Exhibit 10.1
 
SECOND AMENDMENT TO
SENIOR SUBORDINATED NOTE PURCHASE AND SECURITY AGREEMENT

 
THIS SECOND AMENDMENT TO SENIOR SUBORDINATED NOTE PURCHASE AND SECURITY
AGREEMENT dated as of April 30, 2010 (the “Amendment”) amends the Senior
Subordinated Note Purchase and Security Agreement dated as of November 6, 2009
(the “Original Agreement”), by and among Mill Road Capital, L.P., a Delaware
limited partnership (the “Holder”), Physicians Formula, Inc., a New York
corporation (the “Borrower”), Physicians Formula Holdings, Inc., a Delaware
corporation (“Holdings”) and the Guarantors party to the Original Agreement.
 
WHEREAS, the Holder, the Borrower, Holdings and the Guarantors desire to amend
the Original Agreement to change the terms of the Notes sold under the Original
Agreement and to permit the issuance and sale by Holdings of warrants to the
Holder; and
 
WHEREAS, the Holder holds Notes representing at least a majority of the
aggregate principal amount of the Notes outstanding on the date hereof;
 
NOW, THEREFORE, in consideration of the premises and the mutual covenants and
agreements herein contained, the receipt and sufficiency of which are hereby
acknowledged, the parties to this Amendment hereby agree as follows:
 
1.  
Defined Terms

 
Capitalized terms used herein, unless specified otherwise, shall have the same
meanings and/or references as contained in the Original Agreement.
 
2.  
Original Agreement Modifications

 
(a) Section 1.1(a) of the Original Agreement is hereby amended and restated in
its entirety as follows:
 
“(a)           The Borrower has authorized the issuance and sale of its amended
and restated Senior Subordinated Notes due November 6, 2014 in the aggregate
original principal amount of eight million dollars ($8,000,000) in the form set
forth as Exhibit A attached hereto (referred to herein individually as a “Note”
and collectively as the “Notes”, which terms shall also include any notes
delivered in exchange therefor or replacement thereof).  Commencing on the
Second Amendment Effective Date, the Notes will accrue interest on the unpaid
principal amount thereof at an interest rate per annum (the “Interest Rate”)
consisting of (i) ten percent (10.00%) per annum in cash interest plus (ii) four
percent (4.00%) per annum to be added automatically to the unpaid principal
amount of the Notes (“PIK Interest”) on each Interest Payment Date.”
 
(b) The third sentence of Section 1.1(b) of the Original Agreement is hereby
amended by amending and restating such sentence in its entirety as follows:
 
“All accrued PIK Interest shall be compounded annually on the first day of each
calendar year.”
 
 
 

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(c) Section 1.4(a) of the Original Agreement is hereby amended by deleting the
reference to “May 6, 2013” in the first sentence of such section and replacing
it with “November 6, 2014”.
 
(d) Section 1.4(d) of the Original Agreement is amended and restated in its
entirety as follows:
 
“(d)           Prepayment Premium.  In the event of any prepayment or repurchase
of the Notes prior to the Maturity Date pursuant to clauses (b) or (c) above,
the Borrower shall pay to the Holder Representative (on behalf of the Holders)
the prepayment premium indicated below corresponding to the time period in which
such prepayment or repurchase occurs or is required to occur (the “Prepayment
Premium”) (which prepayment premium shall be paid to the Holder Representative
(on behalf of the Holders) as liquidated damages and compensation for the costs
of making funds available with respect to the loans evidenced by the Notes):
 
Period
 
Prepayment Premium
(% of the aggregate principal
amount of the Notes prepaid or repurchased)
 
Closing Date through November 5, 2010
5%
November 6, 2010 through November 5, 2011
4%
November 6, 2011 through November 5, 2012
2%
November 6, 2012 through November 5, 2013
1%
November 6, 2013 and thereafter
0%

”
 
(e) Section 1.8 of the Original Agreement is amended and restated in its
entirety as follows:
 
“1.8           Transfer and Exchange of Notes and Warrants.  The Borrower shall
keep a register in which it shall provide for the registration of the Notes and
the Warrants and the registration of transfers of Notes and the Warrants.  The
Holder of any Note or Warrant may, prior to maturity, prepayment or repurchase
of such Note or the expiration of such Warrant, surrender such Note or Warrant
at the principal office of the Borrower for transfer or exchange.  Any Holder
desiring to transfer or exchange any Note or Warrant (including, but not limited
to, any assignment of a Note or Notes or a Warrant or Warrants contemplated by
Section 11.5 hereof) shall first notify the Borrower in writing at least ten
(10) Business Days in advance of such transfer or exchange.  Promptly, but in
any event within ten (10) Business Days after such notice to the Borrower from
the Holder Representative (on behalf of a Holder of one or more Notes) of  a
Holder’s intention to make such an exchange of such Holder’s Note(s) and without
expense (other than transfer taxes, if any) to such Holder, the Borrower shall
issue in exchange therefor another Note or Notes in the same aggregate principal
amount, as of the date of such issuance, as the unpaid principal amount of the
Note so surrendered and having the same maturity and rate of interest,
containing the same provisions and subject to the same terms and conditions as
the Note so surrendered (provided that no minimum shall apply to a liquidating
distribution of Notes to investors in a Holder and any Notes so distributed may
be subsequently transferred by such investor and its successors in the original
denomination thereof without further restriction).  Each new Note shall be made
payable to such Person or Persons, or assigns, as the Holder of such surrendered
Note may designate, and such transfer or exchange shall be made in such a manner
that no gain or loss of principal or interest shall result therefrom.  The
Borrower shall have no obligation or liability under any Note to any Person
other than the registered Holder of each such Note.  Assignments and transfers
of Notes by the Holders shall be made in compliance with Section 11.5
hereof.  Assignments, transfers and exchanges of Warrants shall be made in
compliance with the terms set forth in the Warrants.
 
 
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(f) Section 2.10 of the Original Agreement is hereby deleted in its entirety.
 
(g) The Original Agreement is hereby amended by inserting the following new
Article IIA as follows:
 
ARTICLE IIA
ISSUANCE OF THE WARRANTS
 
2A.1           The Warrants.  Holdings has authorized the issuance and sale of
warrants for the purchase of an aggregate of 650,000 shares of Common Stock (the
“Warrant Shares”) (subject to adjustment as provided therein) in the form set
forth as Exhibit G attached hereto (referred to herein individually as a
“Warrant” and collectively as the “Warrants”, which terms shall also include any
warrants delivered in exchange therefor or replacement thereof).  The Warrants
shall be exercisable at a purchase price equal to $0.25 per Warrant Share
(subject to adjustment as provided in the Warrants).
 
2A.2           Purchase and Sale of the Warrants.  For no additional
consideration, Holdings agrees to issue to the Purchaser on the Second Amendment
Effective Date, the Warrant.
 
2A.3           Registration Rights.  The Purchaser and its successors and
assigns shall have the registration rights with respect to the Common Stock
purchasable under the Warrants as set forth in the Registration Rights
Agreement.
 
2A.4           Representations and Warranties of the Purchaser regarding the
Warrants.
 
The Purchaser hereby represents and warrants, which representations and
warranties shall survive the Second Amendment Effective Date, that:
 
(a)           It is the present intention of the Purchaser to acquire its
Warrant and the Warrant Shares for its own account, and not as nominee or agent.
 
(b)           The Warrants and the Warrant Shares are being and will be acquired
for the purpose of investment and not with a view to distribution or resale
thereof in violation of the securities laws; subject, nevertheless, to the
condition that, except as otherwise provided herein and subject to compliance
with applicable securities laws, the disposition of the property of the
Purchaser shall at all times be within its control.  The Purchaser was not
formed solely for the purpose of making an investment in the Borrower.  The
Purchaser is an “accredited investor” as that term is defined in Regulation D
promulgated under the Securities Act with such knowledge and experience in
financial and business matters as are necessary in order to evaluate the merits
and risks of an investment in the Warrants and Warrant Shares.  In making its
decision to acquire the Warrant, the Purchaser has relied upon independent
investigations made by the Purchaser and the Purchaser’s representatives,
including the Purchaser’s own professional, tax and other advisors.  The
Purchaser and its representatives have been given the opportunity to ask
questions of, and to receive answers from, the Borrower concerning the terms and
conditions of the acquisition of the Warrant.  The Purchaser has reviewed, or
has had the opportunity to review, all information it deems necessary and
appropriate for the Purchaser to evaluate the financial risks inherent in the
acquisition of the Warrant.  The Purchaser understands that its acquisition of
the Warrant involves a high degree of risk and that no governmental authority
has passed on or made any recommendation or endorsement of the Warrant.
 
 
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(c)           The Purchaser understands that it must bear the economic risk of
its investment for an indefinite period of time because the Warrants and the
Warrant Shares are not, and will not be, registered under the Securities Act or
any applicable state securities laws and may not be resold unless subsequently
registered under the Securities Act and such other laws or unless an exemption
from such registration is available.  The Purchaser acknowledges that, in
issuing the Purchaser’s Warrant and the Warrant Shares, the Borrower is relying
on the representations and warranties of the Purchaser in this Section 2A.4.
 
(d)           The Purchaser hereby acknowledges that its Warrant and each
certificate, if any, representing Warrant Shares (unless no longer required in
the written opinion of counsel delivered to the Borrower, which opinion and
counsel shall be reasonably satisfactory to the Borrower and its legal counsel,
it being agreed that Foley Hoag LLP shall be satisfactory counsel) shall bear a
legend substantially in the following form (in addition to any other legend
required by the Operative Documents):
 
NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES
LAWS AND THE SECURITIES MAY NOT BE SOLD OR TRANSFERRED WITHOUT COMPLIANCE WITH
THE REGISTRATION OR QUALIFICATION PROVISIONS OF APPLICABLE FEDERAL AND STATE
SECURITIES LAWS OR APPLICABLE EXEMPTIONS THEREFROM.
 
The acquisition by the Purchaser of the Warrant Shares shall constitute a
confirmation by it of the foregoing representations.
 
2A.5           Representations and Warranties of Holdings regarding the
Warrants.
 
Holdings hereby represents and warrants, which representations and warranties
shall survive the Second Amendment Effective Date, that:
 
(a)           Authority; No Conflicts.
 
(i)           The execution, delivery and performance of the Operative Documents
and the transactions contemplated thereby by Holdings (including the issuance of
the Warrants and the issuance of the Warrant Shares upon exercise of the
Warrants) are within the power and authority of Holdings and have been
authorized by all corporate or other organizational proceedings of Holdings and
its stockholders and do not and will not (i) contravene any provision of the
certificate of incorporation or bylaws or any other organizational documents of
Holdings or any law, rule or regulation applicable to Holdings, (ii) contravene
any provision of, or constitute an event of default or event that, but for the
requirement that time elapse or notice be given, or both, would constitute an
event of default under, any order, agreement, lease, mortgage, note, bond,
indenture, license, or other instrument or undertaking to which Holdings is a
party or by which any of its properties are bound, or (iii) result in or require
the imposition of any Lien on any of the properties, assets or rights of
Holdings, except in favor of the Holders.
 
 
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(ii)           The Warrants being purchased hereunder and the Warrant Shares
issuable upon exercise of the Warrants, when issued, delivered and paid for in
the manner set forth in this Agreement or, in the case of the Warrant Shares,
when issued, delivered and paid for in the manner set forth in the Warrant, will
be duly authorized and validly issued and outstanding.  No preemptive rights or
other rights of any Person to subscribe for or purchase, and no anti-dilution
adjustment or similar rights of any Person, exist or will be triggered with
respect to the issuance and sale of the Warrants or the issuance of the Warrant
Shares upon the exercise of the Warrants.  Holdings will at all times hereafter
keep available, solely for issuance and delivery upon exercise of the Warrants,
such number of shares of Common Stock as from time to time shall be issuable
upon exercise of the Warrants.
 
(b)           Securities Act.  Neither Holdings, nor anyone acting on its behalf
has offered or will offer to sell Warrants, Common Stock or other securities to,
or has solicited or will solicit offers with respect thereto from, or has
entered into or will enter into any preliminary conversations or negotiations
relating thereto with, any Person, so as to bring the issuance and sale of the
Warrants, or the issuance of the Warrant Shares issuable upon exercise of the
Warrants, under the registration provisions of the Securities Act or the
registration provisions of any securities or Blue Sky laws of any applicable
jurisdiction.  Assuming the accuracy of the representations and warranties of
the Purchaser set forth herein, neither the issuance of the Warrants, nor the
issuance of the Warrant Shares upon exercise of the Warrants, is required to be
registered under the Securities Act or any applicable state securities laws, and
such issuances shall be in compliance with all applicable federal and state
securities laws.
 
(h) Section 3.1 of the Original Agreement is hereby amended by amending and
restating the following definitions therein:
 
“Holder” or “Holders” shall mean the Purchaser (so long as it holds one or more
Notes or one or more Warrants, as the context requires) and any other holder or
holders from time to time of one or more Notes and/or one or more Warrants, as
the context requires.
 
“Maturity Date” shall be November 6, 2014.
 
“Operative Documents” means this Agreement, the Notes, the Guaranties, the
Security Documents, the Intercreditor Agreement, the Warrants, the Registration
Rights Agreement and each other agreement, instrument or document now or
hereafter executed and pursuant to or in connection with any of the foregoing.
 
 
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(i) Section 3.1 of the Original Agreement is hereby further amended by inserting
the following definitions therein in appropriate alphabetical order:
 
“Common Stock” is the common stock, par value $0.01 per share, of Holdings.
 
“Second Amendment Effective Date” is April 30, 2010.
 
“Registration Rights Agreement” means that certain Registration Rights Agreement
dated as of the Second Amendment Effective Date among Purchaser, Holdings and
the other Persons party thereto in the form attached hereto as Exhibit H.
 
“Warrant” or “Warrants” shall have the meaning given to such term in Section
2A.1 hereof.
 
“Warrant Shares” shall have the meaning given to such term in Section 2A.1
hereof.
 
(j) The third sentence of Section 3.2 of the Original Agreement is hereby
amended by amending and restating such sentence in its entirety as follows:
 
“The words “party” or “parties” when used with reference to this Agreement shall
include each party to this Agreement and, by their acceptance of a Note or
Warrant, each Holder.”
 
(k) Section 8.1 of the Original Agreement is hereby amended by inserting the
following new sentence at the end thereof as follows:
 
“Without in any way limiting the rights of the Holders, Holdings hereby agrees
that the Holders of the Warrants or the Warrant Shares would have no adequate
remedy at law, for monetary compensation or otherwise, for the damages that
would be suffered if Holdings or the Borrower were to fail to comply with its
obligations under Article IIA and/or Article VII hereof, and that Holdings
therefore agrees that the Holders of the Warrants and the Warrant Shares shall
be entitled to obtain specific performance of the Holdings’ obligations under
Article IIA and/or Article VII hereof.”
 
(l) Article X of the Original Agreement is hereby amended by deleting the
references to the clause “Each Holder, by acceptance of any Note(s) held by it,”
throughout such Article and replacing it with the clause “Each Holder, by
acceptance of any Note(s) or Warrant(s) held by it,”.
 
(m) Section 10.8 of the Original Agreement is hereby amended by deleting the
references to the clause “with respect to its Note” throughout such Section and
replacing it with the clause “with respect to its Note and its Warrant”.
 
 
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(n) Section 11.2 of the Original Agreement is hereby amended and restated in its
entirety as follows:
 
“11.2           Amendments, Waivers and Consents.  Any provision in this
Agreement, the Notes or the other Operative Documents (other than the Warrants)
to the contrary notwithstanding, changes in or additions to this Agreement and
the other Operative Documents may be made, and compliance with any covenant or
provision set forth herein or therein may be omitted or waived, if the Borrower
shall obtain consent thereto in writing from the Required Holders, and shall, in
any case, deliver copies of such consent in writing to all other Holders of
Notes and/or Warrants; provided that (i) without the consent of all Holders of
Notes, no such consent or waiver shall be effective to reduce the amount of, to
postpone the date fixed for the payment of, the principal of (including any
required redemption) or interest or Prepayment Premium payable on any Note, to
decrease the Interest Rate or the Prepayment Premium, to decrease or postpone
any prepayments or redemptions, to increase the proportion of interest payable
as PIK Interest rather than as cash interest, to alter, amend or waive
compliance with Section 8.1(a), to alter or amend the consent mechanism provided
for under Section 8.3 or this Section 11.2, or to release any material Guarantor
from its guaranty hereunder or any Guaranty, and (ii) without the consent of the
Holder Representative, no such consent or waiver shall be effective to alter the
rights or obligations of the Holder Representative.  The provisions of the
Warrants may be amended or waived in the manner provided, and with the consent
of the Persons required, under Section 12 of the Warrants.  If the Required
Holders vote to alter, amend or waive compliance with the Intercreditor
Agreement or any subordination or intercreditor agreement relating to any
Subordinated Debt, then all Holders shall be bound by such vote and agree to
sign such consent or other document as may be necessary to effectuate such
alteration, amendment or waiver.  Any waiver or consent may be given subject to
satisfaction of conditions stated therein and any waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.  Written notice of any waiver or consent effected under this subsection
shall promptly be delivered by the Borrower to any Holders who did not execute
the same.”
 
(o) The last sentence of Section 11.4(a) of the Original Agreement is hereby
amended by amending and restating such sentence in its entirety as follows:
 
“In addition, the Borrower agrees to pay the expenses of preparing Notes and
Warrants from time to time in connection with exchanges and transfers of Notes
and/or Warrants and the expenses of delivering copies of Operative Documents to
Holders, and the Borrower agrees to indemnify, pay and hold each Holder harmless
from and against any and all liabilities with respect to or resulting from any
delay in paying or omission to pay taxes (other than transfer taxes) and filing
fees with respect to such transfer.”
 
(p) Section 11.4(c) of the Original Agreement is hereby amended and restated in
its entirety as follows:
 
“(c)           The provisions of this Section 11.4 shall survive the payment in
full of all amounts due under this Agreement, the Notes and the other Operative
Documents, the exercise in full or termination of the Warrants, and the
termination of this Agreement and the other Operative Documents.”
 
(q) Section 11.5 of the Original Agreement is hereby amended by inserting the
following new sentence at the end thereof as follows:
 
“Any holder of one or more Warrants may assign its Warrants in compliance with
the terms set forth in the Warrants.”
 
 
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(r) Section 11.7 of the Original Agreement is hereby amended and restated in its
entirety as follows:
 
“11.7           Payments in Respect of Warrants.  The Holders of the Warrants,
by their acceptance thereof, agree that, with respect to the sale to, or
repurchase by, Holdings or any Person directly or indirectly affiliated with
Holdings or any of its managers, directors, officers, members or other
equityholders, of the Warrants, equitable adjustment will be made among them so
that, in effect, all such sums shall be shared ratably by all of the Holders of
the Warrants in proportion to their respective holdings of Warrants.  If any
Holder of one or more Warrants receives any such sum in respect of its Warrants
in excess of its pro rata portion, then such Holder receiving such excess
payment shall purchase for cash from the other Holders of Warrants an interest
in their Warrants in such amount as shall result in a ratable participation by
all of the Holders of the Warrants in the aggregate of all Warrants then
outstanding.”
 
(s) Clause (ii) of Section 11.8 of the Original Agreement is hereby amended and
restated in its entirety as follows:
 
“(ii) the Holders’ agreement to purchase the Notes and Warrants, or the use or
intended use of the proceeds of the Notes and Warrants hereunder,”
 
(t) The last sentence of Section 11.8 of the Original Agreement is hereby
amended by amending and restating such sentence in its entirety as follows:
 
“This indemnification shall survive the payment and satisfaction of all
Obligations, the exercise in full or termination of the Warrants, and the
termination of this Agreement and the other Operative Documents, and shall
remain in force beyond the expiration of any applicable statute of limitations
and payment or satisfaction in full of any single claim under this
indemnification.”
 
(u) The parenthetical in the first sentence of Section 11.14 of the Original
Agreement is hereby amended by amending and restating such parenthetical in its
entirety as follows:
 
“(BY ACCEPTANCE OF ANY NOTE(S) OR WARRANT(S) HELD BY IT)”
 
(v) Section 11.20 of the Original Agreement is hereby amended and restated in
its entirety as follows:
 
“11.20           Specific Performance.  Upon breach or default by the Borrower
or any Guarantor with respect to any obligation hereunder under the Notes, the
Warrants (or the Warrant Shares) or under any other Operative Document, each
Holder shall be entitled to protect and enforce its rights at law, or in equity
or by other appropriate proceedings for specific performance of such obligation,
or for an injunction against such breach or default, or in aid of the exercise
of any power or remedy granted hereby or thereby or by law.”
 
(w) The parenthetical in the first sentence of Section 11.22 of the Original
Agreement is hereby amended by amending and restating such parenthetical in its
entirety as follows:
 
“(by the acceptance of any Note(s) or Warrant(s) held by it)”
 
 
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(x) Clause (f)(A) of Section 11.22 of the Original Agreement is hereby amended
and restated in its entirety as follows:
 
“(A) any assignee of or participant in, or any prospective assignee of or
participant in, any of its rights or obligations under this Agreement, any
Note(s) or any Warrant(s) or”
 
3.  
Amendments to Exhibits

 
The Exhibits to the Credit Agreement are amended (i) by replacing Exhibit A,
with the form of Amended and Restated Senior Subordinated Note attached hereto
as Annex B and (ii) by adding the following new Exhibit G (Warrant), attached
hereto as Annex C, and Exhibit H (Registration Rights Agreement), attached
hereto as Annex D.
 
4.  
Amendment to Operative Documents; Consistent Changes

 
References to the “Purchase Agreement” or the “Note Purchase Agreement” in the
Operative Documents shall be deemed to be references to the Original Agreement
as amended by this Amendment.  Furthermore, the Operative Documents are hereby
amended wherever necessary to reflect the changes described herein.
 
5.  
Confirmation of Certain Terms and Other Matters

 
Each of the Borrower, Holdings, the Guarantors and the Holder hereby ratify and
confirm all terms and provisions of the Operative Documents and all other
documents, instruments, or agreements executed in connection therewith and agree
that, except as expressly amended herein, all of such terms and provisions
remain in full force and effect.  The Borrower , Holdings, the Guarantors and
the Holder hereby confirm and acknowledge that the obligations of the Borrower,
Holdings and the Guarantors under the Original Agreement include all obligations
and liabilities of the Borrower, Holdings and the Guarantors under the Original
Agreement, as amended from time to time including, but not limited to, this
Amendment.  Each of the Borrower, Holdings and the Guarantors also confirm and
acknowledge that this Amendment and the documents, instruments or agreements
executed in connection therewith shall constitute Operative Documents.  Except
as expressly provided herein, this Amendment shall not be deemed a waiver of any
term or condition of any Operative Document and shall not be deemed to prejudice
any right or rights which the Holder may now have or may have in the future
under or in connection with any Operative Document or any of the instruments or
agreements referred to therein, as the same may be amended from time to time.
 
6.  
Collateral Security

 
Each of the Borrower, Holdings and the Guarantors further acknowledge and agree
that the Security Documents continue to secure the Borrower’ prompt, punctual
and faithful payment and performance of (i) the Original Agreement, as amended
by this Amendment and any further extensions, renewals, substitutions,
modifications, amendments or replacements thereof; (ii) the Notes and any
further extensions, renewals, substitutions, modifications, amendments or
replacements of any thereof; (iii) any and all liabilities of the Borrower to
the Holders (including, without limitation, those arising under the Operative
Documents and this Amendment); (iv) any and all liabilities, debts and
obligations, whether now existing or hereafter arising, or at any time owing by
the Borrower to the Holders, including without limitation, costs, costs of
collection, attorneys’ reasonable fees and all court and litigation costs and
expenses, and (v) all sums, bearing interest at the rate provided in the
Original Agreement, as modified, advanced to or on behalf of the Borrower by the
Holders for any purposes, whether dependent or independent of this transaction,
all of which shall be equally secured with and have the same priority as the
original advances under the Notes.
 
 
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7.  
Representations and Warranties

 
Each of the Borrower, Holdings and the Guarantors hereby represent and warrant
that except as otherwise disclosed on the list of “Exceptions to
Representations” annexed hereto as Annex A: (a) they have complied and are now
in compliance with, all of the terms and provisions set forth in the Operative
Documents, as amended, on their part to be observed and performed; (b) no Event
of Default specified in Section 8.1 of the Original Agreement has occurred or is
continuing or would occur as a result of the transactions contemplated by this
Amendment (including the issuance of the Warrants); and (c) the execution,
delivery and performance of this Amendment (including the issuance of the
Warrants): (i) has been duly authorized by all requisite corporation action,
including approval by the stockholders of Holdings, (ii) will not violate either
(x) any provision of law applicable to the Borrower, Holdings or any Guarantor,
any governmental regulation, or its charter documents, or (y) any order of any
court or other agency of government binding on the Borrower, Holdings or any
Guarantor or any indenture, agreement, or other instrument to which the
Borrower, Holdings or any Guarantor is a party, or by which they or any of its
property is bound, and (iii) will not be in conflict with, result in a breach
of, or constitute (with due notice and/or lapse of time) a default under, any
such indenture, agreement, or other instrument.
 
8.  
Conditions to Holder’s Obligations

 
The willingness of the Holder to consent to and enter into this Amendment is
subject to the satisfaction of the following conditions concurrently with the
execution and delivery of this Amendment:
 
(a) The Holder shall have received approving resolutions of the Board of
Directors (or other appropriate governing body) of each of the Borrower,
Holdings and the Guarantors, certified as of or immediately prior to the date
hereof by the Secretary of the Borrower, Holdings and the Guarantors authorizing
the execution and delivery by the Borrower, Holdings and the Guarantors of this
Amendment and all documents referenced herein.  The stockholders of Holdings
shall have approved and authorized the execution and delivery by Holdings, the
Borrower and the Guarantors of this Amendment and all documents referenced
herein.
 
(b) The Borrower, Holdings and the Guarantors shall have executed and delivered
to the Holder, as applicable, (i) this Amendment, (ii) the Amended and Restated
Senior Subordinated Note attached hereto as Annex B, (iii) the Warrant attached
hereto as Annex C, and (iv) the Registration Rights Agreement attached hereto as
Annex D.
 
(c) The Holder shall have received a certificate of a Responsible Officer of
each of the Borrower and Holdings as to the accuracy of the Borrower’s and
Holdings’ representations and warranties in the Original Note Purchase Agreement
in all material respects and in this Amendment and as to such other matters as
the Holder may reasonably request.
 
 
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(d) The Holder shall have received the favorable written opinion of Pepper
Hamilton LLP, counsel to the Borrower and the Guarantors regarding, among other
things, the issuance of the warrants, in form and substance reasonably
satisfactory to the Holder.
 
(e) This Amendment and all documents referenced herein or to be delivered in
connection herewith shall be on terms reasonably satisfactory to Holder’s tax
counsel.
 
(f) The Borrower shall have paid to the Holder all outstanding legal and other
out of pocket fees and expenses incurred relative to the Holder’s relationship
with the Borrower and all costs and fees associated with this Amendment.
 
(g) The Holder shall have received such other documents, certificates,
instruments, and agreements from the Borrower as the Holder may reasonably
request.
 
9.  
Miscellaneous

 
(a) This Amendment shall be governed by, and construed and enforced in
accordance with, the substantive laws of the State of New York, without regard
to its principles of conflicts of laws.
 
(b) This Amendment may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
 
(c) Each of the Borrower, Holdings and the Guarantors shall, from time to time,
at its expense, execute and deliver to the Holder all such other and further
instruments, agreements and documents and take or cause to be taken all such
other and future action as the Holder shall reasonably request in order to
effect and confirm or vest more securely all rights contemplated by this
Amendment, the Original Agreement or any Operative Document.
 

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

 
BORROWER:

 
PHYSICIANS FORMULA, INC.,

 
a New York Corporation

 
By:
/s/ Jeffrey P. Rogers
 

 
Name: Jeffrey P. Rogers

 
Title: President

 
GUARANTORS:

 
PHYSICIANS FORMULA HOLDINGS, INC.,

 
a Delaware Corporation

 
By:
/s/ Jeffrey P. Rogers
 

 
Name: Jeffrey P. Rogers

 
Title: President

 
PHYSICIANS FORMULA COSMETICS, INC.,

 
a Delaware Corporation

 
By:
/s/ Jeffrey P. Rogers
 

 
Name: Jeffrey P. Rogers

 
Title: President

 
PHYSICIANS FORMULA DRTV, LLC,

 
a Delaware Limited Liability Company

 
By:
/s/ Jeffrey P. Rogers
 

 
Name: Jeffrey P. Rogers

 
Title: President

 
 

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HOLDER:

 
MILL ROAD CAPITAL, L.P.,

 
a Delaware Limited Partnership

 
By:
/s/ Charles Goldman
 

 
Name:  Charles Goldman

 
Title:     Managing Director

 
 
 

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Annex A

Exceptions to Representations

 
See Attached.