Exhibit
10.21





Execution Version




THE
RIGHTS OF THE BENEFICIARY OF THIS INSTRUMENT ARE SUBORDINATED IN THE MANNER AND
TO THE EXTENT SET FORTH IN THAT CERTAIN INTERCREDITOR AGREEMENT
(THE”INTERCREDITOR AGREEMENT”) DATED AS OF NOVEMBER 6, 2009 BY AND AMONG WELLS
FARGO BANK, NATIONAL ASSOCIATION ACTING THROUGH ITS WELLS FARGO BUSINESS CREDIT
OPERATING DIVISION, MILL ROAD CAPITAL, L.P. AND PHYSICIANS FORMULA,
INC.




GUARANTOR
SECURITY AGREEMENT




THIS
GUARANTOR SECURITY AGREEMENT (“Agreement”), dated as
of November 6, 2009, is made by and among PHYSICIANS FORMULA HOLDINGS,
INC., a Delaware corporation, PHYSICIANS FORMULA COSMETICS, INC., a Delaware
corporation, PHYSICIANS FORMULA DRTV, LLC, a Delaware limited liability company
(each a “Grantor” and,
collectively, the “Grantors”), and MILL
ROAD CAPITAL, L.P., a Delaware limited partnership (the “Holder
Representative”).





The
Holder Representative has entered into that certain Senior Subordinated Note
Purchase and Security Agreement of even date herewith (as the same may be
amended, supplemented or restated from time to time, the “Purchase Agreement”)
with PHYSICIANS FORMULA, INC., a New York corporation (the “Borrower”) and the
other Grantors, pursuant to which the Holder Representative has agreed to
purchase Borrower’s Senior Subordinated Notes due May 6, 2013 (individually a
“Note” and collectively, the “Notes”).





It is a
condition precedent to the purchase of the Notes by the Holder Representative
under the Purchase Agreement that each Grantor shall have executed and delivered
this Agreement.





ACCORDINGLY,
in consideration of the mutual covenants contained in the Purchase Agreement and
herein, the parties hereby agree as follows:





1.     
       Definitions.  All
terms defined in the recitals hereto and the Purchase Agreement that are not
otherwise defined herein shall have the meanings given them in the recitals and
the Purchase Agreement. All terms defined in the UCC and not otherwise defined
herein have the meanings assigned to them in the UCC.  In addition,
the following terms have the meanings set forth below or in the referenced
Section of this Agreement:




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





“Collateral” means all
of the Grantors’ Accounts, chattel paper and electronic chattel paper, deposit
accounts, documents, Equipment, General Intangibles, goods, instruments,
Inventory, Investment Property, letter-of-credit rights, letters of credit, all
sums on deposit in any collection account, and any items in any lockbox;
together with (i) all substitutions and replacements for and products of
such property; (ii) in the case of all goods, all accessions;
(iii) all accessories, attachments, parts, Equipment and repairs now or
subsequently attached or affixed to or used in connection with any goods;
(iv) all warehouse receipts, bills of lading and other documents of title
that cover such goods now or in the future; (v) all collateral subject to
the Lien of any of the Security Documents; (vi) any money, or other assets
of the Grantors that come into the possession, custody, or control of the Holder
Representative now or in the future; (vii) Proceeds of any of the above
Collateral; (viii) books and records of the Grantors, including without
limitation all mail or e-mail addressed to the Grantors; and (ix) all of
the above Collateral, whether now owned or existing or acquired now or in the
future or in which the Grantors have rights now or in the
future.





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





“Event of Default” has
the meaning given it in Section 6.





“Excluded Property”
means, collectively, (i) any permit, lease or license or any contractual
obligation entered into by the Grantors (A) that prohibits or requires the
consent of any Person other than the Grantors and their Subsidiaries which has
not been obtained as a condition to the creation by the Grantors of a Lien on
any right, title or interest in such permit, lease, license or contractual
obligation or any Capital Stock or equivalent thereof related thereto or that
contains terms stating that the granting of a lien therein would otherwise
result in a material loss by the Grantors of any material rights therein, (B) to
the extent that any law applicable thereto prohibits the creation of a Lien
thereon or (C) to the extent that a Lien thereon would give any other party
a legally enforceable right to terminate such permit, lease, license or any
contractual obligation, but only, with respect to the prohibition in (A), (B)
and (C) to the extent, and for as long as, such prohibition is not terminated or
rendered unenforceable or otherwise deemed ineffective by the UCC or any other
applicable law, (ii) property or assets owned by the Grantors that is subject to
a purchase money Lien or a Capital Lease Obligation if the contractual
obligation pursuant to which such Lien is granted (or in the document providing
for such Capital Lease Obligation) prohibits or requires the consent of any
Person other than the Grantors and their Subsidiaries which has not been
obtained as a condition to the creation of any other Lien on such property or
such assets, (iii) any “intent to use” trademark applications for which a
statement of use has not been filed (but only until such statement is filed
with, and accepted by, the United States Patent and Trademark Office) (each such
trademark, an “Intent
To Use Trademark”) and (iv) shares of capital stock having voting power
in excess of 65% of the voting power of all classes of capital stock of a first
tier controlled foreign corporation (as that term is described in the IRC);
provided, however, “Excluded Property”
shall not include any proceeds, products, substitutions or replacements of
Excluded Property (unless such proceeds, products, substitutions or replacements
would otherwise constitute Excluded Property).





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





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





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





“Permitted Liens”
means (i) the Security Interest, (ii) covenants, restrictions, rights, easements
and minor irregularities in title which do not materially interfere with any
Grantor’s business or operations as presently conducted, (iii) licenses (ranged
on a non-exclusive basis), sublicenses, leases or subleases granted to third
parties in the ordinary course of business and not interfereing with the
business of any Grantor, and (iv) Liens in existence on the date hereof and as
described on Exhibit
C hereto.


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“Security
Interest” has the meaning given in Section
2.





“UCC” means the
Uniform Commercial Code as in effect from time to time in the State of New
York.





2.         
   Security
Interest.  The Grantors hereby pledge, collaterally assign and
grant to the Holder Representative and the Holders a Lien and security interest
(collectively referred to as the “Security Interest”)
in the Collateral as security for the payment and performance of all
Obligations; provided, however,
notwithstanding the foregoing, no Lien is hereby granted on any Excluded
Property, and such Excluded Property shall not be deemed to be “Collateral”;
provided further, that if and
when any property shall cease to be Excluded Property, a Lien on and security
interest in such property shall be deemed granted therein and such property
shall be deemed to be “Collateral.”




3.   
         Representations, Warranties
and Agreements.  Each Grantor hereby represents, warrants and
agrees as follows:




(a)           Title.  The Grantor
(i) has good and marketable title to each item of Collateral in existence
on the date hereof, free and clear of all Liens except the Permitted Liens,
(ii) will have, at the time the Grantor acquires any rights in Collateral
hereafter arising, good and marketable title to each such item of Collateral
free and clear of all Liens except Permitted Liens, (iii) will keep all
Collateral free and clear of all Liens except Permitted Liens, and
(iv) will defend the Collateral against all claims or demands of all
Persons other than the Holder Representative and the holders of Permitted
Liens.  The Grantor will not sell or otherwise dispose of the
Collateral or any interest therein outside the ordinary course of business,
without the prior written consent of the Holder Representative, except for:
(i) the use of cash and Cash Equivalents in the ordinary course of
business; (ii) the sale of obsolete, surplus, uneconomical, or worn-out assets;
(iii) leases or subleases granted to third parties in the ordinary course
of business in each case not interfering with the business of the Grantor; (iv)
licenses of Intellectual Property Rights granted to third parties in the
ordinary course of business in each case not interfering with the business of
the Grantor; and (v) subject to Section 7.23 of the Purchase Agreement,
write-offs or grants of discounts or forgiveness of Accounts, without recourse,
which are at least 90 days past due in connection with the compromise or
collection thereof in the ordinary course of business which do not interfere in
any material respect of Grantor.




(b)           Chief Executive Office;
Identification Number.  The Grantor’s chief executive office
and principal place of business is located at the address set forth under its
signature below.  The Grantor’s federal employer identification number
and organization identification number is correctly set forth under its
signature below.


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(c)           Location of
Collateral.  As of the date hereof, the tangible Collateral is
located at the locations identified on Exhibit A attached
hereto, other than tangible Collateral in transit between such locations in the
ordinary course of business.  The Grantor will not permit any tangible
Collateral to be located in any state (and, if a county filing is required, in
any county) in which a financing statement covering such Collateral is required
to be, but has not in fact been, filed in order to perfect the Security
Interest.




(d)           Changes in Name, Constituent
Documents, Location.  The Grantor will not change its name,
Constituent Documents, or jurisdiction of organization, without the prior
written consent of the Holder Representative.  The Grantor will not
change its business address, without thirty (30) days prior written notice to
the Holder Representative.




(e)           Fixtures.  The
Grantor will not permit any tangible Collateral (other than in-store displays)
to become part of or to be affixed to any real property without first assuring
to the reasonable satisfaction of the Holder Representative that the Security
Interest will be prior and senior to any Lien then held or thereafter acquired
by any mortgagee of such real property or the owner or purchaser of any interest
therein.  If any part or all of the tangible Collateral (other than
in-store displays) is now or will become so related to particular real estate as
to be a fixture, the real estate concerned is accurately set forth in Exhibit B
hereto.




(f)           Rights to
Payment.  Each right to payment and each instrument, document,
chattel paper and other agreement constituting or evidencing Collateral is (or
will be when arising, issued or assigned to the Holder Representative) the
valid, genuine and legally enforceable obligation, subject to no defense, setoff
or counterclaim (other than those arising in the ordinary course of business),
of the account debtor or other obligor named therein or in the Grantor’s records
pertaining thereto as being obligated to pay such obligation.  The
Grantor will neither agree to any material modification or amendment nor agree
to any forbearance, release or cancellation of any such obligation, and will not
subordinate any such right to payment to claims of other creditors of such
account debtor or other obligor.




(g)           Commercial Tort
Claims.  Promptly after a Responsible Officer obtains actual
knowledge thereof (and in any event, within five Business Days), the Grantor
will deliver to the Holder Representative notice of any commercial tort claims
brought against any Person, including the name and address of each defendant, a
summary of the facts, an estimate of the Grantor’s damages, copies of any
complaint or demand letter submitted by the Grantor, and such other information
as the Holder Representative may reasonably request.  Upon written
request by the Holder Representative, the Grantor will grant the Holder
Representative a security interest in all commercial tort claims it may have
against any such Person.




(h)           Miscellaneous
Covenants.  The Grantor will:




(i)     
         keep all tangible
Collateral in good repair, working order and condition, ordinary wear and tear
excepted, and will, from time to time, replace any worn, broken or defective
parts thereof, although Grantor may discontinue the operation  and
maintenance of any properties if Grantor believes that such discontinuance is
desirable to the conduct of its business and not disadvantageous in any material
respect to the Holder Representative;


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(ii)         
    pay or discharge when due all taxes and other
governmental charges levied or assessed upon or against any Collateral or upon
or against the creation, perfection or continuance of the Security Interest,
although Grantor shall not be required to pay any such tax, assessment, charge
or claim whose amount, applicability or validity is being contested in good
faith by appropriate proceedings and for which proper reserves have been
made;




(iii)   
         at any time during
ordinary business hours, permit the Holder Representative or its representatives
to examine or inspect any Collateral, wherever located, and to examine, inspect
and copy the Grantor’s books and records pertaining to the Collateral and its
business and financial condition and to send and discuss with account debtors
and other obligors requests for verifications of amounts owed to the
Grantor;




(iv)   
         keep accurate and complete
records pertaining to the Collateral and pertaining to the Grantor’s business
and financial condition in accordance with GAAP consistently applied and cause
the Company to submit such periodic reports regarding the Collateral and its
business and financial condition as in accordance with the Purchase
Agreement;




(v)       
      promptly, after a Responsible Officer
obtains actual knowledge thereof (and in any event within five Business Days),
notify the Holder Representative of any loss of or material damage to any
Collateral or of any substantial adverse change in any Collateral or the
prospect of its payment;




(vi)             if
the Holder Representative at any time so requests in writing (after the
occurrence and during the continuance of an Event of Default), promptly deliver
to the Holder Representative any instrument, document or chattel paper
constituting Collateral in an amount in excess of $50,000, duly endorsed or
assigned by the Grantor;




(vii)   
        at all times keep all tangible
Collateral insured with insurers acceptable to the Holder Representative, in
such amounts and on such terms (including deductibles) as the Holder
Representative in its sole discretion may require and including, as applicable
and without limitation, business interruption insurance (including force majeure
coverage), hazard coverage on an “all risks” basis for all tangible Collateral,
and theft and physical damage coverage for Collateral consisting of motor
vehicles, with all insurance policies containing an appropriate lender’s
interest endorsement or clause, and name the Holder Representative as an
additional insured;




(viii)           from
time to time authorize or execute such financing statements as the Holder
Representative may reasonably require in order to perfect the Security Interest
and, if any Collateral consists of a motor vehicle, execute such documents as
may be required to have the Security Interest properly noted on a certificate of
title;




(ix)      
       pay when due or reimburse the Holder
Representative on demand for all costs of collection of any of the Obligations
and all expenses (including in each case all reasonable attorneys’ fees)
incurred by the Holder Representative in connection with the creation,
perfection, satisfaction, protection, defense or enforcement of the Security
Interest or the creation, continuance, protection, defense or enforcement of
this Agreement or any or all of the Obligations, including expenses incurred in
any litigation or bankruptcy or insolvency proceedings: provided that such
incurrence is not a product of the Holder Representative’s gross negligence, bad
faith or will misconduct;


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(x)        
     authorize, execute, deliver or endorse any and all
instruments, documents, assignments, security agreements and other agreements
and writings which the Holder Representative may at any time reasonably request
in order to secure, protect, perfect or enforce the Security Interest and the
Holder Representative’s rights under this Agreement; and




(xi)         
    not use or keep any Collateral, or permit it to be used
or kept by any Subsidiary, for any unlawful purpose or in violation of any
federal, state or local law, statute or ordinance.




(i)        
    Holder
Representative’s Right to Take Action.  Each Grantor authorizes
the Holder Representative to file from time to time where permitted by law, such
financing statements against collateral described as “all personal property” or
“all assets” as the Holder Representative deems reasonably necessary or useful
to perfect the Security Interest.  Each Grantor will not amend any
financing statements in favor of the Holder Representative except as permitted
by law.  Further, if any Grantor at any time fails to perform or
observe any agreement contained in Section 3(h), and if
such failure continues for a period of ten (10) days after the Holder
Representative gives such Grantor written notice thereof (or, in the case of the
agreements contained in clauses (vii) and (viii) of Section 3(h),
immediately upon the occurrence of such failure, without notice or lapse of
time), the Holder Representative may (but need not) perform or observe such
agreement on behalf and in the name, place and stead of such Grantor (or, at the
Holder Representative’s option, in the Holder Representative’s own name) and may
(but need not) take any and all other actions which the Holder Representative
may reasonably deem necessary to cure or correct such failure (including,
without limitation, the payment of taxes, the satisfaction of security
interests, liens, or encumbrances, the performance of obligations under
contracts or agreements with account debtors or other obligors, the procurement
and maintenance of insurance, the execution of financing statements, the
endorsement of instruments, the qualification and licensing of such Grantor to
do business in any jurisdiction, and the procurement of repairs or
transportation); and, except to the extent that the effect of such payment would
be to render any loan or forbearance of money usurious or otherwise illegal
under any applicable law, such Grantor shall thereupon pay the Holder
Representative on demand the amount of all moneys expended and all costs and
expenses (including reasonable attorneys’ fees) incurred by the Holder
Representative in connection with or as a result of the Holder Representative’s
performing or observing such agreements or taking such actions, together with
interest thereon from the date expended or incurred by the Holder Representative
at the highest rate then applicable to any of the Obligations.  To
facilitate the performance or observance by the Holder Representative of such
agreements of the Grantors, each Grantor hereby irrevocably appoints (which
appointment is coupled with an interest) the Holder Representative, or its
delegate, as the attorney-in-fact of such Grantor with the right (but not the
duty) from time to time to create, prepare, complete, execute, deliver, endorse
or file, in the name and on behalf of such Grantor, any and all instruments,
documents, financing statements, applications for insurance and other agreements
and writings required to be obtained, executed, delivered or endorsed by such
Grantor under this Section 3 and Section 4
below.


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(j)     
       Senior Lender as
Bailee.  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 Holder Representative and the Holders therein under the
UCC, no such delivery or giving of control to the Holder Representative shall be
required to the extent such Collateral is required to be delivered to or control
is required to be given to the Senior Lender in accordance with the Senior
Credit Agreement, it being understood that the Senior Lender is acting as agent
and bailee for the benefit of the Holder Representative and the Holders pursuant
to the terms of the Intercreditor Agreement.




(k)           Future
Grantors.  The Borrower, Holdings and each Guarantor are
required to cause each of their Domestic Subsidiaries formed or acquired after
the Closing Date to execute and deliver to the Holder Representative,
concurrently with the formation or acquisition thereof, a joinder to this
Agreement substantially in the form of Exhibit D hereto and the Additional
Guarantor Supplement substantially in the form of Exhibit F attached to the
Purchase Agreement.




4.         
   Rights of the Holder
Representative.  At any time and from time to time, whether
before or after an Event of Default, the Holder Representative may take any or
all of the following actions:




(a)     
      Account
Verification.  The Holder Representative may at any time and
from time to time send or require the Grantors to send requests for verification
of accounts or notices of assignment to account debtors and other
obligors.  The Holder Representative may also at any time and from
time to time telephone account debtors and other obligors to verify
accounts.




(b)           Collection
Account.  The Holder Representative may establish a collateral
account for the deposit of checks, drafts and cash payments made by the
Grantors’ account debtors. If a collateral account is so established, each
Grantor shall promptly deliver to the Holder Representative, for deposit into
said collateral account, all payments on Accounts and chattel paper received by
it.  All such payments shall be delivered to the Holder Representative
in the form received (except for any Grantor’s endorsement where
necessary).  Until so deposited, all payments on Accounts and chattel
paper received by any Grantor shall be held in trust by such Grantor for and as
the property of the Holder Representative and shall not be commingled with any
funds or property of such Grantor.  All deposits in said collateral
account shall constitute proceeds of Collateral and shall not constitute payment
of any Obligation.  Unless otherwise agreed in writing, no Grantor
shall have any right to withdraw amounts on deposit in any collateral
account.




(c)           Lockbox.  The Holder
Representative may, by notice to the Grantors, require each Grantor to direct
each of its account debtors to make payment directly to a special lockbox to be
under the control of the Holder Representative. Each Grantor hereby authorizes
and directs the Holder Representative to deposit all checks, drafts and cash
payments received in said lockbox into the collateral account established as set
forth above.


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(d)           Direct
Collection.  The Holder Representative may notify any account
debtor, or any other Person obligated to pay any amount due, that such chattel
paper, Account, or other right to payment has been assigned or transferred to
the Holder Representative for security and shall be paid directly to the Holder
Representative.  At any time after the Holder Representative or any
Grantor gives such notice to an account debtor or other obligor, the Holder
Representative may (but need not), in its own name or in such Grantor’s name,
demand, sue for, collect or receive any money or property at any time payable or
receivable on account of, or securing, any such chattel paper, Account, or other
right to payment, or grant any reasonable to, make any compromise or settlement
with or otherwise agree to waive, modify, amend or change the obligations
(including collateral obligations) of any such account debtor or other
obligor.




5.           Assignment of
Insurance.  Each Grantor hereby collaterally assigns to the
Holder Representative, as additional security for the payment of the
Obligations, any and all moneys (including but not limited to proceeds of
insurance and refunds of unearned premiums) due or to become due under, and all
other rights of such Grantor under or with respect to, any and all policies of
insurance covering the Collateral, each Grantor hereby directs the issuer of any
such policy to pay any such moneys directly to the Holder
Representative.  After the occurrence and during the continuance of an
Event of Default, the Holder Representative may (but need not), in its own name
or in any Grantor’s name, execute and deliver proofs of claim, receive all such
moneys, endorse checks and other instruments representing payment of such
moneys, and adjust, litigate, compromise or release any claim against the issuer
of any such policy.




6.           Events of
Default.  Each of the following occurrences shall constitute an
event of default under this Agreement (herein called “Event of
Default”):  (i) an Event of Default shall occur under the
Purchase Agreement; (ii) any Grantor shall fail to pay any or all of the
Obligations when due or (if payable on demand) on demand; or (iii) any
Grantor shall fail to observe or perform any covenant or agreement herein
binding on it.




7.           Remedies upon Event of
Default.  Upon the occurrence and during the continuance of an
Event of Default, the Holder Representative may exercise any one or more of the
following rights and remedies: (i) declare all unmatured Obligations to be
immediately due and payable, and the same shall thereupon be immediately due and
payable, without presentment or other notice or demand; (ii) exercise and
enforce any or all rights and remedies available upon default to a secured party
under the UCC, including but not limited to the right to take possession of any
Collateral, proceeding without judicial process or by judicial process (without
a prior hearing or notice thereof, which each Grantor hereby expressly waives),
and the right to sell, lease or otherwise dispose of any or all of the
Collateral, and in connection therewith, the Holder Representative may require
the Grantors to make the Collateral available to the Holder Representative at a
place to be designated by the Holder Representative which is reasonably
convenient to both parties, and if notice to the Grantors of any intended
disposition of Collateral or any other intended action is required by law in a
particular instance, such notice shall be deemed commercially reasonable if
given (in the manner specified in Section 9) at
least ten (10) days prior to the date of intended disposition or other action;
(iii) exercise or enforce any or all other rights or remedies available to
the Holder Representative by law or agreement against the Collateral, against
any Grantor or against any other Person or property.  Upon the
occurrence and during the continuance of an Event of Default, the Holder
Representative is hereby granted a nonexclusive, worldwide and royalty-free
license to use or otherwise exploit all Intellectual Property Rights owned by or
licensed to any Grantor that the Holder Representative deems reasonably
necessary or appropriate to the disposition of any Collateral.


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8.         
   Other Personal
Property.  Unless at the time the Holder Representative takes
possession of any tangible Collateral, or within seven (7) days thereafter, any
Grantor gives written notice to the Holder Representative of the existence of
any goods, papers or other property of such Grantor, not affixed to or
constituting a part of such Collateral, but which are located or found upon or
within such Collateral, describing such property, the Holder Representative
shall not be responsible or liable to such Grantor for any action taken or
omitted by or on behalf of the Holder Representative with respect to such
property.




9.       
     Notices; Requests for
Accounting.  All notices, requests, demands and other
communications provided for hereunder shall be in writing and mailed (by first
class registered or certified mail, postage prepaid), sent by express overnight
courier service or electronic facsimile transmission with a copy by mail, sent
as an Electronic Record and delivered by encrypted e-mail, or delivered to the
applicable party at the addresses indicated below:




If to the
Borrower or any Guarantor:




Physicians
Formula, Inc.


1055 West
8th
Street


Azusa, CA
91702


Attention:  Jeff
Berry, Chief Financial Officer


Telephone:
626-334-3395


Fax:
626-812-9462


Email:
jeff.berry@physiciansformula.com





With a
copy (delivery of which alone shall not constitute notice) to:





Kirkland
& Ellis LLP


300 N.
LaSalle Street


Chicago,
IL 60654


Attention:
Louis R. Hernandez, Esq.


Telephone:
312-862-2000


Fax:
312-862-2200


Email:
lhernandez@kirkland.com





If to the
Purchaser or the initial Holder Representative:




Mill Road
Capital, L.P.


Two Sound
View Drive


Greenwich,
CT 06830


Attention:
Thomas Lynch, Managing Director


Telephone:
203-987-3501


Fax:
203-621-3280


Email:
tlynch@millroadcapital.com


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With a
copy (delivery of which alone shall not constitute notice) to:




Foley
Hoag LLP


155
Seaport Boulevard


Boston,
MA  02210


Attention:  Peter
M. Rosenblum, Esq.


Telephone:
617-832-1000


Fax:
617-832-7000


Email:
prosenblum@foleyhoag.com




If to any
other Holder or any successor Holder Representative, at such Holder’s or
successor Holder Representative’s address for notices as set forth in the
transfer records of the Borrower or, as to each of the foregoing, at such other
address as shall be designated by such Person in a written notice to the other
party complying as to delivery with the terms of this Section.




All such
notices, requests, demands and other communications shall, when mailed or sent,
respectively, be effective (i) three (3) Business Days after being deposited in
the mails, (ii) one Business Day after being deposited with the express
overnight courier service or (iii) the Business Day when sent when sent by
electronic facsimile transmission (with receipt confirmed) or sent as an
Electronic Record by electronic mail or similar secure electronic channel to
which the parties have agreed, respectively, addressed as
aforesaid.  All requests under Section 9-210 of the UCC (1) shall
be made in a writing signed by an authorized Person, (2) shall be
personally delivered, sent by registered or certified mail, return receipt
requested, or by overnight courier of national reputation (3) shall be
deemed to be sent when received by the Holder Representative and (4) shall
otherwise comply with the requirements of Section 9-210.  Each Grantor
requests that the Holder Representative respond to all such requests which on
their face appear to come from an authorized individual and releases the Holder
Representative from any liability for so responding.  Each Grantor
shall pay the Holder Representative the maximum amount allowed by law for
responding to such requests.


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10.           Miscellaneous.  This
Agreement has been duly and validly authorized by all necessary corporate (or
equivalent company) action. This Agreement does not contemplate a sale of
accounts, or chattel paper. This Agreement can be waived, modified, amended,
terminated or discharged, and the Security Interest can be released, only
explicitly in a writing signed by the Holder Representative, and, in the case of
amendment or modification, in a writing signed by the Grantors.  A
waiver signed by the Holder Representative shall be effective only in the
specific instance and for the specific purpose given.  Mere delay or
failure to act shall not preclude the exercise or enforcement of any of the
Holder Representative’s rights or remedies.  All rights and remedies
of the Holder Representative shall be cumulative and may be exercised singularly
or concurrently, at the Holder Representative’s option, and the exercise or
enforcement of any one such right or remedy shall neither be a condition to nor
bar the exercise or enforcement of any other.  The Holder
Representative’s duty of care with respect to Collateral in its possession (as
imposed by law) shall be deemed fulfilled if the Holder Representative exercises
reasonable care in physically safekeeping such Collateral or, in the case of
Collateral in the custody or possession of a bailee or other third person,
exercises reasonable care in the selection of the bailee or other third person,
and the Holder Representative need not otherwise preserve, protect, insure or
care for any Collateral.  The Holder Representative shall not be
obligated to preserve any rights the Grantors may have against prior parties, to
realize on the Collateral at all or in any particular manner or order, or apply
any cash proceeds of Collateral in any particular order unless otherwise
provided in the Purchase Agreement.  This Agreement shall be binding
upon and inure to the benefit of the Grantors and the Holder Representative and
their respective successors and assigns and shall take effect when signed by the
Grantor and the Holder Representative and delivered to the Holder
Representative, and each Grantor waives notice of the Holder Representative’s
acceptance hereof.  A carbon, photographic or other reproduction of
this Agreement or of any financing statement signed by any Grantor shall have
the same force and effect as the original for all purposes of a financing
statement.  This Agreement shall be governed by and construed in
accordance with the substantive laws (other than conflict laws) of the State of
New York.  If any provision or application of this Agreement is held
unlawful or unenforceable in any respect, such illegality or unenforceability
shall not affect other provisions or applications which can be given effect and
this Agreement shall be construed as if the unlawful or unenforceable provision
or application had never been contained herein or prescribed hereby. All
representations and warranties contained in this Agreement shall survive the
execution, delivery and performance of this Agreement and the creation and
payment of the Obligations.  The parties hereto hereby
(i) consent to the personal jurisdiction of the state and federal courts
located in the State of New York in connection with any controversy related to
this Agreement; (ii) waive any argument that venue in any such forum is not
convenient, (iii) agree that any litigation initiated by the Holder
Representative or the Grantor in connection with this Agreement or the other
Operative Documents may be venued in either the state or federal courts located
in New York County, New York; and (iv) agree that a final judgment in any
such suit, action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by
law.




11.           Arbitration.  The
Holder Representative and each Grantor agree, upon demand by either party, to
submit to binding arbitration all claims, disputes and controversies between or
among them (and their respective employees, officers, directors, attorneys, and
other agents), whether in tort, contract or otherwise, in any way arising out of
or relating to this Agreement and its negotiation, execution, collateralization,
administration, repayment, modification, extension, substitution, formation,
inducement, enforcement, default or termination.




(a)           Governing
Rules.  Any arbitration proceeding will (i) proceed in a
location in New York, New York selected by the American Arbitration Association
(“AAA”); (ii) be governed by the Federal Arbitration Act (Title 9 of the United
States Code), notwithstanding any conflicting choice of law provision in any of
the documents between the parties; and (iii) be conducted by the AAA, or such
other administrator as the parties shall mutually agree upon, in accordance with
the AAA’s commercial dispute resolution procedures, unless the claim or
counterclaim is at least $1,000,000.00 exclusive of claimed interest,
arbitration fees and costs in which case the arbitration shall be conducted in
accordance with the AAA’s optional procedures for large, complex commercial
disputes (the commercial dispute resolution procedures or the optional
procedures for large, complex commercial disputes to be referred to herein, as
applicable, as the “Rules”).  If there is any inconsistency between
the terms hereof and the Rules, the terms and procedures set forth herein shall
control.  Any party who fails or refuses to submit to arbitration
following a demand by any other party shall bear all costs and expenses incurred
by such other party in compelling arbitration of any dispute.  Nothing
contained herein shall be deemed to be a waiver by any party that is a bank of
the protections afforded to it under 12 U.S.C. §91 or any similar
applicable state law.


- 11
-


(b)           No Waiver of Provisional Remedies,
Self-Help and Foreclosure.  The arbitration requirement does
not limit the right of any party to (i) foreclose against real or personal
property collateral; (ii) exercise self-help remedies relating to collateral or
proceeds of collateral such as setoff or repossession; or (iii) obtain
provisional or ancillary remedies such as replevin, injunctive relief,
attachment or the appointment of a receiver, before, during or after the
pendency of any arbitration proceeding.  This exclusion does not
constitute a waiver of the right or obligation of any party to submit any
dispute to arbitration or reference hereunder, including those arising from the
exercise of the actions detailed in sections (i), (ii) and (iii) of this
paragraph.




(c)           Arbitrator Qualifications and
Powers.  Any arbitration proceeding in which the amount in
controversy is $5,000,000.00 or less will be decided by a single arbitrator
selected according to the Rules, and who shall not render an award of greater
than $5,000,000.00.  Any dispute in which the amount in controversy
exceeds $5,000,000.00 shall be decided by majority vote of a panel of three
arbitrators; provided however, that all three arbitrators must actively
participate in all hearings and deliberations.  The arbitrator will be
a neutral attorney licensed in the State of New York or a neutral retired judge
of the state or federal judiciary of New York, in either case with a minimum of
ten years experience in the substantive law applicable to the subject matter of
the dispute to be arbitrated.  The arbitrator will determine whether
or not an issue is arbitratable and will give effect to the statutes of
limitation in determining any claim.  In any arbitration proceeding
the arbitrator will decide (by documents only or with a hearing at the
arbitrator's discretion) any pre-hearing motions which are similar to motions to
dismiss for failure to state a claim or motions for summary
adjudication.  The arbitrator shall resolve all disputes in accordance
with the substantive law of New York and may grant any remedy or relief that a
court of such state could order or grant within the scope hereof and such
ancillary relief as is necessary to make effective any award.  The
arbitrator shall also have the power to award recovery of all costs and fees, to
impose sanctions and to take such other action as the arbitrator deems necessary
to the same extent a judge could pursuant to the Federal Rules of Civil
Procedure, the New York Code of Civil Procedure or other applicable
law.  Judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction.  The institution and
maintenance of an action for judicial relief or pursuit of a provisional or
ancillary remedy shall not constitute a waiver of the right of any party,
including the plaintiff, to submit the controversy or claim to arbitration if
any other party contests such action for judicial relief.


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-


(d)           Discovery.  In any
arbitration proceeding, discovery will be permitted in accordance with the
Rules.  All discovery shall be expressly limited to matters directly
relevant to the dispute being arbitrated and must be completed no later than
twenty (20) days before the hearing date.  Any requests for an
extension of the discovery periods, or any discovery disputes, will be subject
to final determination by the arbitrator upon a showing that the request for
discovery is essential for the party's presentation and that no alternative
means for obtaining information is available.




(e)           Class Proceedings and
Consolidations.  No party hereto shall be entitled to join or
consolidate disputes by or against others in any arbitration, except parties who
have executed this Agreement or any other contract, instrument or document
relating to any Obligations, or to include in any arbitration any dispute as a
representative or member of a class, or to act in any arbitration in the
interest of the general public or in a private attorney general
capacity.




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




(g)           Miscellaneous.  To
the maximum extent practicable, the AAA, the arbitrators and the parties shall
take all action required to conclude any arbitration proceeding within 180 days
of the filing of the dispute with the AAA.  No arbitrator or other
party to an arbitration proceeding may disclose the existence, content or
results thereof, except for disclosures of information by a party required in
the ordinary course of its business or by applicable law or
regulation.  If more than one agreement for arbitration by or between
the parties potentially applies to a dispute, the arbitration provision most
directly related to the documents between the parties or the subject matter of
the dispute shall control.  This arbitration provision shall survive
termination, amendment or expiration of any of the documents or any relationship
between the parties.




[Signatures
on next page]


- 13
-




Execution
Version




IN
WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date
and year first above written.




GRANTORS:PHYSICIANS
      FORMULA HOLDINGS, INC.a
      Delaware CorporationBy:
            /s/ Ingrid JackelPrint
      Name:
            Ingrid JackelTitle:
            Chief Executive OfficerAddress:
            1055
      West 8th StreetAzusa,
      CA 91702Attn:
      Jeff BerryFax:
      626-812-9462Email:
      jeff.berry@physiciansformula.comFID:
            20-0340099OID:
            3718902PHYSICIANS
      FORMULA COSMETICS, INC.a
      Delaware CorporationBy:
            /s/ Ingrid JackelPrint
      Name:
            Ingrid JackelTitle:
            Chief Executive OfficerAddress:
            1055
      West 8th StreetAzusa,
      CA 91702Attn:
      Jeff BerryFax:
      626-812-9462Email:
      jeff.berry@physiciansformula.comFID:
            76-0733180OID:
            3019117





[Signature
Page to Guarantor Security Agreement]










Execution
Version




PHYSICIANS
      FORMULA DRTV, LLCa
      Delaware Limited Liability CompanyBy:
            /s/ Ingrid JackelPrint
      Name:
            Ingrid JackelTitle:
            Chief Executive OfficerAddress:
            1055
      West 8th StreetAzusa,
      CA 91702Attn:
      Jeff BerryFax:
      626-812-9462Email:
      jeff.berry@physiciansformula.comFID:OID:
            4319769HOLDER
      REPRESENTATIVE:MILL
      ROAD CAPITAL, L.P.a
      Delaware Limited PartnershipBy:
            /s/ Charles GoldmanPrint
      Name:
            Charles GoldmanTitle:
            Managing DirectorAddress:
            Two
      Sound View DriveGreenwich,
      CT 06830Attn:
      Thomas Lynch, Managing DirectorFax:
      203-987-3501Email:
      tlynch@millroadcapital.com




[Signature
Page to Guarantor Security Agreement]







EXHIBIT
A





LOCATION OF
COLLATERAL





Location1055
      W. 8th
      Street
              Azusa,
      CA 917021425
      Max Brose Drive #8
              London,
      Ontario   N6N 0A2
              Canada435
      Park Court
              Lino
      Lakes, MN 55014230
      South Ninth Avenue
              City
      of Industry, CA 91746250
      South Ninth Avenue
              City
      of Industry, CA 91746753-755
      Arrow Grand Circle Way
              Covina,
      CA 917222169
      Wright Ave.
              La
      Verne, CA 91750





EXHIBIT
B





FIXTURES





None.





EXHIBIT
C





PERMITTED
LIENS





Creditor
            Collateral
            Jurisdiction
            Filing Date
            Filing No.U.S.
      District Court, California Central District*
            
            CA
            02/04/2009
            2:09-CV-0866-ABC-FMOLiens
      in favor of the Senior Lender


* This
judgment lien has been discharged.





EXHIBIT
D





JOINDER




AGREEMENT
TO BE BOUND BY GUARANTOR SECURITY AGREEMENT





This
Agreement to be bound by the Guarantor Security Agreement (this “Agreement”) is
executed as of the ___ day of ______________, ___, by ______________, a
_____________ (the “New
Subsidiary”).





RECITALS




A.   
        Pursuant to that certain Senior
Subordinated Note Purchase and Security Agreement dated as of November 6, 2009
among Physicians Formula, Inc., a New York corporation (the “Borrower”), the
Guarantors party thereto and Mill Road Capital, L.P. (the “Holder
Representative”) (as it may be amended, restated, supplemented or
otherwise modified from time to time, the “Purchase Agreement”;
capitalized terms used herein without definition shall have the meanings
assigned to them in the Purchase Agreement), the Holder Representative purchased
certain Notes from the Borrower.




B.    
       As a condition subsequent to the
execution of the Purchase Agreement by the Lender, each Domestic Subsidiary of
the Borrower existing as of the Closing Date entered into a guaranty and
executed the Guarantor Security Agreement dated as of November 6, 2009 (as it
may be amended, restated, supplemented or otherwise modified from time to time,
the “Security
Agreement”), each in favor of the Holder Representative.




C.     
      The Purchase Agreement provides that when
the Borrower, Holdings or any Guarantor acquires or forms a new Domestic
Subsidiary, such Person will cause such Domestic Subsidiary to provide a
Guaranty and to become a party to the Security Agreement.




D. 
          On [Insert Date],
the New Subsidiary [Describe
acquisition/formation of New Subsidiary]. The New Subsidiary anticipates
that it will benefit from the funds available to the Borrower under the Purchase
Agreement, and in recognition of this benefit and in order to comply with the
Purchase Agreement, the New Subsidiary is willing to enter into this
Agreement.




AGREEMENT




NOW,
THEREFORE, the New Subsidiary agrees as follows:




SECTION
1.   Representations and
Warranties.  On and as of the date of this Agreement (the
“Effective
Date”) and for the benefit of the Lender, the New Subsidiary hereby
makes, as to itself, each of the representations and warranties contained in the
Security Agreement.




SECTION
2.   Agreement to be
Bound.  The New Subsidiary agrees that, on and as of the
Effective Date, it shall become a Grantor under the Security Agreement, and
shall be bound by all the provisions of the Security Agreement in the same
manner as if the New Subsidiary had executed the Security Agreement on the
Closing Date.  Notwithstanding the foregoing, (i) references in the
Security Agreement to information regarding any Grantor being set forth on the
signature page for such such Grantor, shall, in the case of the New Subsidiary,
refer to its signature page hereto and (ii) references to Exhibits A-C in the
Security Agreement shall refer, with respect to the New Subsidiary, to Exhibits
A-C hereto.





SECTION
3.  Waiver.  Without
limiting the generality of the waivers in the Security Agreement, the New
Subsidiary specifically agrees to be bound by the Security Agreement, and waives
any right to notice of acceptance of its execution of this Agreement and of its
agreement to be bound by the Security Agreement.




SECTION
4.  Governing
Law.  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).




IN
WITNESS WHEREOF, the New Subsidiary has caused this Agreement to be bound by the
Security Agreement to be executed by its duly authorized officer as of this __
day of ___________, ___.




________________,
      a _____________By:Name:Title:




[Attach
Exhibits A-C of the Guarantor Security Agreement]