries to, incur any Hedging Obligation, except that the Borrower or any
Subsidiary may enter into any Hedging Obligation that (i) is of a
non-speculative nature and (ii) is for the purpose of hedging the Borrower’s or
such Subsidiary’s reasonably estimated interest rate exposure.


 


5.9                                 Acquisition
of Real Property. The Borrower shall submit to the Agent any documents
relating to any fee simple real property interest to be acquired by the
Borrower or any Subsidiary for consideration in excess of $500,000. The
Majority Lenders may require that any such property interest become part of the
Collateral or the Guarantor Collateral (as applicable), and that the Borrower
provide the Agent with title insurance, a favorable environmental report, opinion(s)
of counsel and such other documents and agreements as the Agent may reasonably
request with respect thereto.


 


5.10                           Lease
and License Compliance. (a) The Borrower shall, and shall cause each
Subsidiary to, perform and carry out the material provisions of all leases,
licenses, permits and other occupancy agreements relating to real property or
real property interests which are material to the business of the Borrower or
any Subsidiary (the “Occupancy Agreements”), and shall appear in and defend any
action in which the validity of any Occupancy Agreement is at issue and shall
commence and maintain any action or proceeding necessary to establish or
maintain the validity of any Occupancy Agreement and to enforce the material provisions
thereof. The Borrower shall promptly give notice to the Agent of any material
default by it or any of its Subsidiaries or, to the knowledge of the Borrower,
by any other party to an Occupancy Agreement.


 


(b)                                 With
respect to each Property leased by the Borrower or any Domestic Subsidiary, the
Borrower shall cause a Landlord Consent to be executed and notarized by the
landlord thereof, and delivered to the Agent and, if requested by the Agent,
recorded against such Property in the relevant real property records; provided
that the Borrower need not deliver a Landlord Consent for its corporate
apartment located in Altadena, California.


 


5.11                           Environmental
and Safety Requirements. Without modifying or limiting in any fashion any
other indemnity provided for in this Agreement, the Borrower shall, and shall
cause each Subsidiary to, defend, indemnify and hold harmless the Agent and the
Lenders, and their respective employees, agents, officers and directors,
shareholders, attorneys, successors and assigns (collectively, “Environmental
Indemnitees”) from and against any and all claims, demands, judgments,
fines, encumbrances, liens, liabilities, losses, damages of any type (including
all consequential damages, all stigma damages and all damages for personal
injury, including death or disease, or damage or destruction to property of
others or damage or destruction to natural resources, whether foreseeable or
unforeseeable), costs, penalties, fines, settlements, costs and expenses of
whatever kind or nature known or unknown, contingent or otherwise, arising out
of, or in any way relating to (i) any breach by the Borrower of any
representation or warranty made by the Borrower in this Agreement or any of the
Schedules


 


48

















 


attached hereto, or in any of the certificates furnished by the
Borrower pursuant to this Agreement, or any representation and warranty made by
the Borrower or its Subsidiaries in the Acquisition Agreement; (ii) the San Gabriel Valley Site Liabilities; (iii)
any Hazardous Substances in, on, under, from or at any property or facility owned or operated,
or previously owned or operated, by the Borrower and its Subsidiaries; (iv) any past, present or future violation of any
Environmental and Safety Requirements for any
property or facility owned or operated, or previously owned or operated, by the
Borrower and its Subsidiaries; (v) any
investigation, inquiry, order (whether voluntary or involuntary), hearing,
action or other proceeding under any Environmental and Safety Requirement or by
or before any governmental or quasi-governmental agency in connection with any
actual or alleged Hazardous Substance Activity; (vi)
any orders, requirements or demands of Governmental Authorities pursuant to
Environmental and Safety Requirements; (vii) any notice that any Environmental Indemnitee
is a potentially responsible party under any Environmental and Safety
Requirement with regard to any Hazardous Substance in, on, under, from or at any property or facility owned or operated,
or previously owned or operated, by the Borrower and its Subsidiaries;
and (viii) all costs and expenses of
investigation, monitoring, corrective action, containment, abatement, removal,
repair, cleanup, restoration and remedial work, penalties and fines, attorneys’
fees and disbursements, consultants’ fees, contractors’ fees, environmental
fees and taxes, experts’ fees, laboratory fees, and other response costs,
except to the extent that any of the foregoing arise from or are caused by the
gross negligence or willful misconduct of any Environmental Indemnitee. This
indemnity shall continue in full force and effect and survive the termination
of this Agreement, expiration of the Letters of Credit and the payment of the
Notes and all other amounts payable hereunder.


 


5.12                           Employee
Matters. The Borrower shall give to the Agent prompt notice of any material
dispute arising out of, or material uncured default occurring under, any
employee contract of the Borrower or any Subsidiary either (i) relating to an
officer of the Borrower or any Subsidiary or (ii) providing for salary payments
equal to or in excess of $200,000 per year, or if any of such contracts
shall be terminated or not renewed on substantially similar terms.


 


5.13                           Covenants
Regarding Additional Subsidiaries. (a) The Borrower will cause each of its
Domestic Subsidiaries hereafter formed or acquired to execute and deliver to
the Agent, concurrently with the formation or acquisition thereof, a joinder, substantially in the form attached as an
Exhibit to the Subsidiary Guarantee, causing such Domestic Subsidiary to become
a Guarantor under the Subsidiary Guarantee and a
grantor under the Guarantor Security Agreement, together with appropriate Lien
searches requested by the Agent indicating the Agent’s first priority Lien on
such Domestic Subsidiary’s personal property (subject to Section 6.3) and, in
connection with such deliveries, cause to be delivered to the Agent (A) a
favorable written opinion of counsel satisfactory to the Agent as to such
matters relating thereto as any Lender through the Agent may reasonably
request, in form and substance satisfactory to the Agent, (B) any stock
certificates or other certificates, accompanied by stock powers duly executed
in blank, with regard to the Capital Stock of such Domestic Subsidiary, (C)
such other agreements, instruments, approvals or other documents as any Lender
through the Agent may reasonably request with respect thereto and
(D) certified copies of the organizational documents, resolutions and
incumbency certificates of such Domestic Subsidiary.


 


(b)                                 The
Borrower will cause the shareholder(s), partner(s) or member(s) of each of its
Foreign Subsidiaries hereafter formed or acquired to execute and deliver to the
Agent,


 


49

















 


concurrently with the formation or acquisition thereof, a pledge of 65%
of the Capital Stock having voting power in such Foreign Subsidiary (or such
greater amount of such equity interests as shall not cause the Borrower to
incur material adverse tax consequences under Section 956 of the Code) and 100%
of any other Capital Stock in such Foreign Subsidiary, along with (A) such
agreements, certificates, filings, notices, consents and other actions as the
Agent may request to evidence and perfect such pledge and (B) an executed legal
opinion of local counsel to such pledgor, in form and substance, and from a
firm of attorneys, reasonably satisfactory to the Agent.


 


SECTION 6.                                NEGATIVE COVENANTS


 


The
Borrower hereby agrees that from and after the Closing Date, so long as any
Note remains outstanding and unpaid, any Letter of Credit is outstanding, or
any other amount is owing to any Lender or the Agent hereunder:


 


6.1                                 Financial
Condition Covenants. The Borrower shall not:


 


(a)                                  Total
Leverage Ratio. Permit the Total Leverage Ratio, as of the end of any fiscal
quarter set forth below, to be greater than the ratio set forth opposite such
period:


 


	
  Quarter

  	
   

  	
  Ratio

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  January 1, 2007 to and including December 31, 2007

  	
   

  	
  2.00:1

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  January 1, 2008 to and including December 31, 2008

  	
   

  	
  1.75:1

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  January 1, 2009 and thereafter

  	
   

  	
  1.50:1

  	
   

  



 


(b)                                 Fixed
Charge Coverage Ratio. Permit the Fixed Charge Coverage Ratio, as of the
end of any fiscal quarter set forth below, to be less than the ratio set forth
opposite such period:


 


	
  Quarter

  	
   

  	
  Ratio

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  January
  1, 2007 to and including December 31, 2007

  	
   

  	
  2.00:1

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  January
  1, 2008 and thereafter

  	
   

  	
  2.25:1

  	
   

  



 


(c)                                  Minimum
Tangible Net Worth. Permit Tangible Net Worth of the Borrower and its
Subsidiaries, on a consolidated basis, as of the end of any fiscal quarter, to
be less than the amount set forth below opposite such period:


 


	
  Quarter

  	
   

  	
  Amount

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  January
  1, 2007 to and including March 31, 2007

  	
   

  	
  -$

  	
  17,000,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  April
  1, 2007 to and including June 30, 2007

  	
   

  	
  -$

  	
  13,000,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  July
  1, 2007 to and including September 30, 2007

  	
   

  	
  -$

  	
  11,000,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  October
  1, 2007 to and including December 31, 2007

  	
   

  	
  -$

  	
  7,000,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  January
  1, 2008 to and including March 31, 2008

  	
   

  	
  -$

  	
  3,000,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  April
  1, 2008 to and including June 30, 2008

  	
   

  	
  -$

  	
  1,000,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  July
  1, 2008 to and including September 30, 2008

  	
   

  	
  $

  	
  2,000,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  October
  1, 2008 to and including December 31, 2008

  	
   

  	
  $

  	
  4,700,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  January
  1, 2009 and thereafter

  	
   

  	
  $

  	
  14,000,000

  	
   

  



 


50

















 


(d)                                 Capital
Expenditures. Permit Capital Expenditures of the Borrower and its
Subsidiaries on a consolidated basis for any fiscal year to be more than $3,000,000
(or more than $1,500,000 from the Closing Date to December 31, 2006); provided
that Capital Expenditures shall not include expenditures to the extent
that such expenditures (x) constitute a reinvestment of proceeds from Asset
Dispositions in an aggregate amount not exceeding $500,000 in any fiscal year
or (y) are made from proceeds from an Equity Offering (it being agreed
that each Covenant Compliance Certificate delivered under Section 5.2(a) shall,
with respect to any expenditures during the period covered thereby that were
excluded from the calculation of Capital Expenditures as a result of this
proviso, include a description of such expenditure in form and detail
satisfactory to the Agent); provided  further, that in the
event the Borrower and its Subsidiaries do not expend the entire Capital
Expenditure limitation in any fiscal year, such excess may be used to make
Capital Expenditures in the immediately following fiscal year, but not
thereafter.


 


6.2                                 Limitation
on Indebtedness. The Borrower shall not, and shall not permit any
Subsidiary to, create, incur, issue, assume or suffer to exist any Indebtedness
except for:


 


(a)                                  Indebtedness
created hereunder and under the other Loan Documents;


 


(b)                                 Indebtedness
(i) 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 $100,000 or (ii) for bank overdrafts incurred in the ordinary
course of business that are promptly repaid;


 


(c)                                  trade
credit incurred to acquire goods, supplies, services and incurred in the
ordinary course of business; provided  that any such Indebtedness which
is more than 90 days past due does not exceed $500,000 in the aggregate, is
being contested by the Loan Parties in good faith by appropriate proceedings,
and that adequate reserves with respect thereto have been established on the
books of the Loan Parties to the extent required by GAAP;


 


(d)                                 Capitalized
Lease Obligations in a principal amount not exceeding $1,000,000 outstanding at
anytime;


 


51

















 


(e)                                  Indebtedness
not to exceed an aggregate amount of $1,000,000 at any time outstanding secured
by any purchase money Lien incurred in connection with the acquisition by the
Borrower or any Subsidiary of equipment;


 


(f)                                    Indebtedness
owing by any wholly-owned Domestic Subsidiary to the Borrower or any other
wholly-owned Domestic Subsidiary, and Indebtedness owing by the Borrower to any
wholly-owned Domestic Subsidiary; provided that such inter-company
Indebtedness is evidenced by a note which has been collaterally assigned to the
Agent as security for the Obligations;


 


(g)                                 Indebtedness
incurred by the Borrower or any Subsidiary arising from agreements providing
for indemnification, adjustment of purchase price or similar obligations which
are in amounts, and on terms, which are commercially reasonable, and are incurred
in connection with any Permitted Acquisition or any Asset Disposition permitted
hereunder;


 


(h)                                 unsecured
Indebtedness not referred to in any other clause of this Section 6.2 in an
aggregate principal amount not exceeding $500,000 at any time; and


 


(i)                                     Indebtedness
in an amount not exceeding $3,000,000 incurred by the Borrower to one or more
of its insurance companies, incurred in the ordinary course of business to
finance payment of its insurance premiums.


 


6.3                                 Limitation
on Liens. The Borrower shall not, and shall not permit any Subsidiary to,
create, incur, assume or suffer to exist any Lien upon any of its property,
assets or revenues, whether now owned or hereafter acquired, except for:


 


(a)                                  Liens
created hereunder or under any of the other Loan Documents;


 


(b)                                 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 on the books of the Borrower or a Subsidiary, as
applicable, in conformity with GAAP;


 


(c)                                  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 45 days and, if overdue, for which adequate reserves have been posted
under GAAP;


 


(d)                                 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;


 


(e)                                  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;


 


52

















 


(f)                                    easements,
rights-of-way, restrictions and other similar encumbrances on real property
incurred in the ordinary course of business which, in the aggregate, could not
cause a Material Adverse Effect;


 


(g)                                 subject
to the terms of any Control Agreement, customary rights of setoff and bankers’
liens existing in the ordinary course of business upon deposits of the Borrower
and its Subsidiaries;


 


(h)                                 precautionary
Liens filed by equipment lessors pursuant to operating leases of the Borrower
and its Subsidiaries; provided that no such Lien covers any property
other than the property subject to such lease;


 


(i)                                     Liens
arising from any judgment against a Loan Party not constituting an Event of
Default, provided that (i) the liability under such judgment, together with
that under any other judgment secured by a Lien, shall not exceed $1,000,000 in
the aggregate and (ii) such judgment is covered by insurance under which the
insurer has acknowledged liability in writing;


 


(j)                                     Liens
securing Indebtedness permitted by Section 6.2(e); provided  that
no such Lien covers any property other than the property acquired in connection
with the incurrence of such Indebtedness; and


 


(k)                                  Liens
securing Indebtedness permitted by Section 6.2(i), provided  that
such Liens attach to the proceeds of such insurance only, and not to any other
assets of the Loan Parties.


 


6.4                                 Limitation
on Fundamental Changes. The Borrower shall not, and shall not permit any
Subsidiary to, (a) amend its Organic Documents in any way that could have
a Material Adverse Effect, (b) enter into any merger, consolidation or amalgamation,
or liquidate, wind up or dissolve itself (or suffer any liquidation or
dissolution) except any merger, consolidation or amalgamation of a Subsidiary
into the Borrower, with the Borrower being the survivor thereof, or between or
among the Domestic Subsidiaries; provided  that the Borrower shall
give the Agent thirty days’ prior written notice thereof and shall comply with
all reasonable actions requested by the Agent to protect and maintain its Liens
granted pursuant to the Loan Documents; or (c) except as permitted by Section
6.5, convey, sell, lease, assign, transfer or otherwise dispose of, all or
substantially all of its property, business or assets.


 


6.5                                 Limitation
on Sale of Assets. The Borrower shall not, and shall not permit any of its
Subsidiaries to, make any Asset Disposition unless (i) such Asset Disposition
is for fair market value, (ii) the consideration for such Asset
Disposition is at least 75% cash, (iii) no Default has occurred and is
continuing or would result from such Asset Disposition and (iv) the
consideration for such Asset Disposition, when aggregated with the
consideration for all previous Asset Dispositions during the same fiscal year,
does not exceed $1,000,000.


 


6.6                                 Limitation
on Restricted Payments. The Borrower shall not, and shall not permit any of
its Subsidiaries to, (a) if a corporation,
declare or pay any dividend (other than dividends payable solely in common
stock of the Borrower or its Subsidiaries) on, or make any payment on account
of, or set apart assets for a sinking or other analogous fund for, the
purchase, redemption, defeasance, retirement or other acquisition of, any
shares of any class of Capital Stock of the Borrower or its Subsidiaries or any
warrants or options to purchase any such Capital


 


53

















 


Stock, whether now or hereafter outstanding, and
(b) if a partnership or a limited liability company, make any
distribution with respect to the ownership interests therein, or, in either
case, any other distribution in respect thereof, either directly or indirectly,
whether in cash or property or in obligations of the Borrower or any Subsidiary
(such declarations, payments, setting apart, purchases, redemptions,
defeasance, retirements, acquisitions and distributions being herein called “Restricted
Payments”); provided, however, that


 


(i)                                     the
Subsidiaries may make Restricted Payments to the Borrower;


 


(ii)                                  the
Borrower may make Restricted Payments, in an aggregate amount in any fiscal
year of the Borrower not exceeding $500,000, to the Pledgor to allow the
Pledgor to pay operating expenses relating to the Borrower and the fees and
expenses of the Pledgor’s and the Borrower’s officers and directors, provided
that such amount shall be limited to $100,000 during any period during which an
Event of Default has occurred and is continuing; and


 


(iii)                               the Borrower may make
Restricted Payments to the Pledgor from time to time so long as (1) no Default
or Event of Default has occurred and is continuing at the time of such Restricted
Payment or would occur as a consequence of such Restricted Payment; and (2) if
after giving effect to such Restricted Payment, the Liquidity Amount shall be
greater than or equal to $3,000,000.


 


6.7                                 Limitation
on Acquisitions, Investments, Loans and Advances. The Borrower shall not,
and shall not permit any Subsidiary to, consummate any Acquisition, make any
advance, loan, extension of credit or capital contribution to, or purchase any
stock, bonds, notes, debentures or other securities of or any assets
constituting a business unit of, or make any other investment in (any of the
foregoing, an “investment”), any Person, except:


 


(a)                                  Cash
Equivalents;


 


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


 


(c)                                  the
Borrower’s ownership interest in its Subsidiaries;


 


(d)                                 Permitted
Acquisitions;


 


(e)                                  investments
received in connection with bankruptcy or reorganization of, or settlement of
delinquent accounts and disputes with, customers and suppliers;


 


(f)                                    investments
in the form of promissory notes in favor of the Borrower, acquired by the
Borrower as consideration for an Asset Disposition permitted by Section 6.5,
each of which notes shall be delivered to, and endorsed in favor of, the Agent
to be held by the Agent as collateral under the Security Agreement;


 


(g)                                 loans
or advances to employees of the Borrower or any Subsidiary for moving, travel
or emergency expenses, in an aggregate amount not exceeding $500,000
outstanding at any time; and


 


(h)                                 investments
outstanding on the Closing Date and set forth on Schedule 6.7.


 


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6.8                                 Transactions
with Affiliates. Except as set forth on Schedule 6.8, the Borrower shall
not, and shall not permit any Subsidiary to, enter into any transaction,
including, without limitation, any purchase, sale, lease or exchange of
property or the rendering of any service, with any Subsidiary (other than
wholly-owned Subsidiaries) or any Affiliate, unless such transaction is in the
ordinary course of the Borrower’s or such Subsidiary’s business and is
upon terms no less favorable to the Borrower or such Subsidiary, than it would
obtain in a comparable arm’s length transaction with a Person not an Affiliate;
provided that nothing in this Section 6.8 shall be deemed to prohibit payment
of Restricted Payments in accordance with Section 6.6.


 


6.9                                 Fiscal
Year. The Borrower shall not permit the fiscal year of the Borrower or any
Subsidiary to end on a day other than December 31.


 


6.10                           Prohibitions
on Certain Agreements, Modifications to Certain Agreements. The Borrower
shall not, nor shall it permit any Subsidiary to, enter into or permit to exist
any indenture, agreement, instrument or other arrangement, other than the Loan
Documents, that, directly or indirectly, prohibits or restrains, or has the
effect of prohibiting or restraining, or imposes materially adverse conditions
upon, the incurrence or payment of indebtedness, the granting of Liens (except
with respect to Capitalized Lease Obligations and Indebtedness permitted by
Section 6.2(e), and then only with respect to the property encumbered thereby),
the declaration or payment of dividends, the making of loans, advances or
investments or the sale, assignment, transfer or other disposition of Property
(except with respect to Capitalized Lease Obligations and Indebtedness
permitted by Section 6.2(e), and then only with respect to the property
encumbered thereby), or which imposes any financial covenants on the Borrower
or any Subsidiary.


 


6.11                           Sale-Leaseback
Transactions. The Borrower shall not, and shall not permit any Subsidiary
to, sell, assign or otherwise transfer any of its Properties, rights or assets
(whether now owned or hereafter acquired) to any Person and thereafter directly
or indirectly lease back the same or similar property.


 


6.12                           Unfunded
Liabilities. The Borrower shall not permit unfunded liabilities for any and
all Plans maintained for or covering employees of the Borrower or any
Subsidiary to exceed $500,000 in the aggregate at any time.


 


6.13                           Line
of Business. Neither the Borrower nor any of its Subsidiaries shall engage
in any business other than as described in Section 3.18.


 


SECTION 7.                                EVENTS OF DEFAULT


 


If any
of the following events shall occur and be continuing:


 


(a)                                  The
Borrower shall fail to pay any principal of any Note when due, or the Borrower
shall fail to pay any interest on any Note when due, or any other amount
payable hereunder or under any Loan Document within two Business Days after any
such interest or other amount becomes due; or


 


(b)                                 Any
representation or warranty made by any Loan Party herein or in any other Loan
Document, as applicable, or which is contained in any certificate, document or
financial or


 


55

















 


other statement furnished at any time under or in connection with this
Agreement or any other Loan Document shall prove to have been incorrect in any
material respect when made; or


 


(c)                                  The
Borrower shall default in the observance or performance of any agreement
contained in Section 5.2(e), 5.4, 5.5, 5.6, 5.7 or 5.13, or any provision of
Section 6; or


 


(d)                                 Any
Loan Party shall default in the observance or performance of any other
agreement contained in this Agreement or the other Loan Documents (other than
as provided in paragraphs (a) through (c) of this Section), and such default
shall continue unremedied for a period of 30 days after the earlier of
(i) notice thereof from the Agent to the Borrower and (ii) actual
knowledge thereof by a Responsible Officer of such Loan Party, as applicable;
or


 


(e)                                  Any
material provision of any Loan Document shall at any time for any reason be
declared null and void, or the validity or enforceability of any Loan Document shall
at any time be contested by any Loan Party in writing, or a proceeding shall be
commenced by any Loan Party, or by any Governmental Authority or other Person
having jurisdiction over any Loan Party, seeking to establish the invalidity or
unenforceability thereof, or any Loan Party shall deny in writing that it has
any liability or obligation purported to be created under any Loan Document, or
any Loan Document shall cease to be in full force and effect; or


 


(f)                                    Any
Loan Party shall (i) default in any payment of principal or interest,
regardless of the amount, due in respect of any (A) Indebtedness (other
than the Notes), issued under the same indenture or other agreement, if the
maximum principal amount of Indebtedness covered by such indenture or agreement
is $1,000,000 or greater or (B) Guarantee Obligation with respect to an
amount of $1,000,000 or greater, in either case beyond the period of grace, if
any, provided in the instrument or agreement under which such Indebtedness or
Guarantee Obligation was created, whether or not such default has been waived
by the holders of such Indebtedness or Guarantee Obligation; or (ii) default
in the observance or performance of any other material agreement or condition
relating to any such Indebtedness or Guarantee Obligation or contained in any
instrument or agreement evidencing, securing or relating thereto, or any other
event shall occur or condition exist, the effect of which default or other
event or condition is to cause, or to permit the holder or holders of such
Indebtedness or beneficiary or beneficiaries of such Guarantee Obligation (or a
trustee or agent on behalf of such holder or holders or beneficiary or
beneficiaries) to cause, with the giving of notice if required, such
Indebtedness to become due prior to its stated maturity or such Guarantee
Obligation to become payable or such Indebtedness to be required to be defeased
or purchased; or


 


(g)                                 (i)                                     The
Borrower or any other Loan Party shall commence any voluntary case, proceeding
or other action (A) under any existing or future law of any jurisdiction,
domestic or foreign, relating to bankruptcy, insolvency, reorganization or
relief of debtors, seeking to have an order for relief entered with respect to
it, or seeking to adjudicate it a bankrupt or insolvent, or seeking
reorganization, arrangement, adjustment, winding-up, liquidation, dissolution,
composition or other relief with respect to it or its debts, or (B) seeking
appointment of a receiver, trustee, custodian or other similar official for it
or for all or any substantial part of its assets, or the Borrower or any other
Loan Party shall make a general assignment for the benefit of its creditors; or
(ii) there shall be commenced against the Borrower or any other Loan Party any
involuntary case, proceeding or other action of a nature referred to


 


56

















 


in clause (i) above which (A) results in the entry of an order for
relief or any such adjudication or appointment and (B) remains undismissed,
undischarged, unstayed or unbonded for a period of 60 days; or (iii) there
shall be commenced against the Borrower or any other Loan Party any case,
proceeding or other action seeking issuance of a warrant of attachment,
execution, distraint or similar process against all or any substantial part of
its assets which results in the entry of an order for any such relief which
shall not have been vacated, discharged, stayed or bonded pending appeal within
60 days from the entry thereof; or (iv) the Borrower or any other Loan Party
shall take any action in writing in furtherance of, or indicating its consent
to, approval of, or acquiescence in, any of the acts set forth in clause (i),
(ii), or (iii) above; or (v) the Borrower or any other Loan Party shall
generally not, or shall be unable to, or shall admit in writing its inability
to, pay its debts as they become due or there shall be a general assignment for
the benefit of creditors; or


 


(h)                                 (i)   Any Person shall engage in any non-exempt “prohibited
transaction” (as defined in Section 406 of ERISA or Section 4975 of the Code)
involving any Plan, (ii) any “accumulated funding deficiency” (as defined in
Section 302 of ERISA), whether or not waived, shall exist with respect to any
Plan, (iii) a Reportable Event shall occur with respect to, or proceedings
shall commence to have a trustee appointed, or a trustee shall be appointed, to
administer or to terminate any Single Employer Plan, which Reportable Event or
commencement of proceedings or appointment of a trustee would reasonably be
expected to result in the termination of such Plan for purposes of Title IV of
ERISA, (iv) any Single Employer Plan shall terminate for purposes of Title IV
of ERISA (other than a standard termination) or (v) the Borrower or any
Commonly Controlled Entity would reasonably be expected to incur any liability
in connection with a withdrawal from, or the Insolvency or Reorganization of, a
Multiemployer Plan; or


 


(i)                                     One
or more judgments or decrees shall be entered against one or more of the Loan
Parties involving in the aggregate a liability for all Loan Parties (not paid
or fully covered by insurance under which the insurer has acknowledged
liability in writing) of $1,000,000 or more, and all such judgments or decrees
shall not have been vacated, discharged, stayed or bonded pending appeal within
60 days from the entry thereof or in any event five days before the date of any
sale pursuant to such judgment or decree; or any non-monetary judgment or order
shall be entered against any Loan Party that could have a Material Adverse
Effect and either (i) enforcement proceedings shall have been commenced by
any Person upon such judgment which has not been stayed pending appeal or
(ii) there shall be any period of 10 consecutive days during which a stay
of enforcement of such judgment or order, by reason of a pending appeal or
otherwise, shall not be in effect; or


 


(j)                                     either
(i) any Person or “group” (within the
meaning of Rules 13d-3 and 13d-5 under the Securities Exchange Act of
1934, as amended) other than Summit
Partners, L.P. and its Affiliates shall have obtained the power (whether or not
exercised) to elect a majority of the members of the board of directors (or
similar governing body) of Pledgor; or (ii) the Pledgor is no longer the
legal and beneficial owner of 100% of the Capital Stock of the Borrower; or
(iii) the Borrower ceases to own 100% of the Capital Stock of each Subsidiary;
or


 


(k)                                  The
Agent shall at any time cease to have a valid and perfected first-priority Lien
for any reason on and in 100% of the Capital Stock of the Borrower and each
Domestic


 


57

















 


Subsidiary, or, with respect to the Capital Stock of each Foreign
Subsidiary, the percentage specified in Section 5.13(b); or


 


(l)                                     Any
material provision of any Loan Document, after delivery thereof pursuant to the
provisions hereof, shall, for any reason other than pursuant to the terms
thereof, cease to be valid or enforceable in accordance with its terms, or any
Lien created under any Loan Document shall for any reason other than pursuant
to the terms thereof, cease to be a valid and perfected first priority (except
as permitted by Section 6.3) Lien in any material portion of the Collateral,
the Guarantor Collateral or the property purported to be covered thereby;


 


then, and in any such event, (A) if such event is
an Event of Default specified in paragraph (g) above, automatically each
Commitment and the commitment to issue Letters of Credit shall immediately
terminate and the Loans made to the Borrower hereunder (with accrued interest
thereon) and all other Obligations shall immediately become due and payable
and, to the extent any Letters of Credit are then outstanding, the Borrower
shall make a Cash Collateral Deposit, to be held by the Agent as collateral
under the Security Agreement, in the amount equal to the aggregate Letter of
Credit Amount of such Letters of Credit and (B) if such event is any other
Event of Default, with the consent of the Majority Lenders the Agent may,
or upon the request of the Majority Lenders the Agent shall, take any or all of
the following actions:  (i) by written
notice to the Borrower declare the Commitments and the commitment to issue
Letters of Credit to be terminated forthwith, whereupon the Commitments and the
commitment to issue Letters of Credit shall immediately terminate; and
(ii) by written notice to the Borrower, declare the Loans (with accrued
interest thereon) and all other Obligations under this Agreement and the Notes
to be due and payable forthwith, whereupon (x) the same shall immediately
become due and payable and (y) to the extent any Letters of Credit are
then outstanding, the Borrower shall make a Cash Collateral Deposit, to be held
by the Agent as collateral under the Security Agreement, in an amount equal to
the aggregate Letter of Credit Amount of the Letters of Credit outstanding. In
all cases, with the consent of the Majority Lenders, the Agent may, or upon the
request of the Majority Lenders the Agent shall, enforce any or all of the
Liens and other rights and remedies created pursuant to any Loan Document or
available at law or in equity. Presentment, demand, protest and, except as
expressly provided above in this Section, all other notices of any kind are
hereby expressly waived by the Borrower.


 


Notwithstanding anything to the contrary in this
Agreement or any other Loan Document, on or after the occurrence and
continuation of (i) an Event of Default under Section 7(g), (ii) the
acceleration of the Loans and all other Obligations pursuant to the immediately
preceding paragraph, (iii) the exercise of rights and remedies by the Agent and
the Lenders pursuant to the immediately preceding paragraph or (iv) failure to
pay in full all of the Obligations pertaining to the Revolving Loan Commitment
on the Revolving Loan Commitment Expiration Date or to repay in full all of the
Obligations pertaining to the Term Loans on the Term Loan Maturity Date, the
proceeds resulting from the collection, liquidation, sale or other disposition
of the Collateral or of the Guarantor Collateral shall be applied, first,
to the reasonable costs and expenses (including reasonable attorneys’ fees) of
retaking, holding, storing, processing and preparing for sale, selling,
collecting and liquidating the Collateral and the Guarantor Collateral, and all
other reasonable costs and expenses incurred by the Agent, until each of such
items is paid in full; second, to the payment of all accrued and unpaid
interest and commitment fees due and owing to the Lenders under this Agreement,
pro rata based on each Lender’s Commitment


 


58

















 


Percentage thereof, until each of such items is paid in full; third,
to the satisfaction of all other Obligations (other than contingent indemnification
obligations for which no claim has been made and is outstanding, but including
cash collateralization of all Obligations in respect of outstanding Letters of
Credit), pro rata based on each Lender’s Commitment Percentage thereof; and fourth,
any surplus remaining after the satisfaction of all other Obligations (other
than contingent indemnification obligations for which no claim has been made
and is outstanding), provided no Commitment or Letter of Credit is outstanding,
to be paid over to the Borrower or to whomsoever may be lawfully entitled to
receive such surplus.


 


SECTION 8.                                THE AGENT


 


8.1                                 Appointment.
Each Lender hereby irrevocably designates and appoints Union Bank of
California, N.A., as Agent of such Lender under this Agreement and the other
Loan Documents, and each such Lender irrevocably authorizes Union Bank of
California, N.A., as the Agent, for such Lender, to take such action on its
behalf under the provisions of this Agreement and the other Loan Documents and
to exercise such powers and perform such duties as are expressly delegated to
the Agent, by the terms of this Agreement and the other Loan Documents,
together with such other powers as are reasonably incidental thereto. Notwithstanding
any provision to the contrary elsewhere in this Agreement, the Agent shall not
have any duties or responsibilities, except those expressly set forth herein,
or any fiduciary relationship with any Lender, and no implied covenants,
functions, responsibilities, duties, obligations or liabilities shall be read
into this Agreement or any other Loan Document or otherwise exist against the
Agent in such capacity.


 


8.2                                 Delegation
of Duties. The Agent may execute any of its duties under this Agreement and
the other Loan Documents by or through agents or attorneys-in-fact and shall be
entitled to advice of counsel concerning all matters pertaining to such duties.
The Agent shall not be responsible for the negligence or misconduct of any
agents or attorneys-in-fact selected by it with reasonable care.


 


8.3                                 Exculpatory
Provisions. Neither the Agent nor any of its officers, directors,
employees, agents, attorneys-in-fact, Subsidiaries or Affiliates shall be
(i) liable for any action lawfully taken or omitted to be taken by it or
such Person under or in connection with this Agreement or any other Loan
Document (except for its or such Person’s own gross negligence or willful misconduct)
or (ii) responsible in any manner to any of the Lenders for any recitals,
statements, representations or warranties made by the Borrower, any other Loan
Party or any officer thereof, contained in this Agreement or any other Loan
Document or in any certificate, report, statement or other document referred to
or provided for in, or received by the Agent under or in connection with, this
Agreement or any other Loan Document or for the value, validity, effectiveness,
genuineness, enforceability or sufficiency of this Agreement or the Notes or
any other Loan Document or for any failure of the Borrower or any other Loan
Party to perform its obligations hereunder or thereunder. The Agent shall not
be under any obligation to any Lender to ascertain or to inquire as to the
observance or performance of any of the agreements contained in, or conditions
of, this Agreement or any other Loan Document, or to inspect the properties,
books or records of the Borrower or any other Loan Party.


 


59

















 


8.4                                 Reliance
by Agent. The Agent shall be entitled to rely, and shall be fully protected
in relying, upon any note, writing, resolution, notice (including any
telephonic notice), consent, certificate, affidavit, letter, cablegram,
telegram, telecopy, telex or teletype message, statement, order or other
document or conversation reasonably believed by it to be genuine and correct
and to have been signed, sent or made by the proper Person or Persons and upon
advice and statements of legal counsel (including, without limitation, counsel
to the Borrower), the Accountants and independent accountants and other experts
selected by the Agent. The Agent may deem and treat the payee of any Note as
the owner thereof for all purposes unless a written notice of assignment,
negotiation or transfer thereof shall have been filed with the Agent. The Agent
shall be fully justified in failing or refusing to take any action under this
Agreement or any other Loan Document unless it shall first receive such advice
or concurrence of the Majority Lenders or all Lenders, as it deems appropriate,
or it shall first be indemnified to its satisfaction by the Lenders against any
and all liability and expense (except those incurred solely as a result of the
Agent’s gross negligence or willful misconduct) which may be incurred by it by
reason of taking or continuing to take any such action. The Agent shall in all
cases be fully protected in acting, or in refraining from acting, under this
Agreement and the Notes and the other Loan Documents in accordance with a
request of the Majority Lenders or all Lenders, as may be required, and such
request and any action taken or failure to act pursuant thereto shall be
binding upon all the Lenders and all future holders of the Notes.


 


8.5                                 Notice
of Default. Neither the Agent nor any Lender shall be deemed to have
knowledge or notice of the occurrence of any Default hereunder unless such
Person has received notice from the Agent, a Lender or the Borrower referring
to this Agreement, describing such Default and stating that such notice is a “notice
of default”. In the event that the Agent or any Lender receives such a notice,
the Agent or such Lender, as the case may be, shall give notice thereof to the
Agent and the Lenders. The Agent shall take such action with respect to such
Default as shall be reasonably directed by the Majority Lenders or all Lenders
as appropriate; provided that unless and until the Agent shall have
received such directions, the Agent may (but shall not be obligated to) take
such action, or refrain from taking such action, with respect to such Default
as it shall deem advisable in the best interests of the Lenders or as the Agent
shall believe necessary to protect the Agent and the Lenders’ interests in the
Collateral or the Guarantor Collateral.


 


8.6                                 Non-Reliance
on Agent and Other Lenders. Each Lender expressly acknowledges that none of
the Agent or any of its respective officers, directors, employees, agents,
attorneys-in-fact, Subsidiaries or Affiliates has made any representations or
warranties to it and that no act by the Agent hereafter taken, including any
review of the affairs of the Borrower or any other Loan Party, shall be deemed
to constitute any representation or warranty by the Agent to any Lender. Each
Lender represents to the Agent that it has, independently and without reliance
upon the Agent or any other Lender, and based on such documents and information
as it has deemed appropriate, made its own appraisal of and investigation into
the business, operations, property, financial and other condition and
creditworthiness of the Borrower and the Guarantors and made its own decision
to make its Loans and participate in Letters of Credit hereunder and enter into
this Agreement. Each Lender also represents that it will, independently and
without reliance upon the Agent or any other Lender, and based on such
documents and information as it shall deem appropriate at the time, continue to
make its own credit analysis, appraisals and decisions in taking or not taking
action under this Agreement and the other Loan Documents, and


 


60

















 


to make such investigation as it deems necessary to inform itself as to
the business, operations, property, financial and other condition and
creditworthiness of the Borrower and the other Loan Parties. The Agent agrees
to promptly furnish to each Lender a copy of all notices, reports and other
documents received by it from the Borrower; provided  that the
Agent shall not have any duty or responsibility to provide any Lender with any
credit or other information concerning the business, operations, property,
condition (financial or otherwise), prospects or creditworthiness of the
Borrower or any other Loan Party which may otherwise come into the possession
of the Agent or any of its officers, directors, employees, agents,
attorneys-in-fact, Subsidiaries or Affiliates except such as may come into the
possession of the employees of Agent then having the responsibility for the
administration of this Agreement.


 


8.7                                 Indemnification.
The Lenders hereby indemnify the Agent in its capacity as such (to the extent
not reimbursed by the Borrower and without limiting the obligation of the
Borrower to do so), ratably according to the respective amounts of their
Aggregate Total Commitment Percentages, from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, reasonable costs (including, without limitation, the allocated cost of
internal counsel), reasonable expenses or disbursements of any kind whatsoever
which may at any time (including, without limitation, at any time following the
payment of the Notes) be imposed on, incurred by or asserted against the Agent,
in its capacity as such, but not as a Lender hereunder, in any way relating to
or arising out of this Agreement, any of the other Loan Documents or any
documents contemplated by or referred to herein or therein or the transactions
contemplated hereby or thereby or any action taken or omitted by the Agent
under or in connection with any of the foregoing; provided that (a) no
Lender shall be liable for the payment of any portion of such liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements to the extent resulting from the Agent’s gross
negligence or willful misconduct; (b) the Agent shall not be permitted to
setoff any amounts owed hereunder against any Lender’s pro rata share of any
payment to be made to such Lender pursuant to Section 2.11; and (c) upon the
reasonable request of any Lender (which request shall not be made more than
once in any month), the Agent shall provide such Lender with copies of invoices
or other reasonably detailed written evidence of such expenses and disbursements.
The agreements in this Section shall survive the termination of this Agreement,
the expiration of the Letters of Credit and the payment of the Notes and all
other amounts payable hereunder.


 


8.8                                 Agent
in Its Individual Capacity. The Agent and its Affiliates may make loans to,
accept deposits from and generally engage in any kind of business with the
Borrower and the other Loan Parties as though the Agent were not the Agent
hereunder and under the other Loan Documents. With respect to the Agent, the
Loans made by the Agent, the Letters of Credit participated in by the Agent and
the Notes issued to the Agent shall have the same rights and powers under this
Agreement and the other Loan Documents as any Lender and the Agent may exercise
the same as though it were not the Agent and the terms “Lender” and “Lenders”
shall include the Agent in its individual capacity.


 


8.9                                 Successor
Agent. The Agent may resign as Agent upon ten days’ notice to the Lenders
and the Borrower. If the Agent shall resign as Agent under this Agreement and
the other Loan Documents, then the Majority Lenders shall appoint (with the
approval of the Borrower, such approval not to be unreasonably withheld and not
to be required if an Event of Default shall have occurred and be continuing) from
among the Lenders a successor agent for the


 


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Lenders, whereupon such successor agent shall succeed to the rights,
powers and duties of the Agent and the term “Agent” shall mean such successor
agent, effective upon its appointment, and the former Agent’s rights, powers
and duties as Agent shall be terminated, without any other or further act or
deed on the part of such former Agent or any of the parties to this Agreement
or any holders of the Notes. Notice of such appointment shall be given by such
successor agent to the Borrower and each Lender. After any retiring Agent’s
resignation as Agent, the provisions of this Section shall inure to its benefit
as to any actions taken or omitted to be taken by it while it was Agent, under
this Agreement and the other Loan Documents. In addition, after the replacement
of the Agent hereunder, the retiring Agent shall remain a party hereto and
shall continue to have all the rights and obligations of an Agent under this Agreement
with respect to Letters of Credit issued by it prior to such replacement, but
shall not be required to issue additional Letters of Credit.


 


SECTION 9.                                MISCELLANEOUS


 


9.1                                 Amendments
and Waivers. Neither this Agreement, any Note, any other Loan Document, nor
any terms hereof or thereof may be amended, supplemented or modified except in
accordance with the provisions of this Section. With the prior written consent
of the Majority Lenders and the Borrower, the Borrower may, from time to time,
enter into written amendments, supplements or modifications hereto and to the
other Loan Documents for the purposes of adding any provisions to this
Agreement or the other Loan Documents or changing in any manner the rights of
the Lenders, the Borrower or any other Loan Party hereunder or thereunder or
waiving, on such terms and conditions as may be specified in such instrument,
any of the requirements of this Agreement or the Notes or the other Loan
Documents or any Default and its consequences; provided, however,
that no such waiver and no such amendment, supplement or modification
shall:  (a) reduce the amount or extend
the maturity of any Note or any installment due thereon, or reduce the rate or
extend the time of payment of interest thereon, or reduce the amount or extend
the time of payment of any fee, indemnity or reimbursement payable to any
Lender hereunder, in each case without the written consent of the Lender
affected thereby, or increase any Commitment of any Lender without the written
consent of such Lender; or (b) (i) amend, modify or waive any provision of this
Section 9.1 or reduce the percentage specified in or otherwise modify the
definition of Majority Lenders, or consent to the assignment or transfer by any
Loan Party of any of its rights and obligations under this Agreement and the
other Loan Documents; or (ii) release any Loan Party from any liability under
its respective Loan Documents; or (iii) release any material portion of
the Collateral or any material portion of the Guarantor Collateral, except in
connection with any Asset Disposition permitted by this Agreement; or (iv)
amend, modify or waive, directly or indirectly, any of the provisions of
Section 2.1(e), 2.2(f), 2.12 or the last paragraph of Section 7; or (v) amend,
modify or waive any provision of this Agreement requiring the consent or
approval of all Lenders, in each case without the written consent of all the
Lenders; or (c) amend, modify or waive any provision of Section 8 without the
written consent of the Agent, or any provision affecting the rights and duties
of the Agent as the issuer of Letters of Credit without the written consent of
the Agent. Any such waiver and any such amendment, supplement or modification
shall apply equally to each of the Lenders and shall be binding upon the
Borrower, the other Loan Parties, the Lenders, the Agent, and all future
holders of the Notes. In the case of any waiver, the Borrower, the other Loan
Parties, the Lenders and the Agent, shall be restored to their former position
and rights hereunder and under the outstanding Notes and any other Loan
Documents, and any Default


 


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waived shall be deemed to be cured and not continuing; but no such
waiver shall extend to any subsequent or other Default, or impair any right
consequent thereon.


 


9.2                                 Notices.
All notices, requests and demands or other communications to or upon the
respective parties hereto to be effective shall be in writing unless otherwise
expressly provided herein (including by telecopy), and, unless otherwise
expressly provided herein, shall be deemed to have been duly given or made when
delivered by hand, or 3 days after being deposited in the United States mail,
certified and postage prepaid and return receipt requested, or, in the case of
telecopy notice, when received, in each case addressed to the parties at their
addresses as set forth on the signature pages hereof, or in the Assignment and
Acceptance pursuant to which a Person becomes a party hereto, or to such other
address as may be hereafter notified by the respective parties hereto; provided
that any notice, request or demand to or upon the Agent or the Lenders pursuant
to Section 2.1, 2.2, 2.3, 2.4 or 2.6 shall not be effective until received.


 


The
Agent shall be entitled to rely and act upon telephonic notices purportedly
given by or on behalf of the Borrower even if (i) such notices were not made in
a manner specified herein, were incomplete or were not preceded or followed by
any other form of notice specified herein, (ii) such notices are found not to
have been authorized by the Borrower or (iii) the terms thereof, as understood
by the recipient, varied from any confirmation thereof. The Borrower shall
indemnify the Agent and each Lender from all losses, costs, expenses and liabilities
resulting from the reliance by the Agent on any such notice.


 


9.3                                 No
Waiver; Cumulative Remedies. No failure to exercise and no delay in
exercising, on the part of the Agent or any Lender, any right, remedy, power or
privilege hereunder shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, remedy, power or privilege hereunder preclude
any other or further exercise thereof or the exercise of any other right,
remedy, power or privilege. The rights, remedies, powers and privileges herein
provided are cumulative and not exclusive of any rights, remedies, powers and
privileges provided by law.


 


9.4                                 Survival
of Representations and Warranties. All representations and warranties made
hereunder or the Existing Credit Agreement and in any document, certificate or
statement delivered pursuant hereto or in connection herewith or the Existing
Credit Agreement shall survive the execution and delivery of this Agreement.


 


9.5                                 Payment
of Expenses and Taxes. The Borrower agrees, whether or not the transactions
contemplated hereby are consummated, (a) to pay or reimburse the Agent for all
its reasonable costs and out-of-pocket expenses incurred in connection with the
preparation and execution of, and any amendment, supplement or modification to,
this Agreement and the Notes and the other Loan Documents and any other
documents prepared in connection herewith or therewith, and the consummation
and administration of the transactions contemplated hereby and thereby
(including the transactions to occur on the Closing Date), including, without
limitation, due diligence expenses, syndication expenses, and the reasonable
fees and disbursements of outside counsel to the Agent (including any local
counsel to the Agent) and as to any amendment, supplement or modification to
this Agreement or any other Loan Document and the administration of the
transactions contemplated thereby, and with respect to the foregoing, the


 


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allocated reasonable costs of internal counsel to the Agent, (b) after
the occurrence and during the continuance of a Default, to pay or reimburse the
Agent and each Lender, for all its reasonable costs and out-of-pocket expenses
incurred in connection with the enforcement or preservation of any rights under
this Agreement, the other Loan Documents and any such other documents or in
connection with any refinancing or restructuring of the credit arrangements
provided under this Agreement in the nature of a “work-out” or of any
insolvency or bankruptcy proceeding, including, without limitation, reasonable
legal fees and disbursements of outside counsel to the Agent and each Lender
and the allocated reasonable cost of internal counsel to the Agent and each
Lender, (c) to pay, and indemnify and hold harmless each Lender and the Agent
from, any and all recording and filing fees and any and all liabilities with
respect to, or resulting from any delay in paying, stamp, excise and other
taxes, if any, which may be payable or determined to be payable in connection
with the execution and delivery of, or consummation or administration of any of
the transactions contemplated by, this Agreement or any amendment, supplement
or modification of, or any waiver or consent under or in respect of, this
Agreement, the Notes, the other Loan Documents and any such other documents,
(d) to pay all costs and expenses of the Agent and the Lenders incurred in
connection with the collateral audits contemplated by Section 5.6 and (e) to
pay and indemnify and hold harmless each Lender and the Agent from and against,
any and all other liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs (including, without limitation, the allocated
reasonable cost of internal counsel and the reasonable legal fees and
disbursements of outside counsel to the Lenders and the Agent), expenses or
disbursements of any kind or nature whatsoever with respect to the execution,
delivery and enforcement of this Agreement, the Notes, the other Loan Documents
or the use of the Letters of Credit or the proceeds of the Loans and any such
other documents (all the foregoing, collectively, the “indemnified liabilities”),
provided, that the Borrower shall have no obligation hereunder to the
Agent or any Lender with respect to indemnified liabilities arising from the
gross negligence or willful misconduct of the Agent or such Lender or their
agents or attorneys-in-fact. The agreements in this Section shall survive the
termination of this Agreement, the expiration of the Letters of Credit and the
payment of the Notes and all other amounts payable hereunder.


 


9.6                                 Successors
and Assigns; Participation; Purchasing Lenders.


 


(a)                                  This
Agreement shall be binding upon and inure to the benefit of the Borrower, the
Lenders, the Agent, all future holders of the Notes and their respective
successors and assigns, except that the Borrower may not assign, transfer or
delegate any of its rights or obligations under this Agreement without the
prior written consent of each Lender.


 


(b)                                 Any
Lender may at any time sell to one or more banks or other entities (“Participants”)
participating interests in the rights of such Lender hereunder and under the
other Loan Documents; provided any such sale must result in the
Participant acquiring at least a $1,000,000 (with concurrent sales to one or
more Affiliates of a Participant being treated as a single assignment for purposes
of meeting such minimum amount) risk participation interest in the aggregate
amount of obligations under this Agreement and the other Loan Documents. A
Participant shall have the right only to vote on the extension of regularly
scheduled maturity of principal or interest under a Note, extension of the
expiration of a Letter of Credit, reduction of the principal amount or rate of
interest of a Note, reduction of the amount to be reimbursed under any Letter
of Credit, or the release of any significant portion of the Collateral or the
Guarantor


 


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Collateral. In the event of any such sale by a Lender of participating
interests to a Participant, such Lender’s obligations under this Agreement to
the other parties to this Agreement shall remain unchanged, such Lender shall
remain solely responsible for the performance thereof, such Lender shall remain
the holder of its Note and the participant in such Letters of Credit for all
purposes under this Agreement and the other Loan Documents, and the Borrower
and the Agent shall continue to deal solely and directly with such Lender in
connection with such Lender’s rights and obligations under this Agreement and
the other Loan Documents.


 


(c)                                  Any
Lender may at any time sell to any of its Affiliates or Related Funds or to any
Lender, any Affiliate or Related Fund thereof or to one or more additional
lenders that are approved by the Borrower (“Purchasing Lenders”), such
approval not to be unreasonably withheld or delayed and not to be required if a
Default has occurred and is continuing, and the Agent, such approval not to be
unreasonably withheld or delayed, all or any part of its rights and obligations
under this Agreement, the Notes and the other Loan Documents pursuant to an
Assignment and Acceptance executed by such Purchasing Lender and such
transferor Lender, and delivered to the Agent for its acceptance and recording
in the Register (as defined below), accompanied by a $3,500 processing fee
(except the payment of such fee shall not be required in connection with an
assignment by a Lender to an Affiliate of such Lender or a Related Fund); provided,
however, that (i) any such sale (other than a sale of all of the selling
Lender’s interest hereunder) must result in the Purchasing Lender having an
interest in at least $5,000,000 in aggregate amount of obligations under this
Agreement and the other Loan Documents (except such minimum amount shall not
apply to an assignment by a Lender to (x) an Affiliate of such Lender or a
Related Fund of such Lender, (y) another Lender or (z) a group of new Lenders,
each of whom is an Affiliate or Related Fund of each other to the extent the
aggregate amount assigned to all such new Lenders is at least $5,000,000) and
(ii) no approval of the Borrower or the Agent shall be required in connection
with any assignment by a Lender to an Affiliate of such Lender, another Lender
or a Related Fund. Upon such execution and delivery from and after the transfer
effective date determined pursuant to such assignment document, (x) the
Purchasing Lender thereunder shall be a party hereto and, to the extent
provided in the Assignment and Acceptance, have the rights and obligations of a
Lender hereunder with Commitments as set forth therein, and (y) the transferor
Lender thereunder shall, to the extent of such assigned portion and as provided
in the Assignment and Acceptance, be released from its obligations under this
Agreement and the other Loan Documents (and, in the case of an Assignment and
Acceptance covering all or the remaining portion of a transferor Lender’s
rights and obligations under this Agreement, such transferor Lender shall cease
to be a party hereto). Any such Assignment and Acceptance shall be deemed to
amend this Agreement to the extent, and only to the extent, necessary to
reflect the addition of such Purchasing Lender and the resulting adjustment of
Commitment Percentages arising from the purchase by such Purchasing Lender of
all or a portion of the rights and obligations of such transferor Lender under
this Agreement and the other Loan Documents. The Borrower, at its own expense,
shall execute and deliver to the Agent in exchange for the surrendered Note or
Notes a new Note or Notes to the order of such Purchasing Lender in an amount
equal to the Commitments assumed by it, and if the transferor Lender has
retained a Commitment hereunder, a new Note or Notes to the order of the
transferor Lender in an amount equal to such Commitment retained by it
hereunder. Such new Notes shall be dated the Closing Date. Notwithstanding
anything to the contrary contained in this Section 9.6(c), a Lender may assign
any or all of its rights under the Loan Documents to an Affiliate of such Lender
or a Related Fund of such Lender without delivering an Assignment


 


65

















 


and Acceptance to the Agent or any other Person (a “Related Party
Assignment”); provided, however, that (i) the assigning Lender promptly
delivers notice to the Agent of such assignment identifying the assignee in
detail reasonably acceptable to the Agent, (ii) the Borrower and the Agent may
continue to deal solely and directly with such assigning Lender until an Assignment
and Acceptance has been delivered to the Agent for recordation in the Register,
and provided that the failure of such assigning Lender to deliver an Assignment
and Acceptance to the Agent shall not affect the legality, validity, or binding
effect of such assignment and (iii) an Assignment and Acceptance between the
assigning Lender and an Affiliate of such Lender or a Related Fund of such
Lender shall be effective as of the date specified in such Assignment and
Acceptance.


 


(d)                                 The
Agent shall maintain at its address referred to in Section 9.2 a copy of
each Assignment and Acceptance delivered to it and a register (the “Register”)
for the recordation of the names and addresses of the Lenders and the
Commitments of, and principal amounts of the Loans owing to and, if applicable,
the Letters of Credit participated in by, each Lender from time to time. The
entries in the Register shall be conclusive, in the absence of manifest error,
and the Borrower, the Agent and the Lenders may treat each Person whose name is
recorded in the Register as the owner of the Loans recorded therein for all
purposes of this Agreement. The Register shall be available for inspection by
the Borrower or any Lender at any reasonable time and from time to time upon
reasonable prior notice.


 


(e)                                  Upon
its receipt of an Assignment and Acceptance executed by a transferor Lender and
Purchasing Lender (and, in the case of a Purchasing Lender that is not then a
Lender or an Affiliate or Related Fund thereof, by the Borrower (if required)
and the Agent (if required)) the Agent shall (i) promptly accept such
Assignment and Acceptance and (ii) on the effective date determined
pursuant thereto record the information contained therein in the Register.


 


(f)                                    The
Borrower authorizes each Lender to disclose to any Participant or Purchasing
Lender (each, a “Transferee”) and any prospective Transferee any and all
information in such Lender’s possession concerning the Borrower, the other Loan
Parties and the Affiliates thereof which has been delivered to such Lender by
or on behalf of the Borrower pursuant to this Agreement or any other Loan
Document or which has been delivered to such Lender by or on behalf of the
Borrower in connection with such Lender’s credit evaluation of the Borrower and
the other Loan Parties; provided that such Transferee or prospective
Transferee agrees in writing to maintain the confidentiality of such
information in accordance with the provisions of Section 9.15.


 


(g)                                 Nothing herein shall
prohibit any Lender from pledging or assigning any of its interest and rights
under this Agreement and its Notes to any Federal Reserve Bank in accordance
with applicable law. In addition, the
Borrower hereby acknowledges that each Lender and each of its Affiliates and
Related Funds may at any time pledge or grant a security interest in all or any
portion of the Loans made by it as collateral security to secure obligations of
such Lender, Affiliates of such Lender and Related Funds; provided that
no such pledge or grant of a security interest shall release a Lender from any
of its obligations hereunder or substitute any such pledgee or assignee for
such Lender as a party hereto.


 


(h)                                 Each
Lender (and each Person becoming a Lender pursuant to Section 9.6(c))
represents, warrants and agrees with the Agent as follows:


 


66

















 


(i)                                     Such
Lender is entitled to receive any payments hereunder without the withholding of
any tax and will furnish to Agent and the Borrower such forms, certifications,
statements and other documents as Agent may request from time to time to
evidence such Lender’s exemption from withholding of any tax imposed by any
jurisdiction or to enable Agent to comply with any applicable laws or
regulations relating thereto;


 


(ii)                                  Without
limiting the effect of the foregoing, if such Lender is not created or
organized under the laws of the United States or any state thereof, such Lender
is lawfully engaged in the conduct of a business within the United States and
payments made hereunder are or are reasonably expected to be effectively
connected with the conduct of that trade or business and are or will be
includible in its gross income or, if such Lender is not engaged in a United
States trade or business with which such payments are effectively connected,
such Lender is entitled to the benefits of a tax convention which exempts the
income from United States withholding tax and that it has satisfied all
requirements to qualify for the exemption from tax.


 


(iii)                               Such Lender agrees that
it will, immediately upon the request of the Agent, furnish to the Agent a copy
to the Borrower Form W-9, W-8BEN or W-8ECI (as applicable to it) of the
Internal Revenue Service, or such other forms, certifications, statements or
documents, duly executed and completed by such Lender as evidence of such
Lender’s exemption from the withholding of United States tax with respect
thereto. If such Lender determines that, as a result of any change in any
Requirement of Law or in any official application or interpretation thereof, it
ceases to qualify for exemption from any tax imposed by any jurisdiction with
respect to payments made hereunder, such Lender shall promptly notify the Agent
and the Borrower of such fact and the Agent may, but shall not be required to
withhold the amount of any such applicable tax from amounts paid to such Lender
hereunder. The Agent shall not be obligated to make any payments hereunder to
such Lender in respect to the Obligations owing to such Lender hereunder until
such Lender shall have furnished to the Agent the requested form,
certification, statement or document, and may withhold the amount of such
applicable tax from amounts paid to such Lender hereunder.


 


(iv)                              Each
Lender shall reimburse, indemnify and hold the Agent and the Borrower harmless
from any and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind or nature
whatsoever which may be imposed upon, incurred by or asserted against the Agent
or the Borrower, as the case may be, due to its reliance upon the
representation hereby made that such Lender is exempt from withholding of tax. Unless
the Agent receives written notice to the contrary, such Lender shall be deemed
to have made the representations contained in this Section 9.6(h) for the
current and each subsequent tax year of such Lender.


 


9.7                                 Adjustments;
Set-Off.


 


(a)                                  If
any Lender (a “benefitted Lender”) shall at any time receive any payment
of all or part of its Loans or its participations in Letters of Credit, or
interest thereon, or fees, or receive any collateral in respect thereof
(whether voluntarily or involuntarily, by set-off, pursuant to events or
proceedings of the nature referred to in Section 7(g) or 8.8, or otherwise),
in a greater proportion than any such payment to or collateral received by any
other Lender, if any, in respect of such other Lender’s Loans, its
participation in Letters of Credit, or interest thereon, or fees,


 


67

















 


such benefitted Lender shall purchase for cash from the other Lenders
such portion of each such other Lender’s Loans, participations in Letters of
Credit, or fees, or shall provide such other Lenders with the benefits of any
such collateral, or the proceeds thereof, as shall be necessary to cause such
benefitted Lender to share the excess payment or benefits of such collateral or
proceeds ratably with each of the Lenders; provided, however,
that if all or any portion of such excess payment or benefits is thereafter
recovered from such benefitted Lender, such purchase shall be rescinded, and
the purchase price and benefits returned, to the extent of such recovery, but
without interest. The Borrower agrees that each Lender so purchasing a portion
of another Lender’s Loans or its participations in Letters of Credit may
exercise all rights of payment (including, without limitation, rights of
set-off) with respect to such portion as fully as if such Lender were the
direct holder of such portion.


 


(b)                                 Subject
to Section 9.7(a), in addition to any rights and remedies of the Lenders
provided by law, with the prior consent of the Agent, each Lender shall have
the right, exercisable upon the occurrence and during the continuance of an
Event of Default, without prior notice to the Borrower, any such notice being
expressly waived by the Borrower to the extent permitted by applicable law, to
set-off and appropriate and apply against any such Obligations any and all
deposits (general or special, time or demand, provisional or final), in any
currency, and any other credits, indebtedness or claims in any currency, in
each case whether direct or indirect, absolute or contingent, matured or
unmatured, at any time held or owing by such Lender or Affiliate or any branch
or agency thereof or bank controlling such Lender to or for the credit or the
account of the Borrower to the extent such Obligations are then due and payable.
Each Lender agrees promptly to notify the Borrower after any such set-off and
application made by such Lender, provided that the failure to give such
notice shall not affect the validity of such set-off and application.


 


9.8                                 Counterparts.
This Agreement may be executed by one or more of the parties to this Agreement
on any number of separate counterparts, and all of said counterparts taken
together shall be deemed to constitute one and the same instrument. Delivery of
an executed counterpart of a signature page to this Agreement by telecopier
shall be effective as delivery of a manually executed counterpart of this
Agreement.


 


9.9                                 Severability.
Any provision of this Agreement which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.


 


9.10                           Integration.
This Agreement, together with the other Loan Documents, represents the entire
agreement of the Borrower, the Agent and the Lenders with respect to the
subject matter hereof, and there are no promises, undertakings, representations
or warranties by the Agent or any Lender relative to the subject matter hereof
not expressly set forth or referred to herein or in the other Loan Documents.


 


9.11                           GOVERNING
LAW. THIS AGREEMENT AND THE NOTES AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED
BY, AND CONSTRUED AND INTERPRETED


 


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IN ACCORDANCE WITH, THE LAW OF THE STATE OF
CALIFORNIA (WITHOUT REFERENCE TO ITS CHOICE OF LAW RULES).


 


9.12                           Judicial
Reference; Consent to Jurisdiction.


 


(a)                                  ALL CLAIMS, CAUSES OF ACTION OR OTHER
DISPUTES CONCERNING THE LOAN DOCUMENTS (EACH A “CLAIM”), INCLUDING ANY
AND ALL QUESTIONS OF LAW OR FACT RELATING THERETO, SHALL, AT THE WRITTEN
REQUEST OF ANY PARTY TO THIS AGREEMENT, BE DETERMINED BY JUDICIAL REFERENCE
PURSUANT TO THE CALIFORNIA CODE OF CIVIL PROCEDURE (“REFERENCE”). THE
PARTIES SHALL SELECT A SINGLE NEUTRAL REFEREE, WHO SHALL BE A RETIRED STATE OR
FEDERAL JUDGE. IN THE EVENT THAT THE PARTIES CANNOT AGREE UPON A REFEREE, THE
REFEREE SHALL BE APPOINTED BY THE COURT. THE REFEREE SHALL REPORT A STATEMENT
OF DECISION TO THE COURT. NOTHING IN THIS PARAGRAPH SHALL LIMIT THE RIGHT
OF ANY PARTY AT ANY TIME TO EXERCISE SELF-HELP REMEDIES, FORECLOSE AGAINST
COLLATERAL OR OBTAIN PROVISIONAL REMEDIES. THE PARTIES SHALL BEAR THE FEES AND
EXPENSES OF THE REFEREE EQUALLY UNLESS THE REFEREE ORDERS OTHERWISE. THE
REFEREE SHALL ALSO DETERMINE ALL ISSUES RELATING TO THE APPLICABILITY,
INTERPRETATION, AND ENFORCEABILITY OF THIS PARAGRAPH. THE PARTIES ACKNOWLEDGE
THAT THE CLAIMS WILL NOT BE ADJUDICATED BY A JURY.


 


(b)                                 Subject
to Section 9.12(a), each party hereto hereby irrevocably and unconditionally


 


(i)                                     submits
for itself and its property in any legal action or proceeding relating to this
Agreement and the other Loan Documents to which it is a party, or for recognition
and enforcement of any judgment in respect thereof, to the non-exclusive
general jurisdiction of the courts of the State of California, the courts of
the United States of America for the Central District of California, and
appellate courts from any thereof;


 


(ii)                                  consents
that any such action or proceeding may be brought in such courts and waives any
objection that it may now or hereafter have to the venue of any such action or
proceeding in any such court or that such action or proceeding was brought in
an inconvenient forum and agrees not to plead or claim the same;


 


(iii)                               agrees
that service of process in any such action or proceeding may be effected by
mailing a copy thereof by registered or certified mail (or any substantially
similar form of mail), postage prepaid, to any party at its address set forth
in Section 9.2;


 


(iv)                              agrees
that nothing herein shall affect the right to effect service of process in any
other manner permitted by law or shall limit the right to sue in any other
jurisdiction; and


 


(v)                                 waives,
to the maximum extent not prohibited by law, any right it may have to claim or
recover in any legal action or proceeding referred to in this subsection any
punitive damages.


 


69

















 


9.13                           Acknowledgements.
The Borrower hereby acknowledges that:


 


(a)                                  it
has been advised by counsel in the negotiation, execution and delivery of this
Agreement and the other Loan Documents;


 


(b)                                 neither
the Agent nor any Lender has any fiduciary relationship to the Borrower solely
by virtue of any of the Loan Documents, and the relationship pursuant to the
Loan Documents between the Agent and the Lenders, on one hand, and the Borrower,
on the other hand, is solely that of creditor and debtor; and


 


(c)                                  no
joint venture exists among the Lenders or among the Borrower and the Lenders.


 


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


 


9.15                           Confidentiality.
The Lenders shall take normal and reasonable precautions to maintain the
confidentiality of all non-public information obtained pursuant to the
requirements of this Agreement which has been identified in writing as such by
any Loan Party but may, in any event, make disclosures (a) reasonably
required by any bona fide transferee, assignee or participant in connection
with the contemplated transfer or assignment of any of the Commitments, the
Loans, any participation in Letters of Credit or participation in any of the foregoing
or (b) as required or requested by any governmental agency or
representative thereof or as required pursuant to legal process or (c) to
its attorneys and accountants or (d) as required by law or (e) in
connection with litigation involving any Lender or the Agent; provided
that (i) such transferee, assignee or participant agrees in writing to comply
with the provisions of this Section 9.15 unless specifically prohibited by
applicable law or court order and (ii) in no event shall any Lender or the Agent
be obligated or required to return any materials furnished by the Borrower or
its Subsidiaries.


 


9.16                           Patriot
Act. Each Lender subject to Title III of the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001 (Public Law 107-56) (the “Patriot Act”) hereby
notifies the Borrower that, pursuant to the requirements of the Patriot Act,
such Lender is required to obtain, verify and record information that
identifies the Borrower, which information includes the name and address of the
Borrower and other information that will allow such Lender to identify the
Borrower in accordance with the Patriot Act.


 


[Remainder of page
intentionally left blank.]


 


70

















 


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


 


 


	
   

  	
  PHYSICIANS
  FORMULA, INC.,

  
	
   

  	
  a New York
  corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Address for
  Notices:

  
	
   

  	
   

  
	
   

  	
  1055 West 8th Street

  
	
   

  	
  Azusa, CA 91702

  
	
   

  	
  Attention: Chief Executive Officer

  
	
   

  	
  Telephone: (626) 334-3395

  
	
   

  	
  Facsimile: (626) 812-9462

  
						



 


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  UNION BANK OF
  CALIFORNIA, N.A.,

  
	
   

  	
  as Agent and as
  sole Lender

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Revolving Loan
  Commitment: $20,000,000

  
	
   

  	
  Term Loan
  Commitment: $15,000,000

  
	
   

  	
   

  
	
   

  	
  Address for
  Notices:

  
	
   

  	
   

  
	
   

  	
  Union Bank of
  California, N.A.

  
	
   

  	
  445 South
  Figueroa Street, 13th Floor

  
	
   

  	
  Los Angeles, CA
  90071

  
	
   

  	
  Attention: Craig
  Cappai

  
	
   

  	
  Telephone: (213)
  236-7517

  
	
   

  	
  Facsimile: (213)
  236-7619

  
	
   

  	
   

  
	
   

  	
  Applicable
  Lending Office for

  
	
   

  	
  Base Rate Loans:

  
	
   

  	
   

  
	
   

  	
  445 South
  Figueroa Street

  
	
   

  	
  Los Angeles, CA 90071

  
	
   

  	
   

  
	
   

  	
  Applicable
  Lending Office for

  
	
   

  	
  LIBOR Loans:

  
	
   

  	
   

  
	
   

  	
  445 South
  Figueroa Street

  
	
   

  	
  Los Angeles, CA
  90071

  
	
   

  	
   

  
	
   

  	
  Applicable
  Lending Office for

  
	
   

  	
  participations
  in Letters of Credit:

  
	
   

  	
   

  
	
   

  	
  445 South
  Figueroa Street

  
	
   

  	
  Los Angeles, CA
  90071

  
						



 


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