Document:

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 14, 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

  	
   

  	
  29

  
	
  2.10

  	
   

  	
  Inability to Determine Interest Rate

  	
   

  	
  30

  
	
  2.11

  	
   

  	
  Pro Rata Treatment and Payments

  	
   

  	
  30

  
	
  2.12

  	
   

  	
  Illegality

  	
   

  	
  30

  
	
  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

  	
   

  	
  34

  
	
  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

  	
   

  	
  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

  	
   

  	
  47

  
	
  5.8

  	
   

  	
  Hedging Obligations

  	
   

  	
  47

  
	
  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

  
	
  5.14

  	
   

  	
  Covenant Regarding Insurance Endorsements

  	
   

  	
  50

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  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

  	
   

  	
  54

  
	
  6.8

  	
   

  	
  Transactions with Affiliates

  	
   

  	
  55

  
	
  6.9

  	
   

  	
  Fiscal Year

  	
   

  	
  55

  
	
  6.10

  	
   

  	
  Prohibitions on Certain Agreements, Modifications to
  Certain Agreements

  	
   

  	
  55

  
	
  6.11

  	
   

  	
  Sale-Leaseback Transactions

  	
   

  	
  55

  
	
  6.12

  	
   

  	
  Unfunded Liabilities

  	
   

  	
  55

  
	
  6.13

  	
   

  	
  Line of Business

  	
   

  	
  55

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SECTION 7.

  	
   

  	
  EVENTS OF DEFAULT

  	
   

  	
  55

  

 

 ii
 

 

 

	
  SECTION 8.

  	
   

  	
  THE AGENT

  	
   

  	
  59

  
	
  8.1

  	
   

  	
  Appointment

  	
   

  	
  59

  
	
  8.2

  	
   

  	
  Delegation of Duties

  	
   

  	
  59

  
	
  8.3

  	
   

  	
  Exculpatory Provisions

  	
   

  	
  59

  
	
  8.4

  	
   

  	
  Reliance by Agent

  	
   

  	
  60

  
	
  8.5

  	
   

  	
  Notice of Default

  	
   

  	
  60

  
	
  8.6

  	
   

  	
  Non-Reliance on Agent and Other Lenders

  	
   

  	
  60

  
	
  8.7

  	
   

  	
  Indemnification

  	
   

  	
  61

  
	
  8.8

  	
   

  	
  Agent in Its Individual Capacity

  	
   

  	
  61

  
	
  8.9

  	
   

  	
  Successor Agent

  	
   

  	
  62

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SECTION 9.

  	
   

  	
  MISCELLANEOUS

  	
   

  	
  62

  
	
  9.1

  	
   

  	
  Amendments and Waivers

  	
   

  	
  62

  
	
  9.2

  	
   

  	
  Notices

  	
   

  	
  63

  
	
  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

  	
   

  	
  68

  
	
  9.8

  	
   

  	
  Counterparts

  	
   

  	
  68

  
	
  9.9

  	
   

  	
  Severability

  	
   

  	
  68

  
	
  9.10

  	
   

  	
  Integration

  	
   

  	
  68

  
	
  9.11

  	
   

  	
  GOVERNING LAW

  	
   

  	
  69

  
	
  9.12

  	
   

  	
  Judicial Reference; Consent to Jurisdiction

  	
   

  	
  69

  
	
  9.13

  	
   

  	
  Acknowledgements

  	
   

  	
  70

  
	
  9.14

  	
   

  	
  Headings

  	
   

  	
  70

  
	
  9.15

  	
   

  	
  Confidentiality

  	
   

  	
  70

  
	
  9.16

  	
   

  	
  Patriot Act

  	
   

  	
  70

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  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

  	
   

  	
   

  

 

 iii
 

 

 

	
  3.5

  	
   

  	
  Litigation

  	
   

  	
   

  
	
  3.6

  	
   

  	
  Legal and Operating Names

  	
   

  	
   

  
	
  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 14, 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 $9,308,000 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 13, 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 13, 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)       
(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.

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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.  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.

 38
 

 

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.  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.

 39
 

 

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
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.

 40
 

 

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 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 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.

 41

 

(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.  Subject to Section  5.14, 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 September 30, 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 Ratio not
greater than 2.00:1, a Fixed Charge Coverage Ratio not less than 2.00:1 and
Tangible Net Worth of not less than -$20,000,000.

 42
 

 

(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.

(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.

 43
 

 

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:

(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;

 44
 

 

(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 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 

 45
 

 

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, 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 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 

 46
 

 

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).

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 

 47
 

 

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; provided  further that,
with respect to the Property located at 5308 Irwindale Avenue, Irwindale,
California leased by the Borrower, the Borrower shall use commercially
reasonable efforts to 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
within 30 days after the Closing Date.

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 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 

 48
 

 

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, 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 

 49
 

 

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.

5.14         Covenant
Regarding Insurance Endorsements. 
Within thirty days following the Closing Date, the Borrower shall
deliver to the Agent appropriate evidence showing the Agent as an additional
named insured, additional beneficiary, assignee or loss payee, as appropriate,
for the benefit of the Lenders under the insurance policies provided for in
Section 5.5.

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:

 50
 

 

 

	
  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

  	
   

  

 

(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;

 51
 

 

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

(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;

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

 54
 

 

(i)            within
five days of the Closing Date, the Borrower shall be permitted to distribute to
certain stockholders of the Pledgor proceeds in the approximate amount of
$22,000,000 from the initial public offering of equity interests in the Pledgor
that the Borrower is holding on behalf of the Pledgor.

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 

 55
 

 

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 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, 5.13 or 5.14, 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, 

 56
 

 

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 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

 57
 

 

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 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 

 58
 

 

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 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 

 59
 

 

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.

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 

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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 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.

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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 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.  

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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 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 

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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 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 

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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
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 

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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 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 

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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:

(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.

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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, 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 

 68
 

 

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 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;

 69
 

 

(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.

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:

  	
  /s/ Joseph Jaeger

  	
   

  
	
   

  	
  Name:

  	
  Joseph Jaeger

  
	
   

  	
  Title:

  	
  Chief Financial Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Address for Notices:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  1055 West 8th Street

  	
   

  
	
   

  	
  Azusa, CA 91702

  	
   

  
	
   

  	
  Attention: Chief Executive Officer

  	
   

  
	
   

  	
  Telephone: (626) 334-3395

  	
   

  
	
   

  	
  Facsimile: (626) 334-8008

  	
   

  
						

 

 S-1
 

 

 

	
  

  	
  UNION BANK OF CALIFORNIA, N.A.,

  	
   

  
	
   

  	
  as Agent and as sole Lender

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Craig R. Cappai

  	
   

  
	
   

  	
  Name: Craig R. Cappai

  	
   

  
	
   

  	
  Title: Vice President

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  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

  	
   

  
					

 

 S-2Exhibit 10.2

Physicians Formula
Holdings, Inc.

1055 West 8th Street

Azusa, California 91702

November 14, 2006

Ingrid Jackel

2405 E. Orange Grove Blvd.

Pasadena, CA, 91104

Re:                               Physicians
Formula Holdings, Inc.

(formerly,
PFI Holdings Corp.) (the “Company”)

Amended and Restated
Grant of Nonqualified Stock Option 

Dear Ingrid:

The Company’s Board of Directors has previously
granted to you, on November 3, 2003, a “performance-vesting” stock option (an “Option”)
under the Physicians Formula Holdings, Inc. 2003 Stock Option Plan (the “Plan”),
a copy of which is attached hereto and incorporated herein by reference.  In connection with an initial public offering
of the Company’s Common Stock (as defined below) (the “Initial Public
Offering”), the Board desires to amend and restate the terms of your
Option, effective upon the closing of the Initial Public Offering, to (among
other things) accelerate the vesting of a portion of your Option upon
completion of the Initial Public Offering. 
This Amended and Restated Grant of Nonqualified Stock Option amends and
restates in its entirety the Grant of Nonqualified Stock Option, dated November
3, 2003, relating to your Option.

1.                                       Definitions.  For the purposes of this Agreement, the
following terms shall have the meanings set forth below:

“Board” shall mean the Board of Directors of
the Company.

“Cause” shall have the meaning set forth in
that certain Employment Agreement, dated as of November 3, 2003, by and between
you and Pierre Fabre, Inc. (now known as Physicians Formula, Inc.) (as the same
may be amended or modified from time to time in accordance with its terms).

“Code” shall mean the Internal Revenue Code of
1986, as amended, and any successor statute.

“Committee” shall mean the committee of the
Board which may be designated by the Board to administer the Plan.  The Committee shall be composed of two or
more directors as appointed from time to time to serve by the Board.

 

“Common Stock” shall mean the Company’s Common
Stock, par value $.01 per share, or, in the event that the outstanding Common
Stock is hereafter changed into or exchanged for different stock or securities
of the Company, such other stock or securities.

“Company” shall mean Physicians Formula
Holdings, Inc., a Delaware corporation, and (except to the extent the context
clearly requires otherwise) any subsidiary corporation of Physicians Formula
Holdings, Inc. as such term is defined in Section 424(f) of the Code.

“Disability” shall mean your inability, due to
illness, accident, injury, physical or mental incapacity or other disability,
to carry out effectively your duties and obligations as an employee of the
Company or to participate effectively and actively in the management of the
Company for a period of at least 90 consecutive days or for shorter periods aggregating
at least 120 days (whether or not consecutive) during any twelve-month period,
as determined in the reasonable judgment of the Board.

“Option Shares” shall mean (i) all shares of
Common Stock issued or issuable upon the exercise of the Option and (ii) all
shares of Common Stock issued with respect to the Common Stock referred to in
clause (i) above by way of stock dividend or stock split or in connection with
any conversion, merger, consolidation or recapitalization or other
reorganization affecting the Common Stock. 
Option Shares shall continue to be Option Shares in the hands of any
holder other than you (except for the Company and, to the extent that you are
permitted to transfer Option Shares pursuant to paragraph 14 hereof, purchasers
pursuant to a Public Sale), and each such transferee thereof shall succeed to
the rights and obligations of a holder of Option Shares hereunder.

“Person” shall mean an individual, a
partnership, a corporation, a limited liability company, an association, a joint
stock company, a trust, a joint venture, an unincorporated organization and a
governmental entity or any department, agency or political subdivision thereof.

“Public Sale” shall mean any sale of Option
Shares to the public pursuant to an offering registered under the Securities
Act or to the public through a broker, dealer or market maker pursuant to the
provisions of Rule 144 adopted under the Securities Act.

“Sale of the Company” shall mean the sale of
the Company pursuant to which any “person” or “group” (as those terms are used
in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder and other than Summit
Partners, L.P. and/or any of its affiliated investment funds) acquires (i)
capital stock of the Company possessing the voting power under normal
circumstances to elect a majority of the Company’s board of directors (whether
by merger, consolidation or sale or transfer of the Company’s capital stock) or
(ii) all or substantially all of the Company’s assets determined on a
consolidated basis.

“Securities Act” shall mean the Securities Act
of 1933, as amended, and any successor statute.

 2
 

 

2.                                       Option.

(a)                                  Terms.  Your Option is for the purchase of up to
291,667 shares of Common Stock (the “Option Shares”) at a price per
share of $0.10 (the “Exercise Price”), payable upon exercise as set
forth in paragraph 2(b) below.  Your
Option shall expire at the close of business on November 3, 2013 (the “Expiration
Date”), subject to earlier expiration as provided in paragraph 3(c) below
or upon termination of your employment as provided in paragraph 4(b) below.
Your Option is not intended to be an “incentive stock option” within the
meaning of Section 422 of the Code.

(b)                                 Payment
of Option Price.  Subject to
paragraph 3 below, your Option may be exercised in whole or in part upon
payment of an amount (the “Option Price”) equal to the product of (i)
the Exercise Price multiplied by (ii) the number of Option Shares to be
acquired.  Payment shall be made in cash
(including check, bank draft or money order).

3.                                       Exercisability/Vesting.

(a)                                  Normal
Vesting.  Your Option may be
exercised only to the extent it has become vested as provided in this paragraph
3.  Upon the closing of the Initial
Public Offering, your Option shall immediately vest and become exercisable with
respect to 225,203 of the Option Shares, and your Option shall vest and become
exercisable with respect to the remaining Option Shares in twenty-four (24)
equal installments on each monthly anniversary of the closing date of the
Initial Public Offering (i.e., monthly “pro-rated” vesting), if and
only if you are, and have been, continuously employed by the Company from
the date of this Agreement through such monthly anniversary date.

(b)                                 Effect
on Vesting in Case of Employment Termination.  Notwithstanding paragraph 3(a) above, unless
otherwise determined by the Committee, if your employment with the Company
terminates prior to the Expiration Date for any reason other than for Cause,
your Option shall be vested and fully exercisable with respect to that portion
of your Option that was vested and exercisable on the date your employment with
the Company ceased and any portion of your Option that was not vested and
exercisable on such date shall expire and be forfeited.  If you are discharged for Cause, all of your
Option not previously exercised shall expire and be forfeited whether
exercisable or not.  The number of Option
Shares with respect to which your Option may be exercised shall not increase
once you cease to be employed by the Company.

(c)                                  Acceleration
of Vesting on Sale of the Company. 
If you have been continuously employed by the Company from the date of
this Agreement until a Sale of the Company, the portion of your outstanding
Option which has not become vested as of the date of such event shall
immediately vest and become exercisable with respect to 100% of the Option
Shares simultaneously with the consummation of the Sale of the Company.  In any event, any portion of your Option
which has not been exercised prior to or in connection with the Sale of the
Company shall expire and be forfeited, unless otherwise determined by the
Committee or the Board in its sole discretion.

 3
 

 

4.                                       Expiration
of Option.

(a)                                  Normal
Expiration.  In no event shall any
part of your Option be exercisable after the Expiration Date set forth in
paragraph 2(a) above.

(b)                                 Early
Expiration Upon Termination of Employment. Any portion of your Option that
was not vested and exercisable as of the date your employment with the Company
terminated shall expire and be forfeited on such date, and any portion of your
Option that was vested and exercisable as of the date your employment with the
Company terminated shall also expire and be forfeited; provided  that:
(i) if you die or become subject to any Disability, the portion of your Option
that is vested and exercisable shall expire 90 days from the date of your death
or Disability, but in no event after the Expiration Date, (ii) if you resign,
the portion of your Option that is vested and exercisable shall expire 45 days
from the date of your resignation, but in no event after the Expiration Date,
and (iii) if you are discharged other than for Cause, the portion of your
Option that is vested and exercisable shall expire 30 days from the date of
your discharge, but in no event after the Expiration Date.

5.                                       Procedure
for Exercise.  You may exercise all
or any portion of your Option, to the extent it has vested and is exercisable,
at any time and from time to time prior to its expiration, by delivering
written notice to the Company (to the attention of the Company’s Secretary) and
your written acknowledgement that you have reviewed and have been afforded an
opportunity to ask questions of management of the Company with respect to all financial
and other information provided to you regarding the Company, together with
payment of the Option Price in accordance with the provisions of paragraph 2(b)
above.  As a condition to any exercise of
your Option, you shall permit the Company to deliver to you all financial and
other information regarding the Company it believes necessary to enable you to
make an informed investment decision, and you shall make all customary
investment representations which the Company requires.

6.                                       Securities
Laws Restrictions and Other Restrictions on Transfer of Option Shares.  You represent and warrant that when you
exercise your Option you shall be purchasing Option Shares for your own account
and not on behalf of others.  You
understand and acknowledge that federal and state securities laws govern and
restrict your right to offer, sell or otherwise dispose of any Option Shares
unless your offer, sale or other disposition thereof is registered or qualified
under the Securities Act and applicable state securities laws, or in the
opinion of the Company’s counsel, such offer, sale or other disposition is
exempt from registration or qualification thereunder.  You agree that you shall not offer, sell or
otherwise dispose of any Option Shares in any manner which would: (i) require
the Company to file any registration statement with the Securities and Exchange
Commission (or any similar filing under state law) or to amend or supplement
any such filing or (ii) violate or cause the Company to violate the Securities
Act, the rules and regulations promulgated thereunder or any other state or
federal law.  You further understand that
the certificates for any Option Shares you purchase shall bear such legends as
the Company deems necessary or desirable in connection with the Securities Act
or other rules, regulations or laws.

 4
 

 

7.                                       Non-Transferability
of Option.  Your Option is personal
to you and is not transferable by you other than by will or the laws of descent
and distribution.  During your lifetime
only you (or your guardian or legal representative) may exercise your
Option.  In the event of your death, your
Option may be exercised only (i) by the executor or administrator of your
estate or the person or persons to whom your rights under the Option shall pass
by will or the laws of descent and distribution and (ii) to the extent that you
were entitled hereunder at the date of your death.

8.                                       Conformity
with Plan.  Your Option is intended
to conform in all respects with, and is subject to all applicable provisions
of, the Plan (which is incorporated herein by reference).  Inconsistencies between this Agreement and
the Plan shall be resolved in accordance with the terms of the Plan.  By executing and returning the enclosed copy
of this Agreement, you acknowledge your receipt of this Agreement and the Plan
and agree to be bound by all of the terms of this Agreement and the Plan.   Notwithstanding anything to the contrary in
this Agreement, the Company is not making, and you hereby acknowledge that the
Company has not made, any representations or warranties with respect to the tax
treatment of your Option or any tax consequences in connection therewith.

9.                                       Rights
of Participants.  Nothing in this
Agreement shall interfere with or limit in any way the right of the Company to
terminate your employment at any time (with or without Cause), nor confer upon
you any right to continue in the employ of the Company for any period of time
or to continue your present (or any other) rate of compensation, and in the
event of your termination of employment (including, but not limited to,
termination by the Company without Cause), any portion of your Option that was
not previously vested and exercisable shall expire and be forfeited, except as
otherwise provided herein.  Nothing in
this Agreement shall confer upon you any right to be selected again as a Plan
participant, and nothing in the Plan or this Agreement shall provide for any
adjustment to the number of Option Shares subject to your Option upon the
occurrence of subsequent events except as provided in paragraph 11 below.

10.                                 Withholding
of Taxes.  The Company shall be
entitled, if necessary or desirable, to withhold from you from any amounts due
and payable by the Company to you (or secure payment from you in lieu of
withholding) the amount of any minimum statutory withholding with respect to
any Option Shares issuable under this Plan, and the Company may defer such
issuance unless indemnified by you to its satisfaction.

11.                                 Adjustments.  In the event of (a) a reorganization,
recapitalization, stock dividend or stock split, or combination or other change
in the shares of Common Stock, the Board or the Committee shall make such
adjustments in the number and type of shares authorized by the Plan, the number
and type of shares covered by your Option and the Exercise Price specified
herein as may be determined to be appropriate and equitable, in order to
prevent the dilution or enlargement of rights under your Option, and (b) any
merger, consolidation or exchange of shares, the Board or the Committee may make
such adjustments in the number and type of shares authorized by the Plan, the
number and type of shares covered by your Option and the Exercise Price
specified herein as may be determined to be appropriate and equitable, in order
to prevent the dilution or enlargement of rights under your Option.  The issuance by the Company of shares of
stock of any class, or options or securities exercisable or convertible into 

 5
 

 

shares of stock of any class, for cash or property, or
for labor or services either upon direct sale, or upon the exercise of rights
or warrants to subscribe therefore, or upon exercise or conversion of other
securities, shall not affect, and no adjustment by reason thereof shall be made
with respect to, the number or price of shares of Common Stock then subject to
any Options.

12.                                 Restrictions
on Transfer.

(a)                                  Restrictive
Legend.  The certificates
representing the Option Shares shall bear the following legend:

“THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE
ORIGINALLY ISSUED ON NOVEMBER 3, 2003, HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR UNDER ANY STATE
SECURITIES LAWS AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND APPLICABLE STATE SECURITIES
LAWS OR AN EXEMPTION FROM REGISTRATION THEREUNDER.  THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER AND CERTAIN
OTHER AGREEMENTS SET FORTH IN AN OPTION AGREEMENT BETWEEN THE COMPANY AND
INGRID JACKEL DATED AS OF NOVEMBER 14, 2006, A COPY OF WHICH MAY BE OBTAINED BY
THE HOLDER HEREOF AT THE COMPANY’S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE.”

(b)                                 Opinion
of Counsel.  You may not sell,
transfer or dispose of any Option Shares (except pursuant to an effective
registration statement under the Securities Act) without first delivering to
the Company an opinion of counsel reasonably acceptable in form and substance
to the Company that registration under the Securities Act or any applicable
state securities law is not required in connection with such transfer.

(c)                                  Holdback.  You agree not to effect any public sale or
distribution of any equity securities of the Company, or any securities
convertible into or exchangeable or exercisable for such securities, during the
seven days prior to and the 180 days after the effectiveness of any
underwritten public offering, except as part of such underwritten registration
if otherwise permitted by the Company.

13.                                 Remedies.  The parties hereto shall be entitled to
enforce their rights under this Agreement specifically, to recover damages by
reason of any breach of any provision of this Agreement and to exercise all
other rights existing in their favor. 
The parties hereto acknowledge and agree that money damages would not be
an adequate remedy for any breach of the provisions of this Agreement and that
any party hereto shall be entitled to specific performance and/or injunctive
relief (without posting bond or other security) from any court of law or equity
of competent jurisdiction in order to enforce or prevent any violation of the
provisions of this Agreement.

 6
 

 

14.                                 Amendment.  Except as otherwise provided herein and
notwithstanding anything to the contrary in the Plan, any provision of this
Agreement may be amended or waived only with the prior written consent of the
Company and the Plan participants who have been granted options to purchase a
majority of the options under the Plan (based on the number of underlying
shares of Common Stock issuable upon the exercise of all such options)
theretofore granted under the Plan (unless you will be treated in a manner
different from other Plan participants, in which case your individual written
consent will also be required).

15.                                 Successors
and Assigns.  Except as otherwise
expressly provided herein, all covenants and agreements contained in this
Agreement by or on behalf of any of the parties hereto shall bind and inure to
the benefit of the respective successors and permitted assigns of the parties
hereto whether so expressed or not.

16.                                 Severability.  Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of this Agreement.

17.                                 Counterparts.  This Agreement may be executed simultaneously
in two or more counterparts (including by means of telecopied signature pages),
each of which shall constitute an original, but all of which taken together
shall constitute one and the same Agreement.

18.                                 Descriptive
Headings.  The descriptive headings
of this Agreement are inserted for convenience only and do not constitute a
part of this Agreement.

19.                                 Governing
Law.  The corporate law of Delaware
shall govern all questions concerning the relative rights of the Company and
its stockholders.  All other questions
concerning the construction, validity and interpretation of this Agreement
shall be governed by the internal law, and not the law of conflicts, of
California.

20.                                 Notices.  All notices, demands or other communications
to be given or delivered under or by reason of the provisions of this Agreement
shall be in writing and shall be deemed to have been given when delivered
personally or mailed by certified or registered mail, return receipt requested
and postage prepaid, to the recipient. 
Such notices, demands and other communications shall be sent to you and
to the Company at the addresses indicated below:

If to the Optionee:

Ingrid Jackel

2405 E. Orange Grove Blvd.

Pasadena, CA, 91104

If to the Company:

Physicians Formula Holdings, Inc.

 7
 

 

 

1055 West 8th Street

Azusa, California
91702

Attn:            Chief Executive Officer

Chief Financial Officer

Telecopy:  (626)
334-3395

With a copy to (which shall not constitute notice to the Company):

Summit Partners, L.P.

499 Hamilton Avenue

Palo Alto, California 94301

Attention:                                         Walter
G. Kortschak

                                                                                                Craig
D. Frances

Telephone:                                    (415)
321-1166

Telecopy:                                           (415)
321-1188

Kirkland & Ellis LLP

200 East Randolph Drive

Chicago, Illinois 60601

Attention:                                         Ted
H. Zook, P.C.

Telephone:                                    (312)
861-2000

Telecopy:                                           (312)
861-2200

or to such other address or to the attention of such
other person as the recipient party has specified by prior written notice to
the sending party.

21.                                 Entire
Agreement.  This Agreement and the
Plan constitute the entire understanding between you and the Company, and
supersedes all other agreements, whether written or oral, with respect to the
acquisition by you of Common Stock of the Company.  If there are any conflicts in terms and
conditions between this Agreement and the Plan, the terms and conditions of the
Plan shall govern, unless otherwise determined by the Committee or the Board.

22.                                 Code
Section 280G.  Notwithstanding any
provision of this Agreement to the contrary, if all or any portion of the
payments or benefits received or realized by you pursuant to this Agreement
either alone or together with other payments or benefits which you receive or
realize or are then entitled to receive or realize from the Company or any of
its affiliates would constitute a “parachute payment” within the meaning of
Section 280G of the Code and the regulations promulgated thereunder and/or any
corresponding and applicable state law provision, such payments or benefits
provided to you shall be reduced by reducing the amount of payments or benefits
payable to you pursuant to paragraph 3(c) of this Agreement to the extent necessary
so that no portion of such payments or benefits shall be subject to the excise
tax imposed by Section 4999 of the Code and any corresponding and/or applicable
state law provision; provided  that such reduction shall only be
made if, by reason of such reduction, your net after tax benefit shall exceed
the net after tax benefit if such reduction were not made.  For purposes of this paragraph, 

 8
 

 

“net after tax benefit” shall mean the sum of
(i) the total amount received or realized by you pursuant to this Agreement
that would constitute a “parachute payment” within the meaning of Section 280G
of the Code and any corresponding and applicable state law provision, plus (ii)
any other payments or benefits which you receive or realize or are then
entitled to receive or realize from the Company and any of its affiliates that
would constitute a “parachute payment” within the meaning of Section 280G of
the Code and any corresponding and applicable state law provision, less (iii)
the amount of federal and/or state income taxes payable with respect to the
payments or benefits described in (i) and (ii) above calculated at the maximum
marginal individual income tax rate for each year in which payments or benefits
shall be realized by you (based upon the rate in effect for such year as set
forth in the Code, and any corresponding applicable state law provisions at the
time of the first receipt or realization of the foregoing), less (iv) the
amount of excise taxes imposed with respect to the payments or benefits described
in (i) and (ii) above by Section 4999 of the Code and any corresponding and
applicable state law provision.

*     *    
*     *     *

 9

 

Please execute the extra copy of this Agreement in the
space below and return it to the Company’s Secretary at its executive offices
to confirm your understanding and acceptance of the agreements contained in
this Agreement.

	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
  PHYSICIANS FORMULA HOLDINGS, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Joseph J. Jaeger

  	
   

  
	
   

  	
   

  	
  Name: Joseph J. Jaeger

  
	
   

  	
   

  	
  Title:  Chief
  Financial Officer

  

 

Enclosures:                                  (1)                                  Extra
copy of this Agreement

(2)                                  Copy
of the Plan

The undersigned hereby acknowledges having read this
Agreement and the Plan and hereby agrees to be bound by all provisions set
forth herein and in the Plan. 

	
  Dated as of November 14, 2006

  	
  OPTIONEE

  
	
   

  	
   

  
	
   

  	
  /s/ Ingrid Jackel

  	
   

  
	
   

  	
  Name:  Ingrid
  Jackel

  

 

CONSENT

The undersigned spouse of Ingrid Jackel hereby
acknowledges that I have read the foregoing Stock Option Agreement and that I
understand its contents.  I am aware that
the Agreement imposes certain restrictions on the transfer of my spouse’s
interest in the Common Stock.  I agree
that my spouse’s interest in the Common Stock is subject to this Agreement and
any interest I may have in such Common Stock shall be irrevocably bound by this
Agreement and further that the my community property interest, if any, shall be
similarly bound by this Agreement.  I am
aware that the legal, financial and other matters contained in this Agreement
are complex and I am free to seek advice with respect thereto from independent
counsel.  I have either sought such
advice or determined after carefully reviewing this Agreement that I will waive
such right.

	
  

  	
   

  	
   

  
	
   

  	
  Name of Spouse:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Witness

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