Current Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 8-K
CURRENT REPORT
 
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
Date of Report (Date of earliest event reported): September 4, 2009
 
 
PHYSICIANS FORMULA HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

 
Delaware
001-33142
23-0340099
(State or other jurisdiction of incorporation)
(Commission File Number)
(IRS Employer Identification No.)

 
1055 West 8 th Street
Azusa, California 91702
(Address of principal executive offices, including Zip Code)
 
 
(626) 334-3395
(Registrant’’s telephone number, including area code)
 
 
(Former name or former address, if changed since last report)
 
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
 
 
 
 
Item 1.01. Entry into a Material Definitive Agreement.
 
Bridge Loan
 
On September 4, 2009, Physicians Formula, Inc. (“Physicians”), as borrower, and Mill Road Capital, L.P. (“Mill Road”), as lender, entered into an agreement (the “Bridge Loan Agreement”) for a second-priority senior secured bridge loan facility (the “Bridge Loan”) in the amount of $4.2 million.  Physicians used borrowings under the Bridge Loan to repay $2,935,051.42 of borrowings under the Credit Agreement (as defined below) with Union Bank, N.A. (formerly known as Union Bank of California, N.A.) (“Union Bank”), which includes approximately $2,435,000 of over advance to Physicians, and to fund short-term working capital requirements.  The Bridge Loan will mature on December 3, 2009 (the “Maturity Date”).  Interest will accrue on the Bridge Loan at a rate of 15% per annum and will be payable upon maturity of the Bridge Loan.
 
The Bridge Loan Agreement requires Physicians to comply with the same financial covenants that Physicians is required to comply with under its existing Credit Agreement with Union Bank.  The failure of Physicians to comply with those financial covenants will not, however, constitute a default or an event of default under the Bridge Loan Agreement or a breach thereof.  The Bridge Loan Agreement limits additional indebtedness that Physicians may incur, consistent with the limitations contained in the Credit Agreement, for as long as the Bridge Loan is outstanding.  The Bridge Loan Agreement contains customary events of default.  The failure of Physicians to comply with certain of the negative covenants in the Credit Agreement will result in an event of default under the Bridge Loan Agreement.  The Bridge Loan and accrued interest thereon may be prepaid without penalty at any time with 10 days prior written notice, subject to the terms of an Intercreditor and Subordination Agreement, entered into on September 4, 2009 (the “Intercreditor Agreement”), among Physicians, Mill Road and Union Bank.  The Bridge Loan Agreement does not require Physicians to make any mandatory prepayments.
 
Borrowings under the Bridge Loan Agreement are guaranteed by Physicians Formula Holdings, Inc. (the “Company”) and the domestic subsidiaries of Physicians (the “Guarantors”), and borrowings under the Bridge Loan Agreement are secured by a second-priority pledge of the capital stock of Physicians and its equity interests in each of its subsidiaries and substantially all of the assets of Physicians and its subsidiaries.
 
In addition, on September 4, 2009, the Company separately agreed with Mill Road that it would not enter into any non-senior secured financing transaction or take any steps in furtherance of obtaining any non-senior secured financing with any party other than Mill Road or Union Bank during the 45 day period commencing on September 4, 2009. A s of September 4, 2009, Mill Road was the beneficial owner of approximately 18% of the Company’s outstanding common stock.
 
The foregoing description of the material terms of the Bridge Loan Agreement is qualified by reference to the Bridge Loan Agreement, a copy of which is filed as Exhibit 10.1 hereto and incorporated herein by reference.
 
Concurrently with entering into the Bridge Loan Agreement, Physicians and the Guarantors entered into a Security Agreement in favor of Mill Road, providing for the grant of a security interest in all of the collateral described therein (including a pledge of all equity securities and rights to acquire equity securities of the Guarantors), a copy of which is filed as Exhibit 10.3 hereto and incorporated herein by reference, and the Company entered into a Pledge Agreement in favor of Mill Road, providing for the grant of a security interest in the capital stock of Physicians, a copy of which is filed as Exhibit 10.4 hereto and incorporated herein by reference.
 
Pursuant to the Intercreditor Agreement, the Bridge Loan is unconditionally subordinate in right of payment to the prior payment in full in cash of all obligations under the Credit Agreement and the liens securing obligations under the Bridge Loan are junior and unconditionally subordinate to the liens securing obligations under the Credit Agreement; provided, that the Bridge Loan may be repaid on the earlier of (i) the Maturity Date and (ii) the date on which New Financing (as defined below) is provided in full, including interest accrued thereon (not to exceed 15.0% per annum plus, if applicable, interest at the default rate contemplated by the Bridge Loan Agreement), so long as (a) no default has occurred and is continuing under the Credit Agreement at the time of such payment and certain other conditions have been met and (b) concurrently with such payment, Physicians receives an equity contribution or the proceeds of replacement subordinated debt in an amount not less than the amount required to satisfy the outstanding amounts under the Bridge Loan Agreement in full (“New Financing”).  The Intercreditor Agreement provides that Mill Road has the option to purchase all of the obligations under the Credit Agreement from Union Bank.  A copy of the Intercreditor Agreement is filed as Exhibit 10.5 hereto and incorporated by reference herein.
 
 
 
 
 
Amendment to Senior Credit Agreement
 
On September 4, 2009, Physicians entered into the Sixth Amendment to Credit Agreement (the “Sixth Amendment”), which amends that certain Credit Agreement, dated as of November 14, 2006, as amended on July 8, 2008, September 9, 2008, December 5, 2008, March 30, 2009 and July 29, 2009 (the “Credit Agreement”), by and among Physicians, the several banks and other lenders from time to time parties thereto and Union Bank, as administrative agent and a lender (the “agent” or “lender”), providing for an asset-based revolving credit facility.
 
Pursuant to the Sixth Amendment, the agent agreed to waive the event of default that resulted from an over advance under the Credit Agreement to Physicians from time to time since June 30, 2009.  As of the date of the Sixth Amendment, the over advance to Physicians was approximately $2,435,000.   The over advance automatically increased from approximately $575,000 on August 31, 2009 to approximately $2,435,000 on September 1, 2009 because the Company's borrowing base, which is calculated on a monthly basis, was negatively impacted by the Company's seasonal reduction in sales.  In connection with the Sixth Amendment, Physicians paid the lender a fee of $10,000 and related expenses.  The Sixth Amendment includes amendments to permit the incurrence of the Bridge Loan and the liens securing the obligations thereunder.  In addition, Physicians agreed to enter into documents on or before October 31, 2009 to establish a blocked account at Union Bank on terms as requested by Union Bank.  In accordance with the Sixth Amendment, Physicians used borrowings under the Bridge Loan to repay revolving loans under Credit Agreement to cause the borrowing base availability to be at least $500,000.
 
A copy of the Sixth Amendment is filed as Exhibit 10.6 hereto and incorporated by reference herein.
 
Item 2.03  Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant

The description of the Bridge Loan Agreement, which is included in Item 1.01 of this current report on Form 8-K, is incorporated by reference into this Item 2.03.
 
Item 9.01 Financial Statements and Exhibits

(d) Exhibits

Exhibit No.
 
Description
   
10.1
 
Term Loan Agreement, dated as of September 4, 2009, between Physicians Formula, Inc., as borrower, and Mill Road Capital, L.P., as lender.
10.2
 
Term Note, dated as of September 4, 2009, by Physicians Formula, Inc., in favor of Mill Road Capital, L.P.
10.3
 
Security Agreement, dated as of September 4, 2009, by Physicians Formula, Inc. and the subsidiaries of Physicians Formula, Inc. party thereto, in favor of Mill Road Capital, L.P.
10.4
 
Pledge Agreement, dated as of September 4, 2009, by Physicians Formula Holdings, Inc., in favor of Mill Road Capital, L.P.
10.5
 
Intercreditor and Subordination Agreement, dated as of September 4, 2009, by and among Mill Road Capital, L.P., Physicians Formula, Inc., Physicians Formula Holdings, Inc., the subsidiaries of Physicians Formula, Inc. party thereto and Union Bank, N.A., as administrative agent.
10.6
 
Sixth Amendment to Credit Agreement, dated as of September 4, 2009, by and among Physicians Formula, Inc., the several banks and other lenders from time to time parties to the Credit Agreement and Union Bank, N.A., as administrative agent.
10.7
 
Pledgor Guarantee, dated as of September 4, 2009, by Physicians Formula Holdings, Inc. in favor of Mill Road Capital, L.P.
10.8
 
Subsidiary Guarantee, dated as of September 4, 2009, by the subsidiaries of Physicians Formula, Inc. party thereto, in favor of Mill Road Capital, L.P.
 
 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 
PHYSICIANS FORMULA HOLDINGS, INC.
   
 
/s/ Jeff M. Berry
Date: September 11, 2009
Name:  Jeff M. Berry
 
Title:    Interim Chief Financial Officer
 
 
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Exhibit 10.1
 
 
 


TERM LOAN AGREEMENT





Dated as of September 4, 2009





between

PHYSICIANS FORMULA, INC.

and

MILL ROAD CAPITAL, L.P.
 
 

 
 
 
 

THIS LOAN AGREEMENT, THE OTHER LOAN DOCUMENTS (AS DEFINED BELOW), THE TERM LOAN (AS DEFINED BELOW) AND ALL OTHER OBLIGATIONS (AS DEFINED BELOW), AND THE LIENS CREATED BY THE LOAN DOCUMENTS ARE SUBJECT TO THAT CERTAIN INTERCREDITOR AND SUBORDINATION AGREEMENT DATED AS OF EVEN DATE HEREWITH AMONG PHYSICIANS FORMULA, INC., MILL ROAD CAPITAL, L.P., UNION BANK, N.A. AND THE OTHER PARTIES REFERRED TO THEREIN, AS SUCH AGREEMENT MAY BE AMENDED FROM TIME TO TIME IN ACCORDANCE WITH THE TERMS THEREOF.

TERM LOAN AGREEMENT

This Term Loan Agreement (the “ Loan Agreement ”) is made as of the 4th day of September, 2009 by and among PHYSICIANS FORMULA, INC. , a New York corporation (the “ Borrower ”) having its principal place of business at 1055 West 8 th Street, Azusa, CA 91702, and MILL ROAD CAPITAL, L.P. , a Delaware limited partnership (the “ Lender ”) having its principal place of business at Two Sound View Drive, Greenwich, CT 06830.

RECITALS

WHEREAS, Borrower has requested Lender provide a $4,200,000 term loan facility; and

WHEREAS, the term loan facility shall be used for working capital and for other general corporate purposes; and

WHEREAS, Lender is willing to provide such loan upon the terms and conditions hereinafter set forth.

NOW, THEREFORE, the parties, in consideration of their mutual covenants and agreements hereinafter set forth, and intending to be legally bound hereby, covenant and agree as follows:

1.             DEFINITIONS AND RULES OF INTERPRETATION .

1.1.             Definitions .  The following terms shall have the meanings set forth in this §1 or elsewhere in the provisions of this Loan Agreement referred to below:

Affiliate .  As to any Person, (a) any Person which, directly or indirectly, controls, is controlled by or is under common control with the first Person or (b) any Person who is a director, officer, shareholder, member or partners (i) of such Person, (ii) of a Subsidiary of such Person or (iii) of any Person described in the preceding clause (a).  “Control” of a Person means the power, directly or indirectly, (a) to vote 10% or more of the Capital Stock (on a fully diluted basis) of the Person having ordinary voting power for the election of directors, managing members or general partners (as applicable); or (b) to direct or cause the direction of the management and policies of the Person (whether by contract or otherwise).

Balance Sheet Date .  June 30, 2009.

Borrower .  As defined in the preamble hereto.

Borrower Affiliate .  An Affiliate of the Borrower, any Subsidiary of Borrower or any Guarantor.

Business Day .  Any day which is neither a Saturday or Sunday nor a legal holiday on which commercial banks are authorized or required to be closed in Greenwich, Connecticut, the State of New York or the State of California.

 
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Capital Stock .  Any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership or economic interests in a Person other than a corporation and any and all warrants, rights or options to purchase any of the foregoing.

Change of Control .  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) 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 the Guarantor; or (ii) the Guarantor is no longer the legal and beneficial owner of 100% of the Capital Stock of the Borrower; or (iii) the Borrower ceases to own 100% of the Capital Stock of each of its Subsidiaries.

Closing Date .  The first date on which the conditions set forth in §10 have been satisfied.

Code .  The Internal Revenue Code of 1986.

Collateral .  As defined in the Security Agreement.

Default .   An event that but for the giving of notice or the lapse of time or both would be an Event of Default.

Dollars or $ .  Dollars in lawful currency of the United States of America.

Domestic Subsidiary .  Each Subsidiary organized under the laws of the United States or any state thereof.

Eligible Assignee .  Either (i) an Affiliate of the Lender (who is under common control with such Lender) or (ii) any fund that is administered, managed, advised or underwritten by (a) the Lender or (b) an Affiliate of the Lender (who is under common control with such Lender).

Environmental   Laws . The Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act of 1980 as amended, the Superfund Amendments and Reauthorization Act of 1986, the Federal Clean Water Act, the Federal Clean Air Act, the Toxic Substances Control Act, or any state, local or foreign law, statute, regulation, ordinance, order or decree relating to health, safety or the environment.

Event of Default .  See §11.1.

Foreign Subsidiary .  Any Subsidiary other than a Domestic Subsidiary.

GAAP .  Generally accepted accounting principles in the United States in effect from time to time.

Governing Documents .  With respect to any Person, its certificate or articles of incorporation, certificate of formation, or, as the case may be, certificate of limited partnership, its by-laws, operating agreement or, as the case may be, partnership agreement or other constitutive documents.

Governmental Authority .  Any foreign, federal, state, regional, local, municipal or other government, or any department, commission, board, bureau, agency, public authority or instrumentality thereof, or any court or arbitrator.

 
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Guarantees .  The Guarantees dated as of the date hereof in favor of the Lender, substantially in the forms of Exhibit C-1 and C-2 hereto.

Guarantor .  Physicians Formula Holdings, Inc., a Delaware corporation and parent of the Borrower.

Hazardous Substances .  Any pollutant or contaminant as defined by 42 U.S.C. §9601(33) and any toxic substances, oil or hazardous materials or other chemicals or substances regulated by any Environmental Laws.

Incorporated Affirmative Covenants .  See §7.

Incorporated Negative Covenants .  See §8.

Indebtedness .  As to any Person at any time, any and all indebtedness, obligations or liabilities (whether matured or unmatured, liquidated or unliquidated, direct or indirect, absolute or contingent, or joint or several) of such Person for or in respect of:  (a) borrowed money, seller notes or seller holdbacks, (b) amounts raised under or liabilities in respect of any note purchase or acceptance credit facility, (c) reimbursement obligations (contingent or otherwise) under any letter of credit, currency swap agreement, interest rate swap, cap, collar or floor agreement or other interest rate management device, (d) any other transaction (including forward sale or purchase agreements, capitalized leases and conditional sales agreements) having the commercial effect of a borrowing of money entered into by such Person to finance its operations or capital requirements (but not including trade payables and accrued expenses incurred in the ordinary course of business which are not represented by a promissory note or other evidence of indebtedness and which are not more than 90 days past due), or (e) any guaranty of Indebtedness for borrowed money.

Interest Rate .  A per annum rate equal to the lesser of 15.0% or the maximum rate permitted by applicable law.

Lender .  Mill Road Capital, L.P. and any other Person who becomes an assignee of any rights and obligations of Lender pursuant to §12.

Lender’s Office .  The Lender’s office located at Two Sound View Drive, Greenwich, CT 06830, or at such other location as the Lender may designate from time to time.

Lender’s Special Counsel .  Foley Hoag LLP or such other counsel as may be approved by the Lender.

Lien .  Any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), charge, preference, priority or other security interest or preferential arrangement in the nature of a security interest of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement), any easement, right of way or other encumbrance on title to real property, any financing lease 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.

Loan Agreement .  This Loan Agreement, including the Schedules and Exhibits hereto.

Loan Documents .  This Loan Agreement, the Term Loan Note, the Pledge Agreement, the Security Agreement, the Guarantees, and any other instruments, certificates or documents delivered or

 
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contemplated to be delivered hereunder or thereunder or in connection herewith or therewith, as the same may be supplemented or amended from time to time in accordance herewith or therewith.

Loan Party . The Borrower, each of its Subsidiaries and the Guarantor.

Material Adverse Effect .  With respect to any event or occurrence of whatever nature (including any adverse determination in any litigation, arbitration or governmental investigation or proceeding) a material adverse effect on:

(a)           the business, properties, financial condition, assets or operations of the Borrower and its Subsidiaries, taken as a whole;

(b)           the ability of any Loan Party to perform their respective obligations under any of the Loan Documents; or

(c)           the validity, binding effect or enforceability of the other Loan Documents or the rights, remedies or benefits available to the Lender under any Loan Document.

Obligations .  The unpaid principal of and interest on (including, without limitation, interest accruing after the maturity of the Term Loan 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 Term Loan Note and all other indebtedness, obligations and liabilities of any of the Borrower and its Subsidiaries to the Lender or any of its Affiliates, individually or collectively, existing on the date of this Loan Agreement or arising thereafter, direct or indirect, joint or several, absolute or contingent, matured or unmatured, liquidated or unliquidated, secured or unsecured, arising by contract, operation of law or otherwise, in each case arising or incurred under, out of, or in connection with, this Loan Agreement or any of the other Loan Documents or any other instrument or document at any time evidencing any thereof or made, delivered or given in connection therewith, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses (including, without limitation, all reasonable fees and disbursements of counsel to the Lender that are required to be paid by the Borrower and its Subsidiaries pursuant to the terms of this Loan Agreement) or otherwise.

Participant .  See §12.3.

Person .  Any individual, firm, partnership, joint venture, corporation, limited liability company, association, trust, other unincorporated association, business, or other legal entity, and any Governmental Authority.

Pledge Agreement .  The Pledge Agreement, dated as of the Closing Date made by each of the Borrower’s shareholders and the Borrower in favor of the Lender, substantially in the form of Exhibit D hereto.

Related Parties .  With respect to any specified Person, such Person’s Affiliates and the respective directors, officers, employees, agents and advisors of such Person and such Person’s Affiliates.

Security Agreement .  That certain Security Agreement of even date herewith in substantially the form of Exhibit B hereto by and among the Borrower, the Subsidiary Guarantors and the Lender.

 
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Subordination Agreement .  That certain Intercreditor and Subordination Agreement dated as of September 4, 2009 among the Borrower, the Lender, UB (for the benefit of the Lenders under the UB Credit Agreement) and the other parties referred to therein, as such Subordination Agreement may be amended, modified or restated from time to time.

Subsidiary .  Any corporation, association, trust, or other business entity of which the designated parent shall at any time own directly or indirectly through a Subsidiary or Subsidiaries at least a majority (by number of votes) of the outstanding Voting Stock.

Subsidiary Guarantors .  Certain Subsidiaries of the Borrower party to the Guarantee substantially in the form of Exhibit C-2 hereto.

Taxes .  See §4.4.

Term Loan .  See §2.1.

Term Loan Commitment .  The sum of $4,200,000.

Term Loan Note .  See §2.2.

Term Loan Maturity Date .  December 3, 2009.

Voting Stock .  Stock or similar interests, of any class or classes (however designated), the holders of which are at the time entitled, as such holders, to vote for the election of a majority of the directors (or persons performing similar functions) of the corporation, association, trust or other business entity involved, whether or not the right so to vote exists by reason of the happening of a contingency.

UB .  Union Bank, N.A., formerly known as Union Bank of California, N.A.

UB Credit Agreement .  That certain Credit Agreement dated as of November 14, 2006 among the Borrower, the lenders party thereto and UB, as agent and a lender, including any notes, guarantees, collateral and security documents, instruments and agreements executed in connection therewith, and in each case as amended, restated, supplemented or otherwise modified from time to time before, on or after the date of this Loan Agreement.

Uniform Commercial Code .  The Uniform Commercial Code as in effect in the State of New York from time to time.

1.2.             Rules of Interpretation .

(a)           A reference to any document or agreement shall include such document or agreement as amended, modified or supplemented from time to time in accordance with its terms and the terms of this Loan Agreement.

(b)           The singular includes the plural and the plural includes the singular.

(c)           A reference to any law includes any amendment or modification to such law.

(d)           A reference to any Person includes its permitted successors and permitted assigns.

 
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(e)           Accounting terms not otherwise defined herein have the meanings assigned to them by GAAP applied on a consistent basis by the accounting entity to which they refer.

(f)           The words “include”, “includes” and “including” are not limiting.

(g)           All terms not specifically defined herein or by GAAP, which terms are defined in the Uniform Commercial Code, have the meanings assigned to them therein, with the term “instrument” being that defined under Article 9 of the Uniform Commercial Code.

(h)           Reference to a particular “§” refers to that section of this Loan Agreement unless otherwise indicated.

(i)           The words “herein”, “hereof”, “hereunder” and words of like import shall refer to this Loan Agreement as a whole and not to any particular section or subdivision of this Loan Agreement.

(j)           Unless otherwise expressly indicated, in the computation of periods of time from a specified date to a later specified date, the word “from” means “from and including,” the words “to” and “until” each mean “to but excluding,” and the word “through” means “to and including.”

(k)           This Loan Agreement and the other Loan Documents are the result of negotiation among, and have been reviewed by counsel to, among others, the Lender and the Borrower and are the product of discussions and negotiations among all parties.  Accordingly, this Loan Agreement and the other Loan Documents are not intended to be construed against the Lender merely on account of the Lender’s involvement in the preparation of such documents.

2.             THE TERM LOAN .

2.1.            Term Loan .   Subject to the terms and conditions set forth in this Loan Agreement and upon satisfaction of the conditions precedent referred to in §10 hereof, the Lender agrees to make a term loan (the “ Term Loan ”) to the Borrower on the Closing Date in the aggregate principal amount of the Term Loan Commitment.  On the Closing Date, subject to the terms and conditions of this Loan Agreement, the Term Loan shall be made available to Borrower no later than 2:00 p.m. Connecticut time by a deposit as instructed by the Borrower in writing in the full principal amount of the Term Loan.  Borrower shall not have the right to borrow, repay, and reborrow under this §2.

2.2.            Term Loan Note .  The Term Loan shall be evidenced by a promissory note of the Borrower in substantially the form of Exhibit A hereto (the “ Term Loan Note ”), dated as of the Closing Date and completed with appropriate insertions.  The Term Loan Note shall be payable to the order of the Lender in a principal amount equal to the Term Loan Commitment.  The principal amount as provided therein of the Term Note shall be payable in full on the Term Loan Maturity Date, along with all accrued interest as set forth in §2.3.

2.3.            Interest on Term Loan .  Except as otherwise provided in §4.5, interest on the outstanding principal amount of the Term Loan shall accrue at a fixed per annum rate equal to the Interest Rate and shall be payable on the Term Loan Maturity Date.

3.             REPAYMENT OF THE LOANS .

 
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3.1.            Maturity .   The Borrower promises to pay on the Term Loan Maturity Date, and there shall become absolutely due and payable on the Term Loan Maturity Date, the balance of the Term Loan outstanding on such date, together with any and all accrued and unpaid interest thereon.

3.2.            Optional Prepayments of Term Loan .   The Borrower shall have the right, at its election and with at least 10 days prior written notice to the Lender, to prepay the outstanding amount of the Term Loan, in whole or in part, at any time, without penalty or premium, provided that any such prepayment shall be accompanied by the payment of (a) all accrued interest on the principal amount to be prepaid through the date of prepayment and (b) all other amounts then due and payable hereunder.

4.             CERTAIN GENERAL PROVISIONS .

4.1.            Closing Fee .   There shall be no Closing Fee.

4.2.            Payments to Lender .   Except as otherwise provided herein, all payments of principal, interest, fees and any other amounts due hereunder or under any of the other Loan Documents shall be made on the due date thereof to the Lender in Dollars at the Lender’s Office or at such other place that the Lender may from time to time designate, in each case at or about 2:00 p.m. (Greenwich, Connecticut, time or other local time at the place of payment) and in immediately available funds.

4.3.            Computations .   All computations of interest on the Term Loan and of fees shall be based on a 365 or 366 day year and paid for the actual number of days elapsed.  Whenever a payment hereunder or under any of the other Loan Documents becomes due on a day that is not a Business Day, the due date for such payment shall be extended to the next succeeding Business Day, and interest shall accrue during such extension.

4.4.            Taxes .  All amounts payable hereunder shall be made free and clear of and without deduction for any present or future income, excise, stamp or franchise taxes and other taxes, fees, duties, withholdings or other charges of any nature whatsoever imposed by any taxing authority, but excluding franchise taxes and taxes imposed on or measured by the Lender’s net income or receipts (such non-excluded items being called “ Taxes ”).  In the event that any withholding or deduction from any payment to be made by the Borrower hereunder is required in respect of any Taxes pursuant to any applicable law, rule or regulation, then the Borrower will

(a)           pay directly to the relevant authority the full amount required to be so withheld or deducted;

(b)           promptly forward to the Lender an official receipt or other documentation satisfactory to the Lender evidencing such payment to such authority; and

(c)           pay to the Lender such additional amount or amounts as is necessary to ensure that the net amount actually received by the Lender will equal the full amount the Lender would have received had no such withholding or deduction been required.

Moreover, if any Taxes are directly asserted against the Lender with respect to any payment received by the Lender hereunder, the Lender may pay such Taxes and the Borrower will promptly pay such additional amount (including any penalties, interest or expenses) as is necessary in order that the net amount received by the Lender after the payment of such Taxes (including any Taxes on such additional amount) shall equal the amount the Lender would have received had not such Taxes been asserted.  A statement of the Lender as to any such additional amount or amounts (including calculations thereof in reasonable detail) shall, in the absence of manifest error, be conclusive and binding on the Borrower.

 
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If the Borrower fails to pay any Taxes when due to the appropriate taxing authority or fails to remit to the Lender the required receipts or other required documentary evidence, the Borrower shall indemnify the Lender for any incremental Taxes, interest or penalties that may become payable by the Lender as a result of any such failure.

4.5.            Interest After Default .  During the continuance of an Event of Default the principal of the   Term Loan shall, until such Event of Default has been cured or remedied or such Event of Default has been waived by the Lender, bear interest at a rate per annum equal to the lesser of (a) 2% above the rate of interest otherwise applicable to such Term Loan or (b) the maximum rate permitted by applicable law.

5.            SECURITY ARRANGEMENTS .

5.1.             Security Agreement, Pledge Agreement .  The payment and performance of the Obligations shall be secured by (i) the Collateral (including a pledge of all equity securities and rights to acquire equity securities of the Subsidiary Guarantors) pursuant to the Security Agreement among the Lender, the Borrower and the Subsidiary Guarantors, and (ii) a pledge of all equity securities and rights to acquire equity securities of the Borrower pursuant to the Pledge Agreement among the Lender, the Borrower and the Guarantor.

5.2.             Guarantees .  The payment and performance of the Obligations shall be guaranteed by the Guarantor and the Subsidiary Guarantors pursuant to the terms of the Guarantees.

6.             REPRESENTATIONS AND WARRANTIES .

6.1.            Corporate Authority.

6.1.1.             Incorporation; Good Standing .   The Borrower is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, and each of the Borrower’s Subsidiaries is a corporation (or similar business entity) duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or formation except where a failure to be so qualified would not have a Material Adverse Effect.  Each of the Borrower and its Subsidiaries (a) has all requisite corporate (or the equivalent company) power to own its property and conduct its business as now conducted and as currently contemplated, and (b) is in good standing as a foreign corporation (or similar business entity) and is duly authorized to do business in each jurisdiction where such qualification is necessary except where a failure to be so qualified would not have a Material Adverse Effect.

6.1.2.             Authorization .   The execution, delivery and performance of this Loan Agreement and the other Loan Documents to which the Borrower or any of its Subsidiaries is or is to become a party and the transactions contemplated hereby and thereby (a) are within the corporate (or the equivalent company) authority of such Person, (b) have been duly authorized by all necessary corporate (or the equivalent company) proceedings, (c) do not and will not conflict with or result in any breach or contravention of any provision of law, statute, rule or regulation to which the Borrower or any of its Subsidiaries is subject or any judgment, order, writ, injunction, license or permit applicable to the Borrower or any of its Subsidiaries, and (d) do not conflict with any provision of the Governing Documents of, or any agreement or other instrument binding upon, the Borrower or any of its Subsidiaries.

6.1.3.             Enforceability .   The execution and delivery of this Loan Agreement and the other Loan Documents to which the Borrower or any of its Subsidiaries is or is to become a party will result in valid and legally binding obligations of such Person enforceable against it in accordance

 
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with the respective terms and provisions hereof and thereof, except as enforceability is limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or fraudulent transfer or other laws relating to or affecting generally the enforcement of creditors’ rights and except to the extent that availability of the remedy of specific performance or injunctive relief is subject to the discretion of the court before which any proceeding therefor may be brought.
 

6.2.             Consents; Approvals .   No consent, approval 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 Loan Agreement, the Term Loan Note or the other Loan Documents other than those already obtained.

6.3.             Title to Properties; Leases .   As of the Closing Date the Borrower and its Subsidiaries own all of the assets reflected in the consolidated balance sheet of the Borrower and its Subsidiaries as at the Balance Sheet Date or acquired since that date (except property and assets sold or otherwise disposed of in the ordinary course of business since that date), subject to no Liens except Liens permitted or granted hereunder or under the UB Credit Agreement.

6.4.             Financial Condition .  The (i) audited consolidated financial statements of the Borrower and its Subsidiaries for the fiscal year ended December 31, 2008 and (ii) unaudited consolidated financial statements of the Borrower and its Subsidiaries for the six-month period ended as of the Balance Sheet Date, copies of which have heretofore been furnished to the Lender, 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, 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 obligation, contingent liability or liability for taxes, or any long-term lease or unusual forward or long-term 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.

6.5.             No Material Adverse Changes, etc .   Since the Balance Sheet Date there has been no event or occurrence which has had a Material Adverse Effect.

6.6.             No Event of Default .   No Default or Event of Default has occurred and is continuing, except those that have been waived.

6.7.             Holding Company and Investment Company Acts .   Neither the Borrower nor any of its Subsidiaries is a “holding company”, or a “subsidiary company” of a “holding company”, or an “affiliate” of a “holding company”, as such terms are defined in the Public Utility Holding Company Act of 1935; nor is it an “investment company”, or an “affiliated company” or a “principal underwriter” of an “investment company”, as such terms are defined in the Investment Company Act of 1940.

6.8.             Use of Proceeds .  The proceeds of the Term Loan shall be used for working capital and general corporate purposes, including repayment of up to $ 2,935,051.42 of the outstanding obligations under the UB Credit Agreement on the Closing Date.

6.9.             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 Lender by or on behalf of the Borrower or any Subsidiary in connection with the Loan Documents is in all material respects true, accurate and complete as of the date referred to therein, and no

 
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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 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.
 
7.             AFFIRMATIVE COVENANTS OF THE BORROWER .

The Borrower covenants and agrees that, so long as the Term Loan is outstanding, the Borrower shall and shall cause its Subsidiaries as necessary, to comply with all the affirmative covenants  set forth in Section 5 of the UB Credit Agreement (the “ Incorporated Affirmative Covenants ”).  The Lender shall be entitled to the benefits of Section 5 of the UB Credit Agreement to the same extent as if it were the “Agent” or a “Lender” under the UB Credit Agreement and shall be entitled to rely on any representations and warranties of the Borrower under or pursuant to such Section 5.

In addition, the Borrower shall provide the Lender with written notice within 2 days of any amendment, waiver or modification of UB Credit Agreement or any related agreements.

Notwithstanding the foregoing, in no event will any breach of, or failure to comply with, any Incorporated Affirmative Covenant by the Borrower or any other Loan Party result in an Event of Default hereunder or under any other Loan Document, nor will such breach or failure entitle the Lender to exercise any rights or remedies under the Loan Documents, seek any damages from any Loan Party or otherwise have any rights against the Loan Parties as a result thereof.

Within 5 Business Days after the Closing Date (or such later date as agreed to by the Lender in its sole discretion), the Borrower shall deliver to Lender a certificate of the Secretary of State of Delaware certifying as to the existence and good standing of Guarantor in Delaware.

8.             CERTAIN NEGATIVE COVENANTS OF THE BORROWER .

8.1.            UB Negative Covenants .   The Borrower covenants and agrees that, so long as the Term Loan is outstanding, the Borrower shall and shall cause its Subsidiaries as necessary, to comply with all the negative covenants set forth in Section 6 of the UB Credit Agreement (the “ Incorporated Negative Covenants ”).  The Lender shall be entitled to the benefits of Section 6 of the UB Credit Agreement to the same extent as if it were the “Agent” or a “Lender” under the UB Credit Agreement and shall be entitled to rely on any representations and warranties of the Borrower under or pursuant to such Section 6.

Notwithstanding the foregoing, in no event will any breach of, or failure to comply with, any Incorporated Negative Covenant (other than those specifically referred to in Section 11.1(c)) by the Borrower or any other Loan Party result in an Event of Default hereunder or under any other Loan Document, nor will such breach or failure entitle the Lender to exercise any rights or remedies under the Loan Documents, seek any damages from any Loan Party or otherwise have any rights against the Loan Parties as a result thereof.

 
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8.2.             Additional Negative Covenants .  Notwithstanding the generality of §8.1 above, the Borrower covenants and agrees that, so long as the Term Loan is outstanding:

8.2.1.             Restrictions on Indebtedness .   The Borrower will not, and will not permit any of its Subsidiaries to, create, incur, assume, guarantee or be or remain liable, contingently or otherwise, with respect to any Indebtedness, other than (a) the Obligations under the Loan Documents, (b) the Indebtedness under the UB Credit Agreement and (c) Indebtedness of the type described in subsections 6.2(b), (c), (d), (e), (f) and (i) of the UB Credit Agreement.

9.             RESERVED .

10.             CLOSING CONDITIONS .

The obligation of the Lender to execute this Loan Agreement and to make the Term Loan shall be subject to the satisfaction or waiver of the following conditions precedent   on or prior to the date of execution:

10.1.            Loan Documents .   Each of the Loan Documents required to be dated on or prior to the Closing Date shall have been duly executed and delivered by the respective parties thereto, shall be in full force and effect and shall be in form and substance reasonably satisfactory to the Lender.  The Lender shall have received a fully executed copy of each such document.

10.2.            Certified Copies of Governing Documents; Good Standing Certificates .   The Lender shall have received from each Loan Party, (a) a copy, certified by a duly authorized officer of such Person to be true and complete on the Closing Date, of each of its Governing Documents as in effect on such date of certification and (b) 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 incorporation of such Loan Party certifying as to the existence and good standing of such Loan Party in such state.

10.3.            Corporate or Other Action .   All corporate (or other) action necessary for the valid execution, delivery and performance by each Loan Party of this Loan Agreement and the other Loan Documents to which it is or is to become a party shall have been duly and effectively taken, and evidence thereof reasonably satisfactory to the Lender shall have been provided to the Lender.

10.4.            Incumbency Certificate .   The Lender shall have received from each Loan Party an incumbency certificate, dated as of the Closing Date, signed by a duly authorized officer of such Person, and giving the name and bearing a specimen signature of each individual who shall be authorized:  (a) to sign, in the name and on behalf of such Person, each of the Loan Documents to which such Person is or is to become a party; (b) to request the Term Loan; and (c) to give notices and to take other action on its behalf under the Loan Documents.

10.5.            UCC Search Results .   The Lender shall have received the results of UCC searches of each Loan Party indicating no Liens, other than Liens permitted or granted hereunder or under the UB Credit Agreement and otherwise in form and substance reasonably satisfactory to the Lender.

10.6.            Opinion of Counsel .   The Lender shall have received a favorable legal opinion addressed to the Lender, dated as of the Closing Date, in form and substance reasonably satisfactory to the Lender from Kirkland & Ellis LLP, counsel to the Loan Parties.

10.7.            Payment of Fees .   The Borrower shall have paid the reasonable fees and expenses of the Lender, including without limitation the fees and expenses of the Lender’s Special Counsel.

 
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10.8.            No Material Adverse Change .  The Lender shall be satisfied that there shall have occurred no material adverse change in the business, operations, assets, management, properties or financial condition of the Loan Parties, taken as a whole, since the Balance Sheet Date.

10.9.            Representations True; No Event of Default .   Each of the representations and warranties contained in this Loan Agreement, the other Loan Documents or in any document or instrument delivered to the Lender pursuant to or in connection with this Loan Agreement shall be true (except to the extent that Lender relies on the representations and warranties of the Loan Parties in the UB Credit Agreement, in which case such representations and warranties shall be true in all material respects) as of the date as of which they were made and shall also be true at and as of the time of the making of the Term Loan with the same effect as if made at and as of that time (except to the extent of changes resulting from transactions contemplated or permitted by this Loan Agreement and the other Loan Documents and changes occurring in the ordinary course of business that singly or in the aggregate are not materially adverse, and to the extent that such representations and warranties relate expressly to an earlier date) and no Default or Event of Default shall have occurred and be continuing.

10.10.          No Legal Impediment .   No change shall have occurred in any law or regulations thereunder or interpretations thereof that in the reasonable opinion of the Lender would make it illegal for the Lender to make the Term Loan.

10.11.          Proceedings and Documents .   All proceedings in connection with the transactions contemplated by this Loan Agreement, the other Loan Documents and all other documents incident thereto shall be reasonably satisfactory in substance and in form to the Lender and the Lender’s Special Counsel, and the Lender and such counsel shall have received all information and such counterpart originals or certified or other copies of such documents as the Lender may reasonably request.

11.             EVENTS OF DEFAULT; ACCELERATION; ETC .

11.1.            Events of Default and Acceleration .   If any of the following events (“ Events of Default ”) shall occur:

(a)           the Borrower shall fail to pay any principal of the Term Loan when the same shall become due and payable, whether at the stated date of maturity or any accelerated date of maturity or at any other date fixed for payment;

(b)           the Borrower or any of its Subsidiaries shall fail to pay any interest on the Term Loan, any fees, or other sums due hereunder or under any of the other Loan Documents when the same shall become due and payable, whether at the stated date of maturity or any accelerated date of maturity or at any other date fixed for payment;

(c)           the Borrower shall fail to comply with any of its covenants contained in §§6.2, 6.3, 6.4, 6.5 or 6.13 of the UB Credit Agreement;

(d)           any material representation or warranty of any Loan Party in this Loan Agreement or any of the other Loan Documents or in any other document or instrument delivered pursuant to or in connection with this Loan Agreement shall prove to have been false in any material respect upon the date when made or deemed to have been made or repeated;

(e)           all or any part of the obligations under the UB Credit Agreement shall have been accelerated or all or all or any part of such obligations shall otherwise become due prior to its stated maturity (excluding prepayments required pursuant to the terms thereof);

 
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(f)           the Borrower or any other Loan Party shall make an assignment for the benefit of creditors, or admit in writing its inability to pay or generally fail to pay its debts as they mature or become due, or shall petition or apply for the appointment of a trustee or other custodian, liquidator or receiver of the Borrower or any other Loan Party or of any substantial part of the assets of the Borrower or any other Loan Party or shall commence any case or other proceeding relating to the Borrower or any other Loan Party under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation or similar law of any jurisdiction, now or hereafter in effect, or shall take any action to authorize or in furtherance of any of the foregoing, or if any such petition or application shall be filed or any such case or other proceeding shall be commenced against the Borrower or any other Loan Party and the Borrower or any other Loan Party shall indicate its approval thereof, consent thereto or acquiescence therein or such petition or application shall not have been dismissed within 60 days following the filing thereof;

(g)           a decree or order is entered appointing any such trustee, custodian, liquidator or receiver or adjudicating the Borrower or any other Loan Party bankrupt or insolvent, or approving a petition in any such case or other proceeding, or a decree or order for relief is entered in respect of the Borrower or any other Loan Party in an involuntary case under federal bankruptcy laws as now or hereafter constituted;

(h)           if any of the Loan Documents shall be cancelled, terminated, revoked or rescinded by any Loan Party in each case otherwise than in accordance with the terms thereof or with the express prior written agreement, consent or approval of the Lender, or any action at law, suit or in equity or other legal proceeding to cancel, revoke or rescind any of the Loan Documents shall be commenced by or on behalf of any Loan Party party thereto or any of their respective stockholders, or any court or any other governmental or regulatory authority or agency of competent jurisdiction shall make a determination that, or issue a judgment, order, decree or ruling to the effect that, any one or more of the material Loan Documents is illegal, invalid or unenforceable in accordance with the terms thereof;

(i)           any Loan Party  shall be enjoined, restrained or in any way prevented by the order of any Governmental Authority from conducting any material part of its business, such order shall continue in effect for more than 30 days and such action could reasonably be expected to have a Material Adverse Effect; or

(j)           a Change of Control shall occur;

then, and in any such event, so long as the same may be continuing, the Lender may by notice in writing to the Borrower declare all amounts owing with respect to this Loan Agreement, the Term Loan Note and the other Loan Documents to be, and they shall thereupon forthwith become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Borrower; provided that in the event of any Event of Default specified in §§11.1(f) or 11.1(g), all such amounts shall become immediately due and payable automatically and without any requirement of notice from the Lender.

11.2.            Remedies .   In case any one or more of the Events of Default shall have occurred and be continuing, and whether or not the Lender shall have accelerated the maturity of the Term Loan, pursuant to §11.1, the Lender, if owed any amount with respect to the Term Loan, may proceed to protect and enforce any of its rights and remedies created pursuant to any Loan Document by suit in equity, action at law or other appropriate proceeding, whether for the specific performance of any covenant or agreement contained in this Loan Agreement and the other Loan Documents or any instrument pursuant to which the

 
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Obligations to the Lender are evidenced, including as permitted by applicable law the obtaining of the ex parte appointment of a receiver or other enforcement of any or all of the Liens, and, if such amount shall have become due, by declaration or otherwise, proceed to enforce the payment thereof or any other legal or equitable right of the Lender.  Presentment, demand, protest and, except as provided in this Loan Agreement, all other notices of any kind are hereby expressly waived by the Borrower.  No remedy herein conferred upon the Lender is intended to be exclusive of any other remedy and each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or any other provision of law.
 
11.3.            Distribution of Proceeds .   In the event that the Lender receives any monies in connection with the enforcement of any of the Loan Documents, such monies shall be distributed for application as follows:

(a)            First , to the payment of, or (as the case may be) the reimbursement of the Lender for or in respect of all reasonable costs, expenses, disbursements and losses which shall have been incurred or sustained by the Lender in connection with the collection of such monies by the Lender, for the exercise, protection or enforcement by the Lender of all or any of the rights, remedies, powers and privileges of the Lender under this Loan Agreement or any of the other Loan Documents or in support of any provision of adequate indemnity to the Lender against any taxes or liens which by law shall have, or may have, priority over the rights of the Lender to such monies;

(b)            Second , to all other Obligations (other than contingent indemnification Obligations for which no claim has been made and is outstanding) in such order or preference as the Lender may determine; and

(c)            Last , the balance, if any, after all of the Obligations have been paid in full, to Borrower or as otherwise required by Law.

12.             SUCCESSORS AND ASSIGNS .

12.1.            General Conditions .   The provisions of this Loan Agreement shall be binding upon and inure to the benefit of the parties hereto and their successors and assigns permitted hereby, except that the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of the Lender and the Lender may not assign or otherwise transfer any of its rights or obligations hereunder except (a) to an Eligible Assignee in accordance with the provisions of §12.2, (b) by way of participation in accordance with the provisions of §12.3, or (c) by way of pledge or assignment of a security interest subject to the restrictions of §12.5 (and any other attempted assignment or transfer by any party hereto shall be null and void).  Nothing in this Loan Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their successors and assigns permitted hereby, Participants to the extent provided in §12.3 and, to the extent expressly contemplated hereby, the Lender’s Affiliates) any legal or equitable right, remedy or claim under or by reason of this Loan Agreement or any of the other Loan Documents.

12.2.            Assignments .   The Lender may at any time assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Loan Agreement; provided that (a) each partial assignment shall be made as an assignment of a proportionate part of all the Lender’s rights and obligations under this Loan Agreement with respect to the Term Loan; and (b) the parties to each assignment shall execute and deliver to the Lender an assignment and acceptance agreement.

From and after the effective date specified in each assignment and acceptance agreement, the Eligible

 
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Assignee thereunder shall be a party to this Loan Agreement and, to the extent of the interest assigned by such assignment and acceptance agreement have the rights and obligations of the Lender under this Loan Agreement, and the Lender shall, to the extent of the interest assigned by such assignment and acceptance agreement, be released from its obligations under this Loan Agreement (and, in the case of an assignment and acceptance agreement covering all of the Lender’s rights and obligations under this Loan Agreement, the Lender shall cease to be a party hereto) but shall continue to be entitled to the benefits of §§4.2, 4.4 and §13.3 and the obligations of §13.4 notwithstanding such assignment.  Any assignment or transfer by the Lender of rights or obligations under this Loan Agreement that does not comply with this paragraph shall be treated for purposes of this Loan Agreement as a sale by the Lender of a participation in such rights and obligations in accordance with §12.3.

12.3.            Participations .   Lender may at any time, without the consent of, but with notice to, the Borrower, sell participations to any Person (other than a natural person) (each, a “ Participant ”) in all or a portion of the Lender’s rights and/or obligations under this Loan Agreement (including all or a portion of Term Loan owing to it); provided that (a) the Lender’s obligations under this Loan Agreement shall remain unchanged, (b) the Lender shall remain solely responsible to the Borrower for the performance of such obligations, and (c) the Borrower shall continue to deal solely and directly with the Lender in connection with the Lender’s rights and obligations under this Loan Agreement.  Any agreement or instrument pursuant to which the Lender sells such a participation shall provide that the Lender shall retain the sole right to enforce this Loan Agreement and to approve any amendment, modification or waiver of any provision of this Loan Agreement.  Subject to §12.4, the Borrower agrees that each Participant shall be entitled to the benefits of §§4.2 and 4.4 to the same extent as if it were the Lender and had acquired its interest by assignment pursuant to §12.2.  To the extent permitted by law, each Participant also shall be entitled to the benefits of §13.1   as though it were the Lender, provided such Participant agrees to be subject to §13.1 as though it were the Lender.

12.4.            Payments to Participants .   A Participant shall not be entitled to receive any greater payment under §§4.2 and 4.4 than the Lender would have been entitled to receive with respect to the participation sold to such Participant.

12.5.            Miscellaneous Assignment Provisions .   The  Lender may at any time grant a security interest in all or any portion of its rights under this Loan Agreement to secure obligations of the Lender; provided that no such grant shall release the Lender from any of its obligations hereunder, provide any voting rights hereunder to the secured party thereof, substitute any such secured party for the Lender as a party hereto or affect any rights or obligations of the Borrower or the Lender hereunder.

12.6.            New Term Loan Note .   Upon its receipt of an assignment and acceptance agreement executed by the parties to such assignment, together with the Term Loan Note subject to such assignment, the Lender shall give prompt notice thereof to the Borrower. Within five (5) Business Days after receipt of such notice, the Borrower, at its own expense and upon the written request of the Assignee, shall execute and deliver, in exchange for the surrendered Term Loan Note, a new Term Loan Note to the order of such Assignee in an amount equal to the amount assumed by such Assignee pursuant to such assignment and acceptance agreement and, if the Lender has retained some portion of its obligations hereunder, upon the written request of such Lender, a new Term Loan Note to the order of the Lender in an amount equal to the amount retained by it hereunder.  Such new Term Loan Note shall provide that it is a replacement for the surrendered Term Loan Note, shall be dated the effective date of such assignment and acceptance agreement and shall otherwise be in substantially the form of the assigned Term Loan Note.  The surrendered Term Loan Note shall be cancelled and returned to the Borrower.

13.             PROVISIONS OF GENERAL APPLICATIONS .

 
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13.1.            Setoff .   If an Event of Default shall have occurred and be continuing, the Lender and each of its Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by applicable law, to set off and apply any and all deposits (general or special, time or demand, provisional or final, in whatever currency) at any time held and other obligations (in whatever currency) at any time owing by such Lender or any such Affiliate to or for the credit or the account of Borrower or any other Loan Party against any and all of the obligations of Borrower or such Loan Party now or hereafter existing under this Loan Agreement or any other Loan Document to the Lender or any such Affiliate, irrespective of whether or not the Lender shall have made any demand under this Loan Agreement or any other Loan Document but only to the extent such obligations of Borrower or such Loan Party are due and owing.  The rights of the Lender and its Affiliates under this §13.1 are in addition to other rights and remedies (including other rights of setoff) that the Lender or its Affiliates may have.  The Lender agrees to notify Borrower promptly after any such setoff and application, provided that the failure to give such notice shall not affect the validity of such setoff and application.

13.2.            Expenses .   The Borrower agrees to pay or reimburse (a) the reasonable costs and out-of-pocket expenses of the Lender (including the Lender’s Special Counsel) of producing and reproducing this Loan Agreement, the other Loan Documents and the other agreements and instruments mentioned herein, (b) the reasonable fees, expenses and disbursements of the Lender’s Special Counsel or any local counsel (to the extent deemed reasonably necessary by the Lender) to the Lender incurred in connection with the preparation or interpretation of the Loan Documents and other instruments mentioned herein, any amendments, modifications, approvals, consents or waivers hereto or hereunder, or the cancellation of any Loan Document upon payment in full in cash of all of the Obligations or pursuant to any terms of such Loan Document for providing for such cancellation, (c) the reasonable costs and out-of-pocket fees, expenses and disbursements of the Lender or any of its Affiliates incurred by the Lender or such Affiliate in connection with the preparation, administration or interpretation of the Loan Documents and other instruments mentioned herein, including all examination charges, (d) all reasonable out-of-pocket expenses (including without limitation reasonable attorneys’ fees and costs and reasonable consulting, accounting, appraisal, investment banking and similar professional fees and charges) incurred by the Lender in connection with (i) the enforcement of or preservation of rights under any of the Loan Documents against the Borrower or any of its Subsidiaries or the administration thereof after the occurrence of a Default or an Event of Default and (ii) any litigation, proceeding or dispute whether arising hereunder or otherwise, in any way related to the Lender’s relationship with the Borrower or any of its Subsidiaries, and (e) any attorneys’ fees, costs and expenses paid by the Lender to UB in connection with the Subordination Agreement except to the extent directly caused by the gross negligence or willful misconduct of the Lender.  The covenants contained in this §13.2 shall survive payment or satisfaction in full of all other obligations.

13.3.            Indemnification .   The Borrower agrees to indemnify and hold harmless the Lender and its Affiliates from and against any and all claims, actions and suits whether groundless or otherwise, and from and against any and all liabilities, losses, damages and out-of-pocket expenses of every nature and character arising out of this Loan Agreement or any of the other Loan Documents or the transactions contemplated hereby including, without limitation, (a) any actual or proposed use by the Borrower or any of its Subsidiaries of the proceeds of the Term Loan, (b) the Borrower or any of its Subsidiaries entering into or performing this Loan Agreement or any of the other Loan Documents or (c) with respect to the Borrower and its Subsidiaries and their respective properties and assets, the violation of any Environmental Law, the presence, disposal, escape, seepage, leakage, spillage, discharge, emission, release or threatened release of any Hazardous Substances or any action, suit, proceeding or investigation brought or threatened with respect to any Hazardous Substances (including, but not limited to, claims with respect to wrongful death, personal injury or damage to property), in each case including, without limitation, the reasonable fees and disbursements of counsel incurred in connection with any such investigation, litigation or other proceeding, except to the extent that any of the foregoing are directly

 
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caused by the gross negligence or willful misconduct of the otherwise indemnified party.  In litigation, or the preparation therefor, the Lender and its Affiliates shall be entitled to select their own counsel and, in addition to the foregoing indemnity, the Borrower agrees to pay promptly the reasonable fees and expenses of such counsel.  If, and to the extent that the obligations of the Borrower under this §13.3 are unenforceable for any reason, the Borrower hereby agrees to make the maximum contribution to the payment in satisfaction of such obligations which is permissible under applicable law.  The covenants contained in this §13.3 shall survive payment or satisfaction in full of all other Obligations.
 
13.4.            Treatment of Certain Confidential Information .

13.4.1.               Disclosure .   The Lender and its Affiliates shall only have the right to disclose any non-public information supplied to it by any Loan Party pursuant to this Loan Agreement as follows: (a) to the extent required by statute, rule, regulation or judicial process, (b) to counsel for the Lender, (c) to any regulatory authority having jurisdiction over the Lender, or to auditors or accountants, (d) in connection with any litigation to which the Lender or any Affiliate is a party, or in connection with the enforcement of rights or remedies hereunder or under any other Loan Document, and (e) as reasonably required, to any actual or prospective assignee or participant; provided that, such transferee, assignee or participant agrees in writing to comply with the provisions of this Section 13.4.

13.4.2.               Prior Notification .   Unless prohibited by applicable law or court order, the Lender shall, prior to disclosure thereof, notify the Borrower of any request for disclosure of any non-public information by any governmental agency or representative thereof (other than any such request in connection with an examination of the financial condition of the Lender by such governmental agency) or pursuant to legal process.

13.4.3.               Other .   In no event shall the Lender be obligated or required to return any materials furnished to it or any Affiliate by any Loan Party.  The obligations of the Lender under this §13.4 shall supersede and replace the obligations of the Lender under any confidentiality letter or agreement in respect of this financing or otherwise signed and delivered by the Lender to the Borrower prior to the date hereof and shall be binding upon any assignee of, or purchaser of any participation in, any interest in the Term Loan from the Lender.

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

13.4.5.               Survival .   The covenants contained in this §13.4 shall survive termination of this Loan Agreement.

13.5.            Survival of Covenants, Etc .   All covenants, agreements, representations and warranties made herein, in any of the Loan Documents or in any documents or other papers delivered by or on behalf of any of the Loan Parties pursuant hereto shall be deemed to have been relied upon by the Lender, notwithstanding any investigation heretofore or hereafter made by any of them, and shall survive the making by the Lender of the Term Loan and shall continue in full force and effect so long as any amount due under this Loan Agreement or any of the other Loan Documents remains outstanding, and for such further time as may be otherwise expressly specified in this Loan Agreement.

13.6.            Notices .   Except as otherwise expressly provided in this Loan Agreement, all notices and other communications made or required to be given pursuant to this Loan Agreement shall be in writing

 
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and shall be delivered in hand, mailed by United States registered or certified first class mail, postage prepaid, sent by overnight courier, or sent by telegraph, telecopy, facsimile or telex and confirmed by delivery via courier or postal service, addressed as follows:
 
(a)           if to the Borrower, at 1055 West 8 th Street, Azusa, CA 91702, Attention:  Ingrid Jackel, Chief Executive Officer, Telephone: 626-334-3395, Fax: 626-812-9462 and to, Kirkland & Ellis LLP, 300 N. LaSalle Street, Suite 3200, Chicago, IL 60654, Attention: Louis R. Hernandez, Telephone: 312-862-2000, Fax: 312-862-2200, or at such other address for notice as the Borrower shall last have furnished in writing to the Person giving the notice.

(b)           if to the Lender, at Two Sound View Drive, Greenwich, CT 06830, Attention: Thomas Lynch, Managing Director, Telephone: 203-987-3501, Fax: 203-621-3280, and to, Foley Hoag LLP, 155 Seaport Boulevard, Boston, MA 02210, Attention: Peter M. Rosenblum, Esq., Telephone: 617-832-1000, Fax: 617-832-7000,   or at such other address for notice as the Lender shall last have furnished in writing to the Person giving the notice.

Any such notice or demand shall be deemed to have been duly given or made and to have become effective (i) if delivered by hand, overnight courier or facsimile to a responsible officer of the party to which it is directed, at the time of the receipt thereof by such officer or the sending of such facsimile and (ii) if sent by registered or certified first-class mail, postage prepaid, on the third Business Day following the mailing thereof.

13.7.            Governing Law .  THIS LOAN AGREEMENT AND, EXCEPT AS OTHERWISE SPECIFICALLY PROVIDED THEREIN, EACH OF THE OTHER LOAN DOCUMENTS ARE CONTRACTS UNDER THE LAWS OF THE STATE OF NEW YORK AND SHALL FOR ALL PURPOSES BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF SAID STATE OF NEW YORK (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW).  EACH PARTY HERETO AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF THIS LOAN AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR ANY FEDERAL COURT SITTING THEREIN AND CONSENTS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURT AND SERVICE OF PROCESS IN ANY SUCH SUIT BEING MADE UPON THE SUCH PARTY BY MAIL AT THE ADDRESS SPECIFIED IN §13.6.  EACH PARTY HERETO HEREBY WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH SUIT OR ANY SUCH COURT OR THAT SUCH SUIT IS BROUGHT IN AN INCONVENIENT COURT.

13.8.            Headings .   The captions in this Loan Agreement are for convenience of reference only and shall not define or limit the provisions hereof.

13.9.            Counterparts .   This Loan Agreement and any amendment hereof may be executed in several counterparts and by each party on a separate counterpart, each of which when executed and delivered shall be an original, and all of which together shall constitute one instrument.  In proving this Loan Agreement it shall not be necessary to produce or account for more than one such counterpart signed by the party against whom enforcement is sought.  Delivery by facsimile by any of the parties hereto of an executed counterpart hereof or of any amendment or waiver hereto shall be as effective as an original executed counterpart hereof or of such amendment or waiver and shall be considered a representation that an original executed counterpart hereof or such amendment or waiver, as the case may be, will be delivered.

 
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13.10.             Entire Agreement, Etc .   The Loan Documents and any other documents executed in connection herewith or therewith express the entire understanding of the parties with respect to the transactions contemplated hereby. Neither this Loan Agreement nor any term hereof may be changed, waived, discharged or terminated, except as provided in §13.12.

13.11.             Waiver of Jury Trial .  EACH PARTY HERETO HEREBY WAIVES ITS RIGHT TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS LOAN AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THEREUNDER OR THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY, INCLUDING ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS OR ACTIONS OF THE LENDER RELATING TO THE ADMINISTRATION OF THE TERM LOAN OR ENFORCEMENT OF THE LOAN DOCUMENTS AND AGREES THAT IT WILL NOT SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED.  Except as prohibited by law, each party hereto hereby waives any right it may have to claim or recover in any litigation referred to in the preceding sentence any special, exemplary, punitive or consequential damages or any damages other than, or in addition to, actual damages.  Each party hereto (a) certifies that no representative, agent or attorney of any other party hereto has represented, expressly or otherwise, that such other party hereto would not, in the event of litigation, seek to enforce the foregoing waivers and (b) acknowledges that the other party hereto has been induced to enter into this Loan Agreement, the other Loan Documents to which it is a party by, among other things, the waivers and certifications contained herein.

13.12.             Consents, Amendments, Waivers, Etc .   Any consent or approval required or permitted by this Loan Agreement to be given by the Lender may be given, and any term of this Loan Agreement, the other Loan Documents or any other instrument related hereto or mentioned herein may be amended, and the performance or observance by any Loan Party of any terms of this Loan Agreement, the other Loan Documents or such other instrument or the continuance of any Default or Event of Default may be waived (either generally or in a particular instance and either retroactively or prospectively) with, but only with, the written consent of the Lender; provided, that if there shall be more than one Lender hereunder, than only the written consent of the Lenders holding a majority of the Loans outstanding hereunder shall be required.  No waiver shall extend to or affect any obligation not expressly waived or impair any right consequent thereon.  No course of dealing or delay or omission on the part of the Lender in exercising any right shall operate as a waiver thereof or otherwise be prejudicial thereto.  No notice to or demand upon any Loan Party shall entitle such Loan Party to other or further notice or demand in similar or other circumstances.

13.13.             Severability .   The provisions of this Loan Agreement are severable and if any one clause or provision hereof shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction, and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision of this Loan Agreement in any jurisdiction.

13.14.             USA Patriot Act .  The Lender hereby notifies the Borrower that pursuant to the requirements of the USA PATRIOT Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the “ Act ”), it 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 the Lender to identify the Borrower in accordance with the Act.

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

 
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IN WITNESS WHEREOF , the undersigned have duly executed this Loan Agreement as a sealed instrument as of the date first set forth above.

 
PHYSICIANS FORMULA, INC.
 
         
         
         
 
By:
/s/ Jeffrey Rogers
 
   
Name:
Jeffrey Rogers
 
   
Title:
President
 
         
         
 
MILL ROAD CAPITAL, L.P.
 
         
         
         
 
By:
/s/ Charles Goldman
 
   
Name:
Charles Goldman
 
   
Title:
Managing Director
 

 
 
 

Exhibits

Exhibit A
Form of Term Loan Note
Exhibit B
Form of Security Agreement
Exhibit C-1
Form of Pledgor Guarantee
Exhibit C-1
Form of Subsidiary Guarantee
Exhibit D
Form of Pledge Agreement

 
Exhibit 10.2
 
MILL ROAD CAPITAL, L.P.
TERM NOTE
$4,200,000.00
September 4, 2009

For value received, the undersigned (hereinafter, the “ Borrower ”) hereby promises to pay in lawful money of the United States of America in immediately available funds to the order of Mill Road Capital, L.P., a Delaware limited partnership with a principal place of business at Two Sound View Drive, Greenwich, CT 06830 (hereinafter, the “ Lender ”), at the address of the Lender or at such other address as the holder hereof may designate, the aggregate principal sum of Four Million Two Hundred Thousand ($4,200,000.00) DOLLARS or, if less, the aggregate unpaid principal amount of all advances made by the Lender to the Borrower, together with all interest accruing thereon, pursuant to the Term Loan established pursuant to the terms and conditions of a certain Term Loan Agreement of even date herewith (as from time to time amended, restated, supplemented or otherwise modified, the “ Loan Agreement ”) by and among the Borrower and the Lender. This note (the “ Note ”) is issued pursuant to the Loan Agreement and is the “ Term Loan Note ” as defined therein. Capitalized terms used herein that are not defined shall have the same meanings assigned to such terms in the Loan Agreement.  Reference is made to the Loan Agreement, the terms of which are incorporated herein by reference, for a statement of all of the terms and conditions under which the Term Loan is made, this Note is delivered and this Note is to be repaid.  In the event of any inconsistency between the terms of the Loan Agreement and this Note, the terms of the Loan Agreement shall govern and control.

Interest shall accrue on the unpaid principal balance of this Note as set forth in the Loan Agreement.  Interest shall be computed on the basis of a 365- or 366-day year and paid for the actual number of days elapsed.  The entire unpaid principal balance on this Note and all accrued interest thereon remaining unpaid shall be immediately due and payable in full in immediately available funds on the Term Loan Maturity Date. Time is of the essence hereof.

Upon the occurrence and continuance of an Event of Default or after maturity or after judgment has been rendered on this Note, the unpaid principal balance of this Note shall accrue interest at a rate as set forth in Section 4.5 of the Loan Agreement.

The Borrower may prepay this Note, or portions hereof, as provided in the Loan Agreement, subject to the prepayment provisions set forth therein.

Upon the occurrence and continuance of an Event of Default, all payments, including any prepayments, shall, at the option of the Lender, be applied first to the payment of all costs and expenses incurred by the Lender arising out of the loan transaction evidenced by this Note, which have not been paid or reimbursed to the Lender, then to accrued interest on the unpaid principal balance of this Note, and then to the balance on account of the outstanding principal balance of this Note.

Upon the happening and continuance of any Event of Default, the Lender may (i) declare the then outstanding principal balance of this Note and all interest accrued thereon and all applicable late charges and surcharges and all other liabilities and obligations of the Borrower to the Lender to be immediately due and payable, or (ii) terminate any obligation of the Lender to

 
 
 
make advances pursuant to the Term Loan under the Loan Agreement, whereupon the same shall become immediately due and payable without presentment or demand for payment, notice of non-payment, protest or any other demand or notice of any kind, all of which are expressly waived by the Borrower, except as otherwise set forth in the Loan Agreement.  Failure to exercise either or both such options shall not constitute a waiver of the right to exercise the same in the event of any subsequent default. Notwithstanding the foregoing, upon the occurrence and continuance of an Event of Default described in Sections 11.1(f) or (g) of the Loan Agreement, (A) any obligation of the Lender to advance hereunder shall automatically terminate and (B) the outstanding principal balance of this Note and all interest accrued thereon and all applicable late charges and surcharges and all other liabilities and obligations of the Borrower to the Lender shall become automatically due and payable without presentment or demand for payment, notice of non-payment, protest or any other demand or notice of any kind, all of which are expressly waived by the Borrower.

This Note has been executed and delivered in accordance with the Loan Agreement, which is incorporated herein by reference and which sets forth further rights of the Lender and duties of the Borrower and any guarantor, endorser or surety of any obligation of the Borrower to the Lender with respect hereto. All advances under the Term Loan made by the Lender to the Borrower and payments of principal and interest received by the Lender shall be evidenced by notation on the books and records of the Lender, which shall be conclusive as to the amounts owing to the Lender pursuant to the Note, absent manifest error; provided, however, that the failure of the Lender to make any such notation with respect to any advance or principal or interest payment shall not limit or otherwise affect the obligations of the Borrower hereunder.

The Borrower agrees to pay all taxes levied or assessed upon the outstanding principal against any holder of this Note and to pay all costs, including reasonable attorneys’ fees, costs relating to the appraisal and/or valuation of assets and all other costs and expenses incurred in the collection, protection, preservation, defense, or enforcement of this Note or any guaranty of this Note or in any litigation arising out of the transactions of which this Note or any guaranty of this Note is a part.

Subject to the sharing provisions of the Loan Agreement and the Subordination Agreement, the Borrower hereby grants to the Lender a lien, security interest, and right of set off as security for all of the Borrower’s liabilities and obligations to the Lender, whether now existing or hereafter arising, upon and against all the deposits, credits, collateral and property of the Borrower now or hereafter in the possession, custody, or control of the Lender or any entity under the control of it or in transit to any of them. Upon the occurrence and continuance of an Event of Default, the Lender may set off the same or any part thereof and apply the same to any liability or obligation of the Borrower to the extent due and owing and regardless of the adequacy of any other collateral securing the loan evidenced hereby.   TO THE EXTENT PERMITTED BY LAW,  ANY AND ALL RIGHTS TO REQUIRE THE LENDER TO EXERCISE ITS REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE LIABILITIES PRIOR TO EXERCISING ITS RIGHT OF SET OFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER COLLATERAL OF THE BORROWER ARE HEREBY VOLUNTARILY, INTENTIONALLY, AND IRREVOCABLY WAIVED.
 
 
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THE LENDER AND THE BORROWER MUTUALLY HEREBY KNOWINGLY, VOLUNTARILY, INTENTIONALLY AND IRREVOCABLY WAIVE THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS NOTE, ANY DOCUMENT, INSTRUMENT OR AGREEMENT EVIDENCING, GOVERNING OR SECURING THIS NOTE, INCLUDING THE AFORESAID LOAN AGREEMENT OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTION OF ANY PARTY.  THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR THE LENDER TO ACCEPT THIS NOTE AND ENTER INTO THE LOAN TRANSACTION EVIDENCED BY THIS NOTE.

THE BORROWER WAIVES ANY RIGHT IT MAY HAVE TO PRIOR NOTICE OF AND A HEARING ON THE RIGHT OF ANY HOLDER OF THIS NOTE TO ANY REMEDY OR COMBINATION OF REMEDIES THAT ENABLES SAID HOLDER, BY WAY OF ATTACHMENT, FOREIGN ATTACHMENT, GARNISHMENT OR REPLEVIN, TO DEPRIVE BORROWER OF ANY OF THE COLLATERAL, AT ANY TIME PRIOR TO FINAL JUDGMENT IN ANY LITIGATION INSTITUTED IN CONNECTION WITH THIS NOTE.

All agreements between the Borrower and the Lender are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of acceleration of maturity of the indebtedness evidenced hereby or otherwise, shall the amount paid or agreed to be paid to the Lender for the use or the forbearance of the indebtedness evidenced hereby exceed the maximum permissible under applicable law. As used herein, the term “applicable law” shall mean the law in effect as of the date hereof; provided, however, that in the event there is a change in the law which results in a higher permissible rate of interest, then this Note shall be governed by such new law as of its effective date.  In this regard, it is expressly agreed that it is the intent of the Borrower and the Lender in the execution, delivery and acceptance of this Note to contract in strict compliance with the laws of the State of New York from time to time in effect.  If, under or from any circumstances whatsoever, fulfillment of any provision hereof at the time performance of such provision shall be due, shall involve transcending the limit of such validity prescribed by applicable law, then the obligation to be fulfilled shall automatically be reduced to the limits of such validity, and if under or from circumstances whatsoever the Lender should ever receive as interest an amount which would exceed the highest lawful rate, such amount which would be excessive interest shall be applied to the reduction of the principal balance evidenced hereby and not to the payment of interest. This provision shall control every other provision of all agreements between the Borrower and the Lender.

In accordance with the Loan Agreement, the Lender shall have the right to grant to one or more financial institutions (each, a “ Participant ”) participating interests in the Lender’s obligation to lend hereunder and/or any or all of the loan held by the Lender hereunder.  In the event of any such grant by the Lender of a participating interest to a Participant whether or not upon notice to the Borrower, the Lender shall remain responsible for the performance of its obligations hereunder and the Borrower shall continue to deal solely and directly with the Lender in connection with the Lender’s rights and obligations hereunder.  The Lender may furnish any information concerning the Borrower in its possession from time to time to prospective
 
 
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Participants, provided that the Lender shall require any such prospective Participant to agree in writing to maintain the confidentiality of such information in accordance with the Loan Agreement.

The Borrower waives diligence, demand, presentment for payment, notice of nonpayment, protest and notice of protest, and notice of any renewals or extensions of this Note, and all rights under any statute of limitations, and agrees that the time for payment of this Note may be extended by the Lender in accordance with the terms of the Loan Agreement, without impairing the Borrower’s liability hereon, and the Borrower further consents to the release of all or any part of the security for the payment hereof at the discretion of the Lender in accordance with the provisions of the Loan Agreement and the Subordination Agreement, or the release of any party liable for this obligation without affecting the liability of the other parties hereto. Any delay on the part of the Lender in exercising any right hereunder shall not operate as a waiver of any such right, and any waiver granted for one occasion shall not operate as a waiver in the event of any subsequent default.

If any provision of this Note shall, to any extent, be held invalid or unenforceable, then only such provision shall be deemed ineffective (and then only to the extent of such ineffectiveness) and the remainder of this Note shall not be affected.

This Note shall bind the heirs, executors, administrators, successors and assigns of the Borrower and shall inure to the benefit of the Lender, its successors and assigns.

 [Remainder of page intentionally left blank; signature page to follow.]

 
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This Note is executed as a sealed instrument and shall be governed by and construed in accordance with the laws of the State of New York.

WITNESS:
 
BORROWER:
 
         
   
Physicians Formula, Inc.
 
Print Name:
       
         
         
   
By:
/s/ Jeffrey Rogers  
   
Name: 
Jeffrey Rogers
 
   
Title:
President
 

 
Exhibit 10.3

THE RIGHTS OF THE BENEFICIARY OF THIS INSTRUMENT ARE SUBJECT AND SUBORDINATE TO THE LIENS SECURING ALL OBLIGATIONS OF THE GRANTORS TO THE “AGENT” AND THE “LENDERS” REFERRED TO IN THAT CERTAIN CREDIT AGREEMENT DATED AS OF NOVEMBER 14, 2006 WITH PHYSICIANS FORMULA, INC., PURSUANT TO THE TERMS OF AN INTERCREDITOR AND SUBORDINATION AGREEMENT DATED AS OF SEPTEMBER 4, 2009 AMONG UNION BANK, N.A., MILL ROAD CAPITAL, L.P., PHYSICIANS FORMULA HOLDINGS, INC. AND THE OTHER PARTIES REFERRED TO THEREIN.


SECURITY AGREEMENT
 
This SECURITY AGREEMENT (this “ Agreement ”) is dated as of September 4, 2009, and made by PHYSICIANS FORMULA, INC., a New York corporation (the “ Borrower ”) and each other entity listed on the signature pages hereof (with the Borrower, each a “ Grantor ” and collectively, the “ Grantors ”), whose obligations are joint and several, in favor of MILL ROAD CAPITAL, L.P. (the “ Lender ”).
 
 
RECITALS
 
A.           The Lender has entered into that certain Term Loan Agreement dated as of September 4, 2009 (said Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being called the “ Loan Agreement ”) with the Borrower.
 
B.           Concurrently herewith each Grantor other than the Borrower is executing a Guarantee dated as of even date herewith, in favor of the Lender, which Guarantee supports the Loan Agreement and the Lender’s loan to the Borrower will result in a direct and substantial benefit to such Grantors.
 
C.           It is a condition precedent to the extension of credit by the Lender under the Loan Agreement that each Grantor shall have executed and delivered this Agreement.
 
D.           Terms defined in the Loan Agreement and not otherwise defined herein have the same respective meanings when used herein, and the rules of interpretation set forth in Section 1.2 of the Loan Agreement are incorporated herein by reference.  Schedule and Exhibit references are to this Agreement unless otherwise specified, and each such Schedule and Exhibit is incorporated herein.  The words “include,” “includes” and “including” shall be deemed to be followed by the phrase “without limitation”.
 
 
AGREEMENT
 
NOW, THEREFORE, in order to induce the Lender to enter into the Loan Agreement and for other good and valuable consideration, the receipt and adequacy of which hereby is acknowledged, each Grantor hereby represents, warrants, covenants, agrees, assigns and grants as follows:
 
 
 
 

 
1.            Definitions .  Unless the context otherwise requires, terms defined in the Uniform Commercial Code of the State of New York (the “ Uniform Commercial Code ”) and not otherwise defined in this Agreement or in the Loan Agreement shall have the meanings defined for those terms in the Uniform Commercial Code.  In addition, the following terms shall have the meanings respectively set forth after each:
 
“ Asset Disposition ” shall have the meaning described to such term in the UB Credit Agreement.
 
“ Capital Stock ” means  any and all shares, interests, participation or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation), any and all warrants, options or rights to purchase or any other securities convertible into any of the foregoing.
 
“ Certificates ” means all certificates, instruments and other documents now or hereafter representing or evidencing any Pledged Securities or any Pledged Limited Liability Company Interests.
 
“ Collateral ” means all present and future right, title and interest of each Grantor in or to any property or assets whatsoever, whether now owned or existing or hereafter arising or acquired and wheresoever located, and all rights and powers of such Grantor to transfer any interest in or to any property or assets whatsoever, including, any and all of the following property:
 
(a)           All present and future accounts, accounts receivable, agreements, guarantees, contracts, leases, licenses, contract rights, health-care-insurance receivables, letter-of-credit rights and other rights to payment (collectively, the “ Accounts ”), together with all instruments, documents, chattel paper, security agreements, guaranties, undertakings, surety bonds, insurance policies, notes and drafts, all other supporting obligations, and all forms of obligations owing to such Grantor or in which such Grantor may have any interest, however created or arising;
 
(b)           All present and future general intangibles and payment intangibles; and all other forms of obligations owing to such Grantor or in which such Grantor may have any interest, however created or arising; all tax refunds of every kind and nature to which such Grantor now or hereafter may become entitled, however arising, all other refunds, all commitments to extend financing to such Grantor, and all deposits, goodwill, choses in action, trade secrets, computer programs, software, customer lists, trademarks, trade names, patents, licenses, copyrights, technology, processes, proprietary information, insurance proceeds and warranties including, the Copyrights, the Patents, the Marks and the goodwill of such Grantor’s business connected with and symbolized by the Marks;
 
(c)           All present and future demand, time, savings, passbook, deposit and like accounts (general or special) (collectively, the “ Deposit Accounts ”) in which such Grantor has any interest which is maintained with any bank, savings and loan association, credit union or like organization, including, each account listed on Schedule E (as such Schedule may be supplemented from time to time in accordance with the terms of this Agreement), and all money, cash and cash equivalents of such Grantor, whether or not deposited in any Deposit Account;
 
 
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(d)           All present and future books and records, including, books of account and ledgers of every kind and nature, all electronically recorded data relating to such Grantor or the business thereof, all receptacles and containers for such records, and all files and correspondence;
 
(e)           All present and future goods, including, (i) all presses, furnaces, ovens, conveyors, motors, pumps, containers, compressors, hoists, loaders, lifts, saws, mills and drills and (ii) all furniture, fixtures, furnishings, machinery, automobiles, trucks, other vehicles, spare parts, supplies, equipment, tooling, molds, patterns, dies and other tangible property owned by such Grantor and used, held for use or useful in connection with its business, wherever located, and all other goods used in connection with or in the conduct of such Grantor’s business or otherwise owned by such Grantor (collectively, the “ Equipment ”);
 
(f)           All present and future inventory and merchandise, including, all present and future goods held for sale or lease or to be furnished under a contract of service, all extruded aluminum and thermal management products, all raw materials, work in process and finished goods, all packing materials, supplies and containers relating to or used in connection with any of the foregoing, and all bills of lading, warehouse receipts and documents of title relating to any of the foregoing (collectively, the “ Inventory ”);
 
(g)          All present and future stocks, bonds, debentures, certificated and uncertificated securities, security entitlements, subscription rights, options, warrants, puts, calls, certificates, securities accounts, commodity contracts, commodity accounts, partnership interests, limited liability company interests, joint venture interests and investment and/or brokerage accounts, and all other investment property, including, the Certificates, the Pledged Securities, the Pledged Partnership Interests and the Pledged Limited Liability Company Interests, and all rights, preferences, privileges, dividends, distributions (in cash or in kind), redemption payments or liquidation payments with respect thereto;
 
(h)           All present and future accessions, appurtenances, components, repairs, repair parts, spare parts, replacements, substitutions, additions, issue and/or improvements to or of or with respect to any of the foregoing;
 
(i)           All other tangible and intangible personal property of such Grantor;
 
(j)           All rights, remedies, powers and/or privileges of such Grantor with respect to any of the foregoing; and
 
(k)          Any and all proceeds and products of the foregoing, including, all money, accounts, general intangibles, deposit accounts, documents, instruments, letter-of-credit rights, investment property, chattel paper, goods, insurance proceeds and any other tangible or intangible property received upon the sale or disposition of any of the foregoing;
 
provided , that the Collateral shall not include, and no Grantor grants to the Lender, a Lien in any lease, license or other contract which prohibits the assignment thereof or the grant of a security interest therein to the extent such provisions are not rendered ineffective pursuant to Sections 9-406, 9-407, 9-408 and 9-409 of the Uniform Commercial Code.
 
 
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“ Control Agreement ”:  means all control agreements, restricted account agreement or similar agreement or document, in each case in form and substance satisfactory to the Lender 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.
 
“ Copyrights ” means all:
 
(a)           copyrights, whether or not published or registered under the Copyright Act of 1976, 17 U.S.C. Section 101 et seq., as the same shall be amended from time to time, and any predecessor or successor statute thereto (the “ Copyright Act ”), and applications for registration of copyrights, and all works of authorship and other intellectual property rights therein, including, copyrights for computer programs, source code and object code data bases and related materials and documentation, and including the registered copyrights and copyright applications listed on Schedule B (as such Schedule may be supplemented from time to time in accordance with the terms of this Agreement), and (i) all renewals, revisions, derivative works, enhancements, modifications, updates, new releases and other revisions thereof, (ii) all income, royalties, damages and payments now and hereafter due and/or payable with respect thereto, including, payments under all licenses entered into in connection therewith and damages and payments for past or future infringements thereof, (iii) the right to sue for past, present and future infringements thereof and (iv) all of each Grantor’s rights corresponding thereto throughout the world;
 
(b)           rights under or interests in any copyright license agreements with any other party, whether any Grantor is a licensee or licensor under any such license agreement, including, the copyright license agreements listed on Schedule B (as such Schedule may be supplemented from time to time in accordance with the terms of this Agreement), and the right to use the foregoing in connection with the enforcement of the Lender’s rights under the Loan Documents; and
 
(c)           copyrightable materials now or hereafter owned by any Grantor, all tangible property embodying the copyrights or copyrightable materials described herein, and all tangible property covered by the licenses described in clause (b) hereof.
 
“ Domestic Subsidiary ” means each Subsidiary organized under the laws of the United States or any state thereof.
 
“ Foreign Subsidiary : means any Subsidiary other than a Domestic Subsidiary.
 
“ Limited Liability Company Acknowledgement ” shall have the meaning ascribed to it in Section 4(b) of this Agreement.
 
“ Limited Liability Company Assets ” means all assets, whether tangible or intangible and whether real, personal or mixed (including, all limited liability company capital and interests in other limited liability companies), at any time owned or represented by any Limited Liability Company Interests.
 
“ Limited Liability Company Interests ” means the entire limited liability company interest at any time owned by any Grantor in any Pledged Entity.
 
 
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“ Limited Liability Company Notice ” shall have the meaning ascribed to it in Section 4(b) of this Agreement.
 
“ Marks ” means all (i) trademarks, trademark registrations, interests under trademark license agreements, trade names, trademark applications, service marks, business names, trade styles, designs, logos and other source or business identifiers which are used in the United States or any state, territory or possession thereof, or in any other place, nation or jurisdiction anywhere in the world, including the trademarks, trademark registrations, applications, service marks, business names, trade styles, design logos and other source or business identifiers listed on Schedule B (as such Schedule may be supplemented from time to time in accordance with the terms of this Agreement), (ii) licenses pertaining to any such mark, whether any Grantor is a licensor or licensee including, the licenses listed on Schedule B (as such Schedule may be supplemented from time to time in accordance with the terms of this Agreement), (iii) all income, royalties, damages and payments now and hereafter due and/or payable with respect to any such mark or any such license, including, damages and payments for past, present or future infringements thereof, (iv) rights to sue for past, present and future infringements thereof, (v) rights corresponding thereto throughout the world, (vi) all product specification documents and production and quality control manuals used in the manufacture of products sold under or in connection with such marks, (vii) all documents that reveal the name and address of all sources of supply of, and all terms of purchase and delivery for, all materials and components used in the production of products sold under or in connection with such marks, (viii) all documents constituting or concerning the then current or proposed advertising and promotion by any Grantor, its subsidiaries or licensees of products sold under or in connection with such marks, including all documents that reveal the media used or to be used and the cost for all such advertising and (ix) renewals and proceeds of any of the foregoing.
 
“ Patents ” means all (i) letters patent, design patents, utility patents, inventions and trade secrets, all patents and patent applications in the United States Patent and Trademark Office, and all interests under patent license agreements, including the inventions and improvements described and claimed therein, including those letters patent, design patents, utility patents, inventions, trade secrets, patents, patent applications and patent license agreements listed on Schedule B (as such Schedule may be supplemented from time to time in accordance with the terms of this Agreement), (ii) licenses pertaining to any patent whether any Grantor is a licensor or licensee, (iii) income, royalties, damages and payments now and hereafter due and/or payable under and with respect thereto, including, damages and payments for past, present or future infringements thereof, (iv) rights to sue for past, present and future infringements thereof, (v) rights corresponding thereto throughout the world and (vi) the reissues, divisions, continuations, renewals, extensions and continuations-in-part of any of the foregoing.
 
“ Pledged Collateral ” means the Certificates, the Pledged Securities, the Pledged Partnership Interests and the Pledged Limited Liability Company Interests.  Notwithstanding the foregoing, the security interest granted herein shall not include, and the term Pledged Collateral shall not include, equity interests in any direct Foreign Subsidiary of any Grantor in excess of 65% of the Capital Stock having voting power in such Foreign Subsidiary (unless a greater amount of such equity interests shall not cause such Grantor to incur material adverse tax consequences under Section 956 of the Code).
 
 
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“ Pledged Entity ” means each limited liability company set forth in Schedule A (as such Schedule may be supplemented from time to time in accordance with the terms of this Agreement), together with any other limited liability company in which any Grantor may have an interest at any time.
 
“ Pledged Limited Liability Company Interests ” means all interests in each Pledged Entity held by any Grantor, including those Limited Liability Company Interests identified in Schedule A (as such Schedule may be supplemented from time to time in accordance with the terms of this Agreement), including (i) all the capital thereof and such Grantor’s interests in all profits, losses, Limited Liability Company Assets and other distributions in respect thereof; (ii) all other payments due or to become due to such Grantor in respect of such Limited Liability Company Interests; (iii) all of such Grantor’s claims, rights, powers, privileges, authority, options, security interests, liens and remedies in respect of such Limited Liability Company Interests; (iv) all of such Grantor’s rights to exercise and enforce every right, power, remedy, authority, option and privilege relating to such Limited Liability Company Interests; and (v) all other property delivered in substitution for or in addition to any of the foregoing and all certificates and instruments representing or evidencing such other property received, receivable or otherwise distributed in respect of or in exchange for any or all thereof.
 
“ Pledged Partnership Interests ” means all interests in any partnership or joint venture held by each Grantor, including those partnerships and/or joint ventures identified in Schedule A (as such Schedule may be supplemented from time to time in accordance with the terms of this Agreement) and all dividends, cash, instruments and other properties from time to time received, to be received or otherwise distributed in respect of or in exchange for any or all of such interests.
 
“ Pledged Securities ” means all shares of capital stock of any issuer in which any Grantor has an interest, including, those shares of stock identified in Schedule A (as such Schedule may be supplemented from time to time in accordance with the terms of this Agreement) and all dividends, cash, instruments and other properties from time to time received, to be received or otherwise distributed in respect of or in exchange for any or all of such shares.
 
“ Subordination Agreement ” means that certain Intercreditor and Subordination Agreement dated as of September 4, 2009 among the Borrower, the Lender, UB (for the benefit of the Lenders under the UB Credit Agreement) and the other parties referred to therein, as such Subordination Agreement may be amended, modified or restated from time to time.
 
2.       Creation of Security Interest .  Each Grantor hereby collaterally assigns and pledges to the Lender, and grants to the Lender a security interest in and to, all right, title and interest of such Grantor in and to all presently existing and hereafter acquired Collateral.
 
3.       Security for Obligations .  This Agreement and the pledges made and security interests granted herein secure the prompt payment, in full in cash, and full performance of, the Obligations.
 
 
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4.       Delivery of Pledged Collateral.
 
(a)           With respect to any provision in this Agreement which requires any Grantor to deliver possession or control of any negotiable document, instrument, certificated securities, promissory notes, deposit accounts, security accounts, commodity accounts, and letter of credit rights or other Collateral requiring possession or control thereof in order to perfect the security interest of the Lender therein under the Uniform Commercial Code, no such delivery or giving of control to the Lender shall be required to the extent such Collateral is required to be delivered to or control is required to be given to UB in accordance with the UB Credit Agreement, it being understood that the UB is acting as agent and bailee for the benefit of the Lender pursuant to the terms of the Subordination Agreement.
 
(b)           Each Certificate shall, on (i) the Closing Date (with respect to Certificates existing on such date) and (ii) on the date of receipt or acquisition by any Grantor (with respect to Certificates received or acquired after the Closing Date), be delivered to and held by the Lender and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed undated endorsements, instruments of transfer or assignment in blank, all in form and substance reasonably satisfactory to the Lender, provided that, the Grantors shall not be obligated to deliver any of the foregoing to the extent inconsistent with the Subordination Agreement.
 
(c)           With respect to each Limited Liability Company Interest, on (i) the Closing Date (with respect to Limited Liability Company Interests existing on such date) and (ii) the date of acquisition by any Grantor (with respect to Limited Liability Company Interests acquired after the Closing Date) of any Limited Liability Company Interest, a notice substantially in the form set forth in Schedule G (the “ Limited Liability Company Notice ”) shall be appropriately completed and delivered to each Pledged Entity, notifying each Pledged Entity of the existence of this Agreement and such Grantor shall have received and delivered to the Lender a copy of such Limited Liability Company Notice, along with an acknowledgment in the form set forth in Schedule G (the “ Limited Liability Company Acknowledgment ”), duly executed by the relevant Pledged Entity.
 
(d)           The Lender shall have the right, upon the occurrence and during the continuance of an Event of Default, without notice to any Grantor, to transfer to or to direct each Grantor or any nominee of such Grantor to register or cause to be registered in the name of the Lender or any of its nominees any or all of the Pledged Collateral.  In addition, the Lender shall have the right at any time to exchange certificates or instruments representing or evidencing Pledged Collateral for certificates or instruments of smaller or larger denominations.
 
5.       Further Assurances.
 
(a)           At any time and from time to time, at the written request of the Lender, each Grantor shall execute and deliver to the Lender, at such Grantor’s expense, all such financing statements and other instruments, certificates and documents in form and substance reasonably satisfactory to the Lender, and perform all such other acts as shall be necessary or as the Lender shall reasonably request to fully perfect or protect or maintain, when filed, recorded, delivered or performed, the Lender’s security interests granted pursuant to this Agreement or to enable the
 
 
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Lender and the Lenders to exercise and enforce their rights and remedies hereunder with respect to any Collateral.  Without limiting the generality of the foregoing, each Grantor shall:  (i) at the reasonable request of the Lender, mark conspicuously each document included in the inventory and each other contract relating to the Accounts, and all chattel paper, instruments and other documents and each of their records pertaining to the Collateral with a legend, in form and substance reasonably satisfactory to the Lender, indicating that such document, contract, chattel paper, instrument or Collateral is subject to the security interests granted hereby, provided that, the Grantors shall not be obligated to deliver any of the foregoing to the extent inconsistent with the Subordination Agreement; (ii) if any Account or contract or other writing relating thereto shall be evidenced by a promissory note or other instrument with an individual face value in excess of $50,000 or with an aggregate value in excess of $250,000, deliver and pledge to the Lender such note and/or other instrument duly endorsed and accompanied by duly executed undated instruments of transfer or assignment, all in form and substance reasonably satisfactory to the Lender; (iii) execute and file, and authorize the filing of (where permitted), such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as the Lender may request, in order to perfect and preserve, with the required priority, the security interests granted, or purported to be granted hereby; (iv) upon such Grantor’s registration, or application therefor, of any copyright under the Copyright Act, at the Lender’s request execute and deliver to the Lender for recordation and filing in the United States Copyright Office a copy of this Agreement or another appropriate copyright mortgage document in form and substance satisfactory to the Lender; (v) upon such Grantor’s registration, or application therefor, of any Patent or Mark, at the Lender’s request execute and deliver to the Lender for recordation and filing in the United States Patent and Trademark Office a copy of this Agreement or another appropriate patent or trademark mortgage document, as applicable, in form and substance satisfactory to the Lender; and (vi) at the request of the Lender, cause Control Agreements to be executed by all parties necessary to establish “control” under the Uniform Commercial Code with respect to all deposit accounts, investment property, letter-of-credit rights and electronic chattel paper of such Grantor.
 
(b)           At any time and from time to time, the Lender shall be entitled to file and/or record any or all such financing statements, instruments and documents held by it, and any or all such further financing statements, documents and instruments, relative to the Collateral or any part thereof in each instance, and to take all such other actions as the Lender may deem appropriate to perfect and to maintain perfected the security interests granted herein.
 
(c)           Each Grantor hereby (i) authorizes the Lender to file, one or more financing or continuation statements and amendments thereto that describe the Collateral as “all assets” or words of similar effect and that contain any other information required by Part 5 of Article 9 of the Uniform Commercial Code for the sufficiency or filing office acceptance of any financing statement, continuation statement or amendment, including, without limitation, whether such Grantor is an organization, the type of organization and any organization number issued to such Grantor and (ii) ratifies such authorization to the extent that the Lender has filed any such financing statements, continuation statements, or amendments thereto, prior to the date hereof.  A carbon, photographic or other reproduction of this Agreement or any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement where permitted by law.
 
 
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(d)           Each Grantor shall furnish to the Lender, concurrently with the delivery of quarterly financial statements, schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Lender may reasonably request or as required by the Loan Agreement.  Upon any Grantor’s obtaining any rights or interests in any Deposit Accounts, securities accounts or other investment property (other than that referred to on Schedule A ), such Grantor shall, in addition to all other acts required to be performed in respect thereof pursuant to this Agreement, supplement Schedule E to reflect such additional Deposit Accounts, securities accounts or other investment property.  Upon any Grantor’s publication or registration, or application for registration, of any copyright under the Copyright Act, such Grantor shall, in addition to all other acts required to be performed in respect thereof pursuant to this Agreement, supplement Schedule B to reflect the publication or registration of such copyright or application therefor.  Upon any Grantor’s obtaining any rights or interests in any Marks, such Grantor shall, in addition to all other acts required to be performed in respect thereof pursuant to this Agreement, supplement Schedule B to reflect such additional Marks.  Upon any Grantor’s obtaining any rights or interests in any Patents, such Grantor shall, in addition to all other acts required to be performed in respect thereof pursuant to this Agreement, supplement Schedule B to reflect such Patents.  Upon any Grantor’s receipt or acquisition of any additional shares of capital stock of any Person, any additional partnership interests in any partnership or joint venture or any additional Limited Liability Company Interests, such Grantor shall, in addition to all other acts required to be performed in respect thereof pursuant to this Agreement, supplement Schedule A to reflect such additional Pledged Collateral.  Upon any Grantor’s obtaining any rights or interests in any chattel paper or electronic chattel paper, such Grantor shall, in addition to all other acts required to be performed in respect thereof pursuant to this Agreement, promptly notify the Lender of such rights or interests.
 
(e)           With respect to any Collateral with an individual value of $50,000 consisting of certificates of title or the like as to which the Lender’s security interest need be perfected by, or the priority thereof need be assured by, notation on the certificate of title pertaining to such Collateral, each Grantor will (i) promptly notify the Lender of the acquisition thereof and (ii) at the request of the Lender, cause such security interest to be noted on such certificate of title.
 
(f)           With respect to any Collateral consisting of certificates of stock, securities, instruments, partnership or joint venture interests, interests in limited liability companies, or the like, each Grantor hereby consents and agrees that, upon the occurrence and during the continuance of an Event of Default, the issuers of, or obligors on, any such Collateral, or any registrar or transfer agent or trustee for any such Collateral, shall, subject to the Subordination Agreement, be entitled to accept the provisions of this Agreement as conclusive evidence of the right of the Lender to effect any transfer or exercise any right hereunder or with respect to any such Collateral subject to the terms hereof, notwithstanding any other notice or direction to the contrary heretofore or hereafter given by such Grantor or any other Person to such issuers or such obligors or to any such registrar or transfer agent or trustee.
 
6.       Voting Rights; Dividends; Etc .  So long as no Event of Default shall have occurred and be continuing:
 
(a)            Voting Rights .  Each Grantor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Pledged Securities, the Pledged Partnership Interests
 
 
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and the Pledged Limited Liability Company Interests (including, all voting, consent, administration, management and other rights and remedies under any partnership agreement or any operating agreement or otherwise with respect to the Pledged Securities, the Pledged Partnership Interests or the Pledged Limited Liability Company Interests), or any part thereof, for any purpose not inconsistent with the terms of this Agreement, the Loan Agreement or the other Loan Documents; provided , however , that such Grantor shall not exercise any such right if it would result in a Default.
 
(b)            Dividend and Distribution Rights .  Subject to the terms of the Loan Agreement, each Grantor shall be entitled to receive and to retain and use any and all dividends or distributions paid in respect of the Pledged Securities, the Pledged Partnership Interests or the Pledged Limited Liability Company Interests; provided , however , that any and all
 
(i)     non-cash dividends or distributions in the form of capital stock, certificated limited liability company interests, instruments or other property received, receivable or otherwise distributed in respect of, or in exchange for, any Pledged Securities, Pledged Partnership Interests or Pledged Limited Liability Company Interests,
 
(ii)    dividends and other distributions paid or payable in cash in respect of any Pledged Securities, Pledged Partnership Interests or Pledged Limited Liability Company Interests in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in-surplus, and
 
(iii)   cash paid, payable or otherwise distributed in redemption of, or in exchange for, any Pledged Securities, Pledged Partnership Interests or Pledged Limited Liability Company Interests,
 
shall forthwith be delivered to the Lender to be held as Collateral or applied to the Obligations in accordance with the Loan Agreement, as the Lender may elect; and, if received by such Grantor, shall be received in trust for the benefit of the Lender, be segregated from the other property of such Grantor and forthwith be delivered to the Lender in the same form as so received (with any necessary endorsements).
 
7.       Rights as to Pledged Collateral During Event of Default .  When an Event of Default has occurred and is continuing:
 
(a)            Voting, Dividend and Distribution Rights .  At the option of the Lender, all rights of any Grantor to exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to Section 6(a) above, and to receive the dividends and distributions which it would otherwise be authorized to receive and retain pursuant to Section 6(b) above, shall cease, and all such rights shall thereupon become vested in the Lender who shall thereupon have the sole right to exercise such voting and other consensual rights and to receive and to hold as Pledged Collateral such dividends and distributions.
 
(b)            Dividends and Distributions Held in Trust .  All dividends and other distributions which are received by any Grantor contrary to the provisions of Section 7(a) of this Agreement shall be received in trust for the benefit of the Lender, shall be segregated from other funds of
 
 
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such Grantor and forthwith shall be paid over to the Lender as Collateral in the same form as so received (with any necessary endorsements).
 
(c)            Registration .  Determination by the Lender to exercise its right to sell pursuant to Section 16 hereof any or all of the Pledged Securities without registering the Pledged Securities under the Securities Act of 1933 shall not, by the sole fact of such sale, be deemed to be commercially unreasonable.
 
After any and all Events of Default have been cured or waived, each Grantor shall have the right to exercise the voting and other consensual rights it would otherwise be entitled to exercise pursuant to Section 6(a) hereof and the Loan Agreement and receive the distributions which it would be authorized to receive and retain pursuant to Section 6(b) hereof and the Loan Agreement.
 
8.       Irrevocable Proxy .  Each Grantor hereby revokes (except for any proxies granted in favor of UB) all previous proxies with regard to the Pledged Securities, the Pledged Partnership Interests (if such interests are limited partnership interests) and the Pledged Limited Liability Company Interests and appoints the Lender as its proxyholder and attorney-in-fact to (i) attend and vote at any and all meetings of the shareholders of the corporation(s) which issued the Pledged Securities (whether or not transferred into the name of the Lender), and any adjournments thereof, held on or after the date of the giving of this proxy and to execute any and all written consents, waivers and ratifications of shareholders of such corporation(s) executed on or after the date of the giving of this proxy with the same effect as if such Grantor had personally attended the meetings or had personally voted its shares or had personally signed the written consents, waivers or ratification, and (ii) attend and vote at any and all meetings of the members of the Pledged Entities (whether or not such Pledged Limited Liability Company Interests or Pledged Partnership Interests are transferred into the name of the Lender), and any adjournments thereof, held on or after the date of the giving of this proxy and to execute any and all written consents, waivers and ratifications of the Pledged Entities executed on or after the date of the giving of this proxy with the same effect as if such Grantor had personally attended the meetings or had personally voted on its Limited Liability Company Interests or Pledged Partnership Interests or had personally signed the consents, waivers or ratifications; provided , however , that the Lender as proxyholder and attorney-in-fact shall have rights hereunder only upon the occurrence and during the continuance of an Event of Default.  Each Grantor hereby authorizes the Lender to substitute another Person (which Person shall be a successor to the rights of the Lender hereunder or a nominee appointed by the Lender to serve as proxyholder) as the proxyholder and, upon the occurrence or during the continuance of any Event of Default, hereby authorizes and directs the proxyholder to file this proxy and the substitution instrument with the secretary of the appropriate corporation, limited partnership or limited liability company.  This proxy is coupled with an interest and is irrevocable until such time each Commitment and each Letter of Credit has expired and all Obligations have been paid in full.
 
9.       Copyrights .
 
(a)            Royalties .  Each Grantor hereby agrees that the use by the Lender of the Copyrights as authorized hereunder in connection with the Lender’s exercise of their rights and
 
 
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remedies hereunder shall be without any liability for royalties or other related charges from the Lender to such Grantor.
 
(b)            Restrictions on Future Agreements .  Subject to the terms hereof and of the Loan Agreement, each Grantor shall be permitted to manage, license and administer its Copyrights in such manner as such Grantor in its reasonable business judgment deems desirable; provided , however , that such Grantor will not, without the Lender’s prior written consent, (i) abandon any Copyright in which such Grantor now owns or hereafter acquires any rights or interests, (ii) enter into any license agreements or (iii) fail to take any action, or permit any others (including licensees) to fail to take any action, which would customarily be taken by a Person in the same business and in similar circumstances as such Grantor.
 
(c)            Duties of Grantor .  Each Grantor agrees to:  (i) prosecute in accordance with its reasonable business judgment any copyright application included in the Copyrights, (ii) upon an Event of Default, make application for registration of such uncopyrighted but copyrightable material owned by such Grantor as the Lender reasonably deems appropriate, (iii) place notices of copyright on all copyrightable property produced or owned by such Grantor embodying the Copyrights and cause its licensees to do the same, (iv) file and prosecute opposition and cancellation proceedings in its reasonable business judgment, and (v) take all action necessary in its reasonable business judgment to preserve and maintain all of such Grantor’s rights in those Copyrights that are or shall be necessary in the operation of such Grantor’s business, including making timely filings for renewals and extensions of registered Copyrights and diligently monitoring unauthorized use thereof.  Any expenses incurred in connection with the foregoing shall be borne by the Grantors.  Each Grantor shall give proper statutory notice in connection with its use of each Copyright to the extent necessary for the protection thereof.  Each Grantor shall notify the Lender of any suits it commences to enforce any Copyright and shall provide the Lender with copies of any documents requested by the Lender relating to such suits.  The Lender shall not have any duty with respect to the Copyrights other than to act lawfully and without gross negligence or willful misconduct.  Without limiting the generality of the foregoing, the Lender shall not be under any obligation to take any steps necessary to preserve rights in the Copyrights against any other party, but the Lender may do so at its option upon the occurrence and during the continuance of an Event of Default, and all reasonable expenses incurred in connection therewith shall be for the account of such Grantor and shall be added to the Obligations.
 
10.       Patents and Marks .
 
(a)            Royalties .  Each Grantor hereby agrees that any rights granted hereunder to the Lender with respect to Patents and Marks shall be applicable to all territories in which such Grantor has the right to use such Patents and Marks, from time to time, and without any liability for royalties or other related charges from the Lender to such Grantor.
 
(b)            Restrictions on Future Agreements .  Subject to the terms hereof and of the Loan Agreement, each Grantor shall be permitted to manage, license and administer its Patents and Marks in such manner as such Grantor in its reasonable business judgment deems desirable; provided , however , that such Grantor will not, without the Lender’s prior written consent, (i) abandon any Patent or Mark in which such Grantor now owns or hereafter acquires any rights
 
 
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or interests, (ii) enter into any license agreements or (iii) fail to take any action, or permit any others (including licensees) to fail to take any action, which would customarily be taken by a Person in the same business and in similar circumstances as such Grantor.
 
(c)            Duties of Grantor .  Each Grantor agrees to: (i) prosecute in accordance with its reasonable business judgment any patent application or trademark application included in the Patents or Marks, (ii) upon an Event of Default, make application on unpatented but patentable inventions owned by such Grantor and on unregistered Marks, as the case may be, as the Lender reasonably deems appropriate, (iii) file and prosecute opposition and cancellation proceedings in its reasonable business judgment and (iv) take all action necessary in its reasonable business judgment to preserve and maintain all rights in those Patents and Marks that are or shall be necessary in the operation of such Grantor’s business, including, making timely filings for renewals and extensions of any Patents and Marks and diligently monitoring unauthorized use thereof.  Any expenses incurred in connection with the foregoing shall be borne by such Grantor.  Each Grantor shall give proper statutory notice in connection with its use of each Mark and each Patent to the extent necessary for the protection thereof.  Each Grantor shall notify the Lender of any suit it commences to enforce any Patent or Mark and shall provide the Lender with copies of any documents requested by the Lender relating to such suit.  The Lender shall not have any duty with respect to the Patents and Marks other than to act lawfully and without gross negligence or willful misconduct.  Without limiting the generality of the foregoing, the Lender shall not be under any obligation to take any steps necessary to preserve rights in the Patents and Marks against any other party, but the Lender may do so at its option upon the occurrence and during the continuance of an Event of Default, and all reasonable expenses incurred in connection therewith shall be for the account of such Grantor and shall be added to the Obligations.
 
11.       Grantor’s Representations and Warranties .  Each Grantor represents and warrants as follows:
 
(a)           (i)  Schedule C sets forth each location at which (A) inventory and/or equipment is located or (B) such Grantor conducts business and, with respect to each such location, whether such Grantor is duly qualified and in good standing under the laws of such location; (ii) the chief executive office of such Grantor, where such Grantor keeps its records concerning the Collateral and the chattel paper evidencing the Collateral, is located at the address set forth for such Grantor on Schedule D ; (iii) all records concerning any Accounts and all originals of all contracts and other writings which evidence any Accounts are located at the addresses listed on Schedule D ; (iv) such Grantor has exclusive possession and control of the Equipment and the Inventory, except as set forth on Schedule C ; (v) such Grantor’s exact legal name, and the place of formation of such Grantor, are as set forth in the preamble to this Agreement; (vi) each trade name or other fictitious name under which such Grantor conducts business, or has conducted business at any time during the five years immediately preceding the Closing Date, is set forth on Schedule 3.6 to the UB Credit Agreement; and (vii) such Grantor’s state organizational identification number, if any, is set forth on Schedule F .
 
(b)           Each Grantor is the legal and beneficial owner of the Collateral free and clear of all Liens except for Liens permitted by Section 6.3 of the UB Credit Agreement and Liens created hereby.  Each Grantor has the power, authority and legal right to grant the security interests in the Collateral purported to be granted hereby, and to execute, deliver and perform
 
 
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this Agreement.  The pledge of the Collateral pursuant to this Agreement creates a valid security interest in the Collateral.  Upon the filing of appropriate financing statements in the filing offices set forth on Schedule F (and the payment of the applicable filing fees), the recordation of appropriate documentation with the United States Copyright Office and the United States Patent and Trademark Office, as applicable, the execution of Control Agreements with respect to the deposit accounts and the securities accounts of such Grantor, the giving of a Limited Liability Company Notice to the Pledged Entities and the delivery to the Lender of the Certificates, as the case may be, the Lender will have a perfected security interest (except for Liens permitted by Section 6.3 of the UB Credit Agreement) in the Collateral to the extent a security interest in such Collateral can be perfected by such filings, recordations, the giving of such notices and the delivery of such Certificates.
 
(c)           The Pledged Securities and the Pledged Limited Liability Company Interests have been duly authorized and validly issued and are fully paid and nonassessable.  All of the Pledged Securities and the Pledged Limited Liability Company Interests are in certificated form and are securities (as contemplated by Article 8 of the Uniform Commercial Code).
 
(d)           No consent of any Person, including, any partner in a partnership with respect to which such Grantor has pledged its interest as a Pledged Partnership Interest or any member in a Pledged Entity, is required for the pledge by such Grantor of the Collateral.
 
(e)           Subject to Section 5(d), the Pledged Securities described on Schedule A constitute (i) all of the shares of capital stock of any Person owned by such Grantor and (ii) that percentage of the issued and outstanding shares of the respective issuers thereof indicated on Schedule A , and there is no other class of shares issued and outstanding of the respective issuers thereof except as set forth on Schedule A .  Subject to Section 5(d), the Pledged Partnership Interests described on Schedule A constitute (i) all of the partnerships or joint ventures in which such Grantor has an interest and (ii) such Grantor’s respective percentage interests in each such partnership or joint venture are as set forth on such Schedule A , and there is no other class of interests therein issued and outstanding except as set forth on Schedule A .  Subject to Section 5(d), the Pledged Limited Liability Company Interests described on Schedule A constitute (i) all of the Limited Liability Company Interests of such Grantor and (ii) such Grantor’s respective percentage interests in each such Pledged Entity are as set forth on Schedule A , and there is no other class of interests therein issued and outstanding except as set forth on Schedule A .
 
(f)           No authorization, approval or other action by, and no notice to or filing with, any Governmental Authority (other than such authorizations, approvals and other actions as have already been taken and are in full force and effect) is required (A) for the pledge of the Collateral or the grant of the security interest in the Collateral by such Grantor hereby or for the execution, delivery or performance of this Agreement by such Grantor, or (B) for the exercise by the Lender of the voting rights in the Pledged Securities, the Pledged Partnership Interests and the Pledged Limited Liability Company Interests or of any other rights or remedies in respect of the Collateral hereunder except as may be required in connection with any disposition of Collateral consisting of securities by laws affecting the offering and sale of securities generally.
 
(g)           Such Grantor does not own, is not a licensee of, nor has such Grantor applied for any Copyrights, Marks or Patents, other than those set forth on Schedule B .  Except as set forth
 
 
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on Schedule B , none of such Copyrights, Marks or Patents has been registered with any Governmental Authority, nor has an application for such registration been made.
 
(h)           Subject to Section 5(d), Schedule E sets forth (i) all of such Grantor’s deposit accounts, (ii) all of such Grantor’s securities accounts and other investment property (other than that referred to on Schedule A ) and (iii) all letters of credit issued for the benefit of such Grantor.  Such Grantor has no chattel paper or electronic chattel paper.
 
(i)            Such Grantor does not own or lease any vehicle having a value in excess of $50,000.
 
12.       Grantor’s Covenants .  In addition to the other covenants and agreements set forth herein and in the other Loan Documents, each Grantor covenants and agrees as follows:
 
(a)           Such Grantor will take all reasonable steps to preserve and protect the Collateral.
 
(b)           Such Grantor will promptly notify the Lender in writing in the event of any material damage to the Collateral from any source whatsoever.
 
(c)           Such Grantor will (i) not establish any location of Inventory or Equipment not listed on Schedule C , (ii) not move its principal place of business, chief executive office or any other office listed on Schedule D , (iii) not adopt, use or conduct business under any trade name or other corporate or fictitious name not disclosed on Schedule 3.6 to the UB Credit Agreement, (iv) not acquire or open, as applicable, any deposit account or securities account, or acquire any letter of credit issued for the benefit of such Grantor, (v) not create any chattel paper without placing a legend on the chattel paper acceptable to the Lender indicating the Lender’s security interest therein, (vi) not change its legal name, its place of incorporation, formation or organization (as applicable) or its state organizational identification number, from those specified in the preamble to this Agreement and Schedule F ; (vii) not permit any issuer of Pledged Securities to issue any securities in uncertificated form or seek to convert all or any part of any Pledged Securities into uncertificated form (as contemplated by Article 8 of the Uniform Commercial Code), (viii) not permit any issuer of Pledged Limited Liability Company Interests to issue any Limited Liability Company Interests in uncertificated form, seek to convert all or any part of any Limited Liability Company Interests into uncertificated form or render any Limited Liability Company Interests to no longer be a security (as contemplated by Article 8 of the Uniform Commercial Code) or (ix) not permit any issuer of Pledged Securities or any Pledged Entity to issue any additional Capital Stock or membership interests or any other rights or options with respect thereto, as applicable, other than to such Grantor, except, in each case set forth in clause (i) – (ix) above, upon not less than 30 days’ prior written notice to the Lender and such Grantor’s prior compliance with all applicable requirements of Section 5 hereof necessary to perfect the Lender’s security interests hereunder, and in each case subject to the terms of the Loan Agreement.
 
(d)           Such Grantor shall not permit any Equipment or Inventory to be in the possession of a third party unless written notice of the Lender’s security interest therein has been given to such third party, and such third party has acknowledged in writing that it is holding such Collateral for the benefit of the Lender, such notice and acknowledgement to be in form
 
 
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acceptable to the Lender; provided , however , that no such notice and acknowledgment shall be required to the extent that the aggregate fair market value of the Equipment and Inventory that the Grantors have permitted to be in possession of any and all third parties does not exceed $100,000.
 
(e)           Such Grantor shall not withdraw as a member of any Pledged Entity or a partner in any partnership with respect to which such Grantor has pledged any interest, or file or pursue or take any action which may, directly or indirectly, cause a dissolution or liquidation of or with respect to any Pledged Entity or any such partnership or seek a partition of any property of any Pledged Entity or any such partnership.
 
(f)           Such Grantor shall promptly notify the Lender in writing in the event that such Grantor becomes a licensee of any Copyright, Mark or Patent, other than those set forth on Schedule B , that is necessary for its business and shall execute any and all documents, instruments or agreements and perform any and all actions reasonably requested by the Lender to give an assignment thereof including procuring the consent of the licensor thereto.
 
13.   Lender’s Rights Regarding Collateral .  At any time and from time to time, the Lender may, to the extent necessary or desirable to protect the security hereunder, but the Lender shall not be obligated to:  (a) upon reasonable notice and at such reasonable times during usual business hours (whether or not a Default has occurred), itself or through its representatives, visit and inspect each Grantor’s 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 discuss the business, operations, properties and financial and other condition of such Grantor with, and be advised as to the same by, officers of such Grantor or (b) if an Event of Default has occurred and is continuing, at the expense of the Grantors, subject to the Subordination Agreement, perform any obligation of any Grantor under this Agreement.  At any time and from time to time after an Event of Default has occurred and is continuing, at the expense of the Grantors, the Lender may, to the extent necessary or desirable to protect the security hereunder, but the Lender shall not be obligated to:  (i) notify obligors on the Collateral that the Collateral has been assigned as security to the Lender; (ii) at any time and from time to time request from obligors on the Collateral, in the name of any Grantor or in the name of the Lender, information concerning the Collateral and the amounts owing thereon; and (iii) direct obligors under the contracts included in the Collateral to which any Grantor is a party to direct their performance to the Lender.  Each Grantor shall keep proper books and records and accounts in which full, true and correct entries in conformity with GAAP and all applicable laws shall be made of all material dealings and transactions pertaining to the Collateral.  The Lender shall at all reasonable times have full access to any and all of the Grantors’ books and records pertaining to the Collateral.  The Lender shall not be under any duty or obligation whatsoever to take any action to preserve any rights of or against any prior or other parties in connection with the Collateral, to exercise any voting rights or managerial rights with respect to any Collateral or to make or give any presentments for payment, demands for performance, notices of non-performance, protests, notices of protest, notices of dishonor or notices of any other nature whatsoever in connection with the Collateral or the Obligations.  The Lender shall not be under any duty or obligation whatsoever to take any action to protect or preserve the Collateral or any rights of any Grantor therein, or to make collections or enforce payment thereon, or to participate in any foreclosure or other proceeding in connection therewith.  Nothing contained herein shall constitute an assumption by the Lender
 
 
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of any obligations of any Grantor under any contracts assigned hereunder unless the Lender shall have given written notice to the counterparty to such assigned contract of the Lender’s intention to assume such contract.  Each Grantor shall continue to be liable for performance of its obligations under such contracts.
 
Nothing contained herein shall be construed to make the Lender liable as a stockholder of any corporation, member of any Pledged Entity or partner in any partnership with respect to which any Grantor has pledged its interests in Pledged Securities, Pledged Limited Liability Company Interests or Pledged Partnership Interests, and the Lender by virtue of this Agreement or otherwise (except as referred to in the following sentence) shall not have any of the duties, obligations or liabilities of a stockholder of any such corporation, member of any such Pledged Entity or partner in such partnership.  The parties hereto expressly agree that, unless the Lender shall become the absolute owner of any Pledged Securities or Pledged Limited Liability Company Interests or Pledged Partnership Interests pursuant hereto, this Agreement shall not be construed as creating a partnership or joint venture among the Lender, any such corporation, any such Pledged Entity or any such partnership and/or any Grantor.  Except as provided in the immediately preceding sentence, the Lender, by accepting this Agreement, does not intend to become a stockholder of any corporation, member of any Pledged Entity or partner in any partnership with respect to which any Grantor has pledged its interests in any Pledged Securities, Pledged Limited Liability Company Interests or Pledged Partnership Interests, or otherwise be deemed to be a co-venturer with respect to any Grantor or any such corporation, Pledged Entity or partnership, either before or after an Event of Default shall have occurred.
 
14.       Collections on the Collateral .  Except as provided to the contrary in the Loan Agreement, each Grantor shall have the right to use and to continue to make collections on and receive dividends and other proceeds of all of the Collateral in the ordinary course of business so long as no Event of Default shall have occurred and be continuing.  Upon the occurrence and during the continuance of an Event of Default, at the option of the Lender, each Grantor’s right to make collections on and receive dividends and other proceeds of the Collateral and to use or dispose of such collections and proceeds shall terminate, and any and all dividends, proceeds and collections, including all partial or total prepayments, then held or thereafter received on or on account of the Collateral will be held or received by such Grantor in trust for the Lender and immediately delivered in kind to the Lender (duly endorsed to the Lender, if required), to be applied to the Obligations or held as Collateral, as the Lender shall elect.  Upon the occurrence and during the continuance of an Event of Default, the Lender shall have the right at all times to receive, receipt for, endorse, assign, deposit and deliver, in the name of the Lender or in the name of any Grantor, any and all checks, notes, drafts and other instruments for the payment of money constituting proceeds of or otherwise relating to the Collateral; and each Grantor hereby authorizes the Lender to affix, by facsimile signature or otherwise, the general or special endorsement of such Grantor, in such manner as the Lender shall deem advisable, to any such instrument in the event the same has been delivered to or obtained by the Lender without appropriate endorsement, and the Lender and any collecting bank are hereby authorized to consider such endorsement to be a sufficient, valid and effective endorsement by such Grantor, to the same extent as though it were manually executed by the duly authorized representatives of such Grantor, regardless of by whom or under what circumstances or by what authority such endorsement actually is affixed, without duty of inquiry or responsibility as to such matters, and
 
 
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each Grantor hereby expressly waives demand, presentment, protest and notice of protest or dishonor and all other notices of every kind and nature with respect to any such instrument.
 
15.   Possession of Collateral by Lender .  All the Collateral now, heretofore or hereafter delivered to the Lender shall be held by the Lender in its possession, custody and control.  Any or all of the Collateral delivered to the Lender constituting cash or cash equivalents shall, except as otherwise set forth in any Loan Document or unless an Event of Default has occurred and is continuing, upon written request of any Grantor, be held in an interest-bearing account with the Lender, and shall be invested in investments permitted by the Loan Agreement.  Nothing herein shall obligate the Lender to obtain any particular return thereon.  Upon the occurrence and during the continuance of an Event of Default, whenever any of the Collateral is in the Lender’s possession, custody or control, the Lender may use, operate and consume the Collateral, whether for the purpose of preserving and/or protecting the Collateral, or for the purpose of performing any Grantor’s obligations with respect thereto, or otherwise, and, subject to the terms of Section 13.1 of the Loan Agreement, any or all of the Collateral delivered to the Lender constituting cash or cash equivalents shall be applied by the Lender to payment of the Obligations or held as Collateral, as the Lender shall elect.  The Lender may at any time deliver or redeliver the Collateral or any part thereof to any Grantor, and the receipt of any of the same by such Grantor shall be complete and full acquittance for the Collateral so delivered, and the Lender thereafter shall be discharged from any liability or responsibility arising after such delivery to any Grantor.  So long as the Lender exercises reasonable care with respect to any Collateral in its possession, custody or control, the Lender shall not have any liability for any loss of or damage to any Collateral, and in no event shall the Lender have liability for any diminution in value of the Collateral occasioned by economic or market conditions or events.  The Lender shall be deemed to have exercised reasonable care within the meaning of the preceding sentence if the Collateral in the possession, custody or control of the Lender is accorded treatment substantially equal to that which the Lender accords similar property for its own account, it being understood that neither the Lender nor the Lenders shall have any responsibility for (i) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relating to any Collateral, whether or not the Lender or any Lender has or is deemed to have knowledge of such matters, or (ii) taking any necessary steps to preserve rights against any Person with respect to any Collateral.
 
16.  Remedies .
 
(a)            Rights Upon Event of Default .  Subject to the terms of the Subordination Agreement and upon the occurrence and during the continuance of an Event of Default, the Grantors shall be in default hereunder and the Lender shall have, in any jurisdiction where enforcement is sought, in addition to all other rights and remedies that the Lender may have under this Agreement and under and to the maximum extent permitted by applicable laws or in equity, all rights and remedies of a secured party under the Uniform Commercial Code as enacted in any such jurisdiction in effect at that time, and in addition the following rights and remedies, all of which may be exercised with or without notice to any Grantor except such notice as may be specifically required by applicable law and to the maximum extent permitted by applicable law:  (i) to foreclose the Liens created hereunder or under any other Loan Document by any available judicial procedure or without judicial process; (ii) to enter any premises where any Collateral may be located for the purpose of securing, protecting, inventorying, appraising,
 
 
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inspecting, repairing, preserving, storing, preparing, processing, taking possession of or removing the same; (iii) to sell, assign, lease or otherwise dispose of any Collateral or any part thereof, either at public or private sale or at any broker’s board, in lot or in bulk, for cash, on credit or otherwise, with or without representations or warranties and upon such terms as shall be commercially reasonable; (iv) to notify obligors on the Collateral that the Collateral has been assigned to the Lender and that all payments thereon, or performance with respect thereto, are to be made directly and exclusively to the Lender; (v) to collect by legal proceedings or otherwise all dividends, distributions, interest, principal or other sums now or hereafter payable upon or on account of the Collateral; (vi) to enter into any extension, reorganization, disposition, merger or consolidation agreement, or any other agreement relating to or affecting the Collateral, and in connection therewith the Lender may deposit or surrender control of the Collateral and/or accept other property in exchange for the Collateral as the Lender deems appropriate; (vii) to settle, compromise or release, on terms acceptable to the Lender, in whole or in part, any amounts owing on the Collateral and/or any disputes with respect thereto; (viii) to extend the time of payment, make allowances and adjustments and issue credits in connection with the Collateral in the name of the Lender or in the name of any Grantor; (ix) to enforce payment and prosecute any action or proceeding with respect to any or all of the Collateral and take or bring, in the name of the Lender or in the name of any Grantor, any and all steps, actions, suits or proceedings deemed necessary or desirable by the Lender to effect collection of or to realize upon the Collateral, including, any judicial or nonjudicial foreclosure thereof or thereon, and each Grantor specifically consents to any nonjudicial foreclosure of any or all of the Collateral or any other action taken by the Lender which may release any obligor from personal liability on any of the Collateral, and any money or other property received by the Lender in exchange for or on account of the Collateral, whether representing collections or proceeds of Collateral, and whether resulting from voluntary payments or foreclosure proceedings or other legal action taken by Lender or the Grantor may be applied by the Lender, without notice to such Grantor, to the Obligations in such order and manner as the Lender in its sole discretion shall determine; (x) to insure, protect and preserve the Collateral; (xi) to exercise all rights, remedies, powers or privileges provided under any of the other Loan Documents; and (xii) to remove, from any premises where the same may be located, the Collateral and any and all documents, instruments, files and records, and any receptacles and cabinets containing the same, relating to the Collateral, and the Lender may, at the cost and expense of each Grantor, use such of its supplies, equipment, facilities and space at its places of business as may be necessary or appropriate to properly administer, process, store, control, prepare for sale or disposition and/or sell or dispose of the Collateral or to properly administer and control the handling of collections and realizations thereon, and the Lender shall be deemed to have a rent-free tenancy of any premises of such Grantor for such purposes and for such periods of time as reasonably required by the Lender.  Each Grantor will, at the Lender’s request, assemble the Collateral and make it available to the Lender at places which the Lender may designate, whether at the premises of such Grantor or elsewhere, and will make available to the Lender, free of cost, all premises, equipment and facilities of such Grantor for the purpose of the Lender’s taking possession of the Collateral or storing the same or removing or putting the Collateral in salable form or selling or disposing of the same.  The Lender has no obligation to clean-up or otherwise prepare the Collateral for sale.
 
(b)            Possession by Lender .  Subject to the terms of the Subordination Agreement and upon the occurrence and during the continuance of an Event of Default, the Lender also shall have the right, without notice or demand, either in person, by agent or by a receiver to be
 
 
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appointed by a court in accordance with the provisions of applicable law (and each Grantor hereby expressly consents, to the fullest extent permitted by applicable law, upon the occurrence and during the continuance of an Event of Default to the appointment of such a receiver), and, to the extent permitted by applicable law, without regard to the adequacy of any security for the Obligations, to operate the business of any Grantor, by, inter alia , taking possession of the Collateral or any part thereof and to collect and receive the rents, issues, profits, income and proceeds thereof, pending the exercise of any and all other rights and remedies available to the Lender under this Agreement and/or at law or in equity.  The operation of any Grantor’s business and the taking possession of the Collateral by the Lender shall not cure or waive any Event of Default or notice thereof or invalidate any act done pursuant to such notice.  The rights, remedies and powers of any receiver appointed by a court shall be as ordered by said court.
 
(c)            Sale of Collateral .  Any public or private sale or other disposition of the Collateral may be held at any office of Lender, or at any Grantor’s place of business, or at any other place permitted by applicable law, and without the necessity of the Collateral’s being within the view of prospective purchasers.  The Lender may direct the order and manner of sale of the Collateral, or portions thereof, as it in its sole and absolute discretion may determine provided such sale is commercially reasonable, and each Grantor expressly waives, to the extent permitted by applicable law, any right to direct the order and manner of sale of any Collateral.  The Lender or any Person acting on the Lender’s behalf may bid and purchase at any such sale or other disposition.  In addition to the other rights of the Lender hereunder, subject to the Subordination Agreement, each Grantor hereby grants to the Lender a license or other right to use, without charge, but only after the occurrence and during the continuance of an Event of Default, such Grantor’s labels, copyrights, patents, rights of use of any name, trade names, trademarks and advertising matter, or any property of a similar nature, including, the Copyrights, the Patents and the Marks, in advertising for sale and selling any Collateral.  The Lender may comply with any applicable state or federal law requirements in connection with a disposition of the Collateral and compliance will not be considered adversely to affect the commercial reasonableness of any sale of the Collateral.
 
(d)            Notice of Sale .  Unless the Collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, the Lender will give each Grantor reasonable notice of the time and place of any public sale thereof or of the time on or after which any private sale thereof is to be made.  The requirement of reasonable notice conclusively shall be met if such notice is mailed, certified mail, postage prepaid, to such Grantor at its address set forth in the Loan Agreement, or delivered or otherwise sent to such Grantor, at least ten days before the date of the sale.  Each Grantor expressly waives, to the fullest extent permitted by applicable law, any right to receive notice of any public or private sale of any Collateral or other security for the Obligations except as expressly provided for in this paragraph.  The Lender shall not be obligated to make any sale of the Collateral if it shall determine not to do so regardless of the fact that notice of sale of the Collateral may have been given.  The Lender may, without notice or publication, except as required by applicable law, adjourn the sale from time to time by announcement at the time and place fixed for sale, and such sale may, without further notice (except as required by applicable law), be made at the time and place to which the same was so adjourned.
 
 
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(e)            Private Sales .  With respect to any Collateral consisting of securities, partnership interests, membership interests, joint venture interests or the like, and whether or not any of such Collateral has been effectively registered under the Securities Act of 1933, as amended, or other applicable laws, subject to the Subordination Agreement, the Lender may, in its sole and absolute discretion, sell all or any part of such Collateral at private sale in such manner and under such circumstances as the Lender may deem necessary or advisable in order that the sale may be lawfully conducted in a commercially reasonable manner.  Without limiting the foregoing, the Lender may (i) approach and negotiate with a limited number of potential purchasers, and (ii) restrict the prospective bidders or purchasers to persons who will represent and agree that they are purchasing such Collateral for their own account for investment and not with a view to the distribution or resale thereof.  In the event that any such Collateral is sold at private sale, each Grantor agrees to the extent permitted by applicable law that if such Collateral is sold for a price which is commercially reasonable, then (A) such Grantor shall not be entitled to a credit against the Obligations in an amount in excess of the purchase price, and (B) neither the Lender nor the Lenders shall incur any liability or responsibility to such Grantor in connection therewith, notwithstanding the possibility that a substantially higher price might have been realized at a public sale.  Each Grantor recognizes that a ready market may not exist for such Collateral if it is not regularly traded on a recognized securities exchange, and that a sale by the Lender of any such Collateral for an amount less than a pro rata share of the fair market value of the issuer’s assets minus liabilities may be commercially reasonable in view of the difficulties that may be encountered in attempting to sell a large amount of such Collateral or Collateral that is privately traded.
 
(f)            Title of Purchasers .  Upon consummation of any sale of Collateral hereunder, the Lender shall have the right to assign, transfer and deliver to the purchaser or purchasers thereof the Collateral so sold.  Each such purchaser at any such sale shall hold the Collateral so sold absolutely free from any claim or right upon the part of any Grantor or any other Person claiming through any Grantor, and each Grantor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted.  If the sale of all or any part of the Collateral is made on credit or for future delivery, the Lender shall not be required to apply any portion of the sale price to the Obligations until such amount actually is received by the Lender, and any Collateral so sold may be retained by the Lender until the sale price is paid in full by the purchaser or purchasers thereof.  The Lender shall not incur any liability in case any such purchaser or purchasers shall fail to pay for the Collateral so sold, and, in case of any such failure, the Collateral may be sold again.
 
(g)            Disposition of Proceeds of Sale .  The proceeds resulting from the collection, liquidation, sale or other disposition of the Collateral shall be applied in accordance with Section   11 of the Loan Agreement, subject to the Subordination Agreement.
 
(h)            Certain Waivers .  To the extent permitted by applicable law, the Grantor waives all claims, damages and demands against the Lender and the Lenders arising out of the repossession, retention or sale of the Collateral, or any part or parts thereof, except to the extent any such claims, damages and awards arise out of the gross negligence or willful misconduct of the Lender or the Lenders or their agents or attorneys-in-fact.
 
 
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(i)             Remedies Cumulative .  The rights and remedies provided under this Agreement are cumulative and may be exercised singly or concurrently, and are not exclusive of any other rights and remedies provided by law or equity.
 
(j)             Deficiency .  If the proceeds of sale, collection or other realization of or upon the Collateral pursuant to this Section 16 are insufficient to cover the costs and expenses of such realization and the payment in full of the Obligations, each Grantor shall remain liable for any deficiency.
 
17.    Lender Appointed Attorney-in-Fact .  Each Grantor hereby irrevocably appoints the Lender as such Grantor’s attorney-in-fact, effective upon the occurrence and during continuance of an Event of Default, with full authority in the place and stead of such Grantor, and in the name of such Grantor, or otherwise, from time to time, in the Lender’s sole and absolute discretion to do any of the following acts or things:  (a) to do all acts and things and to execute all documents necessary or advisable to perfect and continue perfected the security interests created by this Agreement and to preserve, maintain and protect the Collateral; (b) to do any and every act which such Grantor is obligated to do under this Agreement; (c) to prepare, sign, file and record, in such Grantor’s name, any financing statement covering the Collateral; (d) to endorse and transfer the Collateral upon foreclosure by the Lender; (e) to grant or issue an exclusive or nonexclusive license under the Copyrights, the Patents or the Marks to anyone upon foreclosure by the Lender; (f) to assign, pledge, convey or otherwise transfer title in or dispose of the Copyrights, the Patents or the Marks to anyone upon foreclosure by the Lender; and (g) to file any claims or take any action or institute any proceedings which the Lender may reasonably deem necessary or desirable for the protection or enforcement of any of the rights of the Lender with respect to any of the Copyrights, the Patents and the Marks; provided , however , that the Lender shall be under no obligation whatsoever to take any of the foregoing actions, and neither the Lender nor the Lenders shall have any liability or responsibility for any act or omission (other than the Lender’s, the Lenders’ or their agents’ or attorneys-in-fact’s own gross negligence or willful misconduct) taken with respect thereto.
 
18.     Costs and Expenses .  Each Grantor agrees to pay to the Lender all reasonable costs and out-of-pocket expenses (including, reasonable attorneys’ fees and disbursements) incurred by the Lender in the enforcement or attempted enforcement of this Agreement, and in connection with any waiver or amendment of any term or provision hereof.  All reasonable costs and expenses, including, reasonable attorneys’ fees and disbursements, incurred or paid by the Lender in exercising any right, privilege, power or remedy conferred by this Agreement (including, the right to perform any obligation of any Grantor), or in the enforcement or attempted enforcement thereof, shall be secured hereby and shall become a part of the Obligations and shall be due and payable to the Lender by each Grantor on demand therefor.
 
19.     Transfers and Other Liens .  Each Grantor agrees that, except as specifically permitted under the Loan Agreement and under Section 9 and Section 10 hereof, it will not (i) sell, assign, exchange, lease, license, transfer or otherwise dispose of, or contract to sell, assign, exchange, transfer or otherwise dispose of, or grant any option with respect to, any of the Collateral, or (ii) create or permit to exist any Lien upon or with respect to any of the Collateral, and each Grantor acknowledges that the Lender does not authorize any of the foregoing.  To the extent any Collateral permitted to be sold or otherwise disposed of is sold or disposed of, such sale or disposition shall be for fair market value.
 

 
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20.    Future Grantors .  The Borrower is required to cause each of its Domestic Subsidiaries formed or acquired after the Closing Date to execute and deliver to the Lender, concurrently with the formation or acquisition thereof, a joinder to this Agreement and the Subsidiary Guarantee substantially in the form of Exhibit A attached to the Subsidiary Guarantee.
 
21.    Understandings With Respect to Waivers and Consents .  Each Grantor represents, warrants and agrees that each of the waivers and consents set forth herein are made with full knowledge of their significance and consequences, with the understanding that events giving rise to any defense or right waived may diminish, destroy or otherwise adversely affect rights which such Grantor otherwise may have against the Lender or others, or against any Collateral.  If any of the waivers or consents herein are determined to be unenforceable under applicable law, such waivers and consents shall be effective to the maximum extent permitted by law.
 
22.    Indemnity .  Each Grantor hereby indemnifies the Lender and the Lenders from and against any and all claims, losses and liabilities growing out of or resulting from this Agreement (including, enforcement of this Agreement), except to the extent such claims, losses or liabilities result from the Lender’s, or their agents’ or attorneys-in-fact’s gross negligence or willful misconduct.
 
23.     Amendments, Etc.   No amendment or waiver of any provision of this Agreement nor consent to any departure by any Grantor herefrom (other than supplements to the Schedules hereto in accordance with the terms of this Agreement) shall in any event be effective unless the same shall be in writing and made in accordance with Section 13.12 of the Loan Agreement, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.
 
24.    Notices .  All notices and other communications provided for hereunder shall be given in the manner, and to the respective addresses, set forth in Section 13.6 of the Loan Agreement.
 
25.     Continuing Security Interest; Successors and Assigns .  This Agreement shall create a continuing security interest in the Collateral and shall (i) remain in full force and effect until payment in full in cash of the Obligations (other than contingent obligations) and the termination or expiration of the Term Loan Commitment, (ii) be binding upon each Grantor, its successors and assigns and (iii) inure, together with the rights and remedies of the Lender hereunder, to the benefit of the Lender, and any successor Lender subject to the terms of the Loan Agreement.  Subject to the terms of the Loan Agreement, any Lender may assign or otherwise transfer any Loans, or the Term Loan Commitment or participations therein, or any rights in Collateral held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to such Lender or Lender herein or otherwise.  Nothing set forth herein or in any other Loan Document is intended or shall be construed to give to any other party any right, remedy or claim under, to or in respect of this Agreement or any other Loan Document or any Collateral.  Each Grantor’s successors and assigns shall include, without limitation, a receiver, trustee or debtor-in-possession thereof or therefor, provided that, none of the rights or obligations of such Grantor hereunder may be assigned or otherwise transferred.
 

 
- 23 -
 
 
26.     Release of Grantor .
 
(a)           This Agreement and all obligations of each Grantor hereunder and all security interests granted hereby shall be released and terminated when all Obligations (other than contingent obligations) have been paid in full in cash and when all Commitments and all Letters of Credit have expired.  Upon such release and termination, all rights in and to the Collateral shall automatically revert to the Grantors, and the Lender and the Lenders shall promptly return any Pledged Collateral in their possession to the Grantors, or to the Person or Persons legally entitled thereto, and shall endorse, execute, deliver, record and file all instruments and documents, and do all other acts and things, reasonably required for the return of the Collateral to the Grantors, or to the Person or Persons legally entitled thereto, and to evidence or document the release of the interests of the Lender arising under this Agreement, all as reasonably requested by, and at the sole expense of, the Grantors.
 
(b)           The Lender agrees that if an Asset Disposition permitted under the UB Credit Agreement occurs with respect to any Collateral, the Lender shall release such Collateral that is the subject of such Asset Disposition to the applicable Grantor free and clear of the Lien under this Agreement.
 
27.    GOVERNING LAW .  THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK (WITHOUT REFERENCE TO ITS CHOICE OF LAW RULES).
 
28.     Counterparts .  This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement.  Delivery of an executed counterpart of a signature page to this Agreement by telecopier (or other electronic transmission) shall be effective as delivery of a manually executed counterpart of this Agreement.
 
 
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
 
 
- 24 -
 

IN WITNESS WHEREOF, each Grantor has executed this Agreement by its duly authorized representative(s), solely in such capacity and not as an individual, as of the date first written above.
 
 
GRANTORS
 
     
 
PHYSICIANS FORMULA, INC.
 
 
a New York corporation
 
         
         
 
By:
/s/ Jeffrey Rogers
 
   
Name:
Jeffrey Rogers
 
   
Title:
President
 
         
         
 
PHYSICIANS FORMULA COSMETICS, INC.,
 
 
a Delaware Corporation
 
         
         
 
By:
/s/ Jeffrey Rogers
 
   
Name:
Jeffrey Rogers
 
   
Title:
President
 
         
         
 
PHYSICIANS FORMULA DRTV, LLC,
 
 
a Delaware Limited Liability Company
 
         
         
 
By:
/s/ Jeffrey Rogers
 
   
Name:
Jeffrey Rogers
 
   
Title:
President
 

 
S-1
 
 
ACKNOWLEDGED AND AGREED, as of the date first written above.


 
MILL ROAD CAPITAL, L.P.
     
     
By:
/s/ Charles Goldman
 
Name:
Charles Goldman
 
Title:
Managing Director
 

 
S-2
 
 
SCHEDULE A
 
PLEDGED COLLATERAL
 
 
1.
Pledged Shares
 
Issuer
Certificate No.
No of Shares
Percentage Interest in  Issuer
Other Classes of Shares
Physicians Formula Cosmetics, Inc.
2
1,000
100%
None

 
 
2.
Pledged Partnership Interests - None
 
 
3.
Pledged Limited Liability Company Interests -
 
Physicians Formula DRTV, LLC
C-1
1,000
100%
None

 
 
 
 
SCHEDULE B
 
COPYRIGHTS, PATENTS AND MARKS
 
Physicians Formula, Inc. - Intellectual Property

COPYRIGHTS - None.

PATENTS

Owned US Patents
Patent No.
Carton with Extended Printable Surface
D567,077

 
Owned Foreign Patents
Country
Patent No.
Carton with Extended Printable Surface
Australia
317340
Loose Powder Jar
Australia
322510

 
MARKS

U.S. Trademarks Registered
Registration No.
Actiplump
3,496,856
Artist's Eraser
3,262,838
Baked Berries
3,169,240
Baked Berry
3,127,457
Baked Butter
3,189,776
Baked Cocoa
3,146,080
Baked Ginger
3,146,079
Baked Gingersnap
3,112,495
Baked Oatmeal
3,189,775
Baked Pyramid
3,382,889
Baked Sands
3,189,777
Baked Smokes
3,169,239
Baked Spices
3,189,774
Baked Sugar
3,197,148
Baked Sweets
3,107,413
Baked to Perfection
2,235,191
Blemish Rx
3,402,746
 
 
 
 
 
Bronze Gems
3,332,539
Brow-Tweez
3,446,275
Circle RX & Design
3,419,413
Cliniclear Technology
3,586,902
Conceal RX & Mortar & Pestle Design
3,325,455
Cover 2 Go
3,235,257
Covertoxten50
3,277,212
Derm@Home
3,170,157
Durascreen
1,695,175
Eco-Olive
3,446,345
Ecoblend
3,423,809
Eurobuffer
3,295,301
Exerc’Eyes
3,064,200
Face Aid
3,202,539
FINELINE
2,277,124
F.L.A.T.
3,346,200
How Green is Your Makeup?
3,544,638
Illuminating Veil
3,402,750
Line Erase RX & Design
3,641,110
Magic Mosaic
3,098,670
Mineral Bronzebrightener
3,644,714
Mineral Wear
3,104,495
Mineral Wear
3,164,117
Mineral Wear
3,373,540
Mineral Wear
3,595,401
Mineral Wear
3,554,909
My Secret Formula
3,577,246
Organic Wear
3,454,574
Organisoy
3,423,808
Painter's Palette
3,331,759
Painter's Tube
3,320,750
PF
3,277,282
PF & Palette Design
3,294,477
Physicians Formula & Design (Line)
3,494,604
Plentiful Lip Palette
3,326,684
Plump Potion
3,341,830
Plump Potion
3,455,125
Pro-Cover
3,276,953
Revined
3,074,104
Silipcone
3,419,412
The Once-A-Day, All Day Sunscreen
2,021,117
Wanderful Brow Wand
3,407,243
 
California Trademarks Registered
Registration No.
 
 
 
 
 
Physicians Formula
112615
Physicians Formula & Line Design
112616

 
 
 


Trademarks Pending
Application No.
Bamboo Wear
77/677,128
Bambuki
77/773,439
Bronze Booster & Sun Design
77/569,242
Brow Designer
77/136,836
Brow Corrector
78/860,415
Mineral Cheekbrightener
77/677,070
Mineral Facebrightener
77/479,575
Correct & Cover
78/860,372
DHA+ Infusion
77/555,910
Eco-Aroma Therapy
77/617,381
Eye-Tech
77/639,786
Healthy Wear
77/691,778
How Green is Your Makeup Remover?
77/663,154
How Green is Your Skincare?
77/663,162
Line Erase Rx & Design
77/569,244
Organiblend
77/276,037
Mineral Cheekbrightener
77/677,070
Mineral Shimmer Gem
77/726,090
Organic Glow
77/087,977
Time Proof
77/136,799
Total Perfection
78/924,753
True Organic
77/087,988
Your Beauty. Our Passion. We promise.
77/594,530

Physicians Formula Cosmetics, Inc. - Intellectual Property
 
COPYRIGHTS - None.
 
PATENTS OWNED
 
Item
Patent Number
Jungle Fever – Leopard powder design
D466,249
Jungle Fever – Tiger powder design
D465,609
Jungle Fever – Tiger Bronzing Cream
D472,014
Jungle Fever – Leopard Bronzing Cream
D471,666
LB FancyPansy – Pansy Pan
D471,317
Camouflage – Sergeant Shadow
D470,973
Skinsitive
D470,974
Camouflage – Corporal Cream Bronzer
D478,686
LB SunnyBuddy – Sunflower Pan
D480,507
LB OopsiDaisy – Daisy Pan
D480,508
Virtual Face Powder – Pan
D495,446
Retro Glow – Round Compact
D482,496
 
 
 
 
 
Retro Glow – Oval Compact
D482,495
Loose-to-Go Pan Design
D508,145
Solar Powder Triangular
D516,742
Sunny Bunch
D516,743
Magic Mosaic
D516,744
Revined
D516,745
Baked Blush
D517,728
Solar Powder 3-D
D518,230
Starlight
D519,241
Cream Blush
D519,240
Face Aid
D521,187
Solar Powder Variation
D522,174
Cosmetic Container
D532,558
Cosmetic Container
D549,393
Carton with Extendable Printable Surface
D567,077
Cosmetic Container
D582,099
Cosmetic Container
D582,100
Lip Butter Paper Compact (with recessed mirror)
D583,505
Paper Compact Container (with mirror)
D583,100
Cosmetic Block
D470,974
Carton with Extended Printable Surface
D567,077
 
TRADEMARKS REGISTERED
 
 
Trademarks
Registration No.
Aqua Cover
2,599,366
Aquacheeks
2,613,511
Baked Blush
3,263,481
Baked Bronzer
2,801,528
Baked Collection
2,953,835
Bare Radiance
2,230,760
Battle Bronzer
2,650,663
Beauty Spiral
2,352,779
Beauty Spiral
2,547,162
Berry-go-Round
2,580,400
Blush Palette
2,598,217
Bright Collection
2,841,745
Brow Collector
2,384,341
Char-Kohl
2,803,685
Cinnamon Roll
2,599,557
Clear Water
2,619,015
Concealer 101
2,852,080
Concealer Twins
2,398,555
Correct & Cover
2,384,357
Crème de Velours
2,356,270
 
 
 
 
 
Crystal Ball
3,083,611
Drops of Bronze
2,413,065
Drops of Crystal
2,942,286
Dust of Bronze
2,422,061
Dust of Crystal
2,659,956
Dust of Gold
2,464,337
Eye-Tech
2,735,561
Eyebrightener
2,288,310
Eyebrightener
2,441,239
Eyeliner Palette
2,670,728
Face Lace
2,852,079
Fineline
2,277,124
Gentle Cover
2,230,761
Geometric Colors
2,520,864
Globe-Trotter
2,596,066
Heart of Gold
2,649,396
Heart of Gold
2,586,654
Heartbreaker
2,670,304
Hide Out
3,115,027
Instant Makeover Tool
3,033,073
Jungle Fever
2,709,526
Lash-In-A-Tube
2,770,397
Le Velvet
1,949,213
LeVelvet Film
1,122,628
Lieutenant Lash
2,644,431
Lip Color Corrector
2,407,434
Lip Spectrum
2,356,269
Loose-To-Go
2,818,418
Magic Cube
2,846,865
Mini Dose
2,459,896
Month 2 Month
2,408,984
Mood Swirls
2,602,854
Moonglow
2,633,330
Only from Physicians Formula!
2,691,072
P & Design 1 (Block)
2,874,954
P & Design 2 (Retro)
2,973,126
P Physicians Formula Intensive Therapy Moisture Cream & Design
1,735,589
P Physicians Formula Intensive Therapy Moisture Lotion & Design
1,759,042
Peach-To-Glow
2,228,941
Pearls of Perfection
2,460,119
Pearls of Perfection
2,650,551
Physicians Formula
1,187,307
Physicians Formula Cosmetics & Retro Design
3,204,345
 
 
 
 
 
Planet Blush
2,596,062
Planet Eyes
2,489,120
Plentifull
2,003,717
Plump Palette
3,074,502
Powder Palette
2,400,377
Professional Formula
78/110,542
Retro Glow
2,664,520
Seducer
2,622,305
Self Defense
2,475,987
Sensitive Skin? Be Sensible!
2,583,857
Sergeant Shadow
2,644,432
Silver Moon
2,626,623
Skinsitive
2,673,075
Sport Team
2,288,234
Star Perfection
2,852,078
Summer Eclipse
2,721,774
Summer Shimmer
2,493,092
Sun Shield
1,257,282
Sun-In-A-Brush
2,650,683
To Any Lengths
2,070,859
Total Perfection
2,371,937
Virtual Eyes
2,526,119
Virtual Face Powder
2,805,872
Virtual Foundation
2,640,888
Virtual Glove
2,598,226
Virtual Lips
2,741,925
Vital Lash
2,719,467
Wanderful Wand
2,833,112
Winter Eclipse
2,550,786

 
PATENTS PENDING
 
Patents
Application No.
Mineral Wear Veil (Cosmetic Brush)
29/264,813
 
TRADEMARKS PENDING
 
Trademarks
Application No.
Blush Palette
77/413,657
Bronzing Bronzer
77/476,016
Eyeliner Palette
77/496,554
Mineral Bronzebrightener
77/479,558
Mineral Cheekbrightener
77/479,568
Mineral Facebrightener
77/479,575
 
 
 
 
 
Skinsitive
77/465,982
Virtual Foundation
77/465,964

 
FOREIGN TRADEMARKS REGISTERED
 
Country
Trademark
Registration No.
Africa (African Intellectual Property Organization)
P PHYSICIANS FORMULA & Design 1
37907
Andorra
PHYSICIANS FORMULA
11299
Argentina
PHYSICIANS FORMULA
1771530
Australia
P PHYSICIANS FORMULA & Design 2
B461391
 
P PHYSICIANS FORMULA & Design 2
B500912
 
HOW GREEN IS YOUR MAKEUP?
1199306
 
MY SECRET FORMULA
1199305
 
P PHYSICIANS FORMULA & Design 2
B500912
Austria
P PHYSICIANS FORMULA & Design 1
116867
Benelux
P & Design 1 (Block)
428208
 
PHYSICIANS FORMULA
416285
Bophuthatswana
P PHYSICIANS FORMULA & Design 2
86/0646
Brazil
P & Design 1 (Block)
813179939
 
PHYSICIANS FORMULA
812952413
Cambodia
P PHYSICIANS FORMULA & Design 1
7594
Canada
P & Design 1 (Block)
385353
 
P PHYSICIANS FORMULA & Design 1
477948
 
PHYSICIANS FORMULA
442028
China
PHYSICIANS FORMULA (Chinese Characters)
876087
Denmark
P & Design 1 (Block)
198907206
 
PHYSICIANS FORMULA
470/1988
Egypt
P & Design 1 (Block)
68514
 
PHYSICIANS FORMULA
67193
 
PHYSICIANS FORMULA
73879
European Community
MINERAL WEAR
006415541
 
ORGANIC WEAR
006415582
Finland
P PHYSICIANS FORMULA & Design 2
118585
France
P & Design 1 (Block)
1396090
 
PHYSICIANS FORMULA
1427439
Germany
P PHYSICIANS FORMULA & Design 1
2908932
Greece
P PHYSICIANS FORMULA & Design 1
86096
Hong Kong
P PHYSICIANS FORMULA & Design 1
B11441
 
PHYSICIANS FORMULA (Chinese Characters)
741/96
India
P & Design 1 (Block)
469868B
 
P PHYSICIANS FORMULA & Design 2
469867B
 
 
 
 
 
Indonesia
P PHYSICIANS FORMULA & Design 1
329032
Ireland, Republic of
P PHYSICIANS FORMULA & Design 2
B125079
 
P PHYSICIANS FORMULA & Design 2
B125080
 
PHYSICIANS FORMULA
238829
Israel
P & Design 1 (Block)
65538
 
PHYSICIANS FORMULA
63739
Italy
P & Design 1 (Block)
486269
 
PHYSICIANS FORMULA
TO96000025
 
PHYSICIANS FORMULA
482291
Japan
P & Design 1 (Block)
2146936
 
PHYSICIANS FORMULA
2709460
Korea, South
P PHYSICIANS FORMULA & Design 1
422210
 
P PHYSICIANS FORMULA & Design 1
414698
Laos
P PHYSICIANS FORMULA & Design 1
5133
Malaysia
P PHYSICIANS FORMULA & Design 1
93009145
 
PHYSICIANS FORMULA (Chinese Characters)
94007530
Mexico
P & Design 1 (Block)
402173
 
PHYSICIANS FORMULA
402221
Morocco
P & Design 1 (Block)
38669
 
PHYSICIANS FORMULA
37615
Namibia
P PHYSICIANS FORMULA & Design 2
86/0668
New Zealand
P PHYSICIANS FORMULA & Design 1
B170325
 
P PHYSICIANS FORMULA & Design 1
B170326
Norway
P PHYSICIANS FORMULA & Design 2
148730
Philippines
PHYSICIANS FORMULA
4-1997-12636
Portugal
P PHYSICIANS FORMULA & Design 1
239846
 
P PHYSICIANS FORMULA & Design 1
239847
Puerto Rico
PHYSICIANS FORMULA
27785
Russian Federation
PHYSICIANS FORMULA
87586
Saudi Arabia
P & Design 1 (Block)
178/66
 
PHYSICIANS FORMULA
166/52
Singapore
P PHYSICIANS FORMULA & Design 1
B3648/93
 
PHYSICIANS FORMULA (Chinese Characters)
7209/94
South Africa
P PHYSICIANS FORMULA & Design 1
86/4294
 
P PHYSICIANS FORMULA & Design 1
88/2372
Spain
P & Design 1 (Block)
1175699
 
P & Design 1 (Block)
1175700
 
PHYSICIANS FORMULA
1155597
 
PHYSICIANS FORMULA
1175196BIS
Sweden
P PHYSICIANS FORMULA & Design 1
222774
Switzerland
P PHYSICIANS FORMULA & Design 1
357102
Taiwan
P PHYSICIANS FORMULA & Design
649964
Turkey
P PHYSICIANS FORMULA & Design 1
106028
United Kingdom
P PHYSICIANS FORMULA & Design 1
B1301801
 
P PHYSICIANS FORMULA & Design 1
B1301802
 
 
 
 
 
Vietnam
P PHYSICIANS FORMULA & Design 1
16618
 
FOREIGN TRADEMARKS PENDING
 
Country
 
Trademark
Application No.
Australia
ORGANIC WEAR
1198137
Canada
HOW GREEN IS YOUR MAKEUP?
1363748
 
MY SECRET FORMULA
1362755
 
ORGANIC WEAR
1362685
Philippines
PHYSICIANS FORMULA
42008004618

 
FOREIGN PATENTS OWNED
 
Country
Patent
Patent No.
Australia
Cosmetic Block – Starlight
306669
 
Cosmetic Block – Cream Blush
306595
 
Cosmetic Block – Face Aid
306770
 
Cosmetic Container
318469
 
Cosmetic Container
311002
 
Cosmetic Block
304171
 
Flat Mascara Container
309292
 
Carton with Extended Printable Surface
317340
 
Loose Powder Jar
322510
 
Cosmetic Block - Magic Mosaic
AU3041715
Canada
Cosmetic Block
111406
 
Cosmetic Block
111407
 
Cosmetic Block
111408
 
Summer Eclipse Bronzing Powder
113194
 
Cosmetic Block
113196
 
Cosmetic Block
113209
 
Cosmetics Container
123138
 
Cosmetics Container
117137
 
Solar Powder SPF 20 Face Powder
111373
 
F.L.A.T. Mascara
116088
 
Cosmetic Block – Solar Powder
111372
 
Cosmetic Block – Baked Blush
111405
 
Cosmetic Block – Solar Powder Design with Triangular Rays
111374
 
Cosmetic Block – Solar Powder Design with Embossed SPF
111373
 
FOREIGN PATENTS PENDING
 
Country
Patent
Application No.
 
 
 
 
 
Canada
Lip Butter Paper Compact
126670
 
Eye Shadow Paper Compact
126669
 
Loose Powder Jar
124009
 
Carton with Extendable Printable Surface
122305

 
Physicians Formula DRTV, LLC - Intellectual Property
 
COPYRIGHTS
 
None.
 
 
PATENTS
 
None.
 
 
MARKS
 
None.
 
 
 
 

SCHEDULE C
 
LOCATIONS OF EQUIPMENT AND INVENTORY
 

Location
Name of Third Party/Bailee
Qualified to do business in such location
1055 W. 8 th Street
Azusa, CA 91702
N/A
Yes
1425 Max Brose Drive #8
London, Ontario   N6N 0A2
Canada
Agility
N/A
435 Park Court
Lino Lakes, MN 55014
Distribution Alternatives, Inc. (d/b/a Scholls, Inc.)
No
230 South Ninth Avenue
City of Industry, CA 91746
N/A
Yes
250 South Ninth Avenue
City of Industry, CA 91746
N/A
Yes
753-755 Arrow Grand Circle Way
Covina, CA 91722
N/A
Yes
2169 Wright Ave.
La Verne, CA 91750
Jet
Yes

 
 
 

SCHEDULE D
 
LOCATIONS OF BOOKS AND RECORDS
 
1.
Chief Executive Office
 
1055 W. 8 th Street
Azusa, CA 91702
 
2.
Locations of Account Records and Chattel Paper
 
1055 W. 8 th Street
Azusa, CA 91702
 
3.
Foreign Qualifications
 
Grantor
Location
Qualified to do business in such location?
Physicians Formula DRTV, LLC
California
Yes
Physicians Formula Cosmetics, Inc.
California
Yes
Physicians Formula, Inc.
California
Yes

 
 
 

SCHEDULE E
 
DEPOSIT ACCOUNTS, CERTAIN INVESTMENT PROPERTY AND LETTERS OF CREDIT
 
1.
Deposit Accounts
 
Grantor
Bank
Type
Account No.
Physicians Formula, Inc.
Union Bank
General / Concentration
 
4960003069
Physicians Formula, Inc.
Union Bank
Disbursements
 
9080013377
Physicians Formula, Inc.
 
Union Bank
Payroll
 
4960003077
Physicians Formula, Inc.
Union Bank
Flex Account --
Employee Benefits deducted from Employee Paychecks
4960003085
Physicians Formula, Inc.
Union Bank
Canadian Time Deposit Account
300464-CAD
Physicians Formula, Inc.
Union Bank
Foreign Currency Direct Deposit Account
300451-CAD
Physicians Formula, Inc.
Royal Bank of Canada
Business Account
102-971-9
Physicians Formula, Inc.
Union Bank
Foreign Currency  Account
300650-CAD
Physicians Formula DRTV, LLC
Union Bank
General Concentration
4960003107
Physicians Formula DRTV, LLC
Union Bank
Disbursements
9080013466
Physicians Formula Holdings, Inc.
Union Bank
Custodian Account
4960003123

 
2.
Securities Accounts and Other Investment Property - None
 
3.
Letters of Credit Issued for the Benefit of the Grantor - None

 
 
 
 
SCHEDULE F
 
UCC FILING OFFICES AND STATE ORGANIZATIONAL IDENTIFICATION NUMBER
 
 
Grantor
Filing Office(s)
S tate Organizational Identification Number
Physicians Formula, Inc.
New York Department of State
N/A
Physicians Formula Holdings, Inc.
Delaware Secretary of State
3718902
Physicians Formula Cosmetics, Inc.
Delaware Secretary of State
3019117
Physicians Formula DRTV, LLC
Delaware Secretary of State
4319769

 
 
 
 
SCHEDULE G
 
FORM OF LIMITED LIABILITY COMPANY NOTICE

 
TO:           [Name of Pledged Entity]
 
Notice is hereby given that, pursuant to the Security Agreement dated as of September 4, 2009 (said Agreement, as it may be amended, restated, supplemented or otherwise modified from time to time, the “ Security Agreement ”), made by Physicians Formula, Inc. (the “ Grantor ”), in favor of Mill Road Capital, L.P., as Lender (the “ Lender ”), the Grantor has pledged and assigned to the Lender, and granted to the Lender a continuing security interest in, all right, title and interest of the Grantor, whether now existing or hereafter arising or acquired, as a member in [NAME OF PLEDGED ENTITY] (the “ Limited Liability Company ”), and in, to and under the [TITLE OF APPLICABLE LIMITED LIABILITY COMPANY AGREEMENT] (said Agreement, as it may be amended, restated, supplemented or otherwise modified from time to time, the “ Limited Liability Company Agreement ”), as such security interest is more particularly described in the Security Agreement.
 
Pursuant to the Security Agreement, the Limited Liability Company is hereby authorized and directed to register each Grantor’s pledge to the Lender of the interest of such Grantor on the Limited Liability Company’s books.
 
Such Grantor hereby requests the Limited Liability Company to indicate the Limited Liability Company’s acceptance of this Notice and consent to and confirmation of its terms and provisions by signing a copy hereof where indicated on the attached page and returning the same to the Lender.
 
 
PHYSICIANS FORMULA, INC.
     
     
 
By:
 
 
Name:
 
 
Title:
 

 
 
 

FORM OF ACKNOWLEDGMENT
 
[NAME OF PLEDGED ENTITY] (the “ Limited Liability Company ”) hereby acknowledges receipt of a copy of the assignment by Physicians Formula, Inc. (the “ Grantor ”) of its interest under the [TITLE OF APPLICABLE LIMITED LIABILITY COMPANY AGREEMENT] (as it may be amended, restated, supplemented or otherwise modified from time to time) pursuant to the terms of the Security Agreement dated as of September 4, 2009 (as it may be amended, restated, supplemented or otherwise modified from time to time in accordance with the terms thereof, the “ Security Agreement ”), made by the Grantor in favor of Mill Road Capital, L.P., as Lender (the “ Lender ”).  The undersigned hereby further confirms the registration of the Grantor’s pledge of its interest to the Lender on the Limited Liability Company’s book.  The undersigned acknowledges the control by the Lender of the Grantor’s interest in the Limited Liability Company and confirms that the undersigned shall act upon the direction of the Lender alone with respect to such interest.
 
Dated:   _____________________, ______
 
 
[NAME OF PLEDGED ENTITY]
     
     
 
By:
 
 
Name:
 
 
Title:
 


Exhibit 10.4
 
 
THE RIGHTS OF THE BENEFICIARY OF THIS INSTRUMENT ARE SUBJECT AND SUBORDINATE TO THE LIENS SECURING ALL OBLIGATIONS OF THE PLEDGOR TO THE “AGENT” AND THE “LENDERS” REFERRED TO IN THAT CERTAIN CREDIT AGREEMENT DATED AS OF NOVEMBER 14, 2006 WITH PHYSICIANS FORMULA, INC., PURSUANT TO THE TERMS OF AN INTERCREDITOR AND SUBORDINATION AGREEMENT DATED AS OF SEPTEMBER 4, 2009 AMONG UNION BANK, N.A., MILL ROAD CAPITAL, L.P., PHYSICIANS FORMULA HOLDINGS, INC. AND THE OTHER PARTIES REFERRED TO THEREIN.

PLEDGE AGREEMENT


This Pledge Agreement (this “ Agreement ”), dated as of September 4, 2009, is made by PHYSICIANS FORMULA HOLDINGS, INC., a Delaware corporation (the “ Pledgor ”), in favor of MILL ROAD CAPITAL, L.P., a Delaware limited partnership having its principal place of business at Two Sound View Drive, Greenwich, CT 06830 (the “ Lender ”).

Recitals

A.           Concurrently herewith, the Lender is entering into a Term Loan Agreement dated as of even date herewith (as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, the “ Loan Agreement ”) with Physicians Formula, Inc., a New York corporation (the “ Borrower ”).  Terms defined in the Loan Agreement and not otherwise defined herein are used herein as defined in the Loan Agreement, and the rules of interpretation set forth in Section 1.2 of the Loan Agreement are incorporated herein by reference.

B.           The Pledgor is concurrently herewith entering into that certain Pledgor Guarantee dated as of even date herewith in favor of the Lender (as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, the “ Pledgor Guarantee ”).

C.           Under the terms of the Loan Agreement, the Borrower is required to cause the Pledgor to execute and deliver this Pledge Agreement.  The Pledgor owns 100% of the equity interests in the Borrower.  The Pledgor therefore desires to execute this Pledge Agreement because it has a financial interest in the success of the Borrower.

AGREEMENT

NOW, THEREFORE, in order to induce the Lender to enter into the Loan Agreement and for other good and valuable consideration, the receipt and adequacy of which hereby is acknowledged, the Pledgor hereby represents, warrants, covenants, agrees, assigns and grants as follows:

1.            Definitions .  Unless the context otherwise requires, terms defined in the Uniform Commercial Code of the State of New York (the “ Uniform Commercial Code ”) and not otherwise defined in this Agreement or in the Loan Agreement shall have the meanings defined for those terms in the Uniform Commercial Code.  In addition, the term “ Secured Party ” shall mean the Lender and the term “ Subordination Agreement ” shall mean that certain Intercreditor and Subordination Agreement dated as of September 4, 2009 among the Borrower, the Lender,

 
 
 

UB (for the benefit of the Lenders under the UB Credit Agreement) and the other parties referred to therein, as such Subordination Agreement may be amended, modified or restated from time to time.

2.            Grant of Security .  The Pledgor hereby assigns and pledges to the Lender, and hereby grants to the Lender, a security interest in, all of the Pledgor’s right, title and interest in and to the following, whether now owned or hereafter acquired, whether now or hereafter existing and wherever located (all of the following herein called the “ Collateral ”):
 
(a)           all shares of capital stock, equity interests or other interests in the Borrower owned by the Pledgor or in which the Pledgor has an interest (the “ Pledged Interests ”); all rights to vote or participate in the management of the Borrower and to receive information concerning the business and affairs of the Borrower; all preferences and privileges with respect thereto, and all distributions (including any redemption payments or liquidation payments), dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Interests; notwithstanding the foregoing, the security interest granted herein shall not include, and the term Collateral shall not include, equity interests in any direct Foreign Subsidiary of the Pledgor in excess of 65% of the Capital Stock having voting power in such Foreign Subsidiary (unless a greater amount of such equity interests shall not cause the Pledgor to incur material adverse tax consequences under Section 956 of the Code); and

(b)           any and all proceeds and products of the foregoing, including, without limitation, all money, accounts, general intangibles, deposit accounts, documents, instruments, letter-of-credit rights, investment property, chattel paper, goods, insurance proceeds and any other tangible or intangible property received upon the sale or disposition of any of the foregoing and, to the extent not otherwise included, all books and records with respect to the foregoing Collateral.

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

4.            Security for Obligations .  This Agreement and the pledges made and security interests granted herein secure the prompt payment and full performance of all obligations of the Pledgor now or hereafter existing under the Pledgor Guarantee, whether for principal, interest, fees, expenses or otherwise, including, without limitation, all obligations of the Pledgor now or hereafter existing under this Agreement, all interest that accrues (whether or not allowed) at the then applicable rate (including interest at the rate for overdue payments described in Section 4.5 of the Loan Agreement) specified in the Loan Agreement on all or any part of any of such

 
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obligations after the filing of any petition or pleading against the Pledgor for a proceeding under any bankruptcy or related law (collectively, the “ Secured Obligations ”).

5.            Delivery of Certificates and Instruments/Control of Collateral .  All certificates or instruments representing or evidencing the Collateral shall be delivered to and held by or on behalf of the Lender pursuant hereto and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance reasonably satisfactory to the Lender.  Subject to the revocable rights specified in Section 9(a), the Lender shall have the right, at any time after the occurrence and during the continuation of any Event of Default, in its discretion and without notice to the Pledgor, to transfer to or register in the name of the Lender or any of its nominees any or all of Collateral.  In addition, the Lender shall have the right to exchange certificates or instruments representing or evidencing Collateral for certificates or instruments of smaller or larger denominations.  On or prior to the Closing Date, the Pledgor will cause the Lender to receive, and at all times to have, control over the Collateral, including, without limitation, in the case of any security entitlement, by causing the Lender to become the entitlement holder with respect thereto.

6.            Representations and Warranties .  The Pledgor represents and warrants as set forth below.

(a)            Location of Pledgor and Collateral, Etc .  The place of business of the Pledgor or, if the Pledgor has more than one place of business, the chief executive office of the Pledgor and the place where the Pledgor keeps its records concerning the Collateral, are located at the address referred to for the Pledgor in Section 20, or at such other location as to which the Pledgor has provided 30 days’ prior written notice to the Lender.  The Pledgor’s exact legal name and state of incorporation are as set forth in the Pledgor’s signature block to this Agreement.  The Pledgor has taken all action (if any) required by Section 7.

(b)            Ownership of Collateral .  As of the Closing Date, the Pledgor is the legal and beneficial owner of the Pledged Interests specified in Schedule 1.

(c)            Pledged Interests .  The Pledged Interests have been duly authorized and validly issued and are fully paid and nonassessable.  All of the Pledged Interests are in certificated form (as contemplated by Article 8 of the Uniform Commercial Code).  The Pledged Interests constitute the percentage of the issued and outstanding shares of the Borrower as specified in Schedule 1.

(d)            Pledge Agreement Authorized and Binding .  The execution, delivery and performance of this Agreement have been duly authorized by the Pledgor and do not require the consent or approval of any Governmental Authority (except (i) any consent or approval which has been made or obtained and is in full force and effect and (ii) material consents or approvals required by the Pledgor 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); and are not in contravention of, or in conflict with, any applicable law.  This Agreement is a valid and legally binding obligation of the Pledgor enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the

 
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enforcement of creditors’ rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law).
 
(e)            Valid and Perfected Security Interest .  This Agreement and the delivery to UB, as agent for the Lender, of the certificates or instruments representing or evidencing the Collateral, accompanied by stock powers or endorsements, as applicable, executed in blank, create a valid and perfected security interest in the Collateral, securing the payment of the Secured Obligations.

(f)            Third-Party Authorizations, Etc .  No consent or authorization of, filing with or other act by or in respect of, any Governmental Authority is required either (i) for the grant by the Pledgor of the security interest granted hereby or for the execution, delivery or performance of this Agreement by the Pledgor or (ii) for the perfection of or exercise by the Lender of its rights provided for in this Agreement or the remedies in respect of the Collateral provided pursuant to this Agreement (except (A) as may be required in connection with the disposition of the Collateral by laws affecting the offering and sale of securities generally, (B) any consent, authorization, filing or other act which has been made or obtained and is in full force and effect and (C) material consents, authorizations, filings or other acts required by the Pledgor 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).

7.            Further Assurances .

(a)           The Pledgor agrees that from time to time, at its own expense, it will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary, or that the Lender may reasonably request, in order to perfect and protect the security interest granted or purported to be granted hereby by the Pledgor or to enable the Lender to exercise and enforce its rights and remedies hereunder with respect to any of the Collateral.  Without limiting the generality of the foregoing, the Pledgor (i) will not take any action that would cause any of the representations and warranties of the Pledgor in Section 6 to become untrue and (ii) will execute and file such financing and continuation statements, and amendments thereto, and such other instruments and notices, as may be necessary or reasonably desirable, or as the Lender may reasonably request, in order to perfect and preserve the security interest granted or purported to be granted hereby.

(b)           The Pledgor hereby authorizes the Lender to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of the Pledgor where permitted by law.  A photocopy or other reproduction of this Agreement or any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement where permitted by law.

(c)           The Pledgor will furnish to the Lender from time to time statements and schedules further identifying and describing the Collateral, and such other reports in connection with the Collateral, as the Lender may reasonably request, all in reasonable detail.

8.            Place of Business; Name .  The Pledgor will keep its place of business or, if the Pledgor has more than one place of business, its chief executive office, and the place where the

 
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Pledgor keeps its records concerning the Collateral, at the location therefor specified pursuant to Section 6(a) or, upon 30 days’ prior written notice to the Lender, at such other locations in jurisdictions where all actions required by Section 7 have been taken with respect to the Collateral.  The Pledgor will hold and preserve such records and will permit representatives of the Lender at any time during normal business hours, upon reasonable prior notice, to inspect, copy and make abstracts from such records.  The Pledgor will not adopt, use or conduct business under any trade name or other corporate or fictitious name (other than its legal name, as set forth on the signature pages hereto) or change its legal name, state of incorporation or state organizational identification number, if any, as specified pursuant to Section 6(a), except upon not less than 30 days’ prior notice to the Lender and the Pledgor’s prior compliance with all applicable requirements of Section 7 hereof necessary to perfect the Lender’s security interest hereunder.

9.            Rights with Respect to Collateral .

(a)           So long as no Event of Default has occurred and is continuing, the provisions set forth below shall apply.

(i)           The Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Collateral or any part thereof for any purpose not inconsistent with the terms of this Agreement or any other Loan Document.

(ii)           The Pledgor shall be entitled to receive and retain any and all distributions paid in compliance with the Loan Agreement in respect of the Collateral; provided , however , that any and all

(A)           distributions paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of or exchange for, the Collateral,

(B)           distributions paid or payable in cash in respect of the Collateral in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in surplus and

(C)           cash paid, payable or otherwise distributed in respect of principal of, or in redemption of or exchange for, any Pledged Interest shall be, and shall, subject to the Subordination Agreement, be forthwith delivered to the Lender to hold as, Collateral and shall, if received by the Pledgor, be received in trust for the benefit of the Lender, be segregated from the other property or funds of the Pledgor and be forthwith delivered to the Lender as Collateral in the same form as so received (with any necessary endorsement).

(b)           Upon the occurrence and during the continuation of any Event of Default, the provisions set forth below shall apply.

(i)           All rights of the Pledgor to exercise the voting and other consensual rights that it would otherwise be entitled to exercise pursuant to Section 9(a)(i) and to receive the dividends and other distributions that it would otherwise be authorized to receive and retain pursuant to Section 9(a)(ii) shall cease, and all such rights, subject to the Subordination

 
5
 

Agreement, shall thereupon become vested in the Lender, which shall thereupon have the sole right to exercise such voting and other consensual rights and to receive and hold as Collateral such distributions.
 
(ii)           All distributions that are received by the Pledgor contrary to the provisions of Section 9(b)(i) shall, subject to the Subordination Agreement, be received in trust for the benefit of the Lender, shall be segregated from other funds of the Pledgor and shall be forthwith paid over to the Lender as Collateral in the same form as so received (with any necessary endorsement).

(iii)           Determination by the Lender to exercise its right to sell any or all of the Pledged Interests without registering them under the Securities Act of 1933 shall not be deemed to be commercially unreasonable.

After any and all Events of Default have been cured or waived, the Pledgor shall have the right to exercise the voting and other consensual rights it would otherwise be entitled to exercise pursuant to Section 9(a)(i) hereof and the Loan Agreement and receive the distributions which it would be authorized to receive and retain pursuant to Section 9(a)(ii) hereof and the Loan Agreement.

(c)           The Pledgor hereby revokes all previous proxies with regard to the Pledged Interests (except proxies granted to UB) and, subject to the Subordination Agreement, appoints the Lender as its proxyholder and attorney-in-fact to attend and vote at any and all meetings of the shareholders of the Borrower (whether or not any Pledged Interests are transferred into the name of the Lender), and any adjournments thereof, held on or after the date of the giving of this proxy and to execute any and all written consents, waivers and ratifications of the Borrower executed on or after the date of the giving of this proxy and prior to the termination of this proxy with the same effect as if the Pledgor had personally attended the meetings or had personally voted on its Pledged Interests or had personally signed the consents, waivers or ratifications; provided , however , that the Lender as proxyholder shall have such rights only upon the occurrence and during the continuance of an Event of Default.  The Pledgor hereby authorizes the Lender to substitute another Person (which Person shall be a successor to the rights of the Lender hereunder, a nominee appointed by the Lender to serve as proxyholder, or otherwise as approved by the Pledgor in writing, such approval not to be unreasonably withheld) as the proxyholder and, upon the occurrence or during the continuance of any Event of Default, subject to the Subordination Agreement, hereby authorizes and directs the proxyholder to file this proxy and the substitution instrument with the secretary of the Borrower.  This proxy is coupled with an interest and is irrevocable until such time as no part of any Term Loan Commitment remains outstanding and all Obligations have been paid in full.

10.            Transfers and Other Liens; Additional Capital Stock .

(a)           The Pledgor will not (i) sell, assign (by operation of law or otherwise) or otherwise dispose of, or grant any option with respect to, any of the Collateral or (ii) create or permit to exist any Lien upon or with respect to any of the Collateral, except for the security interest created by this Agreement and except for security interests in favor of UB.

 
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(b)           The Pledgor agrees that it will (i) cause the Borrower not to issue any capital stock or other equity interests (or options, warrants or other rights with respect thereto) in addition to or in substitution for the Collateral, except to the Pledgor.

11.            Lender Appointed Attorney-in-Fact .  The Pledgor hereby irrevocably appoints the Lender as the Pledgor’s attorney-in-fact, with full authority in the place and stead of the Pledgor and in the name of the Pledgor or otherwise, from time to time in the Lender’s reasonable discretion at any time upon the occurrence and during the continuation of any Event of Default, to, subject to the Subordination Agreement, take any action and to execute any instrument that the Lender may deem reasonably necessary or advisable to accomplish the purposes of this Agreement, including:

(a)           to ask for, demand, collect, sue for, recover, compromise, receive and give acquittance and receipts for moneys due or to become due under or in respect of any of the Collateral;

(b)           to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection with clause (a) above; and

(c)           to file any claims, take any action and institute any proceedings that the Lender may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce compliance with the rights of the Lender with respect to any of the Collateral.

12.            Lender May Perform .  If the Pledgor fails to perform any agreement contained herein, subject to the Subordination Agreement, the Lender may itself perform or cause performance of such agreement, and the reasonable expenses of the Lender incurred in connection therewith shall be payable by the Pledgor under Section 14(b).

13.            Lender’ Duties .  The powers conferred on the Lender hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers.  Except for the safe custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Lender shall have no duty as to any Collateral, as to ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Collateral, whether or not the Lender has or is deemed to have knowledge of such matters, or as to the taking of any necessary steps to preserve rights against any parties or any other rights pertaining to any Collateral.  The Lender shall be deemed to have exercised reasonable care in the custody and preservation of any Collateral in its possession if such Collateral is accorded treatment substantially equal to that the Lender accords its own similar property.

14.            Remedies .  If any Event of Default occurs and is continuing, the provisions set forth below shall apply, subject, in each case, to the Subordination Agreement,.

(a)           The Lender may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all of the rights and remedies of a secured party on default under the Uniform Commercial Code (whether or not the Uniform Commercial Code applies to the affected Collateral) and may also (i) require the Pledgor to, and the Pledgor hereby agrees that it will at its expense and upon request by the Lender forthwith,

 
7
 

assemble all or part of the Collateral as directed by the Lender and make it available to the Lender at a place to be designated by the Lender that is reasonably convenient to both parties and (ii) without notice except as provided below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of the Lender’s offices or elsewhere, for cash, on credit or for future delivery and upon such other terms as the Lender may deem commercially reasonable.  The Pledgor agrees that, to the extent notice of sale is required by law, at least 10 days’ notice to the Pledgor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification.  The Lender shall not be obligated to make any sale of Collateral regardless of notice of sale having been given.  The Lender may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned.  Until the Lender is able to effect a sale, lease, or other disposition of the Collateral, the Lender shall have the right to hold or use the Collateral, or any part thereof, to the extent that it deems appropriate for the purpose of preserving the Collateral or its value or for any other purpose deemed appropriate by the Lender.  The Lender shall have no obligation to the Pledgor to maintain or preserve the rights of the Pledgor as against third parties with respect to the Collateral while the Collateral is in the possession of the Lender.  The Lender may, if it so elects, seek the appointment of a receiver or keeper to take possession of the Collateral and to enforce any of the Lender’s remedies, with respect to such appointment without prior notice or hearing as to such appointment.
 
(b)           The proceeds resulting from the collection, liquidation, sale or other disposition of the Collateral shall be applied, first , to the reasonable costs and expenses (including, without limitation, reasonable attorneys’ fees) of retaking, holding, storing, processing and preparing for sale, selling, collecting and liquidating the Collateral, and the like; second , to the satisfaction of all Secured Obligations (other than contingent obligations); and third , any surplus remaining after the satisfaction of all Secured Obligations (other than contingent obligations), provided no Obligations (other than contingent obligations) exist and no Term Loan Commitment remains outstanding, to be paid over to the Pledgor or to whomsoever may be lawfully entitled to receive such surplus.

(c)           The Lender may exercise any and all rights and remedies of the Pledgor under or in connection with the Collateral, including any and all rights of the Pledgor to demand or otherwise require payment of any amount under, or performance of any provision of, the Collateral.

(d)           To the extent permitted by applicable law, the Pledgor waives all claims, damages and demands against the Lender arising out of the repossession, retention or sale of the Collateral, or any part or parts thereof, except to the extent any such claims, damages and awards arise out of the gross negligence or willful misconduct of the Lender or its agents or attorneys-in-fact.

15.            Private Sales .  Subject to the Subordination Agreement, the Lender may, in its sole and absolute discretion, sell all or any part of the Collateral at private sale in such manner and under such circumstances as the Lender may deem necessary or advisable in order that the sale may be lawfully conducted in a commercially reasonable manner.  Without limiting the foregoing, the Lender may (i) approach and negotiate with a limited number of potential

 
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purchasers, and (ii) restrict the prospective bidders or purchasers to persons who will represent and agree that they are purchasing such Collateral for their own account for investment and not with a view to the distribution or resale thereof.  In the event that any Collateral is sold at private sale, the Pledgor agrees to the extent permitted by applicable law that if the Collateral is sold for a price which is commercially reasonable, then (A) the Pledgor shall not be entitled to a credit against the Secured Obligations in an amount in excess of the purchase price, and (B) the Lender shall not incur any liability or responsibility to the Pledgor in connection therewith, notwithstanding the possibility that a substantially higher price might have been realized at a public sale.  The Pledgor recognizes that a ready market may not exist for such Collateral, and that a sale by the Lender of any such Collateral for an amount less than a pro rata share of the fair market value of the issuer’s assets minus liabilities may be commercially reasonable in view of the difficulties that may be encountered in attempting to sell a large amount of such Collateral or Collateral that is privately traded.

16.            Amendments, Etc.   No amendment or waiver of any provision of this Agreement or consent to any departure by the Pledgor therefrom shall in any event be effective unless the same shall be in writing and otherwise in accordance with Section 13.12 of the Loan Agreement, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.

17.            No Waiver; Remedies .  No failure on the part of the Lender to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof, and no single or partial exercise of any right hereunder shall preclude any other or further exercise thereof or the exercise of any other right.  The remedies provided herein are cumulative and not exclusive of any remedies provided by law.

18.            Continuing Security Interest; Assignment .  This Agreement shall create a continuing security interest in the Collateral and shall (i) remain in full force and effect until payment in full in cash of the Obligations (other than contingent obligations) and the Secured Obligations (other than contingent obligations) and the termination or expiration of the Term Loan Commitment, (ii) be binding upon the Pledgor, its successors and assigns and (iii) inure, together with the rights and remedies of the Lender hereunder, to the benefit of the Lender, and any successor Lender, for the benefit of the Secured Party, subject to the terms of the Loan Agreement.  Subject to the terms of the Loan Agreement, any Lender may assign or otherwise transfer any Loans, Term Loan Commitment or participations therein, or any rights in Collateral held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to the Lender herein or otherwise.  Nothing set forth herein or in any other Loan Document is intended or shall be construed to give to any other party any right, remedy or claim under, to or in respect of this Agreement or any other Loan Document or any Collateral.  The Pledgor’s successors and assigns shall include, without limitation, a receiver, trustee or debtor-in-possession thereof or therefor, provided that , none of the rights or obligations of the Pledgor hereunder may be assigned or otherwise transferred.

19.            Governing Law .  This Agreement and the rights and obligations of the parties under this Agreement shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York (without reference to its choice of law rules).
 
 
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20.            Addresses for Notices .  All notices, demands and other communications provided for hereunder shall be in writing and given in accordance with Section 3.1 of the Pledgor Guarantee.

21.            Release of Pledgor .

(a)           This Agreement and all obligations of the Pledgor hereunder and all security interests granted hereby shall be released and terminated when all Obligations (other than contingent obligations) have been paid in full in cash and when the Term Loan Commitments has expired.  Upon such release and termination, all rights in and to the Collateral shall automatically revert to the Pledgor, and the Lender shall promptly return any Collateral in their possession to the Pledgor, or to the Person or Persons legally entitled thereto, and shall endorse, execute, deliver, record and file all instruments and documents, and do all other acts and things, reasonably required for the return of the Collateral to the Pledgor, or to the Person or Persons legally entitled thereto, and to evidence or document the release of the interests of the Secured Party arising under this Agreement, all as reasonably requested by, and at the sole expense of, the Pledgor.

(b)           The Lender agrees that if an Asset Disposition permitted under the UB Credit Agreement occurs with respect to any Collateral, the Lender shall release such Collateral that is the subject of such Asset Disposition to the Pledgor free and clear of the Lien under this Agreement.





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IN WITNESS WHEREOF, the Pledgor has executed this Agreement by its duly authorized representative, solely in such capacity and not as an individual, as of the date first written above.

 
PLEDGOR
 
       
 
PHYSICIANS FORMULA HOLDINGS, INC.,
 
 
a Delaware corporation
 
       
       
 
By:
/s/ Jeffrey Rogers
 
 
Name: 
Jeffrey Rogers
 
 
Title:
President
 

 
S-1
 

SCHEDULE 1


PLEDGED INTERESTS


Pledged Interest
Certificate No.
No. of Shares
Percentage Interest in Issuer
Other Classes of Shares
         
         
Physicians Formula, Inc.
5
100
100%
None

Exhibit 10.5
 
INTERCREDITOR AND SUBORDINATION AGREEMENT


This INTERCREDITOR AND SUBORDINATION AGREEMENT (“ Agreement ”), dated as of September 4, 2009, is made by (1) MILL ROAD CAPITAL, L.P., a Delaware limited liability company (the “ Subordinated Creditor ”), (2) PHYSICIANS FORMULA, INC., a New York corporation (the “ Borrower ”) and (3) UNION BANK, N.A., as administrative agent (the “ Agent ”) for the Lenders (as defined in the Credit Agreement referred to below, the “ Lenders ”).

RECITALS

A.           The Borrower, the Lenders and the Agent have entered into that certain Credit Agreement dated as of November 14, 2006, as amended by that certain First Amendment to Credit Agreement dated as of July 8, 2008, that certain Second Amendment to Credit Agreement dated as of September 9, 2008, that certain Third Amendment to Credit Agreement dated as of December 5, 2008, that certain Fourth Amendment to Credit Agreement dated as of March 30, 2009, that certain Fifth Amendment to Credit Agreement dated as of July 29, 2009 and that certain Sixth Amendment to Credit Agreement (the “ Sixth Amendment ”) dated as of even date herewith (as so amended, the “ Credit Agreement ”).  Pursuant to the Sixth Amendment, the Agent and the Lenders have agreed to waive certain Events of Default, and amend certain provisions of the Credit Agreement, as requested by the Borrower and as more fully set forth therein.

B.           In connection with the Credit Agreement, the Borrower has executed in favor of the Agent a Security Agreement, pursuant to which the Borrower has assigned, pledged and granted to the Agent a security interest in certain collateral as described therein (as it may be amended, modified, supplemented or restated from time to time, the “ Senior Security Agreement ”).  Capitalized terms used herein and not defined shall have the meanings assigned to them in the Credit Agreement.

C.           Concurrently herewith, the Borrower is entering into that certain Term Loan Agreement dated as of even date herewith between the Borrower and the Subordinated Creditor (the “ Subordinated Loan Agreement ”) and that certain Term Note dated as of even date herewith, executed by the Borrower in favor of the Subordinated Creditor in the face amount of $4,200,000 (the “ Subordinated Note ”), pursuant to which the Subordinated Creditor is concurrently herewith making a term loan in such amount on a subordinated basis to the Borrower (the “ Subordinated Loan ”).  The Subordinated Loan will be secured, on a subordinate basis, by that certain Security Agreement dated as of even date herewith, executed by the Borrower and certain of its Subsidiaries in favor of the Subordinated Creditor (the “ Subordinated Security Agreement ”). In addition, Holdings and certain of the Subsidiaries will execute, in favor of the Subordinated Creditor, those certain Subordinated Guarantees dated as of even date herewith (the “ Subordinated Guarantees ”), and Holdings will execute, in favor of the Subordinated Creditor, that certain Subordinated Pledge Agreement dated as of even date herewith in favor of the Subordinated Creditor (the “ Subordinated Pledge Agreement ”).

D.           It is a condition precedent to the effectiveness of the Sixth Amendment that the Subordinated Creditor and the Borrower shall have executed and delivered this Agreement in favor of the Agent.

 
 
 

Accordingly, the parties hereto agree as follows:

AGREEMENT

SECTION 1.    Definitions .

“ Blockage Notice ”:  written notice of a Non-Payment Default given by the Agent to Subordinated Creditor.

“ Non-Payment Default ”:  any Event of Default other than a Payment Default.

“ Obligors ”:  collectively, the Borrower, Holdings and the Subsidiaries.

“ Payment Default ”:  an Event of Default with respect the payment of principal, interest, fees, expenses or other amounts payable under the Credit Agreement or the other Loan Documents.

“ Secured Parties ”:  the Agent, the Lenders and each counterparty to a Hedging Agreement entered into pursuant to the Credit Agreement, provided that such counterparty is a Lender or an affiliate of a Lender.

“ Subordinated Debt ”:  all debt, liabilities and obligations of the Obligors to the Subordinated Creditor, whether now existing or hereafter arising, under or relating to the Subordinated Debt Documents, all interest on such debt and any and all fees, indemnifications or other liabilities incurred in connection therewith.

“ Subordinated Debt Documents ”:  the Subordinated Loan Agreement, the Subordinated Note, the Subordinated Security Agreement, the Subordinated Guarantees and the Subordinated Pledge Agreement and any other documents, agreements or instruments executed in connection therewith from time to time.

“ Subordinated Liens ”:  any pledge, charge, hypothecation, assignment, lien, security interest or other encumbrance existing or created in support of the Subordinated Debt, including those created by the Subordinated Security Agreement and the Subordinated Pledge Agreement.

SECTION 2.    Agreement To Subordinate .  The Subordinated Creditor and the Obligors represent and agree that (i) the Subordinated Debt (including, without limitation, interest accruing after the filing of a petition initiating any proceeding referred to in Section 4(a) hereof), is and shall be unconditionally subordinate, to the extent and in the manner hereinafter set forth, in right of payment to the prior payment in full in cash of all obligations of the Obligors now or hereafter existing to the Secured Parties under the Loan Documents and any other documents or instruments executed in connection therewith, including but not limited to principal, interest (including, without limitation, interest as provided in the Credit Agreement after the filing of a petition initiating any proceeding referred to in Section 4(a) hereof), fees, expenses (including attorneys’ fees and expenses) or otherwise (such obligations being called the “ Obligations ”) and (ii) the Subordinated Liens are and shall be junior and unconditionally subordinate to all Liens in favor of the Agent or any Lender and securing any part of the Obligations.  For the purposes of this Agreement, the Obligations shall not be deemed to have been paid in full until and unless the holders or owners of the Obligations shall have received indefeasible payment in full in cash, and all Commitments and Letters of Credit shall have expired or been terminated.

 
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SECTION 3.    No Payment on the Subordinated Debt, Etc .  (a)  Except as set forth in Sections 3(b) and 3(c) below, the Subordinated Creditor agrees not to ask for, demand, sue for, take or receive from any Obligor, directly or indirectly, in cash or other property, by setoff or in any other manner (including, without limitation, from or by way of collateral, including by way of any Subordinated Lien), or commence (or join with any other creditor in commencing) any proceeding against any Obligor (including any bankruptcy, insolvency or similar proceeding) for, payment of all or any of the Subordinated Debt, or accelerate all or any portion of the Subordinated Debt, or exercise or seek to exercise any rights or remedies with respect to any Subordinated Lien or institute any action or proceeding with respect to such rights or remedies (including any action of foreclosure), unless and until the Obligations shall have been paid in full.

(b)           Notwithstanding the foregoing Section 3(a), the Borrower may pay in cash, on final maturity of the Subordinated Debt (which shall be not earlier than the first to occur of (i) the 90 th day after the Sixth Amendment Effective Date and (ii) the date the New Financing is funded in full) and the Subordinated Creditor may receive, the outstanding principal amount of the Subordinated Debt and all interest accrued thereon under the Subordinated Note (provided that the rate of interest applicable to the Subordinated Debt shall not at any time exceed 15.0% per annum plus, if applicable, interest at the default rate contemplated by Section 4.5 of the Subordinated Loan Agreement on the date hereof (the “ Default Rate ”)), so long as (i) no Default has occurred and is continuing at the time of such payment and the Borrower has provided to the Agent a Covenant Compliance Certificate to such effect and (ii) concurrently with such payment, the Borrower is receiving an equity contribution or the proceeds of replacement subordinated debt in an amount at least equal to $4,200,000 plus interest and any other amounts required to satisfy the Subordinated Debt in full (the “ New Financing ”), on terms and conditions acceptable to the Agent.

(c)           Notwithstanding the foregoing Section 3(a), but subject to Section 3(b), the Subordinated Creditor may exercise its rights and remedies under the Subordinated Debt unless (i) a Nonpayment Default has occurred and is continuing and the Agent has given a Blockage Notice to the Subordinated Creditor, and fewer than 180 days have elapsed since the giving of such notice or (ii) a Payment Default has occurred and is continuing and the Agent has given a Blockage Notice to the Subordinated Creditor; provided that the foregoing shall not prohibit or limit the accruing of interest on the Subordinated Debt at the Default Rate.  In no event shall the Subordinated Creditor exercise any rights or remedies against any Obligor (except for the accrual of interest at the Default Rate as set forth in the previous sentence) without first providing the Agent with 30 days’ prior written notice describing the event(s) of default that have occurred under the Subordinated Debt Documents and the action(s) the Subordinated Creditor plans to take with respect to them.

SECTION 4.    In Furtherance of Subordination .  The Subordinated Creditor agrees as follows:

(a)           Upon any distribution of all or any of the assets of any Obligor to creditors of any Obligor upon its dissolution, winding up, liquidation, arrangement, or reorganization, whether in any bankruptcy, insolvency, arrangement, reorganization or receivership proceedings or upon any assignment for the benefit of creditors or any other marshalling of the assets and liabilities of any Obligor or otherwise, any payment or distribution of any kind (whether in cash, property or securities) that otherwise would be payable or deliverable upon or with respect to the

 
3
 

Subordinated Debt shall be paid or delivered directly to the Agent for application (in the case of cash) to or as collateral (in the case of non-cash property or securities) for the payment or prepayment of the Obligations until the Obligations shall have been paid in full.

(b)           If any proceeding referred to in subsection (a) above is commenced by or against any Obligor at any time prior to payment of the Obligations in full:

(i)           the Agent is hereby irrevocably authorized and empowered (in its own name or in the name of the Subordinated Creditor or otherwise), but shall have no obligation, to demand, sue for, collect and receive every payment or distribution referred to in subsection (a) above and give acquittance therefore, and to file claims and proofs of claim and take such other action (including, without limitation, voting the Subordinated Debt or enforcing any Subordinated Lien) as the Agent may deem necessary or advisable for the exercise or enforcement of any of the rights or interests of the Secured Parties hereunder; and

(ii)           the Subordinated Creditor shall duly and promptly execute and deliver to the Agent such powers of attorney, assignments or other instruments as it may reasonably request in order to enable the Agent to enforce any and all claims with respect to, and any security interests and other liens securing payment of, the Subordinated Debt.

(c)           All payments or distributions upon or with respect to the Subordinated Debt that are received by the Subordinated Creditor contrary to the provisions of this Agreement shall be received in trust for the benefit of the Agent, shall be segregated from other funds and property held by the Subordinated Creditor and shall be forthwith paid over to the Agent for the benefit of the Secured Parties in the same form as so received (with any necessary endorsement) to be applied (in the case of cash) to or held as collateral (in the case of non-cash property or securities) for the payment or prepayment of the Obligations in accordance, at such times and in such manner as the Agent shall elect.

(d)           The Subordinated Creditor will not contest, protest or object to any foreclosure proceeding or other action brought by the Agent, whether in conjunction with a proceeding referred to in Section 4(a) or otherwise, or any other exercise by the Agent of any rights and remedies relating to the Collateral or the Guarantor Collateral or otherwise under or in connection with the Loan Documents.  The Agent and the Lenders shall have the right to enforce rights, exercise remedies (including set-off and the right to credit bid their debt) and make, in connection with such enforcement or exercise, determinations regarding the release, disposition, or restrictions with respect to the Collateral or the Guarantor Collateral without any consultation with or the consent of the Subordinated Creditor.  The Subordinated Creditor hereby waives any and all rights it may have as a junior lien creditor or otherwise to object to the manner in which the Agent seeks to enforce or collect the Obligations or the Liens securing the Obligations (so long as any such enforcement or collection is conducted in accordance with applicable law), regardless of whether any action or failure to act by or on behalf of the Agent is adverse to the interest of the Subordinated Creditor.

(e)           If, in connection with

 
4
 

(i)           the exercise of any right or remedy by the Agent in respect of the Collateral or the Guarantor Collateral, including any sale, lease, exchange, transfer or other disposition of any such Collateral or Guarantor Collateral; or

(ii)          any sale, lease, exchange, transfer or other disposition of any Collateral or Guarantor Collateral permitted under the terms of the Loan Documents (whether or not an Event of Default has occurred and is continuing);

the Agent, for itself or on behalf of any of the Lenders, releases any of its Liens on any part of the Collateral or the Guarantor Collateral, in each case other than in connection with the payment in full of the Obligations, then the Liens, if any, of the Subordinated Creditor on such Collateral or Guarantor Collateral shall be automatically, unconditionally and simultaneously released, and the Subordinated Creditor promptly shall execute and deliver, at the expense of the Borrower, to the Agent such termination statements, releases and other documents as the Agent may request to effectively confirm such release.

(f)           The Subordinated Creditor agrees not to initiate, prosecute or participate in any claim, action or other proceeding challenging the enforceability, validity, perfection or priority of the Obligations or any Liens securing the Obligations.

(g)           The Agent is hereby authorized to demand specific performance of this Agreement, whether or not the Obligors shall have complied with any of the provisions hereof applicable to them, at any time when the Subordinated Creditor shall have failed to comply with any of the provisions of this Agreement applicable to the Subordinated Creditor.  The Subordinated Creditor hereby irrevocably waives any defense, based on the adequacy of a remedy at law, that might be asserted as a bar to such remedy of specific performance.

SECTION 5.    Rights of Subrogation .  The Subordinated Creditor agrees that no payment or distribution to the Agent pursuant to the provisions of this Agreement shall entitle the Subordinated Creditor to exercise any rights of subrogation in respect thereof until the Obligations shall have been paid in full.

SECTION 6.    Further Assurances .  The Subordinated Creditor and each Obligor will, at its expense and at any time and from time to time, promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that the Agent may request, in order to protect any right or interest granted or purported to be granted hereby or to enable the Agent to exercise and enforce its rights and remedies hereunder.

SECTION 7.    No Change in or Disposition of Subordinated Debt .  The Subordinated Creditor will not:

(a)           sell, assign, pledge, encumber or otherwise dispose of any of the Subordinated Debt unless such purchaser, assignee or secured party agrees in writing to be bound by the terms of this Agreement; or

(b)           without the prior written consent of the Agent, permit any amendment or modification to the Subordinated Debt Documents that is inconsistent with the terms of this Agreement or the other Loan Documents or that could reasonably be expected to materially

 
5
 

adversely affect the interests of the Secured Parties .

SECTION 8.    Agreement by Obligors .  The Obligors agree that they will not make any payment of any of the Subordinated Debt, or take any other action, in contravention of the provisions of this Agreement.

SECTION 9.    Obligations Hereunder Not Affected .  All rights and interests of the Secured Parties hereunder and all agreements and obligations of the Subordinated Creditor and the Obligors under this Agreement, shall remain in full force and effect irrespective of:

(a)           any lack of validity or enforceability of any document evidencing or securing the Obligations;

(b)           any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to departure from any document evidencing the Obligations;

(c)           any exchange, release or non-perfection of any collateral, or any release or amendment or waiver of or consent to departure from any guaranty, for all or any of the Obligations; or

(d)           any other circumstances that might otherwise constitute a defense available to, or a discharge of, the Subordinated Creditor in respect of this Agreement.

This Agreement shall continue to be effective or be reinstated, as the case may be, if at any time any payment of the Obligations is rescinded or must otherwise be returned by the Agent and/or any other Secured Party upon the insolvency, bankruptcy or reorganization of any Obligor or otherwise, all as though such payment had not been made.

SECTION 10.    Waiver .  Each of the Subordinated Creditor and each Obligor hereby waives promptness, diligence, notice of acceptance and any other notice with respect to any of the Obligations and this Agreement and any requirement that the Agent and/or any other Secured Party exhaust any right or take any action against the Obligors or any other Person or any collateral.  The Subordinated Creditor hereby waives any right it may have to require the Agent to deliver to it, or otherwise account for, any property pledged to the Agent for the benefit of the Secured Parties upon any repayment of the Obligations in full, it being understood that in the event of any such repayment, the Agent may release its Liens and forward any such property to the Borrower or to any other party Agent deems appropriate.

SECTION 11.    Representations, Warranties and Covenants.   (a)    Each Obligor and the Subordinated Creditor hereby represents, warrants and covenants for the benefit of the Secured Parties as follows:

(i)           There exists no default in respect of the Subordinated Debt.

(ii)           Upon the making of the Subordinated Loan, the Subordinated Creditor will own the Subordinated Debt free and clear of any lien, security interest, charge or encumbrance.

 
6
 

(iii)             The proceeds of the Subordinated Loan shall be used by the Borrower solely for its general corporate purposes .

(b)           The Subordinated Creditor, each Obligor and the Agent further represents and warrants, as to itself, for the benefit of the Secured Parties and the Subordinated Creditor, as applicable, as follows:

(i)           Such Person has the legal power and authority to execute, deliver and perform its obligations under this Agreement.  This Agreement has been duly authorized by all necessary legal action on the part of such Person.

(ii)           This Agreement is the legal, valid and binding obligation of such Person enforceable against it in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws of general applicability affecting the enforcement of creditors’ rights and the application of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).

(iii)           The execution, delivery and performance by such Person of this Agreement does not contravene any law, regulation, order or contractual restriction binding on or affecting such Person and does not result in or require the creation of any lien, security interest or other charge or encumbrance.

SECTION 12.    Bailee for Perfection .  The Agent agrees to hold that part of the Collateral that is in its possession or control (or in the possession or control of its agents or bailees), to the extent that possession thereof is taken to perfect a Lien thereon under the Uniform Commercial Code (such Collateral being the “Pledged Collateral”) for the benefit of and on behalf of the Secured Parties and the Subordinated Creditor and any assignee solely for the purpose of perfecting the security interest in the Pledged Collateral granted under the Loan Documents and the Subordinated Debt Documents.

(a)           The Agent shall have no obligation whatsoever to the Subordinated Creditor to ensure that the Pledged Collateral is genuine or owned by any of the Obligors or to preserve rights or benefits of any Person except as expressly set forth in this Section 12.  The duties or responsibilities of the Agent under this Section 12 shall be limited solely to holding the Pledged Collateral as bailee in accordance with this Section 12 and delivering the Pledged Collateral upon payment in full of the Obligations as provided in paragraph (d) below.

(b)           The Agent shall not have by reason of the Subordinated Debt Documents, this Agreement or any other document a fiduciary relationship in respect of the Subordinated Creditor, and the Subordinated Creditor hereby waives and releases the Agent from all claims and liabilities arising pursuant to the Agent’s role under this Section 12 as gratuitous bailee and gratuitous agent with respect to the Collateral.  It is understood and agreed that the interests of the Agent and the Subordinated Creditor may differ and the Agent shall be fully entitled to act in its own interest without taking into account the interests of the Subordinated Creditor.

(d)           Upon payment of the Obligations in full, the Agent shall deliver the remaining Pledged Collateral in its possession (if any) together with any necessary endorsements

 
7
 

(such endorsement shall be without recourse and without any representation or warranty), first , to the Subordinated Creditor to the extent the Subordinated Debt remains outstanding, and second , to the Borrower to the extent no Subordinated Debt remains outstanding (in each case, so as to allow such Person to obtain possession or control of such Pledged Collateral), or in any event as a court of law may otherwise order.

SECTION 13.    Right to Purchase Obligations . 
(a)   The Subordinated Creditor shall have an option, exercised by delivery of written notice by the Subordinated Creditor to the Agent (a "Purchase Notice") to purchase all (but not less than all) of the Obligations (at the "Purchase Price" referred to below) from the Agent and the  Lenders, such purchase to be consummated within the ten Business Day period (the “Purchase Period”) after delivery of the Purchase Notice to the Agent.  The Purchase Notice shall be irrevocable.  Each of the Obligors and the Secured Parties agree to promptly and in good faith execute and deliver an Assignment and Acceptance, and do such other acts as may be reasonably requested to consummate this purchase within the Purchase Period.

(b)           On the date specified by the Subordinated Creditor in the Purchase Notice (which shall be within the Purchase Period), the Agent and the Lenders shall sell to the Subordinated Creditor pursuant to an appropriately executed Assignment and Acceptance, without recourse or warranty except as specified in such form Assignment and Acceptance, and the Subordinated Creditor shall purchase from the Agent and the Lenders all (but not less than all) of the Obligations.

(c)           Upon the date of such purchase and sale, the Subordinated Creditor shall (a) pay to the Agent as the purchase price therefor (the "Purchase Price") the full amount of all the Obligations then outstanding and unpaid, (b)  furnish cash collateral to the Agent to secure the Agent and the Lenders with respect to  obligations under Letters of Credit, in an amount equal to the aggregate undrawn face amount of any issued and outstanding Letters of Credit and, in any event, use commercially reasonable efforts to replace all of such letters of credit with letters of credit issued by or for the account of the Subordinated Creditor, and (c) agree to reimburse the Agent and the Lenders for any loss, cost, damage or expense (including reasonable attorneys' fees and legal expenses) in connection with any commissions, fees, costs or expenses related to any  Letters of Credit and any checks or other payments provisionally credited to the Obligations, as to which the Agent or any  Lender has not yet received final payment.

SECTION 14.    Amendments, Etc .  No amendment or waiver of any provision of this Agreement or consent to any departure by the Subordinated Creditor or the Borrower herefrom shall in any event be effective unless the same shall be in writing and signed by the Agent, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.

SECTION 15.    Notices .  All notices, requests and demands or other communications hereunder to be effective shall be in writing (including by facsimile), 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 facsimile notice, when received, in each case addressed as follows:  if to the Subordinated Creditor, to it at its address or facsimile number set forth on the signature page hereof; if to the Borrower or the Agent, to it at its address set forth in the Credit Agreement; or, as to any Person, to it at such other address as shall be designated by

 
8
 

such Person in a written notice to the other Persons.

SECTION 16.    No Waiver; Remedies .  No failure on the part of any Secured Party to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right.  The remedies herein provided are cumulative and not exclusive of any remedies provided by law.

SECTION 17.    Continuing Agreement; Assignment .  This Agreement is a continuing agreement and shall (i) remain in full force and effect until the Obligations shall have been paid in full, (ii) be binding upon the Subordinated Creditor and the Borrower and their respective successors and assigns and (iii) inure to the benefit of and be enforceable by the Agent and/or any other Secured Party and their successors, transferees and assigns.

SECTION 18.    Consent to Jurisdiction; Disputes .  (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, 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 15;

(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.

(b)      ALL CLAIMS, CAUSES OF ACTION AND OTHER DISPUTES CONCERNING THIS AGREEMENT (EACH A “ CLAIM ”), INCLUDING ANY AND ALL QUESTIONS OF LAW OR FACT RELATING THERETO, SHALL, AT THE WRITTEN REQUEST OF ANY PARTY, BE DETERMINED BY JUDICIAL REFERENCE PURSUANT TO THE CALIFORNIA CODE OF CIVIL PROCEDURE.  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 A COURT HAVING JURISDICTION.  THE REFEREE SHALL

 
9
 

REPORT A STATEMENT OF DECISION TO THE COURT.  NOTHING IN THIS PROVISION 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 PROVISION.  THE PARTIES ACKNOWLEDGE THAT CLAIMS WILL NOT BE ADJUDICATED BY A JURY.

SECTION 19.    Attorneys’ Fees and Costs .  The Subordinated Creditor shall reimburse the Agent and any other Secured Party for all attorneys’ fees, costs and expenses incurred by the Agent or any other Secured Party in connection with the enforcement of the Agent’s and any other Secured Party’s rights against the Subordinated Creditor under this Agreement, including, without limitation, attorneys’ fees, costs and expenses for trial, appellate proceedings, out-of-court negotiations and settlements.  Borrower agrees to reimburse the Subordinated Creditor for any such attorneys’ fees, costs and expenses paid by the Subordinated Creditor to the Agent or any other Secured Party in accordance with this Section 19, subject to Section 13.3 of the Subordinated Loan Agreement.

SECTION 20.    Governing Law . THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT 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).

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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

 
SUBORDINATED CREDITOR :
 
       
 
MILL ROAD CAPITAL, L.P.
 
       
       
 
By:
Charles Goldman
 
 
Name:
Charles Goldman
 
 
Title:
Managing Director
 
       
       
 
Address for Notices to Subordinated Creditor:
 
       
 
Two Soundview Drive
 
 
Greenwich, CT 06830
 
 
Facsimile:
203-621-3280
 
 
Attention:
Thomas Lynch
 
       
       
       
 
AGENT :
 
       
 
UNION BANK, N.A.
 
       
 
By:
/s/ T. Kevin Powells
 
 
Name:
T. Kevin Powells
 
 
Title:
Vice President
 
       
       
       
 
BORROWER :
 
       
 
PHYSICIANS FORMULA, INC.
 
       
 
By:
/s/ Jeffrey Rogers
 
 
Name:
Jeffrey Rogers
 
 
Title:
President
 

 
S-1
 
 
 
OBLIGORS :
 
       
       
 
PHYSICIANS FORMULA HOLDINGS, INC.
 
       
 
By:
/s/ Jeffrey Rogers
 
 
Name:
Jeffrey Rogers
 
 
Title:
President
 
       
       
       
 
PHYSICIANS FORMULA COSMETICS, INC.
 
       
 
By:
/s/ Jeffrey Rogers
 
 
Name:
Jeffrey Rogers
 
 
Title:
President
 
       
       
 
PHYSICIANS FORMULA DRTV, LLC
 
       
 
By:
/s/ Jeffrey Rogers
 
 
Name:
Jeffrey Rogers
 
 
Title:
President
 
  
  
S-2
Exhibit 10.6
SIXTH AMENDMENT TO CREDIT AGREEMENT
 
This SIXTH AMENDMENT TO CREDIT AGREEMENT (this “ Amendment ”), dated as of September 4, 2009, is entered into among (1) PHYSICIANS FORMULA, INC., a New York corporation (the “ Borrower ”), (2) the several banks and other lenders from time to time parties to this Amendment (the “ Lenders ”) and (3) UNION BANK, N.A., as administrative agent for the Lenders (in such capacity, the “ Agent ”).
 
RECITALS
 
A.           The Borrower, the Lenders and the Agent have entered into that certain Credit Agreement dated as of November 14, 2006, as amended by that certain First Amendment to Credit Agreement dated as of July 8, 2008, that certain Second Amendment to Credit Agreement dated as of September 9, 2008, that certain Third Amendment to Credit Agreement dated as of December 5, 2008, that certain Fourth Amendment to Credit Agreement dated as of March 30, 2009 and that certain Fifth Amendment to Credit Agreement dated as of July 29, 2009 (as so amended, the “ Credit Agreement ”).  Capitalized terms used herein and not defined shall have the meanings ascribed to them in the Credit Agreement.
 
B.           Pursuant to the Credit Agreement, the Lenders have made availab