Document:

Exhibit
10.35

 

 

Bare
Escentuals, Inc.

 

NOTE
PURCHASE AGREEMENT

Re:  $125,000,000 15.0% Senior
Subordinated Notes,

Due June 7, 2014

 

 

Dated as of June 7, 2006

TO EACH PURCHASER NAMED
IN SCHEDULE I HERETO WHICH IS A SIGNATORY OF THIS AGREEMENT

Ladies and Gentlemen:

The undersigned, Bare Escentuals, Inc., a Delaware
corporation (the “Company”), agrees with you as follows:

SECTION
1.                                DESCRIPTION OF NOTES.

Section 1.1.           Description
of Notes.  The Company will authorize the issue and sale
of $125,000,000 aggregate principal amount of its 15.0% Senior Subordinated
Notes due June 7, 2014 (the “Notes”) to be dated the Closing Date, to
bear interest (computed on the basis of a year of 360 days and twelve 30-day
months) from such date at the rate of 15.0% per annum, payable quarterly in
arrears on March 31st, June 30th, September 30th
and December 31st (each, an “Interest Payment Date”)
(commencing June 30, 2006) through PIK Notes and in full in cash on the
Maturity Date and to be substantially in the form attached hereto as Exhibit A.  The entire amount of the interest payable on
each Interest Payment Date on the Notes may be paid through the issuance of
additional Notes (“PIK Notes”), the principal amount of which is equal
to the interest then due (PIK Notes shall substantially in the form of Exhibit
B with blanks appropriately completed in conformity herewith and, after
issuance thereof, any such PIK Note shall be a “Note”).  Notwithstanding the foregoing, the Company
shall pay interest on the Notes in cash by wire transfer of immediately
available funds to an account designated in writing by the holder (i) on each
Interest Payment Date following the Payment in Full of the Senior Debt and, to
the extent permitted under the Senior Loan Documents, on the Maturity Date, and
(ii) at the option of the Company, if permitted by the Senior Loan Documents,
on each Interest Payment Date prior to the Senior Debt Maturity Date.  During the continuance of an Event of Default
under Section 6.1(a), 6.1(c) or 6.1(d) or the failure to comply with
Section 5.6(b) or 5.10(b), as applicable hereunder, the Notes will bear a
default rate of interest (computed on the basis of 360 days and twelve 30-day
months) from the date of occurrence of such Event of Default or compliance
failure at the rate of 17.0% per annum or as otherwise provided in Section 1.4,
and such interest shall accrue and be payable (through the issuance of PIK
Notes or, to the 

 

 

extent
permitted under the Senior Loan Documents, in cash) on the Interest Payment
Dates and in full in cash on the Maturity Date (the “Default Rate”).  The Notes are not subject to prepayment or
redemption at the option of the Company prior to their expressed maturity dates
except on the terms and conditions and in the amounts set forth in
Section 1 of this Agreement.  The
terms which are capitalized herein shall have the meanings set forth in Annex A
unless the context shall otherwise require.

Section 1.2.           Prepayments of Notes.

(a)           Optional Redemption.  Upon
compliance with Section 1.3, and to the extent permitted by the Senior Loan
Documents, the Company shall have the right to prepay at any time all, or from
time to time, any part of, the Notes, in an amount not less than $500,000 or
incremental multiples of $100,000 in excess thereof, at 100% of the principal
amount to be prepaid together with accrued interest on the principal amount of
the Notes to be prepaid.

(b)           Prepayment of Notes upon Change of Control.  Upon the occurrence of a Change of Control
Agreement Date, the Company will give written notice (a “Control Change
Notice”) of such fact to all holders of the Notes then outstanding no more
than five (5) days after the Change of Control Agreement Date.  The Control Change Notice shall
(i) describe the facts and circumstances of such Change of Control
(including the Change of Control Agreement Date) in reasonable detail,
(ii) make reference to this Section 1.2(b) and state that to the extent
permitted by the Senior Loan Documents, and unless the holder makes a
declaration of its intent not to have the Notes held by it prepaid, such Notes
shall be prepaid in full on or prior to the later of the date of the Change of
Control and the date which is five days after the Change of Control Agreement
Date (the “Control Change Payment Date”), together with accrued interest
thereon, and (iii) specify the date by which the holder must respond to
such Control Change Notice pursuant to this Section 1.2(b) in order not to have
the Notes held by it so prepaid.

All Notes held by such holder shall be prepaid in full
together with accrued interest thereon on the Control Change Payment Date
unless such holder delivers to the Company a written notice declining
prepayment (the “Declaration Notice”) (which notice may provide, at the
holder’s option, for a partial prepayment of such holder’s Notes).  The Company shall prepay in full on the
Control Change Payment Date all Notes (other than Notes for which a written
Declaration Notice has been issued) together with accrued interest thereon,
provided that such prepayment only shall be made to the extent permitted by the
Subordination Agreement.  Such
Declaration Notice shall be effective only if provided to the Company within
the earlier of (i) forty-five (45) days after the delivery of such
Control Change Notice and (ii) the Change of Control Payment Date.  In the event that a Control Change Notice is
given and a holder of the Notes fails to provide a Declaration Notice within
the time period set forth above, the Notes held by such holder shall be prepaid
on the Control Change Payment Date, together with accrued interest thereon.

All prepayments on the Notes pursuant to this Section
1.2(b) shall be made by the payment in cash of the aggregate principal amount
remaining unpaid on such Notes, and accrued interest thereon to the date of
such prepayment.

 

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(c)           Prepayment of Notes From Excess Proceeds.  At any time the Senior Debt has been Paid in
Full and the Company accumulates Excess Proceeds of $500,000 or more from
Dispositions or sales or issuances of Equity Interests, the Company will give
written notice (an “Excess Proceeds Notice”) of such fact to all holders
of the Notes then outstanding no more than five (5) days after such
accumulation.  The Excess Proceeds Notice
shall (i) make reference to this Section 1.2(c) and state that to the
extent permitted by the Senior Loan Documents, unless the holder makes a
declaration of its intent not to have the Notes held by it prepaid, such Notes
shall be prepaid pro rata (based on the unpaid principal amounts thereof) to
the extent of the Excess Proceeds on a date which shall be thirty
(30) days from the date of the Excess Proceeds Notice (the “Excess
Proceeds Payment Date”), together with accrued interest thereon, and
(ii) specify the date by which the holder must respond to such Excess Proceeds
Notice pursuant to this Section 1.2(c) in order not to have the Notes held by
it so prepaid.

To the extent permitted by the Senior Loan Documents,
all Notes held by such holder shall be prepaid together with accrued interest
thereon, on the Excess Proceeds Payment Date unless such holder delivers to the
Company a Declaration Notice  (which
notice may provide, at the holder’s option, for a partial prepayment of such
holder’s Notes).  The Company shall, to
the extent permitted by the Senior Loan Documents, prepay out of such Excess
Proceeds on the Excess Proceeds Payment Date a pro rata portion of each Note
(other than a Note for which a Declaration Notice has been issued), based on
the unpaid principal amounts thereof, together with accrued interest thereon.  Such Declaration Notice shall be effective
only if provided to the Company within twenty (20) days after the date of
the Excess Proceeds Notice.  In the event
that an Excess Proceeds Notice is given and a holder of the Notes fails to
provide a Declaration Notice within the time period set forth above, the Notes
held by such holder shall be prepaid pro rata (based on the unpaid principal
amounts thereof) to the extent of the Excess Proceeds, together with accrued
interest thereon provided that such prepayment only shall be made to the extent
permitted by the Senior Loan Documents.

All prepayments on the Notes pursuant to this Section
1.2(c) shall be made by the payment in cash of the aggregate principal amount
remaining unpaid on such Notes, and accrued interest thereon to the date of
such prepayment.

Section 1.3.           Notice
of Optional Prepayments of Notes.  The Company
will give notice of any prepayment of the Notes pursuant to Section 1.2(a) to
each holder thereof not less than seven (7) days nor more than sixty
(60) days before the date fixed for such optional prepayment specifying
(i) the date of prepayment, (ii) the principal amount of the holder’s
Notes to be prepaid on such date, and (iii) the accrued interest
applicable to the prepayment.  Such notice
of prepayment shall also certify all facts, if any, which are conditions
precedent to any such prepayment.  Notice
of prepayment having been so given, the principal amount of the Notes to be
prepaid, together with accrued interest thereon, upon satisfaction of such
conditions precedent, shall become due and payable on the prepayment date
specified in said notice provided that (i) such prepayment only shall be made
to the extent permitted by the Senior Loan Documents and (ii) the Company shall
have the right to postpone the date for any such prepayment up to three times
for up to seven (7) days per postponement by providing written notice to such
effect, and of the date to which the prepayment has been postponed, to the
holders 

 

3

of the
Notes at least two (2) business days prior to the previously scheduled date for
such prepayment.

Section 1.4.           Failure
to Perform.  In addition to the provisions contained in
Section 1.1, if the Company does not make any prepayment of the Notes upon the occurrence of a Change of
Control Agreement Date as and when required under Section 1.2, or fails to pay the principal amount of, and
all accrued unpaid interest on, the Notes in cash on the Maturity Date as required hereunder, the Notes will
bear a default rate of interest (computed on the basis of 360 days and twelve
30-day months) from one year after the date of failure to perform such
obligation at the rate of 19.0% per annum, and such interest shall accrue and
be payable (through the issuance of PIK Notes or, to the extent permitted under
the Senior Loan Documents, in cash) on the Interest Payment Dates and in full
in cash on the Maturity Date.

Section 1.5.           Direct
Payment.  Notwithstanding anything to the contrary contained in
this Agreement or the Notes, in the case of any Note owned by you or your
nominee or owned by any subsequent holder which has given written notice to the
Company requesting that the provisions of this Section 1.5 shall apply, the
Company will punctually pay when required hereunder the principal thereof,
interest thereon due with respect to said principal, or any amounts otherwise
payable in respect of the Notes without any presentment thereof, directly to
you, to your nominee or to such subsequent holder at your address, or your
nominee’s address, set forth in Schedule I hereto or such other
address as you, your nominee or such subsequent holder may from time to time
designate in writing to the Company or, if a bank account maintained in the
United States with a United States bank is designated for you or your nominee
on Schedule I hereto or in any written notice to the Company from
you, from your nominee or from any such subsequent holder, the Company will
make such payments in immediately available funds to such bank account, marked
for attention as indicated, or in such other manner or to such other account
maintained in the United States in any United States bank as you, your nominee
or any such subsequent holder may from time to time direct in writing.

Section 1.6.           Transaction
Fees.  On the Closing
Date, the Company shall pay to you, a transaction fee in an amount equal to
1.0% of the principal amount of the Notes purchased by you, which fee shall be
fully earned and payable on the Closing Date (the “Transaction Fee”).  On December 31, 2006, the Company shall pay
to you, an additional transaction fee in an amount equal to 1.0% of (i) the
amount of Notes issued on the Closing Date less (ii) the total amount of any
prepayments received through such date (whether applied to the Notes, PIK
Notes, or accrued interest).

Section 1.7.           Pro
Rata Allocation.  Any and all payments on the Notes made by
the Company shall be applied to the Notes then outstanding, together with all
accrued and unpaid interest thereon.

SECTION
2.                                COMMITMENT; CLOSING DATE.

Subject to the terms and conditions hereof and on the
basis of the representations and warranties hereinafter set forth the Company
agrees to issue and sell to you, and you (severally, but not jointly) agree to
purchase from the Company, Notes in the aggregate principal amount set 

 

4

forth opposite your name
on Schedule I hereto on the Closing Date for an aggregate purchase price
equal to the principal amount of such Notes.

Delivery of the Notes will be made at the offices of
Chadbourne & Parke LLP, against payment therefor by wire transfer to the
Company at City National Bank, Acct # 0432714683, ABA# 122016066, in the amount of the purchase price
less the Transaction Fee at 11:00 A.M., New York time, on June 7, 2006 or such
later date (not later than June 12, 2006) as shall mutually be agreed upon by
the Company and the Purchaser (the “Closing Date”).  The Notes delivered to you on the Closing
Date will be delivered to you in the form of a single registered Note in the
form attached hereto as Exhibit A, for the full amount of your
purchase (unless different denominations are specified by you), registered in
your name or in the name of your nominee, all as you may specify at any time
prior to the date fixed for delivery.

SECTION
3.                                CLOSING CONDITIONS.

Your obligation to purchase the Notes on the Closing
Date shall be subject to (i) the performance by the Company of its
agreements hereunder which by the terms hereof are to be performed at or prior
to the time of delivery of the Notes and (ii) to the following further conditions
precedent:

Section 3.1.           Execution of Senior Subordinated Note
Documents.  On or prior to the Closing Date:

(a)           you
shall have received counterparts of this Agreement, duly executed and delivered
to you by the Company and evidence of the simultaneous sale of the Notes to be
sold to the Purchaser hereunder;

(b)           the
Notes in the form attached as Exhibit A shall have been duly
executed and delivered to you by the Company, and shall be in full force and
effect; and

(c)           such
other Senior Subordinated Note Documents as the holders of the Notes may
reasonably request shall have been duly executed and delivered to you and shall
be in full force and effect.

Section 3.2.           Closing Certificates. 
You shall have received:

(a)           certificates
dated the Closing Date, signed on behalf of the Company by a Responsible
Officer of the Company, the truth and accuracy of which shall be a condition to
your obligation to purchase the Notes proposed to be sold to you and to the
effect that (i) the respective representations and warranties of the
Company set forth herein are true and correct on and as of the Closing Date,
(ii) the Company has performed all of its obligations and satisfied all
conditions hereunder which are to be performed or satisfied contemporaneously
with or prior to the Closing Date, and (iii) no Default or Event of Default has
occurred and is continuing;

(b)           certificates
of the Secretary or Assistant Secretary of the Company dated the Closing Date
and certifying (i) that attached thereto are true and complete copies of
(A) the certificate of incorporation or similar governing document (including
all amendments thereto) of 

 

5

 

such
Person, as in effect as of the Closing Date, certified as of a recent date by
the Secretary of State (or like official) of the jurisdiction of such Person’s
formation, (B) the bylaws or similar governing document (including all
amendments thereto) of such Person, as in effect as of the Closing Date and
(C) resolutions duly adopted (and not modified, rescinded or amended) by
the Board of Directors (or similar governing body) of such Person authorizing
the execution, delivery and performance of each of the Senior Subordinated Note
Documents to which it is a party; and (ii) as to the incumbency and
specimen signature of each officer executing any of the Senior Subordinated
Note Documents (together with a certificate of another officer as to the
incumbency and specimen signature of the Secretary or Assistant Secretary
executing the certificate described in this clause (b));

(c)           certificates
of the Secretary or Assistant Secretary of Bare Escentuals Beauty, Inc., dated
the Closing Date and certifying (i) that attached thereto are true and
complete copies of (A) the certificate of incorporation or similar governing
document (including all amendments thereto) of such Person, as in effect as of
the Closing Date, certified as of a recent date by the Secretary of State (or
like official) of the jurisdiction of such Person’s formation and (B) the
bylaws or similar governing document (including all amendments thereto) of such
Person, as in effect as of the Closing Date; and (ii) as to the incumbency
and specimen signature of the Secretary or Assistant Secretary executing the
certificate described in this clause (c); and

(d)           a
long form certificate as to the good standing of the Company and each of its
Subsidiaries as of a recent date, from the Secretary of State (or like
official) of its jurisdiction of formation and the jurisdictions in which its
principal properties are located.

Section 3.3.           Legal
Opinions.  You shall have received from Latham &
Watkins LLP, counsel for the Company, its opinion dated the Closing Date, in
form and substance reasonably satisfactory to you.

Section 3.4.           Payment
of Fees and Expenses.  You shall have received from the Company
on or prior to the Closing Date the payment of all reasonable out-of-pocket
costs, fees and expenses (including, without limitation, reasonable legal fees
and expenses incurred by your counsel) incurred in connection with your due
diligence investigation of the Company and its Subsidiaries and the negotiation
of the Senior Subordinated Note Documents. 
You shall have received from the Company on or prior to the Closing Date
the payment of the Transaction Fee.

Section 3.5.           Application
of Certain Proceeds; Statement of Sources and Uses of Proceeds. 
Substantially concurrently with the delivery of the Notes to you on the
Closing Date (and, in any event, on the Closing Date), the Company shall apply
substantially all of the proceeds of the sale of the Notes and other related
transactions as follows:

(a)           not
more than $341,000,000 in the
aggregate to declare and pay a dividend to the Company’s shareholders; and

(b)           not
more than $4,100,000 to pay fees and expenses related to
the sale of the Notes and other related transactions.

 

6

 

You shall have received a detailed statement and
evidence of such application of proceeds satisfactory in form and substance to
you.

Section 3.6.           Existence
and Authority of the Company and the Subsidiaries. 
On or prior to the Closing Date, you shall have received, in form and
substance reasonably satisfactory to you, such documents and evidence with
respect to the Company and its Subsidiaries as you may reasonably request in
order to establish the existence and good standing of the Company and its
Subsidiaries and the authorization of the transactions contemplated by the
Senior Subordinated Note Documents and the Senior Credit Agreements.

Section 3.7.           Senior
Credit Agreements and Related Agreements.

(a)           On
or prior to the Closing Date the Company and its Subsidiaries, as applicable,
shall have entered into amendments to the Senior Credit Agreements, each of
which shall be in form and substance reasonably satisfactory to you and your
special counsel in all respects and, except with respect to conditions relating
to the consummation of all filings necessary to perfect the security interests
of the Senior Lenders pursuant to the Senior Credit Agreements, no term,
condition or provision thereof shall have been supplemented, amended, modified
or waived without your prior written consent.

(b)           You
shall have received a copy of the Senior Credit Agreements (including the above
described amendments).  On or prior to
the Closing Date, all conditions precedent to the effectiveness of the above described
amendments under the Senior Credit Agreements shall have been fulfilled, and
such transactions shall be consummated simultaneously with the consummation of
the transactions contemplated hereby.

Section 3.8.           Absence of
Material Adverse Change, Etc. 
Since January 1, 2006, (x)
no change constituting a Material Adverse Effect shall have occurred and (y) no
event, development or circumstance shall have occurred that, individually or in
the aggregate, could reasonably be expected to have a Material Adverse Effect.

Section 3.9.           Consents
and Approvals.  All necessary consents, approvals and
authorizations of, and declarations, registrations and filings with,
governmental bodies and non-governmental Persons required in order to
consummate the transactions contemplated by the Senior Subordinated Note
Documents and Senior Credit Agreements shall have been obtained or made and
shall be in full force and effect.

Section 3.10.        Absence
of Litigation, Orders, Etc.  There shall
not be pending or threatened, any action, suit, proceeding, governmental
investigation or arbitration against or affecting the Company, its Subsidiaries
or the respective assets or property of any of the foregoing which seeks to
enjoin or restrain any of the transactions contemplated herein, or the Senior
Credit Agreements or which you reasonably believe is likely to have a Material
Adverse Effect.  No order of any court,
arbitrator or governmental body shall be in effect which purports to enjoin or
restrain any of the transactions contemplated herein or which you reasonably
believe could constitute or result in a Material Adverse Effect.

 

7

Section 3.11.        Your
Purchase Permitted by Applicable Laws; Legal Investment. 
Your purchase of and payment for the Notes to be purchased by you
hereunder on the Closing Date shall be permitted by the laws and regulations of
the jurisdictions to which you are subject and you shall have received such
certificates or other evidence as you may request to establish compliance with
this condition.

Section 3.12.        Capital
Structure; Liquidity.  On a consolidated basis, the capital structure of the Company shall include no more than $593,250,000 in outstanding
principal amount of Indebtedness funded under the Senior Credit Agreements on
the Closing Date and you shall have received a detailed calculation and
evidence of the foregoing.  On a
consolidated basis and immediately after giving effect to the transactions
contemplated by this Agreement and the outstanding loans and commitments under
the Senior Credit Agreements as of the Closing Date, (A) the
Company shall have excess availability
under the revolving credit facility under Senior Credit Agreements of not less
than $25,000,000 and (B) the ratio of total funded Indebtedness (exclusive
of the Indebtedness under the Senior Subordinated Note Documents) as of the
Closing Date to EBITDA of the Company for the 12 months ended April 30, 2006
shall not be in excess of 5.50 to 1.0.

Section 3.13.        Satisfactory
Proceedings.  All proceedings taken in connection with
the transactions contemplated by the Senior Subordinated Note Documents and the
Senior Credit Agreements, and all documents necessary to the consummation
thereof, shall be satisfactory in form and substance to you and your special
counsel, and you shall have received a copy (executed or certified as may be
appropriate) of all legal documents or proceedings taken in connection with the
consummation of said transactions.

SECTION
4.                                REPRESENTATIONS.

Section 4.1.           Representations
of the Company.  The Company represents and warrants to you
that the following are true and correct on and as of the date hereof and on and
as of the Closing Date:

(a)           Existence and Qualification; Power; Compliance With Laws.  The Company is a corporation duly formed,
validly existing and in good standing under the Laws of the State of
Delaware.  The Company is duly qualified
or registered to transact business and is in good standing in the State of
California and each other jurisdiction in which
the conduct of its business or the ownership or leasing of its Properties makes
such qualification or registration necessary, except where the failure so to
qualify or register and to be in good standing would not constitute a Material
Adverse Effect.  The Company has all
requisite power and authority to conduct its business, to own and lease its
Properties and to execute and deliver each Senior Subordinated Note Document to
which it is a Party and to perform its obligations under the Senior
Subordinated Note Documents.  All
outstanding capital stock of the Company is duly authorized, validly issued, fully paid and
non-assessable, and no holder thereof has any enforceable right of rescission
under any applicable state or federal securities or other Laws.  The Company is in compliance with all Laws and other
legal requirements applicable to its business, has obtained all authorizations,
consents, approvals, orders, licenses and permits from, and has accomplished
all filings, registrations and qualifications with, or obtained exemptions from
any of the foregoing 

 

8

from,
any Governmental Authority that are necessary for the transaction of its
business, except where the failure so to comply with Laws and other legal
requirements applicable to its business, obtain authorizations, consents,
approvals, orders, licenses and permits, file, register, qualify or obtain
exemptions does not constitute a Material Adverse Effect.  As of the Closing Date, the ownership of all
issued and outstanding capital stock of 
the Company is as set forth on Schedule II.

(b)           Authority; Compliance With Other Agreements and Instruments and
Government Regulations.  The
Company has all requisite corporate or company power and authority, as
applicable, to execute, deliver and perform the obligations under the Senior
Subordinated Note Documents to which it is a party.  The execution, delivery and performance by the Company of the Senior Subordinated Note
Documents to which it is a Party have been duly authorized by all necessary
corporate or company action, as applicable, and do not and will not:

(i)            require
any consent or approval not heretofore obtained of any partner, director,
stockholder, member, security holder or creditor of such Party;

(ii)           violate
or conflict with any provision of such Party’s charter, articles of
incorporation, bylaws, articles of organization or operating agreement, or
other organizational documents, as applicable;

(iii)          result
in or require the creation or imposition of any Lien or Right of Others upon or
with respect to any Property now owned or leased or hereafter acquired by such
Party;

(iv)          violate
any Requirement of Law applicable to such Party;

(v)           result
in a breach of or constitute a default under, or cause or permit the
acceleration of any obligation owed under, any indenture or loan or credit
agreement or any other Contractual Obligation to which such Party is a party or
by which such Party or any of its Property is bound or affected (it being
understood, however, that the enforcement of the Senior Subordinated Note
Documents may be limited in certain respects by the terms of the Senior Loan
Documents); and such Party is not in violation of, or default under, any
Requirement of Law or Contractual Obligation, or any indenture, loan or credit
agreement described in this paragraph (v), in any respect that constitutes a
Material Adverse Effect.

(c)           No Governmental Approvals Required.  Except as previously obtained or made, no
authorization, consent, approval, order, license or permit from, or filing,
registration or qualification with, any Governmental Authority is or will be
required to authorize or permit under applicable Laws the execution, delivery
and performance by the Company of the Senior Subordinated Note Documents to which it
is a Party.

(d)           Subsidiaries.

(i)            Each
Significant Subsidiary is a legal entity duly formed, validly existing and, if
such concept is legally recognized in such Subsidiary’s jurisdiction of
organization, in “good standing” under the Laws of its jurisdiction of
organization, is duly qualified to do 

 

9

business
as a foreign organization and, if such concept is legally recognized in any
applicable jurisdiction, is in “good standing” as such in each jurisdiction in
which the conduct of its business or the ownership or leasing of its Properties
makes such qualification necessary (except where the failure to be so duly
qualified and in good standing does not constitute a Material Adverse Effect),
and has all requisite power and authority to conduct its business and to own
and lease its Properties.

(ii)           Each
Significant Subsidiary is in compliance with all Laws and other requirements
applicable to its business and has obtained all authorizations, consents,
approvals, orders, licenses, and permits from, and each such Subsidiary has
accomplished all filings, registrations, and qualifications with, or obtained
exemptions from any of the foregoing from, any Governmental Authority that are
necessary for the transaction of its business, except where the failure to be
in such compliance, obtain such authorizations, consents, approvals, orders,
licenses, and permits, accomplish such filings, registrations, and
qualifications, or obtain such exemptions, does not constitute a Material
Adverse Effect.

(e)           Financial Statements.  The Company has furnished to the Purchaser
the audited financial statements of the Company and its Subsidiaries for the
Fiscal Year ended January 1, 2006 and the
internally-prepared financial statements of the Company and its Subsidiaries
for the Fiscal Quarter
ended April 2, 2006 and the
Fiscal Months ended April 30, 2006
and May 28, 2006.

(f)            No Other Liabilities; No Material Adverse Changes.  The Company and its Subsidiaries do not have
any material liability or material contingent liability required under GAAP to
be reflected or disclosed, and not reflected or disclosed, in the internally-prepared
balance sheet described in Section 4.1(e), other than liabilities and
contingent liabilities arising (i) under the Senior Loan Documents or (ii) in
the ordinary course of business since the date of such balance sheet.  As of the Closing Date, other than the
transactions contemplated by Section 3.5 hereof and the execution, delivery and
performance of the Senior Loan Documents, no circumstance or event has occurred
that constitutes a Material Adverse Effect since January 1, 2006. 

(g)           Title to and Location of Property.  The Company and its Subsidiaries have valid
title to the Property (other than assets which are the subject of a Capital
Lease Obligation) reflected in the internally-prepared balance sheet described
in Section 4.1(e), other than (i) items of Property that are immaterial or
Property that is subsequently sold or disposed of in the ordinary course of
business or (ii) exceptions to title that are immaterial or which are
caused by Liens that secure the Indebtedness under the Senior Loan Documents.

(h)           Intangible Assets. 
The Company and its Subsidiaries own, or possess the right to use to the
extent necessary in their respective businesses, all material trademarks, trade
names, copyrights, patents, patent rights, computer software, licenses and
other Intangible Assets that are used in the conduct of their businesses as now
operated, and no such Intangible Asset, to the best knowledge of the Company,
conflicts with the valid trademark, trade name, copyright, patent, patent right
or Intangible Asset of any other Person to the extent that such conflict
constitutes a Material Adverse Effect.

 

10

(i)            Litigation.  There are
no Proceedings (whether or not purportedly on behalf of the Company or any of
its significant Subsidiaries) at law or in equity, or before or by any court or
other Government Authority (including any Environmental Claims) that are
pending or, to the knowledge of Company, threatened against or affecting the
Company or any Significant Subsidiary or any property of the Company or any
Significant Subsidiary and that, individually or in the aggregate, could
reasonably be expected to result in a Material Adverse Effect.  Neither the Company nor any of its
Subsidiaries (i) is in violation of any applicable laws (including
Environmental Laws) that, individually or in the aggregate, could reasonably be
expected to result in a Material Adverse Effect, or (ii) is subject to or
in default with respect to any final judgments, writs, injunctions, decrees,
rules or regulations of any court or other Government Authority that,
individually or in the aggregate, could reasonably be expected to result in a
Material Adverse Effect.

(j)            Binding Obligations. 
The Senior Subordinated Note Documents will, when executed and delivered
by Company, constitute the legal, valid and binding obligation of Company,
enforceable against Company in accordance with its terms, except as enforcement
may be limited by Debtor Relief Laws or equitable principles relating to the
granting of specific performance and other equitable remedies as a matter of
judicial discretion.

(k)           No Default.  No event
has occurred and is continuing that would constitute a Default or Event of
Default.

(l)            ERISA.  With respect
to each Plan:

(i)            such
Plan complies in all material respects with ERISA and any other applicable Laws
to the extent that noncompliance could reasonably be expected to have a
Material Adverse Effect;

(ii)           such
Plan has not incurred any “accumulated funding deficiency” (as defined in
Section 302 of ERISA) that could reasonably be expected to have a Material
Adverse Effect;

(iii)          no
“reportable event” (as defined in Section 4043 of ERISA, but excluding such
events as to which the PBGC has by regulation waived the requirement therein
contained that it be notified within thirty days of the occurrence of such
event) has occurred that could reasonably be expected to have a Material Adverse
Effect;

(iv)          the
Company has not engaged in any non-exempt “prohibited transaction” (as defined
in Section 4975 of the Code) that could reasonably be expected to have a
Material Adverse Effect; and

(v)           the
Company has not incurred and does not expect to incur any withdrawal liability
to any Multiemployer Plan that could reasonably be expected to have a Material
Adverse Effect.

(m)          Regulation U; Investment Company Act.  No part of the proceeds from the sale of
Securities hereunder will be used to purchase or carry, or to extend credit to
others for the 

 

11

 

purpose
of purchasing or carrying, any Margin Stock in violation of Regulation U.  The Company is not nor is it required to be
registered as an “investment company” under the Investment Company Act of 1940,
as amended.

(n)           Disclosure.  No
written statement made by an Officer of the Company or any of its Subsidiaries to any
Purchaser pursuant to this Agreement as of the date thereof contained any
untrue statement of a material fact or omitted a material fact necessary to
make the statement made not misleading in light of all the circumstances known
to the Company and existing at the date the statement was made.  Any projections and pro forma financial information contained
in such materials are based upon good faith estimates and assumptions believed
by Company to be reasonable at the time made, it being recognized by Lenders
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.  There are no facts known (or which should
upon the reasonable exercise of diligence be known) to Company (other than
matters of a general economic nature) that, individually or in the aggregate,
could reasonably be expected to result in a Material Adverse Effect and that
have not been disclosed herein or in such other documents, certificates and
statements furnished to Lenders for use in connection with the transactions
contemplated hereby.

(o)           Tax Liability.  The
Company and its Subsidiaries have filed all tax returns on or prior to the date
due, subject to any extensions, which are required to be filed, and have paid,
or made provision for the payment of, all taxes with respect to the periods,
Property or transactions covered by said returns, or pursuant to any assessment
received by the Company or any of its Subsidiaries, except (a) such taxes, if
any, as are being diligently contested in good faith by appropriate proceedings
and as to which adequate reserves have been established and maintained and (b)
immaterial taxes and, in each of the foregoing cases, so long as no material
Property of the Company or any of its Subsidiaries is at material risk of being
seized, levied upon or forfeited.

(p)           Hazardous Materials. 
Except for such exceptions as individually or in the aggregate could not
reasonably be expected to have a Material Adverse Effect:

                                (i)            neither Company nor any of its
Subsidiaries nor any of their respective real properties or operations are
subject to any outstanding written order, consent decree or settlement
agreement with any Person relating to (a) any Environmental Law, (b) any
Environmental Claim, or (c) any Hazardous Materials Activity;

                                (ii)           neither Company nor any of its
Subsidiaries has received any letter or request for information under Section
104 of the Comprehensive Environmental Response, Compensation, and Liability
Act (42 U.S.C. § 9604) or any comparable state law;

                                (iii)          there are and, to Company’s knowledge,
have been no conditions, occurrences, or Hazardous Materials Activities that
could reasonably be expected to form the basis of an Environmental Claim
against Company or any of its Subsidiaries; and

 

12

                                (iv)          Company and its Subsidiaries have been
and are in compliance with all current or reasonably foreseeable future
requirements pursuant to or under Environmental Laws, except where any
non-compliance would not, individually or in the aggregate, be reasonably
expected to result in a Material Adverse Effect.

(q)           Employee Matters. 
There is no strike or work stoppage in existence or threatened and known
to the Company involving the Company or any of its Subsidiaries that could reasonably be
expected to constitute a Material Adverse Effect.

(r)            Solvency.  After
giving effect to this Agreement, the other Senior Subordinated Note Documents
and the Senior Credit Agreements, the Company shall be Solvent.

(s)           OFAC; PATRIOT Act.

(i)            Neither
the Company or any of its Subsidiaries is a Sanctioned Person or does business
in a Sanctioned Country or with a Sanctioned Person in violation of the
economic sanctions of the United States administered by OFAC.

(ii)           Each
of the Company and its Subsidiaries is in compliance in all material respects
with the PATRIOT Act. No part of the proceeds of the Notes hereunder will be
used, directly or indirectly, for any payments to any governmental
official or employee, political party, official of a political party, candidate
for political office, or anyone else acting in an official capacity, in order
to obtain, retain or direct business or obtain any improper advantage, in
violation of the United States Foreign Corrupt Practices Act of 1977, as
amended.

Section 4.2.           Representations of the Purchaser. 
You represent as follows:

(a)           You
are either (A) an institutional “accredited investor” within the meaning of
Rule 501(a)(1), (2), (3) or (7) promulgated by the SEC under the Securities Act
or (B) a “Qualified Institutional Buyer” as defined in Rule 144A under the
Securities Act, in either case, with such knowledge and experience in financial
and business matters as necessary in order to evaluate the merits and risks of
an investment in the Notes.

(b)           You
represent that you are acquiring the Notes for the purpose of investment and
not with a view to the distribution thereof, and that you have no present
intention of selling, negotiating or otherwise disposing of the Notes in
violation of the Securities Act; it being understood, however, that the
disposition of your property shall at all times be and remain within your
control.

(c)           You
represent that at least one of the following statements is an accurate
representation as to each source of funds (a “Source”) to be used by you
to pay the purchase price of the Notes to be purchased by you hereunder:

(i)            if
you are an insurance company, the Source does not include assets allocated to
any separate account maintained by you in which any employee benefit plan (or
its related trust) has any interest, other than a separate account that is
maintained solely in connection with your fixed contractual obligations under
which the amounts payable, or credited, 

 

13

 

to such
plan and to any participant or beneficiary of such plan (including any
annuitant) are not affected in any manner by the investment performance of the
separate account; or

(ii)           the
Source is either (A) an insurance company pooled separate account, within the
meaning of Prohibited Transaction Exemption (“PTE”) 90-1 (issued
January 29, 1990), or (B) a bank collective investment fund, within the meaning
of the PTE 91-38 (issued July 12, 1991) and, except as you have disclosed
to the Company in writing pursuant to this clause (ii), no employee benefit
plan or group of plans maintained by the same employer or employee organization
beneficially owns more than 10% of all assets allocated to such pooled separate
account or collective investment fund; or

(iii)          the
Source constitutes assets of an “investment fund” (within the meaning of
Part V of PTE 84-14 (the “QPAM Exemption”) managed by a “qualified
professional asset manager” or “QPAM” (within the meaning of Part V of
the QPAM Exemption), no employee benefit plan’s assets that are included in
such investment fund, when combined with the assets of all other employee
benefit plans established or maintained by the same employer or by an affiliate
(within the meaning of Section V(c)(1) of the QPAM Exemption) of such employer
or by the same employee organization and managed by such QPAM, exceed 20% of
the total client assets managed by such QPAM, the conditions of Part I(c) and
(g) of the QPAM Exemption are satisfied, neither the QPAM nor a person
controlling or controlled by the QPAM (applying the definition of “control”
in Section V(e) of the QPAM Exemption) owns a 5% or more interest in the
Company and (i) the identity of such QPAM and (ii) the names of all employee
benefit plans whose assets are included in such investment fund have been
disclosed to the Company in writing pursuant to this clause (iii); or

(iv)          the
Source is a governmental plan; or

(v)           the
Source is one or more employee benefit plans, or a separate account or trust
fund comprised of one or more employee benefit plans, each of which has been
identified to the Company in writing pursuant to this clause (v); or

(vi)          the
Source does not include assets of any employee benefit plan, other than a plan
exempt from the coverage of ERISA.

As used in this Section 4.2, the terms “employee
benefit plan”, “governmental plan”, “party in interest” and “separate
account” shall have the respective meanings assigned to such terms in
Section 3 of ERISA.

SECTION
5.                                COVENANTS.

From and after the Closing Date and continuing so long
as any amount remains unpaid on any Note:

Section 5.1.           Payment
of Notes.  The Company shall pay or cause to be paid the
principal of and interest on the Notes on the dates and in the manner provided
in the Notes and herein.

 

14

The Company shall pay interest (including Accrued
Bankruptcy Interest in any proceeding under any Bankruptcy Law) on overdue
principal at the then applicable interest rate on the Notes to the extent
lawful; it shall pay interest (including Accrued Bankruptcy Interest in any
proceeding under any Bankruptcy Law) on overdue installments of interest
(without regard to any applicable grace period) at the same rate to the extent
lawful.

Section 5.2.           Financial
Statements, Reports, Etc.  The Company will keep, and
will cause each of the Subsidiaries to keep, proper books of record and account
in which full and correct entries will be made of all dealings or transactions
of, or in relation to, the business and affairs of the Company or such
Subsidiary, in accordance with GAAP consistently applied, and will furnish to
you so long as you are a holder of any Note and to each other holder of a Note
(in duplicate if so specified below or otherwise requested):

(a)           Annual Reports.  As soon as available, and in any event within
one hundred twenty (120) days after the end of each Fiscal Year, the
consolidated and consolidating balance sheet of the Company and its Subsidiaries as at the end of
such Fiscal Year and the consolidated and consolidating statements of income,
shareholders’ equity and cash flows, in each case of the Company and its Subsidiaries for such Fiscal
Year, all in reasonable detail.  Such
financial statements shall be certified by the chief financial officer of
Company that they fairly present, in all material respects, the financial
condition of  the Company and its
Subsidiaries as at the dates indicated and the results of their operations and
their cash flows for the periods indicated, (b) a narrative report
describing the operations of the Company and its Subsidiaries for such Fiscal
Year, and (c) in the case of such consolidated financial statements, a
report thereon of Ernst & Young or other independent certified public
accountants of recognized national standing selected by Company and reasonably
satisfactory to the holders of the Notes (it being agreed that the holders of
the Notes shall be deemed to have approved of any such certified public
accountants approved by the Senior Lenders for purposes of preparing similar
certifications called for under the Senior Loan Documents), which report shall
be unqualified, shall express no doubts, assumptions or qualifications
concerning the ability of the Company and its Subsidiaries to continue as a
going concern, and shall state that such consolidated financial statements
fairly present, in all material respects, the consolidated financial position
of the Company and its Subsidiaries as at the dates indicated and the results
of their operations and their cash flows for the periods indicated in
conformity with GAAP applied on a basis consistent with prior years (except as
otherwise disclosed in such financial statements) and that the examination by
such accountants in connection with such consolidated financial statements has
been made in accordance with generally accepted auditing standards provided,
however, that, with respect to any fiscal period ended 180 days or more
after the consummation of an initial public offering of any of the Company’s
Equity Interests, so long as Company is required to file reports under Section
13 of the Exchange Act, the requirements of this paragraph shall be deemed
satisfied by the delivery of, the year-end financials of Company on Form 10-K
for such Fiscal Year;

(b)           Quarterly Reports.  As soon as available, and in any event within
sixty (60) days after the end of each Fiscal Quarter, the consolidated and
consolidating balance sheet of the Company and its Subsidiaries as at the end of
such Fiscal Quarter and the consolidated and consolidating statements of
income, stockholder’s equity and cash flows for such Fiscal Quarter, and the
portion of the Fiscal Year ended with such Fiscal Quarter, all in reasonable
detail.  Such 

 

15

 

financial
statements shall be (i) certified by the chief financial officer of the Company that they fairly present, in all
material respects, the financial condition of the Company and its Subsidiaries as at the dates
indicated and the results of their operations and their cash flows for the
periods indicated, subject only to normal year-end accruals and audit
adjustments and (ii) a narrative report describing the operations of the
Company and its Subsidiaries for such period and for the period from the
beginning of the then current Fiscal year to the end of such quarter provided,
however, that, with respect to any fiscal period ended 180 days or more
after the consummation of an initial public offering of any of the Company’s
Equity Interests, so long as Company is required to file reports under Section
13 of the Exchange Act, the requirements of this paragraph shall be deemed
satisfied by the delivery of the quarterly financials of Company on Form 10-Q
for the relevant Fiscal Quarter;

(c)           Compliance Certificates.  Concurrently with any delivery of financial
statements under Sections 5.2(a) and (b), (i) an Officer’s Certificate of the
Company stating that the signers have reviewed the terms of this Agreement and
have made, or caused to be made under their supervision, a review in reasonable
detail of the transactions and condition of the Company and its Subsidiaries
during the accounting period covered by such financial statements and that such
review has not disclosed the existence during or at the end of such accounting
period, and that the signers do not have knowledge of the existence as at the
date of such Officer’s Certificate, of any condition or event that constitutes
a Default or Event of Default, or, if any such condition or event existed or
exists, specifying the nature and period of existence thereof and what action
Company has taken, is taking and proposes to take with respect thereto; (ii)
concurrently with any delivery of financial statements under Sections 5.2(a)
and (b), a certificate of a Financial Officer of the Company, substantially in the form of Exhibit
D attached hereto; and (iii) in the case of Section 5.2(a) above, a written
statement of the accounting firm giving the report on the financial statements
then being delivered pursuant to such Section stating that in the course of its
regular audit of the financial statements of the Company and its Subsidiaries, which audit was
conducted in accordance with generally accepted auditing standards, nothing
came to their attention that caused them to believe that the Company failed to comply with the terms,
covenants, provisions or conditions of Section 5 of this Agreement, insofar as
they relate to financial and accounting matters, or if any Default has been
noted, specifying the nature and extent thereof; provided that such
accountants shall not be liable by reason of any failure to obtain knowledge of
any such Default or Event of Default that would not be disclosed in the course
of their audit examination;

(d)           Monthly Reports.  As soon as available, and in any event within
thirty (30) days after the end of each Fiscal Month, the consolidated balance
sheet of the Company
and its Subsidiaries as at the end of such Fiscal Month and the consolidated
statement of income, stockholder’s equity and cash flows for such Fiscal Month,
and the portion of the Fiscal Year ended with such Fiscal Month, all in
reasonable detail provided, however, that, with respect to any
fiscal period ended 180 days or more after the consummation of an initial
public offering of any of the Company’s Equity Interests, so long as Company is
required to file reports under Section 13 of the Exchange Act, the requirements
of this paragraph shall be deemed null and void;

 

16

 

(e)           Financial Plan. 
As soon as practicable, and in any event not later than
thirty (30) days after the commencement of each Fiscal Year, a consolidated
plan and financial forecast for such Fiscal Year and the next succeeding Fiscal
Year (the “Financial Plan” for such Fiscal Year), including (i) a forecasted
consolidated balance sheet and forecasted consolidated statements of income and
cash flows of Company and its Subsidiaries for the current Fiscal Year, and
(ii) forecasted consolidated statements of income and cash flows of
Company and its Subsidiaries for each month of each such Fiscal Year;

(f)            Other Information.  The Company shall provide to the holder of
the Notes, copies of any other report or other document that is provided to the
Senior Lenders under Section 6.1 of either of the Senior Credit Agreements
at the time such report or other document is provided to the Senior Lenders;

(g)           Default; Event of Default.  As soon as practicable, and in any event
within two (2) Business Days after a Responsible Officer of the Company or any Subsidiary becomes aware of the
existence of any condition or event which constitutes a Default or Event of
Default, telephonic notice specifying the nature and period of existence
thereof, and, no more than two (2) Business Days after such telephonic notice,
written notice again specifying the nature and period of existence thereof and
specifying what action the Company is taking or proposes to take with respect thereto;

(h)           Senior Credit Agreements Notice. 
As soon as possible, copies of any notices delivered to the Company under and pursuant to the Senior Credit Agreements, including
without limitation, any notices of default thereunder; and

(i)            Publicly Filed Documents. 
If at any time the Company or Bare Escentuals Beauty, Inc. registers
securities under applicable securities laws, the Company will provide, promptly
upon the filing thereof, copies of any publicly filed documents which the
Company or Bare Escentuals Beauty, Inc. shall have filed with the SEC.

(j)            Other Information.  Promptly,
from time to time, such other information regarding the operations, business
affairs and financial condition of the Company or any Subsidiary, or compliance with
the terms of any Senior Subordinated Note Document, as any holder of the Notes
may reasonably request.

In connection with the foregoing, the Company shall, and shall cause its Subsidiaries,
to permit you to visit with management and inspect the financial records and
the property of the Company and its Subsidiaries at reasonable times during
normal business hours and upon reasonable advance notice and to make extracts
from and copies of such financial records, and permit you to discuss the
affairs, finances and condition of the Company and its Subsidiaries with and be
advised as to the same by the officers thereof and the independent accountants
therefor.

Section 5.3.           Limitation on
Restricted Payments and Distributions.

(a)           The
Company will not, and the Company will not 
permit any of its Subsidiaries to, pay Management Fees other than the
payment by the Company and its Subsidiaries of 

 

17

 

Management Fees with respect to and as provided under the
terms of the Management Agreements in effect as of the date hereof or payments made to the Permitted
Holders in connection with a buyout of the Management Agreements upon the
closing of an underwritten public offering of shares on the capital stock of
the Company or Bare Escentuals Beauty, Inc. (provided that such buyout amount is no more than 5 years worth of
Management Fees payable under the Management Agreements), in each case so long as no Event of Default under
Sections 6.1(a), 6.1(c) or 6.1(d) shall have occurred and remain in effect, or
would occur as a result of any such payment.

(b)           Except
with the prior written consent of the holders of the Notes, the Company will
not, and the Company will not permit any of its Subsidiaries to, declare or pay
or make any form of Distribution, whether from capital, income or otherwise,
and whether in cash or other Property, other than (a) Distributions by any
Subsidiary to the Company, to another Subsidiary or to any other Person (other
than a Permitted Holder), (b) Distributions described in Section 3.5 of this
Agreement, (c) Distributions constituting the repurchase of shares of common
stock of the Company or any of its Subsidiaries (or any options rights with
respect to such stock) owned by any former officer or employee of such entity
not to exceed $10,000,000 in the aggregate (or if such Distributions are
insufficient to effect such repurchases, the Company may issue promissory notes
in exchange for such stock (or options rights) and subsequently may redeem such
promissory notes), and (d) payments to purchase Capital Stock of the Company
pursuant to Section 2.1(a) of the Stockholders Agreement, in each case so long
as no Event of Default under Sections 6.1(a), 6.1(c) or 6.1(d) shall have
occurred and remain in effect, or would occur as a result of any such payment.

Section 5.4.           Limitation
on Transactions with Affiliates.  The Company
shall not, and the Company shall not permit any of its respective Subsidiaries
to, enter into any transaction of any kind with any Affiliate other than
(without duplication):  (a) salary,
bonus, employee stock option and other compensation and employment arrangements
with directors, officers and employees in the ordinary course of business; (b)
Distributions permitted pursuant to Section 5.3(b); (c) payments permitted
under Section 5.3(a); (d) transactions (other than transactions between the
Company and its Subsidiaries or among Subsidiaries) on overall terms at least
as favorable to the Company or its Subsidiaries as would be the case in an arm’s-length
transaction between unrelated parties of equal bargaining power; (e) a
transaction between the Company and any of its wholly-owned Subsidiaries or
between any of its wholly-owned Subsidiaries; (f) payment of fees to Berkshire
Partners LLC, JH Partners LLC or their Affiliates on the date hereof and
reimbursement of expenses to such Persons on the date hereof; and (g)
reimbursement of Transaction Costs.

Section 5.5.           Corporate
Existence.  The Company shall, and shall cause each of
its Significant Subsidiaries to, preserve and maintain their respective
existences in the jurisdiction of their formation and all material
authorizations, rights, franchises, privileges, consents, approvals, orders, licenses,
permits, or registrations from any Governmental Authority that are necessary
for the transaction of their respective business and qualify and remain
qualified to transact business in each jurisdiction in which such qualification
is necessary in view of their respective business or the ownership or leasing
of their respective Properties except where the failure to so qualify or remain
qualified would not constitute a Material Adverse Effect.

 

18

Section 5.6.           Limitation
on Incurrence of Additional Indebtedness.  The Company
shall not, and shall not permit any Subsidiary to, directly or indirectly,
create, incur, assume or guaranty, or otherwise become or remain directly or
indirectly liable with respect to, any Indebtedness, except:

(a)           the
Indebtedness pursuant to this Agreement and the other Senior Subordinated Note
Documents;

(b)           Indebtedness
and any guaranty obligations under the Senior Loan Documents in an aggregate
principal amount not to exceed $618,250,000, plus an $85 million cushion (the “Cushion”)
(which can be utilized under either the Senior Loan Documents or other
Indebtedness of Bare Escentuals Beauty, Inc. or its Subsidiaries so long as the
aggregate principal amount thereof does not exceed $85 million), less the
aggregate amount of all principal repayments and prepayments in respect of term
loans and reductions of revolving loan commitments thereunder effected after
the Closing Date (the “Senior Facilities Debt Cap Amount”) and refinancing or
renewals thereof, provided that, (i) any such refinancing Indebtedness is in an
aggregate principal amount not greater than the aggregate principal amount of
the Indebtedness being renewed or refinanced, plus any unutilized Cushion (it
being understood that any revolving loan commitments (whether drawn or undrawn)
which have not been terminated or permanently reduced shall be included in
determining the aggregate principal amount of Indebtedness solely for the
purposes of this Section 5.6(b)(i)), (ii) the final scheduled maturity date of
the refinancing Indebtedness is on or before June 7, 2014, (iii) any such
refinancing Indebtedness shall not shorten the weighted average life of the
Indebtedness being refinanced by more then one year; (iv) any such refinancing
Indebtedness shall not, prior to an event of default under the Senior Credit
Agreements, add additional negative covenants, additional events of default or
otherwise amend the negative covenants in a manner that, when taken as a whole,
make the negative covenants and events of default under such refinancing
Indebtedness materially more restrictive than the negative covenants and events
of default set forth in the Senior Credit Agreements on the date hereof; and
(v) any such refinancing Indebtedness shall not increase the interest rate or
the default interest rate applicable to the Senior Credit Agreements by more
than two (2%) percent per annum above the
highest interest rate or default interest rate, respectively, applicable to the
Indebtedness incurred under the Senior Credit Agreements; provided  however,
that any failure by the Company or any of its Subsidiaries to comply with
clauses (ii) through (v) shall not be deemed a
Default or Event of Default hereunder but rather shall solely result in the
Notes bearing interest at the Default Rate from the date of occurrence of the
compliance failure and such interest shall accrue and be payable
(through the issuance of PIK Notes or, to the extent permitted under the Senior
Loan Documents, in cash) on the Interest Payment Dates and in full in cash on the
Maturity Date, in each case in accordance with Section 1.1.

(c)           the following contingent obligations and,
upon any matured obligations actually arising pursuant thereto, the
Indebtedness corresponding to the contingent obligations so extinguished:

(i)            contingent
obligations in respect of customary indemnification and purchase price
adjustment obligations incurred in connection with a sales of assets;

 

19

 

(ii)           contingent
obligations under guarantees in the ordinary course of business of the
obligations of suppliers, customers, franchisees and licensees of such
Subsidiaries, in an aggregate amount not to exceed at any time $3,000,000;

(iii)          contingent
obligations in respect of any Indebtedness or other obligations of such
Subsidiaries not prohibited hereby;

(iv)          contingent
obligations under take-or pay contracts in an aggregate amount not too exceed
at any time $15,000,000;

(v)           contingent
obligations under Interest Rate Protection Agreements permitted under the
Senior Loan Documents; and

(vi)          any
contingent obligations not otherwise described in this Section 5.6(c); provided
that the maximum aggregate liability, contingent or otherwise, of the Company
or such Subsidiaries in respect of all such contingent obligations shall at no
time exceed $8,000,000;

(d)           Indebtedness
in respect of Capital Leases or to finance the purchase price of equipment,
fixtures, inventory and other similar property of the Company or such
Subsidiaries aggregating not in excess of $30,000,000;

(e)           the
Company and any of the Company’s Subsidiaries may become and remain liable with
respect to Indebtedness to the Company or any Subsidiary of the Company;

(f)            Indebtedness
described in Schedule III annexed hereto, including any
refinancings, refundings, renewals or extensions thereof (without any increase
in the principal amount thereof or any shortening of the maturity of any
principal amount thereof);

(g)           any
Subsidiaries of the Company that are organized outside of the United States of
America, any state thereof or the District of Columbia may become and remain
liable with respect to additional Indebtedness to finance working capital and
otherwise in an aggregate principal amount not to exceed $22,500,000 at any time outstanding;

(h)           the
Company may remain liable with respect to any promissory note issued in
exchange for stock in transactions otherwise permitted by Section 5.3(b)(c);
and

(i)            Indebtedness not otherwise described above in an
aggregate amount not to exceed any Cushion that has not otherwise been
utilized under Section 5.6(b).

Section 5.7.           Restrictions
on Liens.  The Company will not, and will not permit any
Subsidiary to, create, assume or suffer to exist any Lien on any asset now
owned or hereafter acquired by it, except Liens granted pursuant to the Senior
Loan Documents or otherwise permitted under the Senior Loan Documents.

Section 5.8.           Board
Observation Rights.  Unless York Street Mezzanine Partners,
L.P. and its “Affiliates” (as defined in the Stockholders Agreement), including
York Street

 

20

 

Mezzanine
Partners II, L.P., shall have exercised their right to appoint an observer to
the Board of Directors of the Company pursuant to Section 2.5(e) of the
Stockholders Agreement, the York Street Purchasers shall have the right by
written notice delivered to the Company to appoint one (1) observer who shall be entitled
(i) to receive contemporaneously the same notice and other materials in
respect of all meetings (both regular and special) (or written consents) of the
Board of Directors of the Company and Bare Escentuals Beauty, Inc. and each committee
thereof as are furnished to members of said Boards of Directors or such
committee, (ii) to attend all meetings (and review all written consents
prior to the execution thereof) of the Board of Directors of the Company and Bare Escentuals Beauty, Inc. and
each committee thereof and (iii) to participate in all discussions
conducted at meetings (or with respect to actions to be taken by written
consent) of the Board of Directors of the Company and Bare Escentuals Beauty, Inc. and
each committee thereof; provided, however, such observers shall not constitute
members of the Board of Directors of the Company or Bare Escentuals Beauty, Inc. or any
committee thereof and shall not be entitled to vote on any matters presented to
said Board of Directors of the Company or Bare Escentuals Beauty, Inc. or any committee
thereof.  Notwithstanding anything to the
contrary, the rights granted to the observer (including the right to receive
all materials, notices, minutes, consents and forms of consents in lieu of
meetings) shall be temporarily suspended if and to the extent, in the
reasonable opinion of the Board of Directors of the Company or Bare Escentuals
Beauty, Inc., as applicable, the observer’s attendance at any such meeting or
portion thereof (i) violates any law or company policy regarding conflicts of
interest with interested members of the Board of Directors of the Company or
Bare Escentuals, Inc., as applicable, as applied generally to meetings of the
Board of Directors of the Company or Bare Escentuals Beauty, Inc. or (ii)
otherwise could violate the fiduciary duties of the Board of Directors of the
Company or Bare Escentuals Beauty, Inc. or constitute a waiver of any
attorney-client privilege that may exist in connection with such meeting or any
portion thereof, as advised by outside counsel to the Company or Bare
Escentuals Beauty, Inc.  The reasonable
travel and out-of-pocket expenses incurred by any such observer in attending
any such meetings shall be reimbursed by the Company or Bare Escentuals Beauty,
Inc., as applicable.  Following an
underwritten public offering of the Company’s common stock, the York Street
Purchasers shall no longer have the right to appoint an observer to the Board
of Directors of the Company or Bare Escentuals Beauty, Inc.  Notwithstanding the foregoing and
Section 10.16 of this Agreement, the rights provided to the York Street
Purchasers under this Section 5.8 shall terminate upon any assignment by
the York Street Purchasers of their rights under this Agreement or under the
Senior Subordinated Note Documents, other than an assignment to Affiliates
permitted under Section 10.16(i) of this Agreement.

Section 5.9.           Underwritten
Public Offerings.  The Company will not permit the Permitted
Holders to sell their shares in an underwritten primary or secondary public
offering of shares of capital stock of the Company or Bare Escentuals Beauty,
Inc. without the Purchasers’ prior written consent.

Section 5.10.        Amendments.

(a)           The Company
will not, and will not permit any of its Subsidiaries to, amend or modify any
term or provision of (i) the Management Agreements after the Closing Date
without in each case obtaining the prior written consent of the Purchasers to
such amendment or waiver,

 

21

 

if the effect of such amendment or waiver, would be materially adverse to
the Company or Bare Escentuals Beauty, Inc. or (ii) organizational document
of the Company or any of its Subsidiaries, if such amendment or modification in any respect will or is
reasonably likely to adversely affect the interest of the holders of the Notes
(other than with respect to clause (ii) only, customary amendments to such
documents required in connection with the consummation of an underwritten
public offering of shares of capital stock of the Company or Bare Escentuals
Beauty, Inc.); and

(b)           the
Company will not amend, modify, or waive, or permit any amendment,
modification, or waiver of, any provision of the Senior Credit Agreements which
shall do any of the following:

(i)            increases the amount of the outstanding
loans and commitments thereunder beyond the Senior Facilities Debt Cap Amount;

(ii)           amends the final scheduled maturity date
of the Indebtedness under the Senior Credit Agreements to a date after June 7,
2014;

(iii)          shortens
the weighted average life of the Indebtedness incurred under the Senior Credit
Agreements by more than one year;

(iv)       prior to an event of default under the Senior Credit
Agreements, adds additional negative covenants, additional events of default,
or otherwise amends the negative covenants in a manner that, when taken as a
whole, make the negative covenants and events of default under the Senior
Credit Agreements materially more restrictive than the negative covenants and
events of default set forth in the Senior Credit Agreements on the date hereof;

(v)           increases the interest rate or the
default interest rate applicable to the Senior Credit Agreements by more than
two (2%) percent per annum above the highest interest rate or default interest
rate, respectively, applicable to the Indebtedness incurred under the Senior
Credit Agreements.

(c)           Any
failure by the Company to comply with clauses (ii), (iii), (iv) or (v) of
Section 5.10(b) shall not be deemed a Default or Event of Default hereunder but
rather shall solely result in the Notes bearing interest at the Default Rate
from the date of occurrence of the compliance failure and such interest shall accrue and be
payable (through the issuance of PIK Notes or, to the extent permitted under
the Senior Loan Documents, in cash) on the Interest Payment Dates and in full
in cash on the Maturity Date, in each case in accordance with Section 1.1.

SECTION
6.                                EVENTS OF DEFAULT AND REMEDIES THEREFOR.

Section 6.1.           Events of Default.  An
“Event of Default,” wherever used herein, means any one of the following
events:

(a)           the Company’s failure to pay any installment of
principal, or premium, if any, on the Notes when and as the same becomes due
and payable at maturity, redemption, by

 

22

 

acceleration or otherwise, including, without limitation,
any prepayment required pursuant to Section 1.2 or the Company’s
failure to pay any installment of interest on the Notes or any fees or other
amounts due under this Agreement or the Notes within five (5) days after the
due date;

(b)           the
Company’s failure to observe or perform any other covenant or agreement
contained in the Notes and this Agreement (other than covenants or agreements
set forth in Sections 5.6(b)(ii) through (v) and 5.10(b)(ii) through (v)) and,
except for the provisions under Sections 5.2 through 5.10, hereof, the
continuance of such failure for a period of 30 days after the earlier of
(i) an officer of the Company becoming aware of such default or
(ii) receipt by the Company of written notice from a holder of the Notes
identifying such default;

(c)           a court having jurisdiction in the
premises enters a decree or order for (i) relief in respect of the Company or any Significant Subsidiary in an
involuntary case under any applicable Bankruptcy Law now or hereafter in effect,
(ii) appointment of a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Company or any Significant Subsidiary or for all
or substantially all of the property and assets of the Company or any Significant Subsidiary or (iii)
the winding up or liquidation of the affairs of the Company or any Significant Subsidiary and, in
each case, such decree or order shall remain unstayed and in effect for a
period of 60 consecutive days;

(d)           the Company or any Significant Subsidiary (i)
commences a voluntary case under any applicable Bankruptcy Law now or hereafter
in effect, or consents to the entry of an order for relief in an involuntary
case under any such law, (ii) consents to the institution of, or fails to
contest in a timely and appropriate manner, any proceeding or the filing of any
petition described in clause (e) above, (iii) consents to the appointment of or
taking possession by a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Company or any Significant Subsidiary or for all
or substantially all of the property and assets of the Company or any Significant Subsidiary, (iv)
files an answer admitting the material allegations of a petition filed against
it in any proceeding of the type described in clause (e) above, (v) effects any
general assignment for the benefit of creditors, (vi) becomes unable, admits in
writing its inability or fails generally to pay its debts as they become due,
(vii) winds up or liquidates or (viii) takes any action for the purpose of
effecting any of the foregoing;

(e)           any
representation, warranty, certification or other statement made by the Company in any Senior Subordinated Note
Documents or in any statement or certificate at any time given by such Person
in writing pursuant to or in connection with any Senior Subordinated Note
Document is false in any material respect on the date made;

(f)            any
order, judgment or decree is entered against the Company or any Subsidiary decreeing the
dissolution or split up of the Company or any Significant Subsidiary and such order remains
undischarged for a period in excess of 30 days; and

(g)           Any
Senior Subordinated Note Document or any material provisions thereof shall at
any time and for any reason be declared by a court of competent jurisdiction to
be null and void, or a proceeding shall be commenced by the Company or any other Person, or by any
Governmental Authority, seeking to establish the invalidity or unenforceability
thereof

 

23

 

(exclusive
of questions of interpretation of any provision thereof), or the Company shall repudiate or deny that it has any
liability or obligation for the payment of principal or interest or other
obligations purported to be created under any Senior Subordinated Note
Document.

Section 6.2.           Remedies. If any Event of Default shall occur and
be continuing, the holders of a majority of the aggregate principal amount of
the Notes may proceed to protect and enforce its rights under this Agreement by
exercising such remedies as are available under applicable law, either by suit
in equity or by action at law, or both, whether for specific performance of any
covenant or other agreement contained in this Agreement or in aid of the
exercise of any power granted in this Agreement, to the extent permitted under
the Subordination Agreement.  No remedy
conferred in this Agreement upon any holder is intended to be exclusive of any
other remedy, and each and every such remedy shall be cumulative and in
addition to every other remedy conferred herein or now or hereafter existing at
law or in equity or by statute or otherwise.

SECTION
7.                                AMENDMENTS, WAIVERS AND CONSENTS.

Section 7.1.           Consent
Required.  Any term, covenant, agreement or
condition of this Agreement may, with the consent of the Company, be amended or compliance therewith may
be waived (either generally or in a particular instance and either
retroactively or prospectively), if the Company shall have obtained the consent in
writing of the holders of a majority in aggregate principal amount of outstanding
Notes; provided that without the written
consent of the holders of all the Notes then outstanding, no such amendment or
waiver shall be effective which will extend the time for payment (including any
prepayment required by Section 1.2) of the principal of or the interest on any
Note or change the principal amount thereof or reduce the rate of interest
thereon.

Section 7.2.           Solicitation
of Holders.  So long as there are any Notes
outstanding, the Company and its Affiliates will not solicit, request or
negotiate for or with respect to any proposed waiver or amendment of any of the
provisions of this Agreement or the Notes unless the holders of a majority of
the aggregate principal amount of the Notes shall be informed thereof by the Company and shall be afforded the opportunity of
considering the same and shall be supplied by the Company with sufficient information to enable
such holders to make an informed decision with respect thereto.  The Company and its Affiliates will not, directly or
indirectly, pay or cause to be paid any remuneration, whether by way of
supplemental or additional interest, fee or otherwise, to any holder of Notes
as consideration for or as an inducement to entering into by any holder of
Notes of any waiver or amendment of any of the terms and provisions of this
Agreement or the Notes unless such remuneration is concurrently offered, on the
same terms, pro rata based on the principal amount outstanding to the holders
of the then outstanding Notes.

Section 7.3.           Effect
of Amendment or Waiver. Any such amendment or waiver shall apply equally to all of the holders
of the Notes and shall be binding upon them, upon each future holder of any
Note and upon the Company, whether or not such Note shall have been marked to
indicate such amendment or waiver.  No
such amendment or waiver shall extend to or affect any obligation not expressly
amended or waived or impair any right consequent thereon.

 

24

 

SECTION
8.                                INTERPRETATION OF AGREEMENT.

Section 8.1.           Accounting
Principles.  Where the character or amount of any
asset or liability or item of income or expense is required to be determined or
any consolidation or other accounting computation is required to be made for
the purposes of this Agreement, the same shall be done in accordance with GAAP,
to the extent applicable.

Section 8.2.           Directly
or Indirectly.  Where any provision in this Agreement
refers to action to be taken by any Person, or which such Person is prohibited
from taking, such provision shall be applicable whether the action in question
is taken directly or indirectly by such Person.

Section 8.3.           Fiscal
Quarters.  Where any provision in this Agreement refers
to a fiscal quarter ending on a specific date, such provision shall be
construed to refer to the fiscal quarter of the relevant entity ending nearest
such specific date.

Section 8.4.           Document
References.  Except as otherwise provided herein, where
any provision in this Agreement refers to a specific document, such provision
shall be construed to refer to such document as it may be amended from time to
time in accordance with the provisions of this Agreement.

SECTION
9.                                INDEMNIFICATION

Section 9.1.           General. In addition to all other sums due
hereunder or provided for in this Agreement, the Company agrees to indemnify
and hold harmless the holders of the Notes and their respective Affiliates and
each of their respective officers, directors, agents, employees, Subsidiaries,
partners, members, attorneys, accountants and controlling persons (each, an “Indemnified
Party”) to the fullest extent permitted by law from and against any and all
losses, claims, damages, expenses (including, without limitation, reasonable
fees, disbursements and other charges of counsel and costs of investigation
incurred by an Indemnified Party in any action or proceeding between the Company and such Indemnified Party (or
Indemnified Parties) or between an Indemnified Party (or Indemnified Parties)
and any third party or otherwise) or other liabilities, losses, or diminution
in value (collectively, “Liabilities”) resulting from or arising out of
any breach of any representation or warranty, covenant or agreement of the Company in this Agreement, the Notes, or the
other Senior Subordinated Note Documents, including, without limitation, the
failure to make payment when due of amounts owing pursuant to this Agreement,
the Notes or the other Senior Subordinated Note Documents, on the due date
thereof (whether at the scheduled maturity, by acceleration or otherwise) or
any legal, administrative or other actions (including, without limitation,
actions brought by any holders of equity or indebtedness of the Company or derivative actions brought by any
Person claiming through or in the Company’s name), proceedings or investigations
(whether formal or informal), or written threats thereof, based upon, relating
to or arising out of the Senior Subordinated Note Documents, or any Indemnified
Party’s role in the transactions contemplated thereby; provided, however, that the Company shall not be liable under this Section
9.1 to an Indemnified Party to the extent that it is finally judicially
determined that such Liabilities resulted solely from the willful misconduct or
gross negligence of such Indemnified Party; provided, further, that if and to
the extent that such indemnification is unenforceable for any reason, the Company shall make

 

25

 

the
maximum contribution to the payment and satisfaction of such Liabilities that
shall be permissible under applicable Requirements of Law.  In connection with the obligation of the Company to indemnify for expenses as set forth
above, the Company
further agrees, upon presentation of appropriate invoices containing reasonable
detail, promptly to reimburse, without duplication, each Indemnified Party for
all such expenses (including, without limitation, fees, disbursements and other
charges of counsel and costs of investigation incurred by an Indemnified Party
in any action or proceeding between the Company and such Indemnified Party (or
Indemnified Parties) or between an Indemnified Party (or Indemnified Parties)
and any third party or otherwise) as they are incurred by such Indemnified
Party; provided, however, that if an Indemnified Party is reimbursed hereunder
for any expenses, such reimbursement of expenses shall be refunded to the extent
it is finally judicially determined that the Liabilities in question resulted
solely from the willful misconduct or gross negligence of such Indemnified
Party.  Notwithstanding the foregoing, if
any amount becomes payable by the Company under this Section 9.1 prior to the
Payment in Full of the Senior Debt, such amount shall not be payable by the
Company until the Senior Debt is Paid in Full, and shall accrue interest at the
rate provided in Section 1.1 from the date the Company would otherwise be
obligated to pay such amounts until the date paid by the Company.

Section 9.2.           Procedure;
Notification.  Each Indemnified Party under this Section 9
will, promptly after the receipt of written notice of the commencement of any
action, investigation, claim or other proceeding against such Indemnified Party
in respect of which indemnity may be sought from the Company under this Section, notify the Company in writing of the commencement
thereof.  The omission of any Indemnified
Party to so notify the Company of any such action shall not relieve the Company from any liability that it may have to
such Indemnified Party unless, and only to the extent that, such omission
results in the Company being materially prejudiced thereby.  In case any such action, claim or other proceeding
shall be brought against any Indemnified Party and it shall notify the Company of the commencement thereof, the Company shall be entitled to assume the defense
thereof at its own expense, with counsel satisfactory to such Indemnified Party
in its reasonable judgment; provided, however, that any Indemnified Party may,
at its own expense, retain separate counsel to participate in such
defense.  Notwithstanding the foregoing,
such Indemnified Party shall have the right to employ separate counsel at the Company’s expense and to control its own defense
of such action, claim or proceeding if, in the reasonable opinion of counsel to
such Indemnified Party, a conflict or potential conflict exists between the Company, on the one hand, and such Indemnified
Party, on the other hand, that would make such separate representation
advisable.  The Company agrees that it will not, without the
prior written consent of the holders of the Notes, settle, compromise or
consent to the entry of any judgment in any pending or threatened claim, action
or proceeding relating to the matters contemplated hereby (if any Indemnified
Party is a party thereto or has been actually threatened to be made a party
thereto) unless such settlement, compromise or consent (a) does not require the
Indemnified Party to pay any amount or take, or refrain from taking, any action
and (b) includes an unconditional release of such Indemnified Party from all
liability arising or that may arise out of such claim, action or proceeding.  The rights accorded to the Indemnified
Parties hereunder shall be in addition to any rights that any Indemnified Party
may have at common law, by separate agreement or otherwise.

 

26

 

SECTION
10.                          MISCELLANEOUS.

Section 10.1.        Registered
Notes.  The Company shall cause to be kept at its
principal office a register for the registration and transfer of the Notes
(hereinafter called the “Note Register”) and the Company shall register or transfer or cause to
be registered or transferred as hereinafter provided any Note issued pursuant
to this Agreement.

Subject to Section 10.16 hereof, at any time and from
time to time the registered holder of any Note which has been duly registered
as hereinabove provided may transfer such Note upon surrender thereof at the
principal office of the Company duly endorsed or accompanied by a written instrument
of transfer duly executed by the registered holder of such Note or its attorney
duly authorized in writing.

The Person in whose name any registered Note shall be
registered shall be deemed and treated as the owner and holder thereof for all
purposes of this Agreement.  Payment of
or on account of the principal, premium, if any, and interest on any registered
Note shall be made to or upon the written order of such registered holder.

Section 10.2.        Exchange
of Notes.  At any time and from time to time, upon
not less than ten (10) days’ notice to that effect given by the holder of any
Note initially delivered or of any Note substituted therefor pursuant to
Section 10.1, this Section 10.2 or Section 10.3, and, upon surrender of such
Note at its office, the Company will deliver in exchange therefor, without expense to
such holder, a Note for the same aggregate principal amount as the then unpaid
principal amount of the Note so surrendered, or Notes in such other smaller
denominations as such holder shall specify, dated as of the date to which
interest has been paid on the Note so surrendered or, if such surrender is
prior to the payment of any interest thereon, then dated as of the date of
issue, registered in the name of such Person or Persons as may be designated by
such holder, and otherwise of the same form and tenor as the Notes so
surrendered for exchange.  The Company
will pay all charges including, without limitation, any stamp tax or governmental
charge or expense imposed upon such exchange or transfer.

Section 10.3.        Loss,
Theft, Etc. of Notes.  Upon receipt of reasonable evidence
satisfactory to the Company of the loss, theft, mutilation or destruction of any
Note, and in the case of any such loss, theft or destruction upon delivery of a
bond of indemnity in such form and amount as shall be reasonably satisfactory
to the Company,
or in the event of such mutilation upon surrender and cancellation of the Note,
the Company
will make and deliver without expense to the holder thereof, a new Note (as
applicable), of like tenor, in lieu of such lost, stolen, destroyed or
mutilated Note.  If the Purchaser is the
owner of any such lost, stolen or destroyed Note, then the affidavit of an
authorized officer of such owner, setting forth the fact of loss, theft or
destruction and of its ownership of such Note at the time of such loss, theft
or destruction shall be accepted as satisfactory evidence thereof and no
further indemnity shall be required as a condition to the execution and
delivery of a new Note other than the written agreement of such owner to
indemnify the Company.

Section 10.4.        Expenses,
Stamp Tax Indemnity.  Whether or not the transactions herein
contemplated shall be consummated, the Company agrees to pay directly your
out-of-pocket

 

27

 

expenses
in connection with the preparation, execution and delivery of this Agreement
and the other Senior Subordinated Note Documents and the transactions
contemplated hereby, including but not limited to the reasonable charges and
disbursements of your special counsel, duplicating and printing costs and
charges for shipping the Notes, adequately insured to you at your home office
or at such other place as you may designate, and such expenses relating to any amendment,
waivers or consents pursuant to the provisions hereof, including, without
limitation, any amendments, waivers, or consents resulting from any work-out,
renegotiation or restructuring relating to the performance by the Company of its obligations under this Agreement
or the other Senior Subordinated Note Documents.  The Company also agrees that it will pay and
save you harmless against any and all liability with respect to stamp and other
taxes, if any, which may be payable or which may be determined to be payable in
connection with the execution and delivery of this Agreement or the Notes,
whether or not any Notes are then outstanding. 
The Company agrees to protect and indemnify you against any liability
for any and all brokerage fees and commissions payable or claimed to be payable
to any other Person in connection with the transactions contemplated by this
Agreement.  You represent that you have
not retained any broker in connection with the transactions contemplated by
this Agreement.  Notwithstanding the
foregoing, if any amount becomes payable by the Company under this Section 10.4
prior to the Payment in Full of the Senior Debt (other than expenses payable
under this Section 10.4 on the date hereof in connection with the closing of
the transactions contemplated hereby), such amount shall not be payable by the
Company until the Senior Debt is Paid in Full or otherwise approved by the
Senior Lenders, and shall accrue interest at the rate provided in Section 1.1
from the date the Company would otherwise be obligated to pay such amounts
until the date paid by the Company.

Section 10.5.        Powers
and Rights Not Waived; Remedies Cumulative.  No delay or
failure on the part of the holder of any Note in the exercise of any power or
right shall operate as a waiver thereof; nor shall any single or partial
exercise of the same preclude any other or further exercise thereof, or the
exercise of any other power or right, and the rights and remedies of the holder
of any Note are cumulative to, and are not exclusive of, any rights or remedies
any such holder would otherwise have.

Section 10.6.        Notices.  All communications provided for hereunder shall be in
writing and, if to you, delivered or mailed prepaid by registered or certified
mail or overnight air courier, or by facsimile communication, in each case
addressed to you at your address appearing on Schedule I to this
Agreement or such other address as you or the subsequent holder of any Note
initially issued to you may designate to the Company in writing, and if to the Company, delivered or mailed by registered or
certified mail or overnight air courier, or by facsimile communication, to the Company at 71 Stevenson Street, 22nd floor, San
Francisco, CA  94105, fax no. 415-840-0649
or to such other
address as the Company
may in writing designate to you or to a subsequent holder of the Notes
initially issued to you; provided, however,
that a notice to you by overnight air courier shall only be effective if
delivered to you at a street address designated for such purpose in Schedule I,
and a notice to you by facsimile communication shall only be effective if made
by confirmed transmission to you at a telephone number designated for such
purpose in Schedule I, or, in either case, as you or a subsequent
holder of any Note initially issued to you may designate to the Company in writing.

 

28

 

Section 10.7.        Non-Business
Days.  Whenever any payment to be made under this
Agreement or the Notes shall be stated to be due on a day which is not a
Business Day, such payment shall be made on the next Business Day. Such
extension of time in each such case shall be included in computing interest in
connection with such payment.

Section 10.8.        Waiver
of Trial by Jury.  Each of the parties hereto hereby, to the
fullest extent permitted by law, waives trial by jury in any action brought
under or in connection with any of the Senior Subordinated Note Documents.

Section 10.9.        Successors
and Assigns.  This Agreement shall be binding upon the
Company and its successors and assigns and shall inure to your benefit and to
the benefit of your successors and assigns, including each successive holder or
holders of any Notes.

Section 10.10.      Entire
Agreement.  This Agreement, the Notes, and the other
Senior Subordinated Note Documents constitute the entire understanding of the
parties thereto with respect to the subject matter thereof and any prior or
contemporaneous agreements, whether written or oral, with respect thereto are
superseded hereby.

Section 10.11.      Survival
of Covenants and Representations.  All covenants, representations and
warranties made by the Company herein and in any certificates delivered
pursuant hereto, whether or not in connection with the Closing Date, shall
survive the closing and the delivery of this Agreement and the other Senior
Subordinated Note Documents.

Section 10.12.      Legends. 
The Purchaser covenants and agrees that until all Senior Debt is Paid in
Full in cash, the Note and any replacement thereof, and any other promissory
note, document or instrument evidencing Indebtedness under the Senior
Subordinated Debt Documents shall bear at all times, in a conspicuous manner,
the following legend:

THIS NOTE AND THE
RIGHTS AND OBLIGATIONS EVIDENCED HEREBY ARE SUBORDINATE IN THE MANNER AND TO
THE EXTENT SET FORTH IN THAT CERTAIN SUBORDINATION AGREEMENT (THE “SUBORDINATION AGREEMENT”) DATED AS OF JUNE 7, 2006 AMONG YORK STREET MEZZANINE PARTNERS, L.P.,
YORK STREET MEZZANINE PARTNERS II, L.P., CERTAIN OTHER NOTE PURCHASERS PARTY
THERETO, BARE ESCENTUALS, INC., AND BNP PARIBAS,
AS AGENT, TO THE SENIOR DEBT (AS DEFINED THEREIN), AS MORE PARTICULARLY
DESCRIBED IN THE SUBORDINATION AGREEMENT, AND EACH HOLDER OF THIS INSTRUMENT,
BY ITS ACCEPTANCE HEREOF, SHALL BE BOUND BY THE PROVISIONS OF THE SUBORDINATION
AGREEMENT.  A COPY OF THE AGREEMENT AND
SUBORDINATION AGREEMENT SHALL BE FURNISHED WITHOUT CHARGE BY BARE ESCENTUALS,
INC. TO THE HOLDER HEREOF UPON WRITTEN REQUEST.

Section 10.13.      Severability.  Should any part of this Agreement for any reason be
declared invalid or unenforceable, such decision shall not affect the validity
or enforceability of

 

29

 

any
remaining portion, which remaining portion shall remain in force and effect as
if this Agreement had been executed with the invalid or unenforceable portion
thereof eliminated and it is hereby declared the intention of the parties
hereto that they would have executed the remaining portion of this Agreement
without including therein any such part, parts or portion which may, for any
reason, be hereafter declared invalid or unenforceable.

Section 10.14.      Governing
Law.  This Agreement and the Notes issued and sold hereunder
shall be governed by and construed in accordance with the internal laws of the
State of New York, including Sections 5-1401 and 5-1402 of the New York General
Obligations Law.

Section 10.15.      Captions.  The descriptive headings of the various Sections or
parts of this Agreement are for convenience only and shall not affect the
meaning or construction of any of the provisions hereof.

Section 10.16.      Assignment
and Transfer.  Each holder
of the Notes may assign its rights under this Agreement and the Senior
Subordinated Note Documents in compliance with applicable securities
laws (i) to its Affiliates or other
holders of the Notes without the prior written
consent of the Company and (ii) to any Person other than its Affiliates
or other holders of the Notes, with the consent
of the Company (in its sole discretion); provided that any purported
transfer that would cause a violation of this proviso shall be null and
void.  The Company shall use commercially
reasonable efforts to cooperate with Purchaser and any potential permitted
transferees to provide information and to effect any such permitted transfer.  For purposes of the definition of “Affiliate”
in this Section 10.16, the references to “10%” in the definition of “Affiliate”
shall be deemed to refer to “50%”.

[signature page follows]

 

 

30

 

The execution hereof by you shall constitute a
contract between us for the uses and purposes hereinabove set forth, and this
Agreement may be executed in any number of counterparts, each executed
counterpart constituting an original but all together only one agreement.

 

BARE ESCENTUALS, INC.

 

 

 

By:                              /s/ Leslie A.
Blodgett                 
            

Name: Leslie A. Blodgett

Title: Chief Executive Officer

 

 

 

Accepted as of June 7, 2006.

YORK STREET MEZZANINE PARTNERS, L.P.

 

By:                             YORK STREET
CAPITAL PARTNERS II, L.L.C., ITS GENERAL PARTNER

 

 

By:                              /s/ Robert M.
Golding                  
            

Name: Robert M.
Golding

                                               Title: Managing Director                                                 

 

 

YORK STREET MEZZANINE PARTNERS II, L.P.

 

By:                             YORK STREET
CAPITAL PARTNERS II, L.L.C., ITS GENERAL PARTNER

 

 

By:                              /s/ Robert M.
Golding                  
            

Name: Robert M.
Golding

                                                Title: Managing Director

 

APOLLO DISTRESSED INVESTMENT
OFFSHORE FUND, LTD

 

BY:                          APOLLO DIF MANAGEMENT, L.P., ITS INVESTMENT MANAGER

 

 

By:          /s/ Abraham
Katz                             
            

                Name: Abraham Katz

                Title: Vice President

 

APOLLO DISTRESSED INVESTMENT
FUND (QP), L.P.

 

BY:                            APOLLO DIF MANAGEMENT, L.P., ITS INVESTMENT
MANAGER

 

 

By:          /s/ Abraham
Katz                             
            

                Name: Abraham Katz

                Title: Vice President

 

 

2

 

CITIGROUP
FINANCIAL PRODUCTS INC.

 

 

By:                               /s/ Gregory
Frenzel                       
            

Name: Gregory
Frenzel

                                                Title: Managing Director

 

FEINGOLD O’KEEFFE MASTER FUND, LTD.

 

 

By:                               /s/ R. John O’Keefe                                

Name: R. John O’Keeffe

Title: Authorized Signatory

 

DEERFIELD
TRIARC CAPITAL LLC

 

 

By:                                /s/ Robert C.
Green                                            

Name: Robert C.
Green            

Title: President

 

 

OCM MEZZANINE FUND II, L.P.

BY:          OCM MEZZANINE FUND II GP,
LLC,
                GENERAL PARTNER

 

BY:                            OAKTREE CAPITAL 

MANAGEMENT, LLC, MANAGING 

MEMBER

 

By:                               /s/ Gary D.
Trabka                         
            

Name: Gary D.
Trabka

                                               Title: Managing Director

 

By:                               /s/ William B.
Sacher                                      

Name: William B.
Sacher

                                               Title: Managing Director

 

 

3

 

ANNEX
A

DEFINITIONS

Unless the context otherwise requires, the terms
hereinafter set forth when used in this Agreement shall have the following
meanings and the following definitions shall be equally applicable to both the
singular and plural forms of any of the terms herein defined:

“Accrued
Bankruptcy Interest” means, with respect to any Indebtedness, all
interest accruing thereon after the filing of a petition by or against the Company under any Bankruptcy Law, in accordance
with and at the rate (including any rate applicable upon any default or event
of default, to the extent lawful) specified in the documents evidencing or
governing such Indebtedness, whether or not the claim for such interest is
allowed as a claim after such filing in any proceeding under such Bankruptcy
Law.

“Affiliate”
means, as to any Person, any other Person which directly or indirectly
controls, or is under common control with, or is controlled by, such
Person.  As used in this definition, “control”
(and the correlative terms, “controlled by” and “under common control with”)
shall mean possession, directly or indirectly, of power to direct or cause the
direction of management or policies (whether through ownership of securities or
partnership or other ownership interests, by contract or otherwise); provided
that, in any event, any Person that owns, directly or indirectly, 10% or more
of the securities having ordinary voting power for the election of directors or
other governing body of a corporation that has more than 100 record holders of
such securities, or 10% or more of the partnership or other ownership interests
of any other Person that has more than 100 record holders of such interests,
will be deemed to be an Affiliate of such corporation, partnership or other
Person.  For the avoidance of doubt,
Teacher’s Private Capital and its Affiliates shall be considered Affiliates of
the York Street Purchasers.

“Bankruptcy Law”  means Title 11, U.S. Code, or any similar
Federal, state or foreign law for the relief of debtors.

“Board of Directors”
means, with respect to any Person, the board of directors (or if such Person is
not a corporation, the equivalent board of managers or members or body
performing similar functions for such Person) of such Person or any committee
of the Board of Directors of such Person authorized, with respect to any
particular matter, to exercise the power of the board of directors of such
Person.

“Business Day” means any day
excluding Saturday, Sunday and any day which is a legal holiday under the laws
of the State of New York or is a day on which banking institutions located in
such state are authorized or required by law or other governmental action to
close.

“Capital Lease”
means, as to any Person, a lease of any Property by that Person as lessee that
is, or should be in accordance with GAAP (including Financial Accounting
Standards Board Statement No. 13, as amended or superseded from time to time),
recorded as a “capital lease” on the balance sheet of that Person prepared in
accordance with GAAP.

“Capital Lease Obligations” means all monetary obligations of a Person under any
Capital Lease.

 

 

“Capital Stock”
means, with respect to any corporation, any and all shares, interests, rights
to purchase (other than convertible or exchangeable Indebtedness that is not
itself otherwise capital stock), warrants, options, participations or other
equivalents of or interests (however designated) in stock issued by that
corporation.

“Change of Control”
means any of the following:

(a)           at
any time prior to the consummation of an initial public offering of any of the
Company’s Equity Interests, Permitted Holders shall cease to beneficially own
and control, directly or indirectly, at least a majority of the issued and
outstanding shares of Capital Stock of Company entitled (without regard to the
occurrence of any contingency) to vote for the election of members of the Board
of Directors of Company;

(b)           at
any time after the consummation of an initial public offering of any of the
Company’s Equity Interests, (I) Permitted Holders shall cease to beneficially
own and control, directly or indirectly, at least 30% of the capital stock of
Company, or (II) any “person” or “group” (as such terms are used in
sections 13(d) and 14(d) of the Exchange Act, but excluding any employee
benefit plan of such person and its subsidiaries, and any person or entity
acting in its capacity as trustee, agent or other fiduciary or administrator of
any such plan), excluding Permitted Holders, shall become the beneficial owner,
directly or indirectly, of a greater percentage of the then outstanding voting
stock of the Company than that held by Permitted Holders;

(c)           during
any period of twelve (12) consecutive months, the Board of Directors of the
Company shall not consist of a majority of the Continuing Members; or

(d)           the
failure at any time of Company to legally and beneficially own and control 100%
of the issued and outstanding shares of Capital Stock of Bare Escentuals
Beauty, Inc. or the failure at any time of Company to have the ability to elect
all of the Board of Directors of Bare Escentuals Beauty, Inc.  As used
herein, the term “beneficially own” or “beneficial ownership” shall have the
meaning set forth in the Exchange Act and the rules and regulations promulgated
thereunder.

“Change of Control Agreement Date” shall mean any date upon which any
Person enters into an agreement pursuant to which a Change of Control shall
occur.

“Closing Date”
shall have the meaning assigned to it in Section 2.

“Closing Date Shareholders” means the shareholders of the Company on
the Closing Date.

“Code” means the
Internal Revenue Code of 1986, as amended.

“Company” shall
have the meaning assigned to it in the preamble to this Agreement.

 

2

“Continuing Member” means, as of any date of determination any
member of the board of directors of the Company who (i) was a member of
such board of directors on the Closing Date, or (ii) was nominated for
election or elected to such board of directors with the affirmative vote of a
majority of the members who were either members of such board of directors on
the Closing Date or whose nomination or election was previously so approved
(iii) or was nominated for election or elected to such board of directors by
Berkshire Partners LLC, JH Partners LLC or one of their Affiliates.

“Contractual Obligation” means, as to any Person, any provision of any
outstanding security issued by that Person or of any material agreement,
instrument or undertaking to which that Person is a party or by which it or any
of its Property is bound.

“Control Change Notice”
shall have the meaning assigned to it in Section 1.2(b).

“Control Change Payment
Date” shall have the meaning assigned to it in Section 1.2(b).

“Cushion” shall
have the meaning assigned to it in Section 5.6.

“Debtor Relief Laws” means the Bankruptcy Code of the United States of
America, as amended from time to time, and all other applicable liquidation,
conservatorship, bankruptcy, moratorium, rearrangement, receivership, insolvency,
reorganization, or similar debtor relief Laws from time to time in effect
affecting the rights of creditors generally.

“Declaration Notice”
shall have the meaning assigned to it in Section 1.2(b).

“Default” shall
mean any event or condition the occurrence of which would, with the lapse of
time or the giving of notice, or both, constitute an Event of Default.

“Default Rate”
shall have the meaning assigned to it in Section 1.1.

“Disposition”
means the sale, transfer or other disposition (including, without limitation,
by way of casualty, loss, theft or condemnation, eminent domain or other
similar proceedings) in any single transaction or series of related
transactions of any asset, or group of related assets, of the Company or any
Subsidiary other than (a) cash, Investments (other than Investments in a
Subsidiary), Inventory or other assets sold or otherwise disposed of in the
ordinary course of business of the Company or any Subsidiary, (b) equipment
sold or otherwise disposed of by a Subsidiary of the Company which is not a
Significant Subsidiary, (c) any asset transferred by the Company or any
Subsidiary to any Significant Subsidiary of the Company, (d) equipment sold or
otherwise disposed of where substantially similar equipment in replacement
thereof has theretofore been acquired, or thereafter within 270 days is
acquired, by the Company or any Subsidiary, (e) obsolete assets no longer
useful in the business of the Company or any Subsidiary whose carrying value on
the books of the Company or such Subsidiary is less than $500,000 and
(f) any other assets disposed of by the Company to the extent that the
aggregate value of such assets sold in any single transaction or related series
of transactions is equal to $50,000 or less.

 

3

“Distribution”
means, with respect to any Equity Interest issued by a Person, or any warrant
or right to acquire any Equity Interest of a Person, (a) the retirement,
redemption, purchase, or other acquisition for value by such Person of any such
Equity Interest, (b) the declaration or (without duplication) payment by such
Person of any dividend in cash or in Property on or with respect to any such
Equity Interest, (c) any Investment by such Person in the holder of any such
Equity Interest, and (d) any other payment by such Person constituting a
distribution under applicable Laws with respect to such Equity Interest.

“EBITDA”
means, with respect to any fiscal period, the sum of (a) Net Income for that
period, plus (b) any non-recurring loss reflected in such Net Income, minus (c)
any non-recurring gain reflected in such Net Income, plus (d) Interest Expense
of the Company and its Subsidiaries for that period, plus (e) the aggregate
amount of federal and state taxes on or measured by income of the Company and
its Subsidiaries for that period (whether or not payable during that period),
plus (f) depreciation and amortization expense of the Company and its
Subsidiaries for that period, plus (g) all other non-cash, non-recurring
expenses of the Company and its Subsidiaries for that period (including
non-cash compensation changes and non-cash amortization related to purchase
price accounting), plus (h) any Management Fees paid during such period, plus
(i) up to $1.4 million of the aggregate amount of transaction costs and
expenses incurred by the Company and its Subsidiaries in connection with the
October 2005 recapitalization, in each case as determined in accordance with
GAAP, consistently applied and, in the case of items (d), (e), (f), (g), (h)
and (i) only to the extent reflected in the determination of Net Income for
that period.

“Environmental Claim”
means any investigation, notice, notice of violation, claim, action, suit,
proceeding, demand, abatement order or other order or directive (conditional or
otherwise), by any Government Authority or any other Person, arising (i)
pursuant to or in connection with any actual or alleged violation of any
Environmental Law, (ii) in connection with any Hazardous Materials or any
actual or alleged Hazardous Materials Activity, or (iii) in connection with any
actual or alleged damage, injury, threat or harm to health, safety, natural
resources or the environment.

“Environmental Laws”
means any and all current or future common law duties or obligations, statutes,
ordinances, orders, rules, regulations, guidance documents, judgments,
Governmental Authorizations, or any other requirements of any Government
Authority relating to (i) environmental matters, including those relating
to any Hazardous Materials Activity, (ii) the generation, use, storage,
transportation or disposal of Hazardous Materials, or (iii) occupational
safety and health, industrial hygiene, land use or the protection of human,
plant or animal health or welfare, in any manner applicable to the Company or
any of its Subsidiaries or their properties (including without limitation any
Hazardous Materials Laws).

“Equity Interests”
means Capital Stock or partnership, participation or membership interests and
all warrants, options or other rights to acquire Capital Stock or partnership,
participation or membership interests (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock or partnership,
participation or membership interests).

 

4

“ERISA” means the Employee Retirement Income Security Act of 1974,
as amended, and any successor statute of similar import, together with the
regulations thereunder, in each case as in effect from time to time.  References to sections of ERISA shall be
construed to also refer to any successor sections.

 “ERISA Group” means the Company, any of its Subsidiaries and
all members of a controlled group of corporations and all trades or businesses
(whether or not incorporated) under common control which, together with the
Company or any Subsidiary, are treated as a single employer under Section 414
of the Code.

“Event of Default”
shall have the meaning assigned to it in Section 6.1.

“Excess Proceeds” means the accumulated Net Cash Proceeds from
Dispositions and sales or issuances of Equity Interests not applied (i) to
retire Indebtedness due under the Senior Loan Documents or Indebtedness that is
otherwise required to be retired in connection with such Disposition pursuant
to the terms of thereof or (ii) invested in Related Business Assets and
property (except in connection with the acquisition of a Person that becomes a
Subsidiary of the Company in a Related Business), other than notes, bonds,
obligations and securities.

“Excess Proceeds Notice”
shall have the meaning assigned to it in Section 1.2(c).

“Excess Proceeds Payment
Date” shall have the meaning assigned to it in Section 1.2(c).

“Exchange Act”
means the Securities Exchange Act of 1934, as amended.

“Federal Reserve Board”
means the Board of Governors of the Federal Reserve System or any successor
thereto.

“Financial Officer”
of any Person means the chief financial officer, principal accounting officer,
treasurer or controller of such Person.

“Fiscal Month”
means each calendar month in the Fiscal Year.

“Fiscal Quarter”
means a fiscal quarter of any Fiscal Year (as reflected on Exhibit C hereto).

“Fiscal Year” means the fiscal year of the Company
and its Subsidiaries as reflected on Exhibit C hereto.

“GAAP” means
United States generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting profession
in the United States as in effect at the time.

 

5

“Governmental Authority”
means any federal, state, local or foreign court or governmental agency,
authority, instrumentality or regulatory body.

“Hazardous Materials” means oil or petrochemical products,
poly-chlorinated biphenyls, asbestos, urea formaldehyde, flammable explosives,
radioactive materials, hazardous wastes, toxic substances or related materials,
including any substances considered “hazardous substances,” “hazardous wastes,”
“hazardous materials,” “infectious wastes,” “pollutant substances,” “solid
waste” or “toxic substances” under any Hazardous Materials Laws.

“Hazardous
Materials Laws” means all Laws pertaining to the generation,
treatment, transportation or disposal of Hazardous Materials on or about any
Real Property owned or leased by the Company or any Subsidiary thereof, or any
portion thereof, including without limitation the following:  the Federal Water Pollution Control Act (33
U.S.C. § 1251, et  seq.), the Federal Resource Conservation and
Recovery Act of 1976 (42 U.S.C. § 6901, et  seq.), the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended (42 U.S.C. § 9601, et  seq.) and the Superfund
Amendments and Reauthorization Act of 1986, the Hazardous Materials
Transportation Act, as amended (44 U.S.C. § 1801, et  seq.), the
Toxic Substances Control Act, 15 U.S.C. § 2601 et  seq., the
California Health and Safety Code (Section 25100, et  seq.), the
California Water Code and the California Administrative Code, in each case as
such Laws have been or are amended from time to time.

“Indebtedness”
means as applied to any Person, (i) all indebtedness for borrowed money,
(ii) that portion of obligations with respect to Capital Leases that is
properly classified as a liability on a balance sheet in conformity with GAAP,
(iii) notes payable and drafts accepted representing extensions of credit
whether or not representing obligations for borrowed money (excluding trade
payables incurred in the ordinary course of business and constituting current
obligations), (iv) any obligation owed for all or any part of the deferred
purchase price of property or services (excluding any such obligations incurred
under ERISA), which purchase price is (a) due more than six months from
the date of incurrence of the obligation in respect thereof or (b) evidenced by
a note, (v) monetary obligation of such Person under (a) a so-called synthetic,
off-balance sheet or tax retention lease, or (b) an agreement for the use or
possession of property creating obligations that do not appear on the balance
sheet of such Person but which, upon the insolvency or bankruptcy of such
Person, would be characterized as the indebtedness of such Person (without
regard to accounting treatment), and (vi) all indebtedness secured by any
Lien on any property or asset owned or held by such Person regardless of
whether the indebtedness secured thereby shall have been assumed by such Person
or is nonrecourse to the credit of such Person; provided that obligations under
Interest Rate Agreements and Currency Agreements (in each case as defined under
the Senior Credit Agreements) shall not constitute Indebtedness.

“Indemnified Party”
shall have the meaning assigned to it in Section 9.1.

“Intangible Assets”
means assets that are considered intangible assets under GAAP, including
customer lists, goodwill, covenants not to compete, copyrights, trade names,
trademarks and patents.

 

6

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

“Interest Payment Date”
shall have the meaning assigned to it in Section 1.1.

“Interest Rate Protection Agreement” means a written agreement between the
Company and one or more financial institutions providing for “swap”, “cap”, “collar”
or other interest rate protection with respect to any Indebtedness.

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

“Investment”
means, when used in connection with any Person, any investment by or of that
Person, whether by means of purchase or other acquisition of stock or other
Securities of any other Person or by means of a loan, advance creating a debt,
capital contribution, guaranty or other debt or equity participation or
interest in any other Person, including any partnership, limited liability
company and joint venture interests of such Person.  The amount of any Investment shall be the
amount actually invested (minus any return of capital with respect to such
Investment which has actually been received in cash or has been converted into
cash), without adjustment for subsequent increases or decreases in the value of
such Investment.

“Issue Date”
means the date of first issuance of the Notes under this Agreement.

“Laws” means,
collectively, all international, foreign, Federal, state and local statutes,
treaties, rules, guidelines, regulations, ordinances, codes and administrative
or judicial precedents or authorities, including the interpretation or
administration thereof by any Governmental Authority charged with the
enforcement, interpretation or administration thereof, and all applicable administrative
orders, directed duties, requests, licenses, authorizations and permits of, and
agreements with, any Governmental Authority, in each case whether or not having
the force of law.

“Liabilities”
shall have the meaning assigned to it in Section 9.1.

“Lien”
means any mortgage, deed of trust, pledge, hypothecation, assignment for
security, security interest, encumbrance, lien or charge of any kind, whether
voluntarily incurred

 

7

or arising by operation
of Law or otherwise, affecting any Property, including any conditional sale or
other title retention agreement, any lease in the nature of a security
interest, and/or the filing of any financing statement (other than a
precautionary financing statement with respect to a true lease that is not in
the nature of a security interest) under the UCC or comparable Law of any
jurisdiction with respect to any Property.

“Management
Agreements” means each of (a) the Management Agreement dated June
10, 2004 by and between Bare Escentuals Beauty, Inc. (formerly named MD Beauty,
Inc.) and JH Partners LLC, as amended by an amendment thereto of even date
herewith and (b) the Management Agreement dated June 10, 2004 by and
between Bare Escentuals Beauty, Inc. (formerly named MD Beauty, Inc.) and
Berkshire Partners LLC, as amended by an amendment thereto of even date
herewith.

“Management Fees”
means ordinary and customary investment banking, consulting and financial
advisory fees payable by the Company and its Subsidiaries to JH Partners LLC
and Berkshire Partners LLC.

“Margin Stock”
means “margin stock” as such term is defined in Regulation U.

“Material Adverse Effect”
shall mean any change or changes or effect or effects that, individually or in
the aggregate, in the reasonable opinion of the holder or holders of a majority
in aggregate principal amount the Notes, are or are likely to be, materially
adverse to (a) the business, property, operations, prospects or condition
(financial or otherwise) of the Company and its Subsidiaries taken as a whole,
(b) the transactions contemplated by this Agreement, (c) the ability
of the Company to perform its obligations under this Agreement or any of the
other Senior Subordinated Note Documents or (d) the rights of or benefits
or remedies available to the holders of the Notes under any Senior Subordinated
Note Document.

“Maturity Date”
means the later of (i) June 7, 2014, or (ii) the date that is 12 months after
the Senior Debt Maturity Date.

“Multiemployer Plan” shall have the same meaning as in ERISA.

“Net Cash Proceeds”
means the aggregate amount of cash received by the Company in the case of a
Disposition less the sum of all payments, fees, commissions and reasonable and
customary expenses (including, without limitation, the fees and expenses of
legal counsel and investment banking fees and expenses) incurred in connection
with such Disposition, and less the amount (estimated reasonably and in good
faith by the Company) of income, franchise, sales and other applicable taxes
required to be paid by the Company or any Subsidiary in connection with such
Disposition in the taxable year that such sale is consummated or in the
immediately succeeding taxable year, the computation of which shall take into
account the reduction in tax liability resulting from any available operating
losses and net operating loss carryovers, tax credits and tax credit carry
forwards, and similar tax attributes.

“Net Income”
means, with respect to any fiscal period, the consolidated net income of the
Company and its Subsidiaries for that period, determined in accordance with
GAAP, consistently applied.

 

8

“Note Register” shall have the meaning assigned to it in Section
10.1.

“Notes” shall mean the 15.0% Senior Subordinated Notes, due
June 7, 2014, of the Company in an initial aggregate principal amount of
$125,000,000 issued under and pursuant to this Agreement.

“OFAC” means the
U.S. Department of the Treasury’s Office of Foreign Assets Control, and any
successor thereto.

“Officer” means,
with respect to any Person, the Chairman of the Board, the Chief Executive
Officer, the President, the Chief Operating Officer, the Chief Financial
Officer, the Treasurer, any Assistant Treasurer, the Controller, the Secretary,
any Assistant Secretary or any Vice President of such Person.

“Officer’s Certificate”
as applied to any Person that is a corporation, partnership, trust or limited
liability company, means a certificate executed on behalf of such Person by one
or more Officers of such Person or one or more Officers of a general partner or
a managing member if such general partner or managing member is a corporation,
partnership, trust or limited liability company.

“Party”
means any Person other than the holders of the Notes, which now or hereafter is
a party to any of the Senior Subordinated Note Documents.

“Paid in Full”
or “Payment in Full” means the irrevocable
termination of all commitments to extend credit that would constitute Senior
Debt, the payment in full in cash of all Senior Debt, including (without
limitation) principal, interest, fees, costs (including but not limited to
post-petition interest, fees and costs even if such interest, fees and costs
are not an allowed claim enforceable against any Debtor in a bankruptcy case
under applicable law) and premium (if any), and the discharge or cash
collateralization (in an amount equal to 105% of the maximum amount that may be
drawn thereon) of all letters of credit outstanding under the Senior Credit
Agreements. If the Senior Debt is Paid in Full as provided above, and any
payment thereon is subsequently invalidated, declared to be fraudulent or
preferential, set aside or is required to be repaid to a trustee, receiver or
any other party under any bankruptcy act, state or Federal law, common law or
equitable cause or otherwise, and whether as a result of any demand,
settlement, litigation or otherwise, then the Senior Debt shall be deemed
revived and not Paid in Full until subsequently Paid in Full as provided above.

“PATRIOT Act”
means the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism (USA PATRIOT Act, Title III of Pub. L.
107-56 (signed into law October 26, 2001)), as amended from time to time, and
any successor statute, and all rules and regulations from time to time
promulgated thereunder.

“PBGC” means the Pension Benefit Guaranty
Corporation and any entity succeeding to any or all of its functions under
ERISA.

 

9

“Permitted Holder”
shall mean (a) Berkshire Partners LLC, JH Partners LLC and their Affiliates, or
any entities controlled thereby or any of the partners thereof and/or (b) any
Permitted Transferee of any Person in clause (a).

“Permitted Transferee”
shall mean, with respect to any Person, (a) any Affiliates of such Person, (b)
the heirs, executors, administrators, testamentary trustees, legatees or
beneficiaries of any such Person or (c) a trust, the beneficiaries of which, or
a corporation or partnership, the stockholders, or general and limited
partners, of which, or a limited liability company, the members of which,
include only such Person or his or her spouse or lineal descendants, in each
case to whom such Person has transferred the beneficial ownership of any
Securities of the Company.

“Person” or “person” means any corporation, individual, limited liability
company, joint stock company, joint venture, partnership, limited liability
company, unincorporated association, governmental regulatory entity, country,
state or political subdivision thereof, trust, municipality or other entity.

“PIK Notes”
shall have the meaning assigned to it in Section 1.1.

“Plan” means, at any time, an employee pension
benefit plan (other than a Multiemployer Plan) which is covered by Title IV of
ERISA or subject to the minimum funding standards under Section 412 of the Code
and either (i) is maintained, or contributed to, by any member of the ERISA
Group for employees of any member of the ERISA Group or (ii) has at any time
within the preceding five years been maintained, or contributed to, by any Person
which was at such time a member of the ERISA Group for employees of any Person
which was at such time a member of the ERISA Group.

“Property”
means any interest in any kind of property or asset, whether real, personal or
mixed, or tangible or intangible.

“PTE” shall have
the meaning assigned to it in Section 4.2(c)(ii).

“Purchaser” shall mean each Person designated as a
Purchaser on Schedule I hereto.

“QPAM” shall
have the meaning assigned to it in Section 4.2(c)(iii).

“QPAM Exemption”
shall have the meaning assigned to it in Section 4.2(c)(iii).

“Real Property”
means, as of any date of determination, all real property then or theretofore
owned, leased or occupied by the Company or any Subsidiary.

“Regulation U”
means such regulation of the Federal Reserve Board, as in effect from time to
time.

 

10

“Related Business”
means the business conducted by the Company and its Subsidiaries as of the
Issue Date and any and all businesses that in the good faith judgment of the
Board of Directors of the Company are substantially related or ancillary
businesses.

“Related Business Asset”
means assets that the Company determines will be used in a Related Business.

“Release” means
any release, spill, emission, leaking, pumping, pouring, injection, escaping,
deposit, disposal, discharge, dispersal, dumping, leaching or migration of
Hazardous Materials into the indoor or outdoor environment (including the
abandonment or disposal of any barrels, containers or other closed receptacles
containing any Hazardous Materials), or into or out of including the movement
of any Hazardous Materials through the air, soil, surface water, groundwater or
property.

“Requirements of Law”
means, collectively, any and all requirements of any Governmental Authority
including any and all laws, ordinances, rules, regulations or similar statutes
or case law.

“Responsible Officer” shall mean the president, the chief executive officer or
the chief financial officer of either a Subsidiary or of the Company, as the
case may be.

“Rights of Others” means, as to
any Property in which a Person has an interest, any legal or equitable right,
title or other interest (other than a Lien) held by any other Person in that
Property, and any option or right held by any other Person to acquire any such
right, title or other interest in that Property, including any option or right
to acquire a Lien; provided, however, that (a) no covenant restricting the use
or disposition of Property of such Person contained in any Contractual
Obligation of such Person and (b) no provision contained in a contract creating
a right of payment or performance in favor of a Person that conditions, limits,
restricts, diminishes, transfers or terminates such right shall be deemed to
constitute a Right of Others.

“Sanctioned Country”
means a country subject to a sanctions program identified on the list
maintained by OFAC and available at
http://www.treas.gov/offices/enforcement/ofac/sanctions/, or as otherwise
published from time to time.

“Sanctioned Person”
means (i) a Person named on the list of Specially Designated Nationals or
Blocked Persons maintained by OFAC available at
http://www.treas.gov/offices/enforcement/ofac/sdn/t11sdn.pdf, or as otherwise
published from time to time, or (ii) (A) an agency of the government of a
Sanctioned Country, (B) an organization controlled by a Sanctioned Country, or
(C) a Person resident in a Sanctioned Country, to the extent subject to a
sanctions program administered by OFAC.

“SEC” means the
United States Securities and Exchange Commission, or any successor agency.

 

11

 “Securities” means any capital stock,
share, voting trust certificate, bond, debenture, note or other evidence or
Indebtedness, limited partnership interest, member interest, or any warrant,
option or other right to purchase or acquire any of the foregoing.

“Securities Act”
means the Securities Act of 1933, as amended, and the rules and regulations of
the SEC thereunder.

“Senior
Credit Agreements” means that certain Credit Agreement, dated as of
February 18, 2005, by and among Company and its Subsidiaries, the financial
institutions from time to time party thereto, and BNP
Paribas, as administrative agent, as amended by (i) that certain First
Amendment to Credit Agreement, dated as of July 21, 2005, (ii) that certain
Second Amendment to Credit Agreement, dated as of October 7, 2005, (iii) that
certain Third Amendment to Credit Agreement, dated as of March 17, 2006, and
(iv) that certain Fourth Amendment to Credit Agreement, dated as of the date
hereof, and that certain Term Loan Credit Agreement, dated as of February 18,
2005, by and among Company and its Subsidiaries, the financial institutions
party thereto, and BNP Paribas, as administrative agent, as amended by (i) that
certain First Amendment to Term Loan Agreement, dated as of July 21, 2005, (ii)
that certain Second Amendment to Term Loan Agreement, dated as of October 7,
2005, (iii) that certain Third Amendment to Term Loan Agreement, dated as of
March 17, 2006, and (iv) that certain Fourth Amendment to Term Loan Agreement,
dated as of the date hereof, as either or both of them may be amended,
modified, waived, supplemented, extended, restated, replaced or refinanced from
time to time, with the same Senior Lenders or different Senior Lenders (but not
to include Berkshire Partners LLC, JH Partners LLC and their Affiliates),
including amendments, replacements and refinancings that increase the amount of
obligations thereunder (including, without limitation, increases in the
principal amount thereof).  For purposes
of clarification, any refinancings of the Senior Credit Agreements permitted
under Section 5.6(b) shall be deemed “Senior Credit Agreements” hereunder.

“Senior Debt”
means all present and future obligations of the Company or any of its
Subsidiaries owing to one or more Senior Lenders, or any of them, arising out
of or related to the extension of credit or other financial accommodations by
Senior Lenders under the Senior Credit Agreements and the other Senior Loan
Documents, including, without limitation, all claims for principal and
interest, reimbursement obligations in respect of letters of credit,
obligations under hedge agreements or in connection with cash management
services, indemnification obligations and reimbursement of fees, costs and
expenses, or otherwise, whether fixed or contingent, matured or unmatured,
liquidated or unliquidated.  PURCHASER
EXPRESSLY ACKNOWLEDGES AND AGREES THAT THE SENIOR DEBT SHALL INCLUDE ANY
INTEREST, FEES, COSTS AND CHARGES (INCLUDING, WITHOUT LIMITATION, REASONABLE
ATTORNEYS’ FEES AND EXPENSES) PAYABLE BY THE COMPANY AND THE OTHER LOAN PARTIES
UNDER THE SENIOR CREDIT AGREEMENTS AND THE OTHER LOAN DOCUMENTS THAT: (I)
ACCRUES AND BECOMES DUE AFTER THE FILING OF A PETITION BY OR AGAINST HOLDINGS
OR ANY OF THE OTHER LOAN PARTIES UNDER TITLE 11 OF THE UNITED STATES CODE, AS
AMENDED (THE “BANKRUPTCY CODE”); OR (II) OTHERWISE WOULD HAVE ACCRUED
AND BECOME DUE BUT  FOR THE FILING OF A PETITION BY OR AGAINST THE
COMPANY OR ANY OF THE OTHER LOAN PARTIES UNDER THE 

 

12

BANKRUPTCY
CODE AND THE OPERATION OF CERTAIN PROVISIONS OF THE BANKRUPTCY CODE, REGARDLESS
IN ALL CASES OF WHETHER ANY SUCH AMOUNTS ARE ALLOWED AS A CLAIM UNDER THE
BANKRUPTCY CODE OR AVOIDED PURSUANT TO FRAUDULENT CONVEYANCE, PREFERENTIAL
TRANSFER OR ANY OTHER REASON.  EACH
PURCHASER MAKES THE FOREGOING ACKNOWLEDG­MENT AND AGREEMENT IN ACCORDANCE WITH
THE DOCTRINE KNOWN AS THE “RULE OF EXPLICITNESS.”

“Senior Debt Maturity Date”
means the earlier of (i) the scheduled maturity date of the Senior Debt
including any refinancings or extensions thereof with the same Senior Lenders
or different Senior Lenders (but not to include Berkshire Partners LLC, JH
Partners LLC and their Affiliates) and (ii) the date of repayment in full of
the Senior Debt, whether by prepayment, redemption, acceleration or otherwise,
where such Senior Debt is not being refinanced in the manner provided for in
clause (i).

“Senior
Lenders” means the Senior Lenders under the Senior Credit
Agreements, and shall be deemed to include any holder of any obligation which
is payable under any Senior Credit Agreement or secured by any lien securing
any Senior Credit Agreement.

“Senior Loan
Documents” shall mean the Senior Credit Agreements, all agreements,
certificates and documents identified as “Loan Documents” (or a similar term)
in the Senior Credit Agreements, and all documents executed by the Company or
any of its Affiliates in connection therewith (in each case, as the same may be
amended, modified, waived, supplemented, extended, restated, replaced or
refinanced from time to time in accordance with Article V hereunder).

“Senior Subordinated Note
Documents” shall mean this Agreement, the Notes and the other
agreements, certificates, instruments and documents delivered herewith and
therewith.

“Significant
Subsidiary” means, as of any date of determination, any wholly-owned
Subsidiary of the Company that has total assets in excess of $12,500,000,
determined in accordance with GAAP.

“Solvent” means, as of any date of determination,
and as to any Person, that on such date: 
(a) the fair valuation of the assets of such Person is greater than the
fair valuation of such Person’s probable liability in respect of existing
debts; (b) such Person does not intend to, and does not believe that it will,
incur debts beyond such Person’s ability to pay as such debts mature; (c) such
Person is not engaged in a business or transaction, and is not about to engage
in a business or transaction, which would leave such Person with assets
remaining which would constitute unreasonably small capital after giving effect
to the nature of the particular business or transaction (including, in the case
of the Company, the issuance of the Notes described in this Agreement); and (d)
such Person is generally paying its debts as they become due.  For purposes of the foregoing (1) the “fair
valuation” of any assets means the amount realizable within a reasonable time,
either through collection or sale, of such assets at their regular market
value, which is the amount obtainable by a capable and diligent businessman
from an interested buyer willing to purchase such assets within a reasonable
time under ordinary circumstances; and (2) 

 

13

the term “debts” includes
any legal liability whether matured or unmatured, liquidated or unliquidated,
absolute, fixed, or contingent.

“Source” shall
have the meaning assigned to it in Section 4.2(c).

“Stockholders Agreement”
shall mean the Stockholders Agreement dated as of June 10, 2004, by and
among the Company and the stockholders named therein, as amended by the First
Amendment to Stockholders Agreement, dated as of December 21, 2004.

“Subordination Agreement”
shall mean the Subordination Agreement dated as of the date hereof by and among
the Purchaser and the Senior Lenders.

“Subsidiary”
with respect to any Person, means (1) a corporation a majority of whose Equity
Interests with voting power, under ordinary circumstances, to elect directors
is at the time, directly or indirectly, owned by such Person, by such Person
and one or more Subsidiaries of such Person or by one or more Subsidiaries of
such Person, and (2) any other Person (other than a corporation) in which such
Person, one or more Subsidiaries of such Person, or such Person and one or more
Subsidiaries of such Person, directly or indirectly, at the date of
determination thereof has a majority ownership interest, or (3) a partnership
in which such Person or a Subsidiary of such Person is, at the time, a general
partner and in which such Person, directly or indirectly, at the date of
determination thereof has a majority ownership interest.  Unless the context requires otherwise,
Subsidiary means each direct and indirect Subsidiary of the Company.

“Transaction Costs”
means all fees, costs, expenses, premiums, termination payments and prepayment
penalties incurred by the Company or its Subsidiaries on or before
the date hereof (or promptly thereafter in connection with the
transactions under the Senior Credit Agreements occurring on the date
hereof) in connection with the transactions contemplated by the Senior
Credit Agreements, including write-off of deferred financing costs.

“Transaction Fee”
shall have the meaning assigned to it in Section 1.6.

“York Street Purchasers”
means York Street Mezzanine Partners, L.P. and York Street Mezzanine Partners
II, L.P., collectively.

 

14

Schedule I

	
  NAME AND ADDRESS

  OF PURCHASER

  	
  PRINCIPAL AMOUNT OF NOTES

  TO BE PURCHASED

  
	
  

  York Street Mezzanine Partners, L.P.

  c/o York Street Capital Partners, L.L.C.

  One Pluckemin Way

  Bedminster, NJ 07921

  Attention: Robert M. Golding

  Tel: (908) 658-3714

  Fax: (908) 658-9933

   

  	
  

  $20,000,000

  
	
  

  York Street Mezzanine Partners II, L.P.

  c/o York Street Capital Partners II, L.L.C.

  One Pluckemin Way

  Bedminster, NJ 07921

  Attention: Robert M. Golding

  Tel: (908) 658-3714

  Fax: (908) 658-9933

   

  	
  

  $55,000,000

  
	
  Apollo Distressed
  Investment Fund (QP), L.P.

  c/o David Ruditzky

  2 Manhattanville Road

  Purchase, NY 10577

  914-272-6021

  914-694-1073

  ruditzky@apollodif.com

   

  	
  $5,712,000

   

  
	
  Apollo Distressed
  Investment Offshore Fund, LTD

  c/o David Ruditzky

  2 Manhattanville Road

  Purchase, NY 10577

  914-272-6021

  914-694-1073

  ruditzky@apollodif.com

  	
  $6,288,000

  

 

 

 

 

	
  Citigroup Financial
  Products Inc.

  c/o Citibank, N.A.

  2 Penn’s Way

  New Castle, DE 19720

  Attn: Vincent J. Farrell

  Telephone Number:
  302-894-6032

  Facsimile Number:
  212-994-1592

   

  	
  $12,000,000

  
	
  Deerfield Triarc Capital
  LLC.

  c/o James M. Wiant

  Vice President

  Deerfield Capital
  Management LLC

  280 Park Avenue, 41st
  Floor

  New York, New York 10017

  212.451.3178

  212.451.3256 (fax)

   

  	
  $12,000,000

  
	
  Feingold O’Keeffe Master
  Fund, Ltd.

  c/0 Scott D’Orsi, CFA

  Phone: 617-310-6103

  Fax: 617-310-6110

  Email:      scott@focapital.com

  Address: 

  One International Place, 23rd floor

  Boston, MA 02110

  Portfolio Manager

   

  	
  $2,000,000

  
	
  OCM Mezzanine Fund II,
  L.P.

  William Casperson

  Oaktree Capital
  Management, LLC

  1301 Avenue of the
  Americas, 34th Floor

  New York, New York  10019

  Tel:  (212) 284-1965

  Fax: (212) 284-1969

   

  	
  $12,000,000

  

 

 

 

 

Schedule II

 

[See
attached]

 

 

 

 

Schedule III

 

•                  Irrevocable Letter of
Credit, dated October 22, 2003, issued by Wells Fargo Bank, N.A. in favor of
Westminster Properties, Ltd.

•                  Guaranty, dated October 17,
2003, by MD Beauty, Inc. to Westminster Properties, Ltd.

•                  Credit Card Processing
Services Agreement Guaranty Addendum, dated as of January 14, 2003, between MD
Beauty, Inc. and Paymentech, L.P.

•                  Irrevocable Letter of
Credit, dated April 14, 2005, issued by BNP Paribas in favor of ECI Stevenson
LLC, as amended by the amendment dated May 9, 2006

 

 

 

EXHIBIT A

 

FORM OF SENIOR SUBORDINATED NOTE

 

 

THE OFFER AND SALE OF
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY STATE SECURITIES LAWS AND THIS NOTE MAY NOT BE TRANSFERRED, SOLD OR
OTHERWISE DISPOSED OF EXCEPT WHILE A REGISTRATION STATEMENT IS IN EFFECT OR
PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND
APPLICABLE STATE SECURITIES LAWS. THE HOLDER OF THIS NOTE IS SUBJECT TO THE
TERMS OF THE NOTE PURCHASE AGREEMENT, DATED AS OF JUNE 7, 2006 (THE “AGREEMENT”),
AMONG BARE ESCENTUALS, INC., YORK STREET MEZZANINE PARTNERS, L.P., YORK STREET
MEZZANINE PARTNERS II, L.P. AND CERTAIN OTHER NOTE PURCHASERS PARTY
THERETO.  THIS NOTE AND THE RIGHTS AND
OBLIGATIONS EVIDENCED HEREBY ARE SUBORDINATE IN THE MANNER AND TO THE EXTENT
SET FORTH IN THAT CERTAIN SUBORDINATION AGREEMENT (THE “SUBORDINATION AGREEMENT”) DATED AS OF JUNE 7, 2006 AMONG YORK
STREET MEZZANINE PARTNERS, L.P., YORK STREET MEZZANINE PARTNERS II, L.P.,
CERTAIN OTHER NOTE PURCHASERS PARTY THERETO, BARE ESCENTUALS, INC., AND BNP PARIBAS, AS AGENT, TO THE SENIOR DEBT
(AS DEFINED THEREIN), AS MORE PARTICULARLY DESCRIBED IN THE SUBORDINATION
AGREEMENT, AND EACH HOLDER OF THIS INSTRUMENT, BY ITS ACCEPTANCE HEREOF, SHALL
BE BOUND BY THE PROVISIONS OF THE SUBORDINATION AGREEMENT.  A COPY OF THE AGREEMENT AND SUBORDINATION
AGREEMENT SHALL BE FURNISHED WITHOUT CHARGE BY BARE ESCENTUALS, INC. TO THE
HOLDER HEREOF UPON WRITTEN REQUEST.

THIS NOTE HAS BEEN
ISSUED WITH ORIGINAL ISSUE DISCOUNT, AND AS REQUIRED BY TREASURY REGULATION
§1.12755-3(B)(1), INFORMATION REGARDING THE ISSUE PRICE, THE AMOUNT OF ORIGINAL
ISSUE DISCOUNT, THE ISSUE DATE AND THE YIELD TO MATURITY MAY BE OBTAINED FROM
BARE ESCENTUALS, INC.

BARE ESCENTUALS, INC.

 

15.0% SENIOR SUBORDINATED NOTE DUE JUNE 7, 2014

 

$[125,000,000]                                                                                                                                               June
7, 2006

FOR VALUE RECEIVED, the undersigned, BARE ESCENTUALS,
INC., a Delaware corporation (the “Company”), promises to pay to the
order of [YORK STREET MEZZANINE PARTNERS, L.P.] [YORK STREET MEZZANINE PARTNERS
II, L.P.] [AND CERTAIN OTHER NOTE PURCHASERS], or registered assigns, the
principal sum of [ONE HUNDRED TWENTY FIVE MILLION DOLLARS ($125,000,000)] on
the Maturity Date, with 

 

interest (computed on the
basis of a 360-day year of twelve 30-day months) on the unpaid balance thereof
at the rate of fifteen percent (15.0%) per annum from the date hereof, payable
in kind or in cash quarterly in arrears on March 31, June 30, September 30 and
December 31 (commencing on June 30, 2006) (each, an “Interest Payment Date”)
until the principal hereof shall have become due and payable.  The entire amount of the interest payable on
each Interest Payment Date on the Notes may be paid through the issuance of
additional Notes, the principal amount of which is equal to the interest then
due.  Notwithstanding the foregoing, the
Company shall pay interest on the Notes in cash by wire transfer of immediately
available funds to an account designated in writing by the holder (i) on each
Interest Payment Date following the Payment in Full of the Senior Debt and, to
the extent permitted under the Senior Loan Documents, on the Maturity Date, and
(ii) at the option of the Company, if permitted by the Senior Loan Documents,
on each Interest Payment Date prior to the Senior Debt Maturity Date.

This Note is issued by the Company on the date hereof
pursuant to the Agreement.  Capitalized terms
used herein without definition are used herein with the meanings ascribed to
such terms in the Agreement.

During the continuance of an Event
of Default described under Section 6.1(a), 6.1(c) or 6.1(d) of the Agreement or
the failure to comply with Section 5.6 or 5.10 of the Agreement, the Notes will
bear a default rate of interest (computed on the basis of 360 days and twelve
30-day months) from the date of occurrence of such Event of Default or
compliance failure at the rate of 17.0% per annum, and such interest shall
accrue and be payable (through the issuance of PIK Notes or, to the extent
permitted under the Senior Loan Documents, in cash) on the Interest Payment
Dates and in full in
cash on the Maturity Date.

In addition, if the Company does not perform its
obligations described in Section 1.4 of the Agreement, the Notes will bear a
default rate of interest (computed on the basis of 360 days and twelve 30-day
months) from one year after the date of failure to perform such obligation at
the rate of 19.0% per annum, and such interest shall accrue and be payable
(through the issuance of PIK Notes or, to the extent permitted under the Senior
Loan Documents, in cash) on the Interest Payment Dates and in full in cash on the Maturity Date.

In the event that any interest rate(s) provided for in
the Notes shall be determined to be unlawful, such interest rate(s) shall be
computed at the highest rate permitted by applicable law.  Any payment by the Company of any interest
amount in excess of that permitted by law shall be considered a mistake, with
the excess being applied to the principal amount of this Note without
prepayment premium or penalty; if no such principal amount is outstanding, such
excess shall be returned to the Company.

Payments of principal of, and interest on this Note
are to be made in lawful money of the United States of America as provided in
the Agreement.

This Note is a registered Note and, as provided in the
Agreement, upon surrender of this Note for registration of transfer, duly
endorsed, or accompanied by a written instrument of transfer duly executed, by
the registered holder hereof or such holder’s attorney duly authorized in
writing, a new Note for a like principal amount will be issued to, and
registered in the name 

 

A-2

of, the transferee.  Prior to due presentment for registration of
transfer, the Company may treat the person in whose name this Note is
registered as the owner hereof for the purpose of receiving payment and for all
other purposes, and the Company will not be affected by any notice to the
contrary.

The Company will make required prepayments of
principal on the dates and in the amounts specified in the Agreement.  This Note is also subject to optional
prepayment, in whole or from time to time in part, at the times and on the
terms specified in the Agreement.

If an Event of Default occurs and is
continuing, the principal of this Note may be declared by the holders of a
majority of the aggregate principal amount of the Notes or otherwise become due
and payable, in each case in the manner, at the price and with the effect
provided in the Agreement.

This Note shall be governed by and construed in
accordance with the internal laws of the State of New York, including Sections
5-1401 and 5-1402 of the New York General Obligations Law.

[signature page follows]

 

A-3

 

IN WITNESS WHEREOF, the Company has caused this Note
to be duly executed as of the date first set forth above.

 

BARE ESCENTUALS, INC.

 

 

 

By:_________________________

Name:

Title:

 

 

 

EXHIBIT B

 

FORM OF PIK NOTE

 

 

THE OFFER AND SALE OF
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY STATE SECURITIES LAWS AND THIS NOTE MAY NOT BE TRANSFERRED, SOLD OR
OTHERWISE DISPOSED OF EXCEPT WHILE A REGISTRATION STATEMENT IS IN EFFECT OR
PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND
APPLICABLE STATE SECURITIES LAWS. THE HOLDER OF THIS NOTE IS SUBJECT TO THE
TERMS OF THE NOTE PURCHASE AGREEMENT, DATED AS OF JUNE 7, 2006 (THE “AGREEMENT”),
AMONG BARE ESCENTUALS, INC., YORK STREET MEZZANINE PARTNERS, L.P., YORK STREET
MEZZANINE PARTNERS II, L.P. AND CERTAIN OTHER NOTE PURCHASERS PARTY THERETO.
THIS NOTE AND THE RIGHTS AND OBLIGATIONS EVIDENCED HEREBY ARE SUBORDINATE IN
THE MANNER AND TO THE EXTENT SET FORTH IN THAT CERTAIN SUBORDINATION AGREEMENT
(THE “SUBORDINATION
AGREEMENT”) DATED AS OF JUNE 7, 2006 AMONG YORK STREET MEZZANINE
PARTNERS, L.P., YORK STREET MEZZANINE PARTNERS II, L.P., CERTAIN NOTE
PURCHASERS PARTY THERETO, BARE ESCENTUALS, INC.,
AND BNP PARIBAS, AS AGENT, TO THE SENIOR DEBT (AS DEFINED THEREIN), AS
MORE PARTICULARLY DESCRIBED IN THE SUBORDINATION AGREEMENT, AND EACH HOLDER OF
THIS INSTRUMENT, BY ITS ACCEPTANCE HEREOF, SHALL BE BOUND BY THE PROVISIONS OF
THE SUBORDINATION AGREEMENT.  A COPY OF
THE AGREEMENT AND SUBORDINATION AGREEMENT SHALL BE FURNISHED WITHOUT CHARGE BY
BARE ESCENTUALS, INC. TO THE HOLDER HEREOF UPON WRITTEN REQUEST.

THIS NOTE HAS BEEN
ISSUED WITH ORIGINAL ISSUE DISCOUNT, AND AS REQUIRED BY TREASURY REGULATION
§1.12755-3(B)(1), INFORMATION REGARDING THE ISSUE PRICE, THE AMOUNT OF ORIGINAL
ISSUE DISCOUNT, THE ISSUE DATE AND THE YIELD TO MATURITY MAY BE OBTAINED FROM
BARE ESCENTUALS, INC.

BARE ESCENTUALS, INC.

 

15.0% SENIOR SUBORDINATED NOTE DUE JUNE 7, 2014

 

$[                  ]                                                                                                                                 [               ] [    ], 200[  ]

FOR VALUE RECEIVED, the undersigned, BARE ESCENTUALS,
INC., a Delaware corporation (the “Company”), promises to pay to the
order of [YORK STREET MEZZANINE PARTNERS, L.P.] [YORK STREET MEZZANINE PARTNERS II, L.P.] [AND CERTAIN OTHER NOTE PURCHASERS],
or registered assigns, the principal sum of [___________] ($[_______]) on the
Maturity Date, with interest (computed on the basis of a 

 

360-day year of twelve
30-day months) on the unpaid balance thereof at the rate of fifteen percent
(15.0%) per annum from the date hereof, payable in kind or in cash quarterly in
arrears on March 31, June 30, September 30 and December 31 (commencing on
[____________]) (each, an “Interest Payment Date”) until the principal hereof
shall have become due and payable.  The
entire amount of the interest payable on each Interest Payment Date on the
Notes may be paid through the issuance of additional Notes, the principal
amount of which is equal to the interest then due.  Notwithstanding the foregoing, the Company
shall pay interest on the Notes in cash by wire transfer of immediately
available funds to an account designated in writing by the holder (i) on each
Interest Payment Date following Payment in Full of the Senior Debt and, to the
extent permitted under the Senior Loan Documents, on the Maturity Date, and
(ii) at the option of the Company, if permitted by the Senior Loan Documents,
on each Interest Payment Date prior to the Senior Debt Maturity Date.

This Note is issued by the Company on the date hereof
pursuant to the Agreement.  Capitalized
terms used herein without definition are used herein with the meanings ascribed
to such terms in the Agreement.

During the continuance of an Event
of Default described under Section 6.1(a). 6.1(c) or 6.1(d) of the Agreement or
the failure to comply with Section 5.6 or 5.10 of the Agreement, the Notes will
bear a default rate of interest (computed on the basis of 360 days and twelve
30-day months) from the date of occurrence of such Event of Default or
compliance failure at the rate of 17.0% per annum, and such interest shall
accrue and be payable (through the issuance of PIK Notes or, to the extent
permitted under the Senior Loan Documents, in cash) on the Interest Payment
Dates and in full in
cash on the Maturity Date.

In addition, if the Company does not perform its
obligations described in Section 1.4 of the Agreement, the Notes will bear a
default rate of interest (computed on the basis of 360 days and twelve 30-day
months) from one year after the date of failure to perform such obligation at
the rate of 19.0% per annum, and such interest shall accrue and be payable
(through the issuance of PIK Notes or, to the extent permitted under the Senior
Loan Documents, in cash) on the Interest Payment Dates and in full in cash on the Maturity Date.

In the event that any interest rate(s) provided for in
the Notes shall be determined to be unlawful, such interest rate(s) shall be
computed at the highest rate permitted by applicable law.  Any payment by the Company of any interest
amount in excess of that permitted by law shall be considered a mistake, with
the excess being applied to the principal amount of this Note without
prepayment premium or penalty; if no such principal amount is outstanding, such
excess shall be returned to the Company.

Payments of principal of and interest on this Note are
to be made in lawful money of the United States of America as provided in the
Agreement.

This Note is a registered Note and, as provided in the
Agreement, upon surrender of this Note for registration of transfer, duly
endorsed, or accompanied by a written instrument of transfer duly executed, by
the registered holder hereof or such holder’s attorney duly authorized in
writing, a new Note for a like principal amount will be issued to, and
registered in the name

 

B-2

 

of, the transferee.  Prior to due presentment for registration of
transfer, the Company may treat the person in whose name this Note is
registered as the owner hereof for the purpose of receiving payment and for all
other purposes, and the Company will not be affected by any notice to the
contrary.

The Company will make required prepayments of
principal on the dates and in the amounts specified in the Agreement.  This Note is also subject to optional
prepayment, in whole or from time to time in part, at the times and on the
terms specified in the Agreement.

If an Event of Default occurs and is
continuing, the principal of this Note may be declared by the holders of a
majority of the aggregate principal amount of the Notes or otherwise become due
and payable, in each case in the manner, at the price and with the effect
provided in the Agreement.

This Note shall be governed by and construed in
accordance with the internal laws of the State of New York, including Sections
5-1401 and 5-1402 of the New York General Obligations Law.

[signature page follows]

 

 

B-3

 

IN WITNESS WHEREOF, the Company has caused this Note
to be duly executed as of the date first set forth above.

 

	
   

  	
  BARE ESCENTUALS, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

 

EXHIBIT C

 

[See attached]

 

 

 

EXHIBIT D

 

FORM
OF COMPLIANCE CERTIFICATE

 

THE UNDERSIGNED HEREBY CERTIFY THAT:

(1)           We are the duly elected [**Title**] and [**Title**] of Bare Escentuals, Inc., a Delaware
corporation (“Company”).

(2)           We have reviewed the terms of that certain Note Purchase
Agreement dated as of June 7, 2006, by and among the Company, York Street
Mezzanine Partners, L.P.,  York Street
Mezzanine Partners II, L.P. and certain other note purchasers party thereto, as
amended, supplemented or otherwise modified to the date hereof (said Note
Purchase Agreement, as so amended, supplemented or otherwise modified, being
the “Note Purchase  Agreement”; the terms used but not defined
herein have the meanings assigned to such terms in the Note Purchase
Agreement), and we have made, or have caused to be made under our supervision,
a review in reasonable detail of the transactions and condition of Company and
its Subsidiaries during the accounting period covered by the attached financial
statements.

(3)           The examination described in paragraph (2) above did not
disclose, and we have no knowledge of, the existence of any condition or event
which constitutes an Event of Default or a Default during or at the end of the
accounting period covered by the attached financial statements or as of the
date of this Certificate[**,
except as set forth below**].

[**Set forth [**below**]
[**in a separate attachment to
this Certificate**] are all
exceptions to paragraph (3) above listing, in detail, the nature of the
condition or event, the period during which it has existed and the action which
Company has taken, is taking, or proposes to take with respect to each such
condition or event.

 

	
   

  	
  BARE
  ESCENTUALS, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:Exhibit
10.36

 

[LOGO]

 

STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE
- NET

AIR COMMERCIAL REAL ESTATE ASSOCIATION

1              Basic Provisions (“Basic Provisions”).

 

1.1             Parties: This Lease (“Lease”), dated for
reference purposes only May  26,  2005             

is made by and between Davis Forbes Partners, L.P.,
a California limited partnership                                       

                                                                                                                                                                 (“Lessor”)

and MD Beauty, Inc., a Delaware corporation                                                                                                       

                                                                                                                                                                                

                                            (“Lessee”), (collectively the “Parties”,
or individually a “Party”).

 

                1.2(a)      Premises:
That certain portion of the Project (as defned below), including all
improvements therein or to be provided by Lessor under the terms of this Lease,
commonly known by the street address of 2265-95     Davis Court                                                            
 , located in the City of Hayward                      ,
County of Alameda                           ,
State of California                             with
zip code 94545      , as outlined on
Exhibit A          attached
hereto (“Premises”) and generally described as
(describe briefy the nature of the Premises): the south  45 feet
of Parcel  1  and all of Parcel  2, Parcel Map No.  510,
filed September 11, 1969 in Parcel Map Book 61, Page 57, Official records of Alameda County                                                            .

 

In addition to Lessee’s rights to
use and occupy the Premises as hereinafter specifed, Lessee shall have
non-exclusive rights to the any utility raceways of the building containing the
Premises (“Building”) and to the common Areas (as
defined in Paragraph 2.7 below), but shall not have any rights to the roof or
exterior walls of the Building or to any other buildings in the Project. The
Premises, the Building, the Common Areas, the land upon which they are located,
along with all other buildings and improvements thereon, are herein
collectively referred to as the “Project” (See also Paragraphs 2 and 71)

 

                1.2(b)      Parking: 100                   unreserved vehicle
parking spaces.  (See also Pargraphs 2.6 and 57)

 

1.3          Term: 5                      years and one-half month                   months
(“Original Term”) commencing July 15,
2005            (“Commencement Date”) and ending July                               31,  2010        

(“Expiration Date”). (See also
Paragraphs 3 and 52)

 

1.4          Early Possession:  (See Paragraph 50)                              (“Early Possession Date”).

(See also Paragraphs 3.2 and 3.3)

 

1.5          Base Rent: $    21, 273.00      
per month (“Base Rent”), payable on the
first              

day of each month commencing August 1, 2005                                          (See
also Paragraph 4)

x If this box is checked, there are
provisions in this Lease for the Base Rent to be adjusted. (See Paragraph 52)

 

1.6          Lessee’s Share of Common Area
Operating Expenses: See Paragraph    5 .3 percent (      %) (“Lessee’s Share”).
Lessee’s Share has been calculated by dividing the approximate square
footage of the Premises by the approximate square footage of the Project. In the
event that the size of the Premises and/or the Project are modifed during the term
of this Lease, Lessor shall recalculate Lessee’s Share to reflect such
modifcation.

 

17           Base Rent and Other Monies Paid Upon
Execution:

 

(a)           Base Rent: $10, 636.50             for the period July 15-31,               2005.

(b)           Common
Area Operating Expenses: $2, 691.50  for the period July 15-31, 2005.

(c)           Security Deposit: $24, 017.00   (“Security Deposit”). (See also Paragraph 5)

(d)           Other: $                        
for                                                                               

(e)           Total
Due Upon Execution of this Lease: $37, 345.00        

 

1.8             Agreed Use: Warehousing and distribution of cosmetics and
administrative office

uses                                                                                                                                                                  

                                                                                                                                   (See also Paragraph 6)

 

1.9          Insuring Party. Lessor is the “Insuring Party”.        (See
also Paragraph 8)

 

1.10        Real Estate Brokers: (See also Paragraphs 15 and 68)

 

(a)           Representation: The following real estate brokers (the “Brokers”) and brokerage relationships exist in this
transaction (check applicable boxes):

x BT Commercial Real Estate                         
represents Lessor exclusively (“Lessor’s Broker”);

x Cushman & Wakefield of California, Inc.   represents
Lessee exclusively (“Lessee’s Broker”);
or

o                                                                          
represents both Lessor and Lessee (“Dual Agency”).

 

(b)           Payment
to Brokers: Upon
execution and delivery of this Lease by both Parties, Lessor shall pay to the
Brokers the brokerage fee agreed to in a separate written agreement (or if
there is no such agreement, this sum of
         or % of the total Base
Rent for the brokerage services rendered by the Broker). (See Paragraph 68)

 

1.11        Guarantor.
The
obligations of the Lessee under this Lease are to be guaranteed by                                                              
("Guarantor")  (See also Paragraph 32)

 

1.12        Attachments. Attached hereto are the following, all
of which constitute a part of this Lease:

 

x an Addendum consisting of Paragraphs 5 0   
through 72        :

x a site plan depicting the Premises; (See Exhibit A) 

o a site plan depicting the Project;

o a current set of the Rules and Regulations for the
Project:

 

[Illegible]                                                                                                                                                                  [Illegible]

INITIALS                                                                                                                                                                 INITIALS

 

 

1

 

o a current set of the Rules and
Regulations adopted by the owners’ association; 

o a Work Letter;

o other
(specify);                                                                                                                              

                                                                                                                                                           

 

2.             Premises.

 

2.1             Letting. Lessor hereby
leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the
term, at the rental, and upon all of the terms, covenants and conditions set
forth in this Lease. Unless otherwise provided herein, any statement of size
set forth in this Lease, or that may have been used
in calculating Rent, is an approximation which the Parties agree is reasonable
and any payments based thereon are not subject
to revision whether or not the actual size is more or less. NOTE: Lessee is
advised to verify the actual size prior to executing this Lease.

 

2.2             Condition. Lessor
shall deliver that portion of the Premises contained within the Building (“Unit”) to Lessee broom clean and free of debris
on the Commencement Date or the Early Possession Date, whichever first occurs (“Start Date”), and, so long as the required service contracts described in Paragraph 7.1(b) below are obtained by Lessee and
in effect within thirty days following the Start Date, warrants that the
existing electrical, plumbing, fire sprinkler, lighting, heating, ventilating
and air conditioning systems (“HVAC”),
loading doors, sump pumps, if any, and all other such
elements in the Unit, other than those constructed by Lessee, shalt be in good
operating condition on said date, that the structural elements of the roof,
bearing walls and foundation of the Unit shall be free of material defects, and
that the Unit does not contain hazardous levels of any mold or fungi defined as
toxic under applicable state or federal law. If a non-compliance with such warranty
exists as of the Start Date, or if one of such systems or elements should
malfunction or fail within the appropriate warranty period, Lessor shall, as
Lessor’s sole obligation with respect to such matter, except as otherwise
provided in this Lease, promptly after receipt of written notice from Lessee
setting forth with specifcity the nature and extent of such non-compliance,
malfunction or failure, rectify same at Lessor’s expense. The warranty periods
shall be as follows: (i) 6 months as to the HVAC systems, and (ii) 30
days as to the remaining systems and other elements of the Unit. If Lessee does
not give Lessor the required notice within the appropriate warranty period,
correction of any such non-compliance, malfunction or failure shall be the
obligation of Lessee at Lessee’s sole cost and expense (except for the repairs
to the fire sprinkler systems, roof, foundations, and/or bearing walls - see
Paragraph 7).

 

2.3             Compliance. Lessor
warrants that to the best of its knowledge the improvements on the Premises and the Common Areas comply with the building codes that were
in effect at the time that each such improvement, or portion thereof, was
constructed, and also with all applicable laws, covenants
or restrictions of record, regulations, and ordinances in effect on the Start
Date (“Applicable Requirements”). Said
warranty does not apply to the use to which Lessee will
put the Premises, modifications which may be required by the Americans with
Disabilities Act or any similar laws as a result of
Lessee’s use (see Paragraph 49), or to any Alterations or Utility Installations
(as defined in Paragraph 7.3(a)) made or to be made by Lessee. NOTE: Lessee is responsible for determining whether or not the Applicable
Requirements and especially the zoning are appropriate for Lessee’s intended
use, and acknowledges that past uses of the Premises may no longer be allowed.
If the Premises do not comply with said warranty, Lessor shall, except as
otherwise provided, promptly after receipt of written notice from Lessee
setting forth with specificity the nature and extent of such non-compliance,
rectify the same at Lessor’s expense. If Lessee does not give Lessor written
notice of a non-compliance with this warranty within 6 months following the
Start Date, correction of that non-compliance shall be the obligation of Lessee
at Lessee’s sole cost and expense. If the Applicable Requirements are hereafter
changed so as to require during the term of this Lease the construction of an
addition to or an alteration of the Unit. Premises and/or Building, the
remediation of any Hazardous Substance, or the reinforcement or other physical
modification of the Unit, Premises and/or Building (“Capital Expenditure”), Lessor and Lessee shall allocate the
cost of such work as follows: (See Paragraph 72)

 

(a)           Subject
to Paragraph 2.3(c) below, if such Capital Expenditures are required as a
result of the specifc and unique use of the Premises by Lessee as compared with
uses by tenants in general, Lessee shall be fully responsible for the cost
thereof, provided, however that if such Capital Expenditure is required during
the last 2 years of this Lease and the cost thereof exceeds 6 months’ Base
Rent, Lessee may instead terminate this Lease unless Lessor notifes Lessee, in
writing, within 10 days afer receipt of Lessee’s termination notice that Lessor
has elected to pay the difference between the actual cost thereof and the
amount equal to 6 months’ Base Rent. If Lessee elects termination, Lessee shall
immediately cease the use of the Premises which requires such Capital
Expenditure and deliver to Lessor written notice specifying a termination date
at least 90 days thereafer. Such termination date shall, however, in no event
be earlier than the last day that Lessee could legally utilize the Premises
without commencing such Capital Expenditure.

 

(b)           If such
Capital Expenditure is not the result of the specifc and unique use of the
Premises by Lessee (such as, governmentally mandated seismic modifcations),
then Lessor and Lessee shall allocate the obligation to pay for the portion of
such costs reasonably attributable to the Premises pursuant to the formula set
out in Paragraph 7.1(d); provided, however, that if such Capital Expenditure is
required durng the last 2 years of this Lease or if Lessor reasonably
determines that it is not economically feasible to pay its share thereof,
Lessor shall have the option to terminate this Lease upon 90 days prior written
notice to Lessee unless Lessee notifes Lessor, in writing, within 10 days after
receipt of Lessor’s termination notice that Lessee will pay for such Capital
Expenditure. If Lessor does not elect to terminate, and fails to tender its
share of any such Capital Expenditure, Lessee may advance such funds and deduct
same, with Interest, from Rent until Lessor’s share of such costs have been
fully paid. If Lessee is unable to finance Lessor’s share, or if the balance of
the Rent due and payable for the remainder of this Lease is not suffcient to
fully reimburse Lessee on an offset basis, Lessee shall have the right to
terminate this Lease upon 30 days written notice to Lessor.

 

(c)           Notwithstanding
the above, the provisions concerning Capital Expenditures are intended to apply
only to non-voluntary, unexpected, and new Applicable Requirements. If the
Capital Expenditures are instead triggered by Lessee as a result of an actual
or proposed change
in use, change in intensity of use, or modifcation to the Premises then, and in
that event, Lessee shall either: (i) immediately cease such changed use
or intensity of use and/or take such other steps as may be necessary to
eliminate the requirement for such Capital Expenditure, or (ii) complete such
Capital Expenditure at its own expense. Lessee shall not have any right to
terminate this Lease.

 

2.4          Acknowledgements. Lessee
acknowledges that: (a) it has been advised by Lessor and/or Brokers to satisfy
itself with respect to the condition of the Premises (including but not limited
to the electrical, HVAC and fire sprinkler systems, security, environmental
aspects, and compliance with Applicable Requirements and the Americans with
Disabilities Act), and their suitability for Lessee’s intended use, (b) Lessee
has made such investigation as it deems necessary with reference to such
matters and assumes all responsibility therefor as the same relate to its
occupancy of the Premises, and (c) neither Lessor, Lessor’s agents, nor Brokers
have made any oral or written representations or warranties with respect to
said matters other than as set forth in this Lease. In addition, Lessor
acknowledges that: (i) Brokers have made no representations, promises or
warranties concerning Lessee’s ability to honor the Lease or suitability to
occupy the Premises, and (ii) it is Lessor’s sole responsibility to investigate
the financial capability and/or suitability of
all proposed tenants.

 

2.5           Lessee
as Prior Owner/Occupant. The warranties made by Lessor in Pargraph 3 shall be
of no force or effect if immediately prior to the Start Date Lessee was the owner
or occupant of the Premises. In such event Lessee shall be responsible for any
necessary corrective work:

 

2.6          Vehicle Parking. Lessee
shall be entitled to use the number of parking spaces specifed in Paragraph
1.2(b) on those portions of the Common Areas designated from time to time by
Lessor for parking. Lessee shall not use more parking spaces than said number.
Said parking spaces shall be used for parking by vehicles no larger than
full-size passenger automobiles or pick-up trucks, herein called “Permitted
Size Vehicles.”

 

 

2

 

Lessor
may regulate the loading and unloading of vehicles by adopting Rules and
Regulations as provided in Paragraph 2.9. No vehicles other than Permitted Size
Vehicles may be parked in the Common Area without the prior written permission
of Lessor. In addition:

 

(a)           Lessee
shall not permit or allow any vehicles that belong to or are controlled by
Lessee or Lessee’s employees, suppliers, shippers, customers, contractors or
invitees to be loaded, unloaded, or parked in areas other than those designated
by Lessor for such activilies.

 

(b)           Lessee shall not
service or store any vehicles in the Common Areas.

 

(c)           If
Lessee permits or allows any of the prohibited activities described in this
Paragraph 2.6, then Lessor shall have the right, without notice, in addition to
such other rights and remedies that it may have, to remove or tow away the
vehicle involved and charge the cost to Lessee, which cost shall be immediately
payable upon demand by Lessor. (See Paragraph 57)

 

2.7          Common Areas -
Definition. The term “Common Areas” is
defned as all areas and facilities outside the Premises and within the exterior boundary line of the Project and Interior utility raceways and
installations within the Unit that are provided and designated by the Lessor
from time to lime for the general non-exclusive use of Lessor, Lessee and other
tenants of the Project and their respective employees, suppliers, shippers,
customers, contractors and invitees, including parking areas, loading and
unloading areas, trash areas, roadways, walkways, driveways and landscaped
areas.

 

2.8          Common Areas - Lessee’s
Rights. Lessor grants to Lessee, for the beneft of Lessee and its employees, suppliers, shippers, contractors, customers and invitees, during the term of this Lease, the
non-exclusive right to use, in common with others entitled to such use, the Common Areas as they exist from time to time, subject to any rights,
powers, and privileges reserved by Lessor under the terms hereof or under the terms of any rules and regulations or restrictions governing the use of
the Project. Under no circumstances shall the right herein granted to use the Common Areas be deemed to include the right to store any property, temporarily
or permanently, in the Common Areas. Any such storage shall be permitted only
by the prior written consent of Lessor or Lessor’s designated agent, which
consent may be revoked at any time. In the event that any unauthorized storage shall occur then Lessor shall have the right,
without notice, in addition to such other rights and remedies that it may have,
to remove the property and charge the cost to Lessee, which cost shall be
immediately payable upon demand by Lessor.

 

2.9          Common Areas - Rules
and Regulations. Lessor or such other person(s)
as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to
time, to establish, modify, amend and enforce reasonable rules and regulations
(“Rules and Regulations”) for the management, safety, care, and cleanliness of
the grounds, the parking and unloading of vehicles and the preservation of good
order, as well as for the convenience of other occupants or tenants of the
Building and the Project and their invitees. Lessee agrees to abide by and
conform to all such Rules and Regulations, and shall use its best eforts to
cause its employees, suppliers, shippers, customers, contractors and invitees
to so abide and conform. Lessor shall not be responsible to Lessee for the
non-compliance with said Rules and Regulations by other
tenants of the Project.

 

2.10        Common Areas -
Changes. Lessor shall have the right, in
Lessor’s sole discretion, from time to time:

 

(a)           To make changes to
the Common Areas, including, without limitation, changes in the location, size,
shape and number of driveways, entrances, parking spaces, parking areas,
loading and unloading areas, ingress, egress, direction of traffic, landscaped
areas, walkways and utility raceways;

 

(b)           To
close temporarily any of the Common Areas for maintenance purposes so long as reasonable
access to the Premises remains available;

 

(c)           To designate other
land outside the boundaries of the Project to be a part of the Common Areas;

 

(d)           To
add additional buildings and improvements to the Common Areas;

 

(e)           To
use the Common Areas while engaged in making additional improvements, repairs
or alterations to the Project, or any portion thereof; and

 

(f)            To do and perform
such other acts and make such other changes in, to or with respect to the
Common Areas and Project as Lessor may, in the exercise of sound business
judgment, deem to be appropriate.

 

3.          Term.

 

3.1          Term. The Commencement Date, Expiration Date and Original Term of this Lease
are as specifed in Paragraph 1.3.

 

3.2          Early Possession. If Lessee
totally or partially occupies the Premises prior to the Commencement Date, the
obligation to pay Base Rent shall be abated for the period of such early
possession. All other terms of this Lease (including but not limited to the
obligations to pay Lessee’s Share of Common Area Operating Expenses, Real
Property Taxes and insurance premiums and to maintain the Premises) shall be in
effect during such period. Any such early possession shall
not affect the Expiration Date.

 

3.3          Delay In Possession. Lessor agrees
to use its best commercially reasonable efforts to deliver possession of the
Premises to Lessee by the Commencement Date. If, despite said efforts, Lessor is
unable to deliver possession as agreed, Lessor shall not be subject to any
liability therefor, nor shall such failure affect the validity of this Lease or
change the Expiration Date. Lessee shall not, however, be obligated to pay Rent
or perform its other obligations until Lessor delivers possession of the
Premises and any period of rent abatement that Lessee would otherwise have enjoyed shall
run from the date of the delivery of possession and continue for a period equal
to what Lessee would otherwise have enjoyed, but minus any days of delay caused
by the acts or omissions of Lessee. If possession is not delivered within 60
days after the Commencement Date, Lessee may, at its option, by notice
in writing within 10 days after the end of such 60 day period, cancel this
Lease, in which event the Parties shall be discharged from all obligations
hereunder. If such written notice is not received by Lessor within said 10 day
period, Lessee’s right to cancel shall terminate. Except as
otherwise provided, if possession is not tendered to Lessee by the Start Date
and Lessee does not terminate this Lease, as aforesaid, any period of rent
abatement that Lessee would otherwise have enjoyed shall run from the date of
delivery of possession and continue for a period equal to what Lessee would
otherwise have enjoyed under the terms hereof, but minus any days of delay
caused by the acts or omissions of Lessee. If possession of the
Premises is not delivered within 4 months afer the Commencement Date, this
Lease shall terminate unless other agreements are reached
between Lessor and Lessee, in writing.

 

3.4          Lessee Compliance. Lessor shall
not be required to tender possession of the Premises to Lessee until
Lessee complies with its obligation to provide evidence of insurance (Paragraph 8.5).
Pending delivery of such evidence, Lessee shall be required to perform all of
its obligations under this Lease from and after the Start Date, including the
payment of Rent, notwithstanding Lessor’s election to withhold possession pending receipt
of such evidence of insurance. Further, if Lessee is required to perform any
other conditions prior to or concurrent with the Start Date, the Start Date shall occur but Lessor may elect to withhold possession
until such conditions are satisfied.

 

4.             Rent.

 

4.1          Rent Defined. All monetary
obligations of Lessee to Lessor under the terms of this Lease (except for the
Security Deposit) are deemed to be rent (“Rent”).

 

4.2          Common Area Operating Expenses. Lessee shall
pay to Lessor during the term hereof, in addition to the Base
Rent, Lessee’s Share (as specifed in Paragraph 1.6) of all Common
Area Operating Expenses, as hereinafer defned, during each calendar year of the
term of this Lease, in accordance with the following provisions:

 

(a)           “Common
Area Operating Expenses” are defined, for purposes of this Lease, as all costs incurred by
Lessor relating

 

 

3

 

to the ownership and
operation of the Project, including, but not limited to, the following: (see
Paragraphs 53 and 63)

(i)                                     The operation, repair and maintenance, in neat, clean, good order and
condition , and if necessary the replacement, of the following:

(as)         The Common Areas and Common Area
improvements, including parking areas, loading and unloading areas, trash areas,
roadways, parkways, walkways, driveways,
landscaped areas, bumpers, irrigation systems, Common Area lighting
facilities, fences and gates, elevators, roofs, and roof drainage systems.

(bb)         Exterior signs and any tenant
directories.

(cc)         Any fire sprinkler systems.

(ii)                                  The cost of
water, gas, electricity and telephone to service the Common Areas and any
utilities not separately metered.

(iii)                               Trash disposal, pest control services, property
management, security services, owners’ association dues and fees, the cost to
repaint the exterior of any structures and the cost of any environmental
inspections.

(iv)                              Reserves set
aside for maintenance, repair and/or replacement of Common Area improvements
and equipment.

(v)                                 Real Property
Taxes (as defined in Paragraph 10).

(vi)                              The cost of the
premiums for the Insurance maintained by Lessor pursuant to Paragraph 8.

(vii)                           Any deductible
portion of an insured loss concerning the Building or the Common Areas, with no
deductible to exceed ten thousand dollars ($10,000.00).

(viii)                        Auditors’,
accountants’ and attorneys’ fees and costs related to the operation,
maintenance, repair and replacement of the Project.

(ix)                                The cost of any
capital improvement to the Building or the Project not covered under the provisions of Paragraph 2.3 provided;
however, that Lessor shall allocate the cost of any such capital
improvement over a 12 year period and Lessee shall not be required to pay more
than Lessee’s Share of 1/144th of the cost of such capital improvement in any
given month.

(x)                                   Any other services to be provided by Lessor that are stated elsewhere in
this Lease to be a Common Area Operating Expense.

 

(b)           Any Common Area Operating Expenses and Real
Property Taxes that are specifcally attributable to the Unit, the Building or to any other building in the Project or to the operation,
repair and maintenance thereof, shall be allocated entirely to such Unit,
Building, or other building. However, any
Common Area Operating Expenses and Real Property Taxes that are not specifically
attributable to the Building or to any other
building or to the operation, repair and maintenance thereof, shall be
equitably allocated by Lessor to all buildings in the Project. 

 

(c)           The inclusion of the
improvements, facilities and services set forth in Subparagraph 4.2(a) shall
not be deemed to impose an obligation upon
Lessor to either have said improvements or facilities or to provide those
services unless the Project already has the same, Lessor already provides the
services, or Lessor has agreed elsewhere in this Lease to provide the same or
some of them.

 

(d)           Lessee’s Share of
Common Area Operating Expenses is payable monthly on the same day as the Base Rent is due hereunder. The amount of such
payments shall be based on Lessor’s estimate
of the annual Common Area Operating Expenses. Within 60 days after written
request (but not more than once each year) Lessor shall deliver to Lessee a
reasonably detailed statement showing Lessee’s Share of the actual Common Area Operating Expenses incurred during the preceding year.
If Lessee’s payments during such year exceed Lessee’s Share, Lessor shall credit the amount of such over-payment against Lessee’s future
payments. If Lessee’s payments during such year were less than Lessee’s Share,
Lessee shall pay to Lessor the amount of the deficiency within 10 days afer
delivery by Lessor to Lessee of the statement.

 

(e)           Common
Area Operating Expenses shall not include any expenses paid by any tenant
directly to third parties, or as to which
Lessor is otherwise reimbursed by any third party, other tenant, or insurance
proceeds.

 

4.3          Payment. Lessee shall cause payment
of Rent to be received by Lessor in lawful money of
the United States, without offset or deduction (except as specifcally permitted
in this Lease), on or before the day
on which it is due. All monetary amounts shall be rounded to the nearest whole
dollar. In the event that any invoice prepared by Lessor is inaccurate such
inaccuracy shall not constitute a waiver and Lessee shall be obligated to pay
the amount set forth in this Lease. Rent for any period during the term hereof
which is for less than one full calendar month shall be prorated based upon the
actual number of days of said month. Payment of Rent shall be made to Lessor at
its address stated herein or to such other persons or place as Lessor may from
time to time designate in writing. Acceptance of a payment which is less than
the amount then due shall not be a waiver of Lessor’s rights to the balance of
such Rent, regardless of Lessors endorsement of any check so stating. In the
event that any check, draft, or other instrument of payment given by Lessee to
Lessor is dishonored for any reason, Lessee agrees to pay to Lessor the sum of
$25 in addition to any Late Charge and Lessor, at its option, may require all
future Rent be paid by cashier’s check. Payments will be applied first to
accrued late charges and attorney’s fees, second to
accrued interest, then to Base Rent and Common Area Operating Expenses, and any
remaining amount to any other outstanding charges or costs.

 

5.             Security Deposit.
Lessee shall deposit with Lessor upon execution hereof the Security Deposit as security for Lessee’s faithful performance of its
obligations under this Lease. If Lessee falls to pay Rent, or otherwise
Defaults under this Lease, Lessor may use, apply or retain all or any portion
of said Security Deposit for the payment of any amount due Lessor or to
reimburse or compensate Lessor for any liability, expense, loss or damage which
Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or
any portion of the Security Deposit, Lessee shall within 10 days after written
request therefor deposit monies with Lessor sufficient to restore said Security
Deposit to the full amount required by this Lease. If the Base Rent increases during the term of this Lease, Lessee shall,
upon written request from Lessor, deposit additional monies with Lessor as that
the total amount of the Security Deposit shall at all times bear the same
proportion to the increased Base Rent as the Initial Security Deposit born to
the initial Base Rent. Should the Agreed Use be
amended to accommodate a material change in the business of Lessee or to
accommodate a sublessee or assignee, Lessor shall have the right to increase
the Security Deposit to the extent necessary, in Lessor’s reasonable judgment,
to account for any increased wear and tear that the Premises may suffer as a
result thereof. If a change in control of Lessee occurs during this Lease and
following such change the financial condition of Lessee is, in Lessor’s
reasonable judgment, significantly reduced, Lessee shall deposit such
additional monies with Lessor as shall be sufficient to cause the Security
Deposit to be at a commercially reasonable level based on such change in financial
condition. Lessor shall not be required to keep the Security Deposit separate
from its general accounts. Within 14 days after the expiration or termination
of this Lease, if Lessor elects to apply the Security Deposit only to unpaid
Rent, and otherwise within 30 days after the Premises have been vacated
pursuant to Paragraph 7.4(c) below, Lessor shall return that portion of the
Security Deposit not used or applied by Lessor. No part of the Security Deposit
shall be considered to be held in trust, to bear interest or to be prepayment
for any monies to be paid by Lessee under this Lease.

 

6.             Use.

6.1          Use. Lessee shall
use and occupy the Premises only for the Agreed Use, or any other legal use
which is reasonably comparable thereto, and for no other purpose. Lessee shall
not use or permit the use of the Premises in a manner that is unlawful, creates
damage, waste or a

 

 

4

 

nuisance, or that disturbs occupants of or causes damage
to neighboring premises or properties. Other than guide, signal and seeing eye
dogs, Lessee shall not keep or allow in the
Premises any pets, animals, birds, fish, or reptiles. Lessor shall not
unreasonably withhold or delay its consent to any written request for a
modification of the Agreed Use, so long as the same will not impair the
structural integrity of the Building or the mechanical or electrical systems therein, and/or is not signifcantly more burdensome to
the Project. If Lessor elects to withhold consent, Lessor shall within 7 days after such request give written notifcation of same, which notice shall
include an explanation of Lessor’s objections to the change in the Agreed Use.

 

6.2                               Hazardous
Substances. (see Paragraph 62)

 

                              (a)              Reportable Uses
Require Consent. The term “Hazardous Substance” as used in this
Lease shall mean any product, substance, or waste whose
presence, use, manufacture, disposal, transportation, or release, either by
itself or in combination with other materials expected to be on the Premises,
is either: (i) potentially injurious to the public health, safety or welfare,
the environment or the Premises, (ii) regulated or
monitored by any governmental authority, or (iii) a basis for potential
liability of Lessor to any governmental agency or third party under any
applicable statute or common law theory. Hazardous Substances shall include,
but not be limited to, hydrocarbons, petroleum, gasoline, and/or crude oil or
any products, by-products or fractions thereof. Lessee
shall not engage in any activity in or on the Premises which constitutes a
Reportable Use of Hazardous Substances without the express prior written
consent of Lessor and timely compliance (at Lessee’s expense) with all
Applicable Requirements. “Reportable Use” shall mean (i) the
installation or use of any above or below ground storage tank, (ii) the
generation, possession, storage, use, transportation, or
disposal of a Hazardous Substance that requires a permit from, or with respect
to which a report, notice, registration or business plan is required to be filed
with, any governmental authority, and/or (iii) the presence at the Premises of
a Hazardous Substance with respect to which any Applicable Requirements
requires that a notice be given to persons entering or occupying the Premises
or neighboring properties. Notwithstanding the
foregoing, Lessee may use any ordinary and customary materials reasonably
required to be used in the normal course of the Agreed Use, ordinary office
supplies (copier toner, liquid paper, glue, etc.) and common household cleaning
materials, so long as such use is in compliance
with all Applicable Requirements, is not a Reportable Use, and does not expose
the Premises or neighboring property to any meaningful risk of contamination or damage or expose Lessor to any liability
therefor. In addition, Lessor may condition its consent to any Reportable Use
upon receiving such additional assurances as Lessor reasonably deems necessary
to protect itself, the public, the Premises and/or the environment against
damage, contamination, injury and/or liability, including, but not limited to,
the installation (and removal on or before Lease expiration or termination) of protective modifications (such as concrete encasements) and/or increasing
the Security Deposit.

 

                              (b)              Duty to Inform Lessor. If
Lessee knows, or has reasonable cause to believe, that a Hazardous Substance
has come to be located in, on, under or about the Premises, other than as
previously consented to by Lessor, Lessee shall immediately give written notice
of such fact to Lessor, and provide Lessor with a copy of
any report, notice, claim or other documentation which it has concerning the
presence of such Hazardous Substance.

 

                              (c)              Lessee Remediation. Lessee
shall not cause or permit any Hazardous Substance to be spilled or released in,
on, under, or about the Premises (including through the
plumbing or sanitary sewer system) and shall promptly, at Lessee’s expense,
comply with all Applicable Requirements and take
all investigatory and/or remedial action reasonably recommended, whether or not
formally ordered or required, for the
cleanup of any contamination of, and for the maintenance, security and/or
monitoring of the Premises or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any
Hazardous Substance brought onto the Premises during the term of this Lease, by
or for Lessee, or Lessee’s employees, agents or invitees.

 

                              (d)              Lessee Indemnification. Lessee
shall indemnify, defend and hold Lessor, its agents, employees, lenders and
ground lessor, if any, harmless from and against any and all loss of rents
and/or damages, liabilities, judgments, claims, expenses, penalties, and
attorneys’ and consultants’ fees arising out of or involving any Hazardous
Substance brought onto the Premises by or for Lessee, or Lessee's employees,
agents or invitees (provided, however, that Lessee shall have no liability
under this Lease with respect to underground migration of any Hazardous
Substance under the Premises from areas outside of the Project not caused or
contributed to by Lessee). Lessee’s obligations shall include, but not be limited to, the effects of any contamination or injury to
person, property or the environment created or suffered by Lessee, and the cost
of investigation, removal, remediation, restoration
and/or abatement, and shall survive the expiration or termination of this
Lease. No termination, cancellation or release agreement entered into by Lessor
and Lessee shall release Lessee from its obligations under this Lease with
respect to Hazardous Substances, unless specifically so agreed
by Lessor in writing at the time of such agreement.

 

                              (e)              Lessor
Indemnification. Lessor and its successors and assigns shall
indemnify, defend, reimburse and hold Lessee, its employees and lenders,
harmless from and against any and all environmental damages, including the cost
of remediation, which are suffered as a direct result of Hazardous Substances
on the Premises prior to Lessee taking possession or which are caused by the
gross negligence or willful misconduct of Lessor, its agents or employees.
Lessor’s obligations, as and when required by the Applicable Requirements,
shall include, but not be limited to, the cost of investigation, removal,
remediation, restoration and/or abatement, and shall survive the expiration or
termination of this Lease.

 

                              (f)              Investigations and Remediations. Lessor
shall retain the responsibility and pay for any investigations or remediation measures required by governmental entities having jurisdiction with
respect to the existence of Hazardous Substances on the Premises prior to the Lessee taking possession, unless such remediation measure is required as
a result of Lessee’s use (including “Alterations”, as defined in paragraph 7.3(a) below) of the Premises, in which event Lessee shall be responsible
for such payment. Lessee shall cooperate fully in any such activities at the request of Lessor, including allowing Lessor and Lessor’s agents to have
reasonable access to the Premises at reasonable times in order to carry out
Lessor’s investigative and remedial responsibilities.

 

                              (g)             Lessor Termination
Option. If a Hazardous Substance Condition (see Paragraph 9.1(e))
occurs during the term of this Lease, unless
Lessee is legally responsible therefor (in which case Lessee shall make the
Investigation and remediation thereof required by the Applicable Requirements
and this Lease shall continue in full force and effect, but subject to Lessor’s
rights under Paragraph 6.2(d) and Paragraph 13), Lessor may, at Lessor’s option, either (i) investigate and remediate such
Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor’s expense, in which event this Lease shall continue in full force
and effect, or (ii) if the estimated cost to remediate such condition exceeds
12 times the then monthly Base Rent or $100,000,
whichever is greater, give written notice to Lessee, within 30 days after
receipt by Lessor of knowledge of the occurrence of such Hazardous Substance
Condition, of Lessor's desire to terminate this Lease as of the date 60 days
following the date of such notice. In the event
Lessor elects to give a termination notice, Lessee may, within 10 days thereafter,
give written notice to Lessor of Lessee’s commitment
to pay the amount by which the cost of the remediation of such Hazardous
Substance Condition exceeds an amount equal to 12 times the then monthly Base
Rent or $100,000, whichever is greater. Lessee shall provide Lessor with said
funds or satisfactory assurance thereof within 30 days
following such commitment. In such event, this Lease shall continue in full
force and effect, and Lessor shall proceed to make such remediation as soon as
reasonably possible after the required funds are available. If Lessee does not
give such notice and provide the required funds or assurance thereof within the time provided, this Lease shall terminate as of the
date specified in Lessor’s notice of termination.

 

6.3          Lessee’s Compliance with Applicable
Requirements. Except as otherwise provided in this Lease, Lessee
shall, at Lessee’s sole expense, fully, diligently and in a timely manner,
materially comply with all Applicable Requirements, the requirements of any
applicable fire insurance underwriter or rating bureau, and the recommendations
of Lessor’s engineers and/or consultants which relate in any manner to such Requirements,
without regard to whether said Requirements are now in effect or become
effective after the Start Date. Lessee shall, within 10 days after receipt of
Lessor’s written request, provide Lessor with copies of all permits and other
documents, and other information evidencing Lessee’s

 

 

5

 

compliance
with any Applicable Requirements specified by Lessor, and shall immediately
upon receipt, notify Lessor in writing (with copies of any documents involved)
of any threatened or actual claim, notice, citation, warning, complaint or
report pertaining to or involving the failure of Lessee or the Premises to
comply with any Applicable Requirements. Likewise, Lessee shall Immediately
give written notice to Lessor of: (i) any water damage to the Premises and any
suspected seepage, pooling, dampness or other condition conducive to the
production of mold; or (ii) any mustiness or other odors that might indicate
the presence of mold in the Premises.

                6.4          Inspection; Compliance. Lessor and Lessor’s “Lender” (as defined
in Paragraph 30) and consultants shall have the right to enter Into Premises at
any time, in the case of an emergency, and otherwise at reasonable times after
reasonable notice, for the purpose of inspecting the condition of the Premises
and for verifying compliance by Lessee with this Lease. The cost of any such
Inspections shall be paid by Lessor, unless a violation of Applicable
Requirements, or a Hazardous Substance condition (see Paragraph 9.1) is found
to exist or be Imminent, or the inspection is requested or ordered by a
governmental authority. In such case, Lessee shall upon request reimburse
Lessor for the cost of such inspection, so long as such inspection is
reasonably related to the violation or contamination. In addition, Lessee shall
provide copies of all relevant material safety data sheets (MSDS) to Lessor
within 10 days of the receipt of written request therefor.

7.             Maintenance; Repairs,
Utility Installations; Trade Fixtures and Alterations.

                7.1          Lessee’s
Obligations. (see Paragraphs 60 and 61)

                                (a)           In General. Subject to the
provisions of Paragraph 2.2 (Condition), 2.3 (Compliance), 6.3 (Lessee’s
Compliance with Applicable Requirements), 7.2 (Lessor’s Obligations), 9 (Damage or Destruction), and 14 (Condemnation),
Lessee shall, at Lessee’s sole expense, keep the Premises, Utility
Installations (intended for Lessee’s exclusive use, no matter where located),
and Alterations in good order, condition and repair (whether or not the portion
of the Premises requiring repairs, or the means of repairing the same, are
reasonably or readily accessible to Lessee, and whether or not the need for
such repairs occurs as a result of Lessee’s use, any prior use, the elements or
the age of such portion of the Premises), inducting, but not limited to, all
equipment or facilities, such as plumbing, HVAC equipment, electrical, lighting
facilities, boilers, pressure vessels, fixtures, interior walls, interior
surfaces of exterior walls, ceilings, floors, windows, doors, plate glass, and
skylights but excluding any items which are the responsibility of Lessor
pursuant to Paragraph 7.2. Lessee, in keeping the Premises in good order,
condition and repair, shall exercise and perform good maintenance practices,
specifcally including the procurement and maintenance of the service contracts
required by Paragraph 7.1(b) below. Lessee’s obligations shall include
restorations, replacements or renewals when necessary to keep the Premises and
all improvements thereon or a part thereof in good order, condition and state
of repair.

                                (b)           Service Contracts.
Lessee shall, at Lessee’s sole expense, procure and maintain contracts, with
copies to Lessor, in customary form and substance for, and with contractors
specializing and experienced in the maintenance of the following equipment and improvements, if
any, if and when installed on the Premises: (i) HVAC equipment, (ii) boiler
and pressure vessels, (iii) clarifiers, and (iv) any other equipment, if reasonably required by Lessor.
However, Lessor reserves the right, upon notice to Lessee, to procure and
maintain any or all of such service contracts, and Lessee shall reimburse
Lessor, upon demand, for the reasonable cost thereof.

                                (c)           Failure to Perform.
If Lessee fails to perform Lessee’s obligations under this Paragraph 7.1,
Lessor may enter upon the Premises after 10 days’ prior written notice to
Lessee (except in the case of an emergency, in which case no notice shall be
required), perform such obligations on Lessee’s behalf, and put the Premises in
good order, condition and repair, and Lessee shall promptly pay to Lessor a sum
equal to 115% of the cost thereof.

                                (d)           Replacement.
Subject to Lessee’s indemnification of Lessor as set forth in Paragraph 8.7
below, and without relieving Lessee of liability resulting from Lessee’s
failure to exercise and perform good maintenance practices, If an item
described in Paragraph 7.1(b) cannot be repaired other than at a cost which is
in excess of 50% of the cost of replacing such item, then such item shall be
replaced by Lessor, and the cost thereof shall be prorated between the Parties
and Lessee shall only be obligated to pay, each month during the remainder of
the term of this Lease, on the date on which Base Rent is due, an amount equal
to the product of multiplying the cost of such replacement by a fraction, the
numerator of which is one, and the denominator of which is 144 (ie. 1/144th of
the cost per month). Lessee shall pay Interest on the unamortized balance but
may prepay its obligation at any time. (see Paragraph 54)

                7.2          Lessor’s Obligations.
Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance), 4.2
(Common Area Operating Expenses), 6 (Use), 7.1 (Lessee’s Obligations), 9 (Damage or
Destruction) and 14 (Condemnation), Lessor, subject to reimbursement pursuant
to Paragraph 4.2, shall keep in good order, condition and repair the
foundations, exterior walls, structural condition of interior bearing walls,
exterior roof, fire sprinkler system, Common Area fre alarm and/or smoke
detection systems, fire hydrants, parking lots, walkways, parkways, driveways,
landscaping, fences, signs and utility systems serving the Common Areas and all
parts thereof, as well as providing the services for which there is a Common
Area Operating Expense pursuant to Paragraph 4.2. Lessor shall not be obligated
to paint the exterior or interior surfaces of exterior walls nor shall Lessor
be obligated to maintain, repair or replace windows, doors or plate glass of
the Premises. Lessee expressly waives the beneft of any statute now or hereafter
in effect to the extent It Is inconsistent with the terms of this Lease. (See Paragraph 54)

                7.3          Utility Installations; Trade Fixtures; Alterations. (See Paragraphs 58, 59, 63, 64, and 65)

                                (a)           Definitions. The term “Utility Installations” refers to all
floor and window coverings, air and/or vacuum lines, power panels, electrical distribution, security and fire
protection systems, communication cabling, lighting fixtures, HVAC equipment,
plumbing, and fencing In or on the Premises. The term “Trade Fixtures” shall
mean Lessee’s machinery and equipment that can be removed without doing
material damage to the Premises. The term “Alterations” shall mean any modification
of the Improvements, other than Utility Installations or Trade Fixtures,
whether by addition or deletion. “Lessee Owned Alterations and/or Utility
Installations” are defined as Alterations and/or Utility Installations made by
Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a).

                                (b)           Consent. Lessee
shall not make any Alterations or Utility Installations to the Premises without
Lessor’s prior written consent. Lessee may, however, make non-structural
Utility Installations to the interior of the Premises (excluding the roof)
without such consent but upon notice to Lessor, as long as they are not visible
from the outside, do not involve puncturing, relocating or removing the roof or
any existing walls; will not affect the electrical, plumbing, HVAC, and/or life
safety systems, and the cumulative cost thereof during this Lease as extended
does not exceed a sum equal to 3 month’s Base Rent in the aggregate or a sum
equal to one month’s Base Rent in any one year. Notwithstanding the foregoing,
Lessee shall not make or permit any roof penetrations and/or Install anything
on the roof without the prior written approval of Lessor. Lessor may, as a
precondition to granting such approval, require Lessee to utilize a contractor
chosen and/or approved by Lessor. Any Alterations or Utility Installations that
Lessee shall desire to make and which require the consent of the Lessor shall
be presented to Lessor in written form with detailed plans. Consent shall be deemed
conditioned upon Lessee’s: (i) acquiring all applicable governmental
permits, (ii) furnishing Lessor with copies of both the permits and the plans
and specifications prior to commencement of the work, and (iii) compliance with
all conditions of said permits and other Applicable Requirements in a prompt
and expeditious manner. Any Alterations or Utility Installations shall be
performed In a workmanlike manner with good and sufficient materials. Lessee
shall promptly upon completion furnish Lessor with as-built plans and specifications.
For work which costs an amount in excess of one month’s Base Rent, Lessor may
condition its consent upon Lessee providing a lien and completion bond in an
amount equal to 150% of the estimated cost of such Alteration or Utility
Installation and/or upon Lessee’s posting an additional Security Deposit with
Lessor.

                                (c)           Liens; Bonds.
Lessee shall pay, when due, all claims for labor or materials furnished or
alleged to have been furnished to or for Lessee at or for use on the Premises,
which claims are or may be secured by any mechanic’s or materialman’s lien
against the Premises or 

 

6

 

interest therein. Lessee shall give Lessor not less
than 10 days notice prior to the commencement of any work in, on or about the
Premises, and Lessor shall have the right to post notices of
non-responsibility. If Lessee shall contest the validity of any such lien,
claim or demand, then Lessee shall, at its sole expense defend and protect
itself, Lessor and the Premises against the same and shall pay and satisfy any
such adverse judgment that may be rendered thereon before the enforcement
thereof. If Lessor shall require, Lessee shall furnish a surety bond in an
amount equal to 150% of the amount of such contested lien, claim or demand,
indemnifying Lessor against liability for the same. If Lessor elects to
participate in any such action, Lessee shall pay Lessor’s attorneys’ fees and
costs.

                7.4          Ownership; Removal;
Surrender; and Restoration.

                                (a)           Ownership. Subject to Lessor’s right to require removal or
elect ownership as hereinafter provided, all Alterations and Utility
Installations made by Lessee shall be the property of Lessee, but considered a
part of the Premises. Lessor may, at any time, elect in writing to be the owner
of all or any specified part of the Lessee Owned Alterations and Utility
Installations. Unless otherwise instructed per paragraph 7.4(b) hereof, all Lessee
Owned Alterations and Utility Installations shall, at the expiration or
termination of this Lease, become the property of Lessor and be surrendered by
Lessee with the Premises.

                                (b)           Removal. By delivery to Lessee of written notice from Lessor
not earlier than 90 and not later than 30 days prior to the end of the term of
this Lease, Lessor may require that any or all Lessee Owned Alterations or
Utility Installations be removed by the expiration or termination of this
Lease. Lessor may require the removal at any time of all or any part of any
Lessee Owned Alterations or Utility Installations made without the required
consent.

                                (c)           Surrender; Restoration. Lessee shall surrender the Premises
by the Expiration Date or any earlier termination date, with all of the
improvements, parts and surfaces thereof broom clean and free of debris, and in
good operating order, condition and state of repair, ordinary wear and tear
excepted. “Ordinary wear and tear” shall not include any damage or
deterioration that would have been prevented by good maintenance practice.
Notwithstanding the foregoing, if this Lease is for 12 months or less, then
Lessee shall surrender the Premises in the same condition as delivered to
Lessee on the Start Date with NO allowance for ordinary wear and tear. Lessee
shall repair any damage occasioned by the installation, maintenance or removal
of Trade Fixtures, Lessee owned Alterations and/or Utility Installations,
furnishings, and equipment as well as the removal of any storage tank installed
by or for Lessee. Lessee shall also completely remove from the Premises any and
all Hazardous Substances brought onto the Premises by or for Lessee, or any
third party (except Hazardous Substances which were deposited via underground
migration from areas outside of the Project) even if such removal would require
Lessee to perform or pay for work that exceeds statutory requirements. Trade
Fixtures shall remain the property of Lessee and shall be removed by Lessee. Any
personal property of Lessee not removed on or before the Expiration Date or any
earlier termination date shall be deemed to have been abandoned by Lessee and
may be disposed of or retained by Lessor as Lessor may desire. The failure by
Lessee to timely vacate the Premises pursuant to this Paragraph 7.4(c) without
the express written consent of Lessor shall constitute a holdover under the
provisions of Paragraph 26 below.

8.             Insurance; Indemnity.

                8.1          Payment of Premiums.
The cost of the premiums for the insurance policies required to be carried by
Lessor, pursuant to Paragraphs 8.2(b), 8.3(a) and 8.3(b), shall be a Common
Area Operating Expense. Premiums for policy periods commencing prior to, or
extending beyond, the term of this Lease shall be prorated to coincide with the
corresponding Start Date or Expiration Date.

                8.2          Liability Insurance.

                                (a)           Carried by Lessee. Lessee shall obtain and keep in force a
Commercial General Liability policy of insurance protecting Lessee and Lessor
as an additional insured against claims for bodily injury, personal injury and
property damage based upon or arising out of the ownership, use, occupancy or
maintenance of the Premises and all areas appurtenant thereto. Such insurance
shall be on an occurrence basis providing single limit coverage in an amount
not less than $1,000,000  $2,000,000 per
occurrence with an annual aggregate of not less than $2,000,000. Lessee shall
add Lessor as an additionalinsured by means of an endorsement at least as broad
as the Insurance Service Organization's "Additional Insured-Managers or
Lessors of Premises" Endorsement and coverage shall also be exteneded to
include damage caused by heat, smoke or fumes from a hostile fire. The policy
shall not contain any intra-insured exclusions as between insured persons or organizations,
but shall include coverage for liability assumed under this Lease as an “insured
contract” for the performance of Lessee’s indemnity obligations under this
Lease. The limits of said insurance shall not, however, limit the liability of
Lessee nor relieve Lessee of any obligation hereunder. Lessee shall provide an
endorsement on its liability policy(ies) which provides that its insurance
shall be primary to and not contributory with any similiar insurance carried by
Lessor, whose insurance shall be considered excess insurance only.

                                (b)           Carried by Lessor. Lessor shall maintain liability insurance
as described in Paragraph 8.2(a), in addition to, and not in lieu of, the
insurance required to be maintained by Lessee. Lessee shall not be named as an
additional insured therein.

                8.3          Property Insurance -
Building, Improvements and Rental Value.

                                (a)           Building and Improvements. Lessor shall obtain and keep in
force a policy or policies of insurance in the name of Lessor, with loss
payable to Lessor, any ground-lessor, and to any Lender insuring loss or damage
to the Premises. The amount of such insurance shall be equal to the full
replacement cost of the Premises, as the same shall exist from time to time, or
the amount required by any Lender, but in no event more than the commercially
reasonable and available insurable value thereof. Lessee Owned Alterations and
Utility Installations, Trade Fixtures, and Lessee’s personal property shall be
insured by Lessee under Paragraph 8.4. If the coverage is available and
commercially appropriate, such policy or policies shall insure against all
risks of direct physical loss or damage (except the perils of flood and/or
earthquake unless required by a Lender), including coverage for debris removal
and the enforcement of any Applicable Requirements requiring the upgrading,
demolition, reconstruction or replacement of any portion of the Premises as the
result of a covered loss. Said policy or policies shall also contain an agreed
valuation provision in lieu of any coinsurance clause, waiver of subrogation,
and inflation guard protection causing an increase in the annual property
insurance coverage amount by a factor of not less than the adjusted U.S.
Department of Labor Consumer Price Index for All Urban Consumers for the city
nearest to where the Premises are located. If such insurance coverage has a
deductible clause, the deductible amount shall not exceed $1,000  $25,000 per occurrence.

                                (b)           Rental Value. Lessor shall also obtain and keep in force a
policy or policies in the name of Lessor with loss payable to Lessor and any
Lender, insuring the loss of the full Rent for one year with an extended period
of indemnity for an additional 180 days (“Rental Value insurance”). Said
insurance shall contain an agreed valuation provision in lieu of any
coinsurance clause, and the amount of coverage shall be adjusted annually to
reflect the projected Rent otherwise payable by Lessee, for the next 12 month
period.

                                (c)           Adjacent Premises. Lessee shall pay for any increase in the
premiums for the property insurance of the Building and for the Common Areas or
other buildings in the Project if said increase is caused by Lessee’s acts,
omissions, use or occupancy of the Premises.

                                (d)           Lessee’s Improvements. Since Lessor is the Insuring Party,
Lessor shall not be required to insure Lessee Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease.

                8.4          Lessee’s Property;
Business Interruption Insurance.

                                (a)           Property Damage. Lessee shall obtain and maintain insurance
coverage on all of Lessee’s personal property, Trade Fixtures, and Lessee Owned
Alterations and Utility Installations. Such insurance shall be full replacement
cost coverage with a deductible of not to exceed $1,000 per occurrence. The
proceeds from any such insurance shall be used by Lessee for the replacement of
personal property, Trade Fixtures and Lessee Owned Alterations and Utility
Installations. Lessee shall provide Lessor with written evidence that such
insurance is in force.

7

 

                                (b)           Business
Interruption. Lessee shall obtain and maintain
loss of income and extra expense insurance in amounts as will reimburse Lessee for direct or indirect loss of
earnings attributable to all perils commonly insured against by prudent Lessees
in the business of Lessee or attributable to prevention of access to the
Premises as a result of such perils.

                                (c)           No Representation of Adequate Coverage. Lessor makes no representation that the limits
or forms of coverage of insurance specifed herein are adequate to cover
Lessee’s property, business operations or obligations under this Lease.

                8.5          Insurance Policies.
Insurance required herein shall be by companies duly licensed or admitted to transact
business in the state where the Premises are located, and maintaining during
the policy term a “General Policyholders Rating” of at least A, VI, as set
forth in the most current Issue of “Best’s Insurance Guide”, or such other
rating as may be required by a Lender. Lessee shall not do or permit to be done
anything which invalidates the required Insurance policies. Lessee shall, prior
to the Start Date, deliver to Lessor certifed copies of policies of such
insurance or certificates evidencing the existence and amounts of the required
insurance. No such policy shall be cancelable or subject to modifcation except
afer 30 days prior written notice to Lessor. Lessee shall, at least 10 days
prior to the expiration of such policies, furnish Lessor with evidence of
renewals or “insurance binders” evidencing renewal thereof, or Lessor may order
such insurance and charge the cost thereof to Lessee, which amount shall be
payable by Lessee to Lessor upon demand. Such policies shall be for a term of
at least one year, or the length of the remaining term of this Lease, whichever
is less. If either Party shall fail to procure and maintain the insurance
required to be carried by it, the other Party may, but shall not be required
to, procure and maintain the same. (See Paragraph 56)

                8.6          Waiver of Subrogation.
Without affecting any other rights or remedies, Lessee and Lessor each hereby
release and relieve the other, and waive their entire right to recover damages
against the other, for loss of or damage to its property arising out of or incident
to the perils required to be insured against herein. The efect of such releases
and waivers is not limited by the amount of insurance carried or required, or
by any deductibles applicable hereto. The Parties agree to have their respective
property damage insurance carriers waive any right to subrogation that such
companies may have against Lessor or Lessee, as the case may be, so long as the
insurance is not invalidated thereby.

                8.7          Indemnity.
Except for Lessor’s gross negligence or willful misconduct, Lessee shall
indemnify, protect, defend and hold harmless the Premises, Lessor and its
agents, Lessor’s master or ground lessor, partners and Lenders, from and
against any and all claims, loss of rents and/or damages, liens, judgments,
penalties, attorneys’ and consultants’ fees, expenses and/or liabilities
arising out of, Involving, or in connection with, the use and/or occupancy of
the Premises by Lessee. If any action or proceeding is brought against Lessor
by reason of any of the foregoing matters, Lessee shall upon notice defend the
same at Lessee’s expense by counsel reasonably satisfactory to Lessor and
Lessor shall cooperate with Lessee in such defense. Lessor need not have first
paid any such claim in order to be defended or indemnifed.

                8.8          Exemption of Lessor from Liability. Lessor
shall not be liable for injury or damage to the person or goods, wares,
merchandise or other property of Lessee, Lessee’s employees, contractors,
invitees, customers, or any other person in or about the Premises, whether such
damage or injury is caused by or results from fire, steam, electricity, gas,
water or rain, indoor air quality, the presence of mold or from the breakage,
leakage. obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, HVAC or lighting fixtures, or from any other cause,
whether the said injury or damage results from conditions arising upon the
Premises or upon other portions of the Building, or from other sources or
places. Lessor shall not be liable for any damages arising from any act or
neglect of any other tenant of Lessor nor from the failure of Lessor to enforce
the provisions of any other lease in the Project. Notwithstanding Lessors
negligence or breach of this Lease, Lessor shall under no circumstances be
liable for injury to Lessee’s business or for any loss of income or proft
therefrom.

                8.9          Failure to Provide Insurance. Lessee
acknowledges that any failure on its part to obtain or maintain the insurance
required herein will expose Lessor to risks and potentially cause Lessor to
incur costs not contemplated by this Lease, the extent of which will be
extremely  difficult to ascertain.
Accordingly, for any month or portion thereof that Lessee does not maintain the
required insurance and/or does not provide Lessor with the required binders or
certifcates evidencing the existence of the required Insurance, the Base Rent
shall be automatically increased, without any requirement for notice to Lessee,
by an amount equal to 10% of the then existing Base Rent or $100, whichever is
greater. The parties agree that such increase in Base Rent represents fair and
reasonable compensation for the additional risk/costs that Lessor will incur by
reason of Lessee’s failure to maintain the required Insurance. Such increase in
Base Rent shall in no event constitute a waiver of Lessee’s Default or Breach
with respect to the failure to maintain such insurance, prevent the exercise of
any of the other rights and remedies granted hereunder, nor relieve Lessee of
its obligation to maintain the insurance specifed in this Lease.

9.             Damage or Destruction.

                9.1          Definitions.

                                (a)           “Premises Partial Damage”
shall mean damage or destruction to the improvements on the Premises, other
than Lessee Owned Alterations and Utility
Installations, which can reasonably be repaired in 3 months or less from the
date of the damage or destruction, and the cost thereof does not exceed a sum
equal to 6 month’s Base Rent. Lessor shall notify Lessee In writing within 30
days from the date of the damage or destruction as to whether or not the damage
is Partial or Total. Notwithstanding the foregoing, Premises Partial Damage
shall not include damage to windows, doors, and/or other similar items which
Lessee has the responsibility to repair or replace pursuant to the provisions
of Paragraph 7.1.

                                (b)           “Premises Total Destruction”
shall mean damage or destruction to the improvements on the Premises, other
than Lessee Owned Alterations and Utility Installations and Trade Fixtures,
which cannot reasonably be repaired in 3 months or less from the date of the
damage or destruction and/or the cost thereof exceeds a sum equal to 6 month’s
Base Rent. Lessor shall notify Lessee in writing within 30 days from the date
of the damage or destruction as to whether or not the damage is Partial or
Total.

                                (c)           “Insured Loss” shall mean damage or destruction to
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations and Trade Fixtures, which was caused by an event required to be covered
by the insurance described in Paragraph 8.3(a), irrespective of any
deductible amounts or coverage limits involved.

                                (d)           “Replacement Cost”
shall mean the cost to repair or rebuild the improvements owned by Lessor at
the time of the occurrence to their Condition existing immediately prior
thereto, including demolition, debris removal and upgrading required by the
operation of Applicable Requirements, and without deduction for depreciation.

                                (e)           “Hazardous
Substance Condition” shall mean the occurrence or discovery of a
condition involving the presence of, or a contamination by, a Hazardous
Substance as defned in Paragraph 8,2(a), in, on, or under the Premises which
requires repair, remediation, or restoration.

                9.2          Partial Damage - Insured Loss. If a
Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at
Lessors expense, repair such damage (but not Lessee’s Trade Fixtures or Lessee
Owned Alterations and Utility Installations) as soon as reasonably possible and
this Lease shall continue in full force and efect; provided, however, that
Lessee shall, at Lessors election, make the repair of any damage or destruction
the total cost to repair of which is $10,000 or less, and, in such event,
Lessor shall make any applicable insurance proceeds available to Lessee on a
reasonable basis for that purpose. Notwithstanding the foregoing, if the
required insurance was not in force or the insurance proceeds are not
sufficient to effect such repair, the Insuring Party shall promptly contribute the
shortage in proceeds as and when required to complete said repairs. In the
event, however, such shortage was due to the fact that, by reason of the unique
nature of the Improvements, full replacement cost insurance coverage was not
commercially reasonable and available, Lessor shall have no obligation to pay
for the shortage in insurance proceeds or to fully

 

8

 

restore
the unique aspects of the Premises unless Lessee provides Lessor with the funds
to cover same, or adequate assurance thereof, within 10 days following receipt
of written notice of such shortage and request therefor. If Lessor receives
said funds or adequate assurance thereof within said 10 day period, the party
responsible for making the repairs shall complete them as soon as reasonably
possible and this Lease shall remain in full force and effect. If such funds or
assurance are not received, Lessor may nevertheless elect by written notice to
Lessee within 10 days thereafer to: (i) make such restoration and repair as is
commercially reasonable with Lessor paying any shortage in proceeds, in which
case this Lease shall remain in full force and efect, or (ii) have this Lease
terminate 30 days thereafer. Lessee shall not be entitled to reimbursement of
any funds contributed by Lessee to repair any such damage or destruction.
Premises Partial Damage due to food or earthquake shall be subject to Paragraph
9.3, notwithstanding that there may be some insurance coverage, but the net
proceeds of any such insurance shall be made available for the repairs if made
by either Party.

                9.3          Partial Damage - Uninsured
Loss. If a Premises Partial Damage that is not an insured Loss
occurs, unless caused by a negligent or willful act of Lessee (in which event
Lessee shall make the repairs at Lessee’s expense), Lessor may either: (i)
repair such damage as soon as reasonably possible at Lessor’s expense, in which
event this Lease shall continue in full force and efect, or (ii) terminate this
Lease by giving written notice to Lessee within 30 days afer receipt by Lessor
of knowledge of the occurrence of such damage. Such termination shall be
effective 60 days following the date of such notice. In the event Lessor elects
to terminate this Lease, Lessee shall have the right within 10 days after
receipt of the termination notice to give written notice to Lessor of Lessee’s
commitment to pay for the repair of such damage without reimbursement from
Lessor. Lessee shall provide Lessor with said funds or satisfactory assurance thereof
within 30 days afer making such commitment. In such event this Lease shall
continue in full force and effect, and Lessor shall proceed to make such
repairs as soon as reasonably possible afer the required funds are available.
If Lessee does not make the required commitment, this Lease shall terminate as
of the date specifed in the termination notice,

                9.4          Total Destruction. Notwithstanding any other provision
hereof, if a Premises Total Destruction occurs, this Lease shall terminate 60
days following such Destruction. If the damage or destruction was caused by the
gross negligence or willful misconduct of Lessee, Lessor shall have the right
to recover Lessor’s damages from Lessee, except as provided In Paragraph 8.6.

                9.5          Damage Near End of Term.
If at any time during the last 8 months of this Lease there is damage for which
the cost to repair exceeds one month’s Base Rent, whether or not an Insured
Loss, Lessor may terminate this Lease efective 60 days following the date of
occurrence of such damage by giving a written termination notice to Lessee
within 30 days afer the date of occurrence of such damage. Notwithstanding the foregoing,
if Lessee at that time has an exercisable option to extend this Lease or to
purchase the Premises, then Lessee may preserve this Lease by, (a) exercising
such option and (b) providing Lessor with any shortage in insurance proceeds
(or adequate assurance thereof) needed to make the repairs on or before the
earlier of (i) the date which is 10 days afer Lessee’s receipt of Lessor’s
written notice purporting to terminate this Lease, or (ii) the day prior to the
date upon which such option expires. tf Lessee duly exercises such option
during such period and provides Lessor with funds (or adequate assurance
thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor’s
commercially reasonable expense, repair such damage as soon as reasonably
possible and this Lease shaf continue in full force and efect. If Lessee fails
to exercise such option and provide such funds or assurance during such period,
then this Lease shall terminate on the date specifed in the termination notice
and Lessee’s option shall be extinguished.

                9.6          Abatement of Rent; Lessee’s
Remedies.

                                (a)           Abatement. In the event of
Premises Partial Damage or Premises Total Destruction or a Hazardous Substance Condition for which Lessee is not responsible under
this Lease, the Rent payable by Lessee for the period required for the repair,
remediation or restoration of such damage shall be abated In proportion to the
degree to which Lessee’s use of the Premises is impaired, but not to exceed the
proceeds received from the Rental Value insurance. All other obligations of
Lessee hereunder shall be performed by Lessee, and Lessor shall have no
liability for any such damage, destruction, remediation, repair or restoration
except as provided herein.

                                (b)           Remedies. If
Lessor shall be obligated to repair or restore the Premises and does not
commence, in a substantial and meaningful way, such repair or restoration
within 90 days afer such obligation shall accrue, Lessee may, at any time prior
to the commencement of such repair or restoration, give written notice to
Lessor and to any Lenders of which Lessee has actual notice, of Lessee’s
election to terminate this Lease on a date not less than 60 days following the
giving of such notice. If Lessee gives such notice and such repair or
restoration is not commenced within 30 days thereafer, this Lease shall
terminate as of the date specifed in said notice. If the repair or restoration
is commenced within such 30 days, this Lease shall continue in full force and
efect. “Commence” shaf mean either the unconditional authorization of the
preparation of the required plans, or the beginning of the actual work on the
Premises, whichever frst occurs.

                9.7          Termination; Advance Payments. Upon termination of this
Lease pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment
shall be made concerning advance Base Rent and any other advance payments made
by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of
Lessee’s Security Deposit as has not been, or is not then required to be, used
by Lessor.

                9.8          Waive Statutes.
Lessor and Lessee agree that the terms of this Lease shall govern the effect of
any damage to or destruction of the Premises with respect to the termination of
this Lease and hereby waive the provisions of any present or future statute to
the extent inconsistent herewith.

                10.          Real Property Taxes.

                10.1        Definition. As used herein,
the term “Real Property Taxes” shall include any form of assessment; real
estate, general, special, ordinary or
extraordinary, or rental levy or tax (other than inheritance, personal income
or estate taxes); improvement bond; and/or license fee imposed upon or levied
against any legal or equitable interest of Lessor in the Project, Lessees right
to other income therefrom, and/or Lessor’s business of leasing, by any
authority having the direct or indirect power to tax and where the funds are
generated with reference to the Project address and where the proceeds so
generated are to be applied by the city, county or other local taxing authority
of a jurisdiction within which the Project is located. The term “Real Property
Taxes” shall also include any tax, fee, levy, assessment or charge, or any
increase therein: (i) imposed by reason of events occurring during the term of
this Lease, including but not limited to, a change in the ownership of the
Project, (ii) a change in the improvements thereon, and/or (iii) levied or assessed
on machinery or equipment provided by Lessor to Lessee pursuant to this Lease.
In calculating Real Property Taxes for any calendar year, the Real Property
Taxes for any real estate tax year shall be included in the calculation of Real
Property Taxes for such calendar year based upon the number of days which such
calendar year and tax year have in common.

                10.2        Payment
of Taxes. Except as otherwise provided in Paragraph 10.3,
Lessor shall pay the Real Property Taxes applicable to the Project, and said
payments shall be included in the calculation of Common Area Operating Expenses
In accordance with the provisions of Paragraph 4.2.

                10.3        Additional Improvements. Common
Area Operating Expenses shall not include Real Property Taxes specifed in the
lax assessor’s records and work sheets as being caused by additional
improvements placed upon the Project by other lessees or by Lessor for the
exclusive enjoyment of such other lessees. Notwithstanding Paragraph 10.2
hereof, Lessee shall, however, pay to Lessor at the time Common Area Operating
Expenses are payable under Paragraph 4.2, the entirety of any increase in Real
Property Taxes if assessed solely by reason of Alterations, Trade Fixtures or
Utility Installations placed upon the Premises by Lessee or at Lessee’s request
or by reason of any alterations or Improvements to the Premises made by Lessor
subsequent to the execution of this Lease by the Parties.

                10.4        Joint Assessment. If the Building is not
separately assessed, Real Property Taxes allocated to the Building shall be an
equitable proportion of the Real Property Taxes for all of the land and
improvements included within the tax parcel assessed, such proportion to be
determined by

 

9

 

Lessor from the respective
valuations assigned in the assessor’s work sheets or such other information as
may be reasonably available, Lessors reasonable determination thereof, in good
faith, shall be conclusive.

                10.5        Personal Property Taxes.
Lessee shall pay prior to delinquency all taxes assessed against and levied
upon Lessee Owned Alterations and Utility Installations, Trade Fixtures,
furnishings, equipment and all personal property of Lessee contained in the
Premises, When possible, Lessee shall cause its Lessee Owned Alterations and
Utilty Installations, Trade Fixtures, furnishings, equipment and all other
personal property to be assessed and billed separately from the real property
of Lessor. If any of Lessee’s said property shall be assessed with Lessors real
property, Lessee shall pay Lessor the taxes attributable to Lessee’s property
within 10 days after receipt of a written statement setting forth the taxes
applicable to Lessee’s property.

                11.          Utilities and Services.
Lessee shall pay for all water, gas, heat, light, power, telephone, trash
disposal and other utilities and services supplied to the Premises, together
with any taxes thereon. Notwithstanding the provisions of Paragraph 4.2, if at
any time in Lessors sole reasonable judgment, Lessor determines that Lessee is
using a disproportionate amount of water, electricity or other commonly metered
utilities, or that Lessee is generating such a large volume of trash as to
require an increase in the size of the trash receptacle and/or an increase in
the number of times per month that it is emptied, then Lessor may increase
Lessee’s Base Rent by an amount equal to such increased costs. There shall be
no abatement of Rent and Lessor shall not be liable in any respect whatsoever
for the inadequacy, stoppage, interruption or discontinuance of any utility or
service due to not, strike, labor dispute, breakdown, accident, repair or other
cause beyond Lessors reasonable control or in cooperation with governmental
request or directions.

12.          Assignment and Subletting.

                12.1        Lessor’s Consent Required.

                                (a)           Lessee
shall not voluntarily or by operation of law assign, transfer, mortgage or
encumber (collectively, “assign or assignment”)
or sublet all or any part of Lessee’s interest in this Lease or in the Premises
without Lessor's prior written consent. 

                                (b)           Unless Lessee is a corporation and its
stock is publicly traded on a national stock exchange, a change in the control
of Lessee shall constitute an assignment
requiring consent. The transfer, on a cumulative basis, of 25% fifty percent
(50%) or more of the voting control of Lessee shall constitute a change in
control for this purpose.

                                (c)           The Involvement of Lessee or its
assets in any transaction, or series of transactions (by way of merger, sale,
acquisition, financing, transfer, leveraged buy-out or otherwise), whether or
not a formal assignment or hypothecation of this Lease or Lessee’s assets
occurs, which results or will result in a reduction of the Net Worth of Lessee
by an amount greater than 25% of such Net Worth as it was represented at the
time of the execution of this Lease or at the time of the most recent
assignment to which Lessor has consented, or as it exists immediately prior to
said transaction or transactions constituting such reduction, whichever was or is
greater, shall be considered an assignment of this Lease to which Lessor may
withhold its consent. “Net Worth of Lessee” shall mean the net worth of Lessee
(excluding any guarantors) established under generally accepted accounting
principles.

                                (d)
          An assignment or subletting
without consent shall, at Lessor’s option, be a Default curable after notice
per Paragraph 13.1 (c), or a noncurable Breach without the necessity of
any notice and grace period. If Lessor elects to treat such unapproved assignment
or subletting as a noncurable Breach, Lessor may either: (i) terminate this
Lease, or (ii) upon 30 days written notice, increase the monthly Base Rent to
110% of the Base Rent then in effect. Further, in the event of such Breach and
rental adjustment, (i) the purchase price of any option to purchase the
Premises held by Lessee shall be subject to similar adjustment to 110% of the
price previously in effect, and (ii) all fixed and non-fixed rental adjustments
scheduled during the remainder of the Lease term shall be increased to 110% of
the scheduled adjusted rent.

                                (e)
          Lessee’s remedy for any breach
of Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or
injunctive relief.

                                (f)            Lessor may reasonably withhold
consent to a proposed assignment or subletting if Lessee is in Default at the
time consent is requested.

                                (g)           Notwithstanding the foregoing,
allowing a diminlmus portion of the Premises, le. 20 square feel or less, to be
used by a third party vendor in connection with the installation of a vending
machine or payphone shall not constitute a subletting.

                12.2        Terms and Conditions Applicable to Assignment and
Subletting.

                                (a)           Regardless of Lessors consent, no assignment
or subletting shall:  (i) be
effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this
Lease, (ii) release Lessee of any obligations hereunder, or (iii) alter the
primary liability of Lessee for the payment of Rent or for the performance of
any other obligations to be performed by Lessee, 

                                (b)           Lessor may accept Rent or performance
of Lessee’s obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay In
the approval or disapproval of such assignment nor the acceptance of Rent or
performance shall constitute a waiver or estoppel of Lessors right to exercise
its remedies for Lessee’s Default or Breach.

                                (c)           Lessor’s consent to any assignment or
subletting shall not constitute consent to any subsequent assignment or subletting.

                                (d)           In
the event of any Default or Breach by Lessee, Lessor may proceed directly
against Lessee, any Guarantors or anyone else
responsible for the performance of Lessee’s obligations under this Lease,
Including any assignee or sublessee, without first exhausting Lessor’s remedies
against any other person or entity responsible therefore to Lessor, or any
security held by Lessor,

                                (e)           Each request for consent to an assignment or
subletting shall be in writing, accompanied by information relevant to Lessor’s
determination as to the fnancial and operational responsibility and
appropriateness of the proposed assignee or sublessee, including but not
limited to the intended use and/or required modifcation of the Premises, if
any, together with a fee of $500 as consideration for Lessor’s considering and
processing said request. Lessee agrees to provide Lessor with such other or
additional information and/or documentation as may be reasonably requested.
(See also Paragraph 36)

                                (f)            Any assignee of, or sublessee under,
this Lease shall, by reason of accepting such assignment, entering into such
sublease, or entering into possession of the Premises or any portion thereof,
be deemed to have assumed and agreed to conform and comply with each and every
term, covenant, condition and obligation herein to be observed or performed by
Lessee during the term of said assignment or sublease, other than such
obligations as are contrary to or inconsistent with provisions of an assignment
or sublease to which Lessor has specifcally consented to in writing.

                                (g)           Lessor’s consent to any assignment or
subletting shall not transfer to the assignee or sublessee any Option granted
to the original Lessee by this Lease unless such transfer is specifcally
consented to by Lessor in writing. (See Paragraph 39.2)

                12.3       Additional
Terms and Conditions Applicable to Subletting. The following terms
and conditions shall apply to any subletting by Lessee of all or any part of
the Premises and shall be deemed included in all subleases under this Lease
whether or not expressly incorporated therein: 

                                (a)           Lessee hereby assigns and transfers
to Lessor all of Lessee’s interest in all Rent payable on any sublease, and
Lessor may collect such Rent and apply same
toward Lessee’s obligations under this Lease; provided, however, that until a
Breach shall occur in the performance of Lessee’s obligations, Lessee may
collect said Rent, In the event that the amount collected by Lessor exceeds
Lessee’s then outstanding obligations any such excess shall be refunded to
Lessee. Lessor shall not, by reason of the foregoing or any assignment of such
sublease,

 

10

nor by reason of the collection of Rent, be deemed liable to the
sublessee for any failure of Lessee to perform and comply with any of Lessee’s
obligations to such sublessee. Lessee hereby Irrevocably authorizes and directs
any such sublessee, upon receipt of a written notice from Lessor stating that a
Breach exists in the performance of Lessee’s obligations under this Lease, to
pay to Lessor all Rent due and to become due under the sublease. Sublessee
shall rely upon any such notice from Lessor and shall pay all Rents to Lessor
without any obligation or right to inquire as to whether such Breach exists,
notwithstanding any claim from Lessee to the contrary.

 

(b)           In the event of a Breach by Lessee,
Lessor may, at its option, require sublessee to attorn to Lessor, in which
event Lessor shag undertake the obligations of the sublessor under such
sublease from the time of the exercise of said option to the expiration of such
sublease; provided, however, Lessor shall not be tiable for any prepaid rents
or security deposit paid by such sublessee to such sublessor or for any prior
Defaults or Breaches of such sublessor.

 

(c)           Any matter requiring the consent of
the sublessor under a sublease shall also require the consent of Lessor.

 

(d)           No sublessee shall further assign or
sublet all or any part of the Premises without Lessors prior written consent.

 

(e)           Lessor shall deliver a copy of any
notice of Default or Breach by Lessee to the sublessee, who shall have the
right to cure the Default of Lessee within the grace period, if any, specifed
in such notice. The sublessee shall have a right of reimbursement and ofset
from and against Lessee for any such Defaults cured by the sublessee.

 

13.          Default; Breach;
Remedies.

 

13.1        Default; Breach.  A “Defautt” is defned as a failure by the
Lessee to comply with or perform any of the terms, covenants, conditions or Rules and Regulations under this
Lease. A “Breach” Is defned as the occurrence of one or more of the following
Defaults, and the failure of Lessee to cure such Default within any applicable
grace period:

 

(a)           The
abandonment of the Premises; or the vacating of the Premises without providing
a commercially reasonable level of security, or where the coverage of the
property insurance described in Paragraph 8.3 is jeopardized as a result
thereof, or without providing reasonable assurances to minimize potential
vandalism.

 

(b)           The
failure of Lessee to make any payment of Rent or any Security Deposit required
to be made by Lessee hereunder, whether to Lessor or to a third party, when
due, to provide reasonable evidence of insurance or surety bond, or to fulfll
any obligation under this Lease which endangers or threatens life or property,
where such failure continues for a period of 3 business days following written
notice to Lessee.

 

(c)           The commission of waste, act or acts
constituting public or private nuisance, and/or an illegal activity on the
Premises by Lessee, where such actions continue for a period of 3
business days following written notice to Lessee,

 

(d)           The failure by Lessee to provide (i)
reasonable written evidence of compliance with Applicable Requirements, (ii)
the service contracts, (iii) the rescission of an unauthorized assignment or
subletting, (iv) an Estoppel Certifcate, (v) a requested subordination, (vi) evidence concerning any guaranty and/or Guarantor,
(vii) any document requested under Paragraph 41, (viii) material data safety
sheets (MSDS), or (ix) any other documentation or information which Lessor may
reasonably require of Lessee under the terms of this Lease, where any such
failure continues for a period of 10 days following written notice to Lessee.

 

(e)           A
Default by Lessee as to the terms, covenants, conditions or provisions of this
Lease, or of the rules adopted under Paragraph
2.9 hereof, other than those described in subparagraphs 13.1(a), (b), (c) or
(d), above, where such Default continues for a period of 30 days after written notice; provided, however, that if the nature of Lessee’s
Default Is such that more than 30 days are reasonably required for its cure,
then it shall not be deemed to be a Breach if Lessee commences such cure within
said 30 day period and thereafer diligently prosecutes such cure to completion.

 

(f)            The occurrence of any of the
following events: (i)
the making of any general arrngement or assignment for the beneft of creditors;
(ii) becoming a “debtor” as defned in 11 U.S.C. § 101 or any successor statute thereto (unless, in
the case of a petition fled against Lessee,
the same is dismissed within 60 days); (iii) the appointment of a trustee or
receiver to take possession of substantially all of Lessee’s assets located at
the Premises or of Lessee’s interest In this Lease, where possession Is not
restored to Lessee within 30 days; or (iv) the attachment, execution or other
judicial seizure of substantially all of Lessee’s assets located at the
Premises or of Lessee’s interest In this Lease, where such seizure is not
discharged within 30 days; provided, however, in the event that any provision
of this subparagraph is contrary to any applicable law, such provision shall be of no force or efect, and not afect the validity of
the remaining provisions.

 

(g)           The discovery that any fnancial
statement of Lessee or of any Guarantor given to Lessor was materially false.

(h)           If
the performance of Lessee’s obligations under this Lease Is guaranteed: (i) the
death of a Guarantor, (ii) the termination of
a Guarantor’s liability with respect to this Lease other than in accordance
with the terms of such guaranty, (iii) a Guarantor’s becoming insolvent or the
subject of a bankruptcy fling, (iv) a Guarantors refusal to honor the guaranty,
or (v) a Guarantors breach of its guaranty obligation on an anticipatory basis,
and Lessee’s failure, within 60 days following written notice of any such
event, to provide written alternative assurance or security, which, when
coupled with the then existing resources of Lessee, equals or exceeds the
combined fnanciat resources of Lessee and the Guarantors that existed at the
time of execution of this Lease.

 

13.2        Remedies.  If Lessee fails to perform any of
its affrmative duties or obligations, within 10 days afer written notice (or in
case of an emergency, without notice), Lessor may, at its
option, perform such duty or obligation on Lessee’s behalf, including but not
limited to the obtaining of reasonably required bonds, insurance policies, or
governmental licenses, permits or approvals. Lessee shall pay to Lessor an
amount equal to 115% of the costs and expenses incurred by Lessor in such
performance upon receipt of an invoice therefor. In the event of a Breach,
Lessor may, with or without further notice or demand, and without limiting
Lessor in the exercise of any right or remedy which Lessor may have by reason
of such Breach:

 

(a)           Terminate
Lessee’s right to possession of the Premises by any lawful means, in which case
this Lease shall terminate and Lessee shall immediately surrender possession to
Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the
unpaid Rent which had been earned at the time of termination; (ii) the worth at
the time of award of the amount by which the unpaid rent which would have been
earned after termination until the time of award exceeds the amount of such
rental loss that the Lessee proves could have been reasonably avoided; (iii)
the worth at the time of award of the amount by which the unpaid rent for the
balance of the term afer the time of award exceeds the amount of such rental
loss that the Lessee proves could be reasonably avoided; and (iv) any other
amount necessary to compensate Lessor for all the detriment proximately caused
by the Lessee’s failure to perform its obligations under this Lease or which in
the ordinary course of things would be likely to result therefrom, including
but not limited to the cost of recovering possession of the Premises, expenses
of reletting, including necessary renovation and alteration of the Premises,
reasonable attorneys’ fees, and that portion of any leasing commission paid by
Lessor In connection with this Lease applicabte to the unexpired term of this
Lease. The worth at the time of award of the amount referred to In provision
(Iii) of the immediately preceding sentence shall be computed by discounting
such amount at the discount rate of the Federal Reserve Bank of the District
within which the Premises are located at the time of award plus one percent.
Eforts by Lessor to mitigate damages caused by Lessee’s Breach of this Lease
shall not waive Lessor’s right to recover damages under Pargraph 12. If
termination of this Lease is obtained through the provisional remedy of
unlawful detainer, Lessor shall have the right to recover in such proceeding
any unpaid Rent and damages as are recoverable therein, or Lessor may reserve
the right to recover all or any part thereof in a separate suit. If a notice
and grace period required under Paragraph 13.1 was not previously given, a
notice to pay rent or quit, or to perform or quit given to Lessee under the
unlawful detainer statute shall also constitute the notice required by
Paragraph 13.1. In such case, the applicable grace period required by Paragraph
13.1 and the unlawful detalner statute shall run concurrently, and the failure
of Lessee to cure the

 

 

11

Default
within the greater of the two such grace periods shall constitute both an
unlawful detainer and a Breach of this Lease entitling Lessor to the remedies
provided for In this Lease and/or by said statute.

 

(b)           Continue
the Lease and Lessee’s right to possession and recover the Rent as it becomes
due, in which event Lessee may sublet or assign, subject only to reasonable
limitations. Acts of maintenance, efforts to relet, and/or the appointment of a
receiver to protect the Lessor’s Interests, shall not constitute a termination
of the Lessee’s right to possession.

 

(c)           Pursue any other
remedy now or hereafer available under the laws or judicial decisions of the
state wherein the Premises are located. The expiration or termination of
this Lease and/or the termination of Lessee’s right to possession shall not
relieve Lessee from liability under any indemnity provisions of this Lease as
to matters occurring or accruing during the term hereof or by reason of Lessee’s
occupancy of the Premises.

 

13.3        Inducement Recapture.  Any
agreement for free or abated rent or other charges, or for the giving or paying
by Lessor to or for Lessee of any cash or other
bonus, inducement or consideration for Lessee’s entering into this Lease, all
of which concessions are hereinafer referred to as “inducement Provisions”,
Shall be deemed conditioned upon Lessee’s full and faithful performance of all
of the terms, covenants and conditions of this Lease. Upon Breach of this Lease
by Lessee, any such Inducement Provision shall automatically be deemed deleted
from this Lease and of no further force or efect, and any rent, other charge,
bonus, inducement or consideration theretofore abated, given or paid by Lessor
under such an Inducement Provision shall be immediately due and payable by
Lessee to Lessor, notwithstanding any subsequent cure of said Breach by Lessee.
The acceptance by Lessor of rent or the cure of the Breach which initiated the
operation of this paragraph shall not be deemed a waiver by Lessor of the
provisions of this paragraph unless specifcatly so stated in writing by Lessor
at the time of such acceptance.

 

13.4        Late Charges.  Lessee
hereby acknowledges that late payment by Lessee of Rent will cause Lessor to
incur costs not contemplated by this Lease, the
exact amount of which will be extremely diffcult to ascertain. Such costs
Include, but are not limited to, processing and accounting charges, and late
charges which may be imposed upon Lessor by any Lender. Accordingly, if any
Rent shall not be received by Lessor within 5 days afer such amount shall be
due, then, without any requirement for notice to Lessee, Lessee shall
immediately pay to Lessor a one-time late charge equal to 10% six
percent (61⁄4) of each such overdue amount or $100, whichever is greater. The
parties hereby agree that such late charge represents a fair and reasonable
estimate of the costs Lessor will incur by reason of such late payment,
Acceptance of such late charge by Lessor shall in no event constitute a waiver
of Lessee’s Default or Breach with respect to such overdue amount, nor prevent
the exercise of any of the other rights and remedies granted hereunder. In the
event that a late charge is payable hereunder, whether or not collected, for 3
consecutive installments of Base Rent, then notwithstanding any provision of
this Lease to the contrary, Base Rent shall, at Lessor’s option, become due and
payable quarterly in advance.

 

13.5        Interest.  Any
monetary payment due Lessor hereunder, other than late charges, not received by
Lessor, when due as to scheduled payments (such as Base
Rent) or within 30 days following the date on which it was due for
non-scheduled payment, shall bear interest from the date when due, as to
scheduled payments, or the 31st day afer It was due as to non-scheduled
payments. The interest (“interest”) charged shall be computed at the rate of
10% per annum but shall not exceed the maximum rate allowed by law. Interest Is
payable in addition to the potential late charge provided for in Paragraph
13.4.

 

13.6        Breach by Lessor.

 

(a)           Notice of Breach. Lessor shall not be deemed
in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by
Lessor. For purposes of this Paragraph, a reasonable time shall in no event be
less than 30 days after receipt by Lessor, and any Lender whose name and
address shall have been furnished Lessee in writing for such purpose, of
written notice specifying wherein such obligation of Lessor has not been
performed; provided, however, that if the nature of Lessor’s obligation is such
that more than 30 days are reasonably required for Its performance, then Lessor
shall not be in breach if performance is commenced within such 30 day period
and thereafer diligently pursued to completion.

 

(b)      Performance
by Lessee on Behalf of Lessor. In the event that neither Lessor nor Lender
cures said breach within 30 days after receipt of said notice, or if having
commenced said cure they do not diligently pursue It to completion, then Lessee
may elect to cure said breach at Lessee’s expense and offset from Rent the
actual and reasonable cost to perform such cure, provided however, that such
ofset shall not exceed an amount equal to the greater of one month’s Base Rent
or the Security Deposit, reserving Lessee’s right to reimbursement from Lessor
for any such expense In excess of such ofset. Lessee shall document the cost of
said cure and supply said documentation to Lessor.

 

14.          Condemnation.  If the Premises or any portion
thereof are taken under the power of eminent domain or sold under the threat of
the exercise of said power (collectively “Condemnation”), this Lease shall
terminate as to the part taken as of the date the condemning authority takes
title or possession, whichever frst occurs, If more than 10% of the floor area
of the Unit, or more than 25% of Lessee’s Reserved Parking Spaces, is taken by
Condemnation, Lessee may, at Lessee’s option, to be exercised in writing within
10 days afer Lessor shall have given Lessee written notice of such taking (or
in the absence of such notice, within 10 days afer the condemning authority
shall have taken possession) terminate this Lease as of the date the condemning
authority takes such possession. If Lessee does not terminate this Lease in
accordance with the foregoing, this Lease shall remain in full force and efect
as to the portion of the Premises remaining, except that the Base Rent shall be
reduced in proportion to the reduction in utility of the Premises caused by
such Condemnation. Condemnation awards and/or payments shall be the property of
Lessor, whether such award shall be made as compensation for diminution in
value of the leasehold, the value of the part taken, or for severance damages;
provided, however, that Lessee shall be entitled to any compensation for Lessee’s
relocation expenses, loss of business goodwill and/or Trade Fixtures, without
regard to whether or not this Lease is terminated pursuant to the provisions of
this Paragraph. All Alterations and Utility Installations made to the Premises
by Lessee, for purposes of Condemnation only, shall be considered the property
of the Lessee and Lessee shall be entitled to any and all compensation which is
payable therefor, In the event that this Lease Is not terminated by reason of
the Condemnation, Lessor shall repair any damage to the Premises caused by such
Condemnation.

 

15.          Brokerage Fees. (See Paragraph 68)

 

15.1        Additional Commission.  In addition to the payments owed pursuant to Paragraph
1.10 above, and unless Lessor and the Brokers otherwise agree in writing,
Lessor agrees that: (a) if Lessee exercises any Option, (b) if Lessee acquires
from Lessor any rights to the Premises or other premises owned by Lessor and
located within the Project, (c) if Lessee remains in possession of the
Premises, with the consent of Lessor, after the expiration of this Lease, or
(d) if Base Rent is increased, whether by agreement or operation of an
escalation clause herein, then, Lessor shall pay Brokers a fee in accordance
with the schedule of the Brokers in effect at the time of the execution of this
Lease.

 

15.2        Assumption of Obligations. Any buyer or transferee of Lessor's
interest in this Lease shall be deemed to have assumed Lessor's obligation
hereunder. Brokers shall be third party beneficiaries of the provisions of
Paragraphs 1.10, 15, 22 and 31. If Lessor fails to pay to Brokers any amounts
due as and for brokerage fees pertaining to this Lease when due, then such
amounts shall accrue Interest. In addition, if Lessor fails to pay any amounts
to Lessee's Broker when due, Lessee's Broker may send written notice to Lessor
and Lessee of such failure and if Lessor fails to pay such amounts within 10
days after said notice, Lessee shall pay said monies to its Broker and offset
such amounts against Rent. In addition, Lessee's Broker shall be deemed to be a
third party beneficiary of any commission agreement entered into by and/or
between Lessor and Lessor's Broker for the limited purpose of collecting any
brokerage fee owed.

 

15.3        Representations
and Indemnities of Broker Relationships. Lessee and Lessor each represent
and warrant to the other that it

 

 

12

has had
no dealings with any person, frm, broker or fnder (other than the Brokers, If
any) In connection with this Lease, and that no one other than said named Brokers
is entitled to any commission or fnder’s fee In connection herewith. Lessee and
Lessor do each hereby agree to indemnify, protect, defend and hold the other
harmless from and against liability for compensation or charges which may be
claimed by any such unnamed broker, fnder or other similar party by reason of
any dealings or actions of the Indemnifying Party, including any costs,
expenses, attorneys’ fees reasonably Incurred with respect thereto.

 

16.          Estoppel Certificates.

 

(a)           Each Party (as “Responding Party”)
shall within 10 days afer written notice from the other Party (the “Requesting Party”) execute, acknowledge and deliver to the
Requesting Party a statement in writing in form similar to the then most
current “Estoppel Certifcate” form published by the AIR Commercial Real Estate
Association, plus such additional Information, confrmation and/or statements as
may be reasonably requested by the Requesting Party.

 

(b)           If
the Responding Party shall fail to execute or deliver the Estoppel Certifcate within
such 10 day period, the Requesting Party may
execute an Estoppel Certifcate stating that: (i) the Lease is In full force and
efect without modifcation except as may be represented by the Requesting Party, (ii) there are no uncured defaults in the Requesting
Party’s performance, and (iii) if Lessor is the Requesting Party, not more than
one month’s rent has been paid in advance. Prospective purchasers and
encumbrancers may rely upon the Requesting Party’s Estoppel Certificate, and
the Responding Party shall be estopped from denying the truth of the facts
contained in said Certifcate.

 

(c)           If
Lessor desires to fnance, refnance, or sell the Premises, or any part thereof,
Lessee and all Guarantors shall deliver to any
potential tender or purchaser designated by Lessor such fnancial statements as
may be reasonably required by such lender or purchaser, including but not limited to Lessee’s fnancial statements for the past 3 years. All
such fnancial statements shall be received by Lessor and such lender or purchaser
in confdence and shall be used only for the purposes herein set forth.

 

17.          Definition
of Lessor.  The term “Lessor”
as used herein shall mean the owner or owners at the time in question of the
fee title to the Premises, or, if this Is a sublease, of the Lessee’s interest
in the prior lease. In the event of a transfer of Lessor’s title or interest in
the Premises or this Lease, Lessor shalt detiver to the transferee or assignee
(in cash or by credit) any unused Security Deposit held by Lessor. Except as
provided in Paragraph 15, upon such transfer or assignment and delivery of the
Security Deposit, as aforesaid, the prior Lessor shall be relieved of all
liability with respect to the obligations and/or
covenants under this Lease thereafer to be performed by the Lessor. Subject to
the foregoing, the obligations arid/or covenants in this Lease to be performed
by the Lessor shall be binding only upon the Lessor as herelnabove defned.

 

18.          Severabitity.  The invalidity of any provision of this
Lease, as determined by a court of competent jurisdiction, shall in no way
afect the validity of any other provision hereof.

 

19.          Days.  Unless
otherwise specifcally indicated to the contrary, the word “days” as used in
this Lease shall mean and refer to calendar days.

 

20.          Limitation on Liability.  The obligations of Lessor under this Lease
shall not constitute personal obligations of Lessor, or its partners, members,
directors, offcers or shareholders, and Lessee shall look to the Premises, and
to no other assets of Lessor, for the satisfaction of any liability of Lessor
with respect to this Lease, and shatl not seek recourse against Lessor’s
partners, members, directors, offcers or shareholders, or any of their personal
assets for such satisfaction.

 

21.          Time of Essence.  Time Is of the essence with respect to the
performance of all obligations to be performed or observed by the Parties under
this Lease.

 

22.          No Prior or Other Agreements: Broker Dtsctatmer.  This Lease contains all agreements between the
Parties with respect to any matter mentioned
herein, and no other prior or contemporaneous agreement or understanding shall
be efective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its
own investigation as to the nature, quality, character and fnancial
responsibility of the other Party to this Lease and as to the use, nature,
quality and character of the Premises. Brokers have no responsibility with
respect thereto or with respect to any default or breach hereof by either
Party. The liability (including court costs and attorneys’ fees), of any Broker
with respect to negotiation, execution, delivery or performance by either
Lessor or Lessee under this Lease or any amendment or modifcation hereto shall
be limited to an amount up to the fee received by such Broker pursuant to this
Lease: provided, however, that the foregoing limitation on each Broker’s
liability shall not be applicable to any gross negligence or willful misconduct
of such Broker,

 

23.          Notices.

 

23.1        Notice
Requirements. All notices required or
permitted by this Lease or applicable law shall be in w riting and may be
delivered in person (by hand or by courier) or
may be sent by regular, certifed or registered mall or U.S. Postal Service
Express Mail, with postage prepaid, or by facsimile
transmission, and shall be deemed suffciently given if served In a manner
specified in this Paragraph 23. The addresses noted adjacent to a Party’s
signature on this Lease shall be that Party’s address for delivery or mailing
of notices. Either Party may by written notice to the other specify a different
address for notice, except that upon Lessee’s taking possession of the
Premises, the Premises shall constitute Lessee’s address for notice. A copy of
all notices to Lessor shall be concurrently transmitted to such party or
parties at such addresses as Lessor may from time to time hereafer designate In
writing.

 

23.2        Date of Notice.  Any notice sent by registered or
certifed mail, return receipt requested, shall be deemed given on the date of
delivery shown on the receipt card, or if no delivery date is shown, the
postmark thereon, if sent by regular mail the notice shall be deemed given 72
hours afer the same is addressed as required herein and mailed with postage prepaid.
Notices delivered by United States Express Mail or overnight courier that
guarantee next day delivery shall be deemed given 24 hours afer delivery of the
same to the Postal Service or courier. Notices transmitted by facsimile
transmission or similar means shall be deemed delivered upon telephone
confrmation of receipt (confrmation report from fax machine is suffcient),
provided a copy is also delivered via delivery or mail, If notice is received
on a Saturday, Sunday or legal holiday, it shall be deemed received on the next business day.

 

24.          Waivers.  No waiver by Lessor of the
Default or Breach of any term, covenant or condition hereof by Lessee, shall be
deemed a waiver of any other term, covenant or condition hereof, or of any
subsequent Default or Breach by Lessee of the same or of any other term,
covenant or condition hereof. Lessor’s consent to, or approval of, any act
shall not be deemed to render unnecessary the obtaining of Lessor’s consent to,
or approval of, any subsequent or similar act by Lessee, or be construed as the
basis of an estoppel to enforce the provision or provisions of this Lease
requiring such consent. The acceptance of Rent
by Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment
by Lessee may be accepted by Lessor on account of
moneys or damages due Lessor, notwithstanding any qualifying statements or
conditions made by Lessee in connection therewith, which such statements and/or
conditions shall be of no force or effect whatsoever unless specifcally agreed
to in writing by Lessor at or before the time of deposit of such payment.

 

25.          Disctosures Regarding The Nature of a Real Estate Agency
Relationship.

 

(a)           When entering into a discussion with
a real estate agent regarding a real estate transaction, a Lessor or Lessee
should from the outset understand what type of agency relationship or
representation it has with the agent or agents in the transaction, Lessor and
Lessee acknowledge being advised by the Brokers in this transaction, as
follows:

 

(i)            Lessor’s Agent. A Lessor’s agent under a listing
agreement with the Lessor acts as the agent for the Lessor only. A Lessor’s
agent or subagent has the following affrmative obligatins: To the Lessor: A fiduciary
duty of utmost care, integrity, honesty, and loyalty in dealings with the
Lessor. To the Lessee and the Lessor:  (a)
Diligent exercise of reasonable skills and care in performance of the agent’s
duties.  (b) A

 

 

13

duty
of honest and fair dealing and good faith.  (c) A duty to disclose all facts known to the
agent materially afecting the value or desirability of the property that are
not known to, or within the diligent attention and observation of, the Parties.
An agent is not obligated to reveal to either Party any confidential
information obtained from the other Party which does not Involve the affrmative
duties set forth above.

 

(ii)           Lessee’s Agent. An agent can agree to act as agent for
the Lessee only. In these situations, the agent is not the Lessor’s agent, even
if by agreement the agent may receive compensation for services rendered,
either in full or in part from the Lessor, An agent acting only for a Lessee
has the following affrmative obligations. To the Lessee: A fiduciary duty of
utmost care, integrity, honesty, and loyalty in dealings with the Lessee. To
the Lessee and the Lessor:  (a) Diligent
exercise of reasonable skills and care in performance of the agent’s duties.  (b) A duty of honest and fair dealing and good
faith.  (c) A duty to disclose all facts
known to the agent materially afecting the value or desirability of the
property that are not known to, or within the diligent atention and observation
of, the Parties. An agent is not obligated to reveal to either Party any
confidential information obtained from the other Party which does not involve
the affirmative duties set forth above.

 

(iii)          Agent Representing Both
Lessor and Lessee. A real estate agent, either acting directly or
through one or more associate licenses, can legally be the agent of both the
Lessor and the Lessee in a transaction, but only with the knowledge and consent
of both the Lessor and the Lessee. In a dual agency situation, the agent has
the following afrmative obligations to both the Lessor and the Lessee:  (a) A fiduciary duty of utmost care,
integrity, honesty and loyalty in the dealings with either Lessor or the
Lessee.  (b) Other duties to the Lessor
and the Lessee as stated above in subparagraphs (i) or (ii). In representing
both Lessor and Lessee, the agent may not without the express permission of the
respective Party, disclose to the other Party that the Lessor will accept rent
in an amount less than that indicated in the listing or that the Lessee is
willing to pay a higher rent than that ofered. The above duties of the agent In
a real estate transaction do not relieve a Lessor or Lessee from the
responsibility to protect their own Interests. Lessor and Lessee should
carefully read all agreements to assure that they adequately express their
understanding of the transaction. A real estate agent is a person qualifed to
advise about real estate. If legal or tax advice is desired, consult a
competent professional.

 

(b)           Brokers
have no responsibility with respect to any Default or Breach hereof by either
Party. The Parties agree that no lawsui or other legal proceeding involving any
breach of duty, error or omission relating to this Lease may be brought against
Broker more than one year afer the Start Date and that the liability (Including
court costs and attorneys’ fees), of any Broker with respect to any such
lawsuit and/or legal proceeding shall not exceed the fee received by such
Broker pursuant to this Lease; provided, however, that the foregoing limitation
on each Broker’s liability shall not be applicable to any gross negligence or
willful misconduct of such Broker.

 

(c)           Buyer and Seller
agree to identify to Brokers as “Confdential” any communication or Information
given Brokers that is considered by such Party to be confidential,

 

26.          No
Right To Holdover.  Lessee has no right to retain possession of
the Premises or any part thereof beyond the expiration or termination of this
Lease. In the event that Lessee holds over, then the Base Rent shalt be
increased to 456% 125% of the Base Rent applicable immediately preceding the
expiration or termination. Nothing contained herein shall be construed as
consent by Lessor to any holding over by Lessee.

 

27.          Cumulative Remedies.  No remedy or election hereunder
shall be deemed exclusive but shall, wherever possible, be cumulative with all
other remedies at law or In equity.

 

28.          Covenants and Conditions; Construction
of Agreement.  Alt provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions. In construing this
Lease, all headings and titles are for the convenience of the Parties only and
shall not be considered a part of this Lease. Whenever required by the context,
the singular shall include the plural and vice versa. This Lease shall not be
construed as if prepared by one of the Parties, but rather according to its
fair meaning as a whole, as if both Parties had prepared it.

 

29.          Binding Efect; Choice of Law.  This Lease shall be binding upon the parties,
their personal representatives, successors and assigns and be governed by the
laws of the State in which the Premises are located, Any litigation between the
Parties hereto concerning this Lease shall be initiated In the county in which
the Premises are located.

 

30.          SubordInation;
Attomment; Non-DIsturbance.

 

30.1        Subordination.  This Lease and any Option
granted hereby shall be subject and subordinate to any ground lease, mortgage,
deed of trust, or other hypothecation or
security device (collectively, “Security Device”), now or hereafer placed upon
the Premises, to any and all advances made on the security thereof, and to all
renewals, modifcations, and extensions thereof. Lessee agrees that the holders
of any such Security Devices (In this Lease together referred to as “Lender”)
shall have no liability or obligation to perform any of the obligations of
Lessor under this Lease, Any Lender may elect to have this Lease and/or any
Option granted hereby superior to the lien of Its Security Device by giving
written notice thereof to Lessee, whereupon this Lease and such Options shall
be deemed pror to such Security Device, notwithstanding the relative dates of
the documentation or recordation thereof.

 

30.2        Attornment.  In the event that Lessor
transfers title to the Premises, or the Premises are acquired by another upon
the foreclosure or termination of a Security Device to which this Lease is
subordinated (i) Lessee shall, subject to the non-disturbance provisions of
Paragraph 30.3, attorn to such new owner, and upon request, enter into a new
lease, containing all of the terms and provisions of this Lease, with such new
owner for the remainder of the term hereof, or, at the election of the new
owner, this Lease will automatically become a new lease between Lessee and such
new owner, and (ii) Lessor shall thereafer be relieved of any further obkgations
hereunder and such new owner shall assume all of Lessor’s obligations, except that such new
owner shall not: (a) be liable for any act or omission of any prior
lessor or with respect to events occurring prior to acquisition of ownership; (b) be subject to any offsets or defenses which Lessee might
have against any prior lessor, (c) be bound by prepayment of more than one month’s rent, or (d) be liable for the return of any security deposit
paid to any pror lessor.

 

30.3        Non Disturbance.  With respect to Security Devices
entered into by Lessor afer the execution of this Lease, Lessee’s subordination
of this Lease shall be subject to receiving a commercially reasonable
non-dIsturbance agreement (a “Non Disturbance Agreement”) from the Lender which
Non-Disturbance Agreement provides that Lessee’s possession of the Premises,
and this Lease, including any options to extend the term hereof, will not be
disturbed so long as Lessee is not in Breach hereof and attoms to the record
owner of the Premises. Further, within 60 days after the execution of this
Lease, Lessor shall use its commercially reasonable eforts to obtain a
Non-Disturbance Agreement from the holder of any preexisting Security Device
which is secured by the Premises. In the event that Lessor is unable to provide
the Non-Disturbance Agreement within said 60 days, then Lessee may, at Lessee’s
option, directly contact Lender and attempt to negotiate for the execution and
delivery of a Non-Disturbance Agreement.

 

30.4        Setf-Executing.  The agreements contained in this
Paragraph 30 shall be efective without the execution of any further documents;
provided, however, that, upon written request from Lessor or a Lender in
connection with a sale, financing or refnancing of the Premises, Lessee and
Lessor shall execute such further writings as may be reasonably required to
separately document any subordination, attornment and/or Non-Disturbance
Agreement provided for herein.

 

31.          Attorneys’ Fees.  If any Party or Broker brings an
action or proceeding Involving the Premises whether founded in tort, contract
or equity, or to declare rights hereunder, the Prevailing Party (as hereafer
defned) in any such proceeding, action, or appeal thereon, shall be entitled to
reasonable attorneys’ fees. Such fees may be awarded In the same suit or
recovered in a separate suit, whether or not such action or proceeding is
pursued to decision or judgment. The term, “Prevailing Party” shall include,
without limitation, a Party or Broker who substantially obtains or defeats the
relief sought, as the case may be, whether by compromise, settlement, judgment,
or the abandonment by the other Party or Broker of its claim or defense. The
attorneys’ fees award shall not be computed in accordance with any court fee
schedule, but shall be such as to fully reimburse all attoreys’ fees

 

 

14

reasonably
incurred. In addition, Lessor shall be entitled to attorneys’ fees, costs and
expenses incurred in the preparation and servce of notices of Default and
consultations in connection therewith, whether or not a legal action is
subsequently commenced In connection with such Default or resulting Breach
($200 is a reasonable minimum per occurrence for such services and
consultation).

 

32.          Lessor’s Access;
Showing Premises.  Repairs. Lessor and Lessors agents shall have
the right to enter the Premises at any lime, in the case of an emergency, and
otherwise at reasonable times afer reasonable prior notice for the purpose of
showing the same to prospective purchasers, lenders, or tenants, and making
such alterations, repairs, improvements or additions to the Premises as Lessor
may deem necessary or desirable and the erecting, using and maintaining of
utilities, services, pipes and conduits through the Premises and/or other
premises as long as there is no material adverse efect on Lessee’s use of the
Premises. All such activities shall be without abatement of rent or liability
to Lessee.

 

33.          Auctions.  Lessee shall not conduct, nor
permit to be conducted, any auction upon the Premises without Lessor’s prior
written consent. Lessor shall not be obligated to exercise any standard of
reasonableness in determining whether to permit an auction.

 

34.          Signs.  Lessor may place on the Premises ordinary “For
Sale” signs at any time and ordinary “For Lease” signs during the last 6 months
of the term hereof. Except for ordinary “For Sublease” signs which may be
placed only on the Premises, Lessee shall not place any sign upon the Project
without Lessor’s prior written consent. All signs must comply with all
Applicable Requirements.

 

35.          Termination; Merger.  Unless specifcally stated
otherwise In writing by Lessor, the voluntary or other surrender of this Lease
by Lessee, the mutual termination or cancellation hereof, or a termination
hereof by Lessor for Breach by Lessee, shall automatically terminate any
sublease or lesser estate in the Premises; provided, however, that Lessor may
elect to continue any one or all existing subtenancies. Lessor’s failure within
10 days following any such event to elect to the contrary by written notice to
the holder of any such lesser interest, shalt constitute Lessors election to
have such event constitute the termination of such interest.

 

36.          Consents.  Except as otherwise provided
herein, wherever in this Lease the consent of a Party is required to an act by
or for the other Party, such consent shall not be unreasonably withheld or
delayed. Lessor’s actual reasonable costs and expenses (including but not
limited to architects’, attorneys’, engineers’ and other consultants’ fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent, including but not limited to consents to an assignment, a
subletting or the presence or use of a Hazardous Substance, shall be paid by
Lessee upon receipt of an Invoice and supporting documentation therefor.
Lessors consent to any act, assignment or subletting shall not constitute an
acknowledgment that no Default or Breach by Lessee of this Lease exists, nor
shall such consent be deemed a waiver of any then existing Default or Breach,
except as may be otherwise specifcally stated in writing by Lessor at the time
of such consent. The failure to specify herein any particular condition to
Lessor’s consent shall not preclude the Imposition by Lessor at the time of
consent of such further or other conditions as are then reasonable with
reference to the particular matter for which consent is being given. In the
event that either Party disagrees with any determination made by the other
hereunder and reasonably requests the reasons for such determination, the
determining party shall furnish its reasons in writing and in reasonable detail
within 10 business days following such request.

 

37.          Guarantor.

 

37.1        Execution.  The Guarantors, If any, shall each execute a
guaranty in the form most recently published by the AIR Commercial Real Estate
Association.

 

37.2        Default.  It shall constitute a Default of the Lessee If
any Guarantor fails or refuses, upon request to provide: (a) evidence of the execution
of the guaranty, including the authority of the party signing on Guarantor’s
behalf to obligate Guarantor, and in the case of a corporate Guarantor, a
certifed copy of a resolution of its board of directors authorizing the making
of such guaranty, (b) current financial statements, (c) an Estoppel Cerifcate,
or (d) written confrmation that the guaranty is still in efect.

 

38.          Quiet Possession.  Subject to payment by Lessee of the Rent and
performance of all of the covenants, conditions and provisions on Lessee’s part
to be observed and performed under this Lease, Lessee shall have quiet
possession and quiet enjoyment of the Premises during the term hereof.

 

39.          Options.  If Lessee Is granted an option, as defned
below, then the following provisions shall apply. (See Paragraph 66)

 

39.1        Definition.  “Option” shall mean: (a) the right to extend
the term of or renew this Lease or to extend or renew any lease that Lessee has on other propery of Lessor; (b) the right of frst refusal or
frst offer to lease either the Premises or other property of Lessor; (c) the
right to purchase or the right of first refusal to purchase the Premises or
other property of Lessor.

 

39.2        Options Personal To Original Lessee.  Any Option granted to Lessee In
this Lease is personal to the original Lessee, and cannot be assigned or
exercised by anyone other than said original Lessee and only while the original
Lessee is In full possession of the Premises and, if requested by Lessor, with
Lessee certifying that Lessee has no Intention of thereafer assigning or
subletting.

 

39.3        Multiple Options.  In the event that Lessee has any multiple
Options to extend or renew this Lease, a later Option cannot be exercised
unless the prior Options have been validly exercised.

 

39.4        Effect of Default on
Options.

 

(a)           Lessee shall have no
right to exercise an Option: (i) during the period commencing with the giving
of any notice of Default and continuing until
said Default Is cured, (ii) during the period of tme any Rent Is unpaid
(without regard to whether notice thereof is given Lessee), (iii) during the
time Lessee is in Breach of this Lease, or (iv) In the event that Lessee has
been given 3 or more notices of separate Default, whether or not the Defaults
are cured, during the 12 month period Immediately preceding the exercise of the
Option.

 

(b)           The
period of time within which an Option may be exercised shall not be extended or
enlarged by reason of Lessee’s inability to exercise an Option because of the
provisions of Paragraph 39.4(a),

 

(c)           An
Option shall terminate and be of no further force or effect, notwithstanding
Lessee’s due and timely exercise of the Option, if, afer such exercise and
prior to the commencement of the extended term or completion of the purchase,
(i) Lessee fails to pay Rent for a period of 30 days after such Rent becomes
due (without any necessity of Lessor to give notice thereof),or (ii) if Lessee
commits a Breach of this Lease.

 

40.          Security Measures.  Lessee hereby acknowledges that
the Rent payable to Lessor hereunder does not include the cost of guard service
or other security measures, and that Lessor shall have no obligation whatsoever
to provide same, Lessee assumes all responsibility for the protection of the
Premises, Lessee, its agents and invitees and their propery from the acts of
third parties.

 

41.          Reservations.  Lessor reserves the right: (i) to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, (ii) to cause the recordation of
parcel maps and restrictions, and (iii) to create and/or Install new utility
raceways, so long as such easements, rights, dedications, maps, restrictions,
and utility raceways do not unreasonably Interfere with the use of the Premises
by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor
to effectuate such rights.

 

42.          Performance Under Protest.  If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation
to pay the money is asserted shall have the right to make payment “under
protest” and such payment shall not be regarded as a voluntary payment and
there shall survive the right on the part of said Party to Institute suit for
recovery of such sum. If it shall be adjudged that there was no legal
obligation on the part of said Party to pay such sum or any part thereof, said
Party shall be entitled to recover such sum or so much thereof as it was not
legally required to pay. A Party who does not initiate suit for the recovery of
sums paid “under protest” within 6 months shall be deemed to have waived its
right to protest such payment.

 

43.          Authority; Multiple Parties;
Execution.

 

 

15

 

                (a)           If
either Party hereto is a corporation, trust, limited liability company,
partnership, or similar entity, each individual executing this Lease on behalf
of such entity represents and warrants that he or she is duly authorized to
execute and deliver this Lease on its behalf. Each party shall, within 30 days
after request, deliver to the other party satisfactory evidence of such
authority.

 

                (b)           If
this Lease is executed by more than one person or entity as “Lessee” each such
person or entity shall be jointly and severally liable hereunder. It is agreed
that any one of the named Lessees shall be empowered to execute any amendment
to the Lease, or other document ancillary thereto and bind all of the named
Lessees, and Lessor may rely on the same as if all of the named Lessees had
executed such document.

 

                (c)           This
Lease may be executed by the Parties in counterparts, each of which shall be
deemed an original and all of which together shall constitute one and the same
instrument.

 

44.          Conflict. Any
conflict between the printed provisions of this Lease and the typewritten or
handwritten provisions shall be controlled by the typewritten or handwritten
provisions.

 

45.          Offer.
Preparation of this Lease by either party or their agent and submission of same
to the other Party shall not be deemed an offer to lease to the other Party.
This Lease is not intended to be binding until executed and delivered by all
Parties hereto.

 

46.          Amendments.
This Lease may be modified only in writing, signed by the Parties in interest
at the time of the modification. As long as they do not materially change Lessee's
obligations hereunder, Lessee agrees to make such reasonable non-monetary
modifications to this Lease as may be reasonably required by a Lender in
connection with the obtaining of normal financing or refinancing of the
Premises.

 

47.          Waiver of Jury Trial. THE
PARTIES HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO TRIAL BY JURY IN ANY ACTION OR
PROCEEDING INVOLVING THE PROPERTY OR ARISING OUT OF THIS AGREEMENT.

 

48.          Mediation and Arbitration
of Disputes. An addendum requiring the Mediation and/or the Arbitration
of all disputes between the Parties and/or Brokers arising out of this Lease o is x is not
attached to this Lease.

 

49.          Americans with
Disabilities Act. Since compliance with the Americans with
Disabilities Act (ADA) is dependent upon Lessee's specific use of the Premises,
Lessor makes no warranty or representation as to whether or not the Premises
comply with ADA or any similar legislation. In the event that Lessee’s use of
the Premises requires modifications or additions to the Premises in order to be
in ADA compliance, Lessee agrees to make any such necessary modifications
and/or additions at Lessee’s expense.

 

LESSOR AND LESSEE HAVE
CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN,
AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT
THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE
TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND
PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES.

 

ATTENTION: NO REPRESENTATION
OR RECOMMENDATION IS MADE BY THE AIR COMMERCIAL REAL ESTATE ASSOCIATION OR BY
ANY BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF
THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO:

 

1.             SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX
CONSEQUENCES OF THIS LEASE.

 

2.             RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE
THE CONDITION OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE
LIMITED TO  THE POSSIBLE PRESENCE OF
HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE STRUCTURAL INTEGRITY, THE
CONDITION OF THE ROOF AND OPERATING SYSTEMS, COMPLIANCE WITH THE AMERICANS WITH
DISABILITIES ACT AND THE SUITABILITY OF THE PREMISES FOR LESSEE’S INTENDED USE.

 

WARNING: IF THE PREMISES ARE
LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS OF THE LEASE MAY
NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE STATE IN WHICH THE PREMISES
ARE LOCATED.

 

The parties hereto have
executed this Lease at the place and on the dates specified above their
respective signatures.

 

	
  Executed at: San Mateo,
  California

  	
   

  	
  Executed at: San
  Francisco, California

  
	
  On: May 31, 2005

  	
   

  	
  On: May 26, 2005

  
	
   

  	
   

  	
   

  
	
  By LESSOR:

  	
   

  	
  By LESSEE:

  
	
  Davis Forbes Partners,
  L.P.

  	
   

  	
  MD Beauty, Inc.

  
	
  By:

  	
  /s/ Wallace D. Mersereau

  	
   

  	
   

  	
  By:

  	
  /s/ Gary J. Baumgartner

  	
   

  
	
  Name Printed: Wallace D.
  Mersereau

  	
   

  	
  Name Printed: Gary J.
  Baumgartner

  
	
  Title: Managing Partner

  	
   

  	
  Title: Chief Information
  Officer, SVP—Distribution

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
  By:

  	
  /s/ Myles McCormick

  	
   

  
	
  Name Printed: 

  	
   

  	
  Name Printed: Myles
  McCormick

  
	
  Title: 

  	
   

  	
  Title: Chief Financial
  Officer

  
	
  Address: 66 Bovet Road,
  Suite 330

  	
   

  	
  Address: 425 Bush Street,
  Suite 300

  
	
  San Mateo, California
  94402

  	
   

  	
  San Francisco, California
  94108

  
	
   

  	
   

  	
   

  
	
  Telephone: (650) 574-7015

  	
   

  	
  Telephone: (415) 288-3500

  
	
  Facsimile: (650) 574-1135

  	
   

  	
  Facsimile: (415) 288-3501

  
	
  Federal ID No. 45-0476393

  	
   

  	
  Federal ID No. 94-3120254

  
	
   

  	
   

  	
   

  
	
  BROKER:

  	
   

  	
  BROKER:

  
	
  BT Commercial Real Estate

  	
   

  	
  Cushman & Wakefield of
  California, Inc.

  
	
   

  	
   

  	
   

  
	
  Attn: Jay W. Hagglund

  	
   

  	
  Attn: Theodore J. Anderson

  
	
  Title: Partner

  	
   

  	
  Title: 

  
	
  Address: 555 - 12th
  Street, Suite 1400

  	
   

  	
  Address: 1111 Broadway,
  Suite 1600

  
	
  Oakland, California 94607

  	
   

  	
  Oakland, California 94607

  
	
  Telephone: (510) 465-8000

  	
   

  	
  Telephone: (510) 763-4900

  
	
  Facsimile: (510) 465-1350

  	
   

  	
  Facsimile: (510) 834-4119

  
	
  Email:
  jhagglund@btcommercial.com

  	
   

  	
  Email: Ted
  Anderson@cushwake.com

  
	
  Federal ID No.

  	
   

  	
  Federal ID No.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
							

 

These forms are often modified
to meet changing requirements of law and needs of the industry. Always write or
call to make sure you are

 

16

 

 

utilizing the most current form: AIR COMMERCIAL REAL
ESTATE ASSOCIATION, 700 South Flower Street, Suite 600, Los Angeles, CA 90017.
(213) 687-6777.

 

©Copyright 1999 By AIR
Commercial Real Estate Association.

 

All rights reserved.

 

No part of these works
may be reproduced in any form without permission in writing.

 

 

17

 

Addendum

 

50.           Early Possession. The Early Possession Date shall be the
day following the date the last of the following events occurs: 1) this Lease
is fully signed, 2) the receipt by Lessor of the first half-month’s Rent, first
half-month’s Common Area Operating Expenses
and the Security Deposit, and 3) the receipt by Lessor of evidence acceptable
to Lessor of Lessee’s compliance with all of Lessee’s insurance requirements in
this Lease. Lessee shall pay no Base Rent or Common Area Operating Expenses
during the Early Possession period.

 

51.           Improvements by Lessor. Prior to the
Commencement Date, Lessor, at its cost and  expense, shall: a) install six (6) edge-of-dock plate
levelers at dock doors designated by Lessee; b) install a 6-foot-wide double
door between the present ground floor lunchroom and the adjoining large office to the
north; c) install new vinyl tile in the combined ground floor lunchroom and
adjoining large office to the north; d) install new carpeting in presently
carpeted areas of other portions of ground floor offices; e) clean ceramic tile floors in all restrooms; f)
repaint walls in all offices and restrooms; g) clean existing carpeting on
stairs and in mezzanine offices; h) install a large stainless steel warehouse
sink at a mutually acceptable location near the warehouse restroom; and i)
construct an L-shaped modesty wall in front of the door to the warehouse
restroom. Lessor and Lessee agree and acknowledge that the Parties will be
concurrently making improvements and alterations to the Premises (Lessee’s
improvements and alterations will be generally wiring and telecommunications
equipment). With respect to such concurrent improvements and alterations, the
Parties shall operate in good faith to accommodate one another’s work schedule
and not interfere with work being performed by the other Party.

 

52.           Rent Adjustments. The monthly Base Rent shall be adjusted in accordance
with the following
schedule:

 

	
  Commencement
  Date

  	
   

  	
  Monthly Base Rent

  
	
  August
  1, 2006

  	
   

  	
  $21,959.00

  
	
  August
  1, 2007

  	
   

  	
  $22,645.00

  
	
  August
  1, 2008

  	
   

  	
  $23,331.00

  
	
  August
  1, 2009

  	
   

  	
  $24,017.00

  

 

53.           Common Area Operating Expenses. Because the Premises are separately assessed
for property tax purposes, are insured by Lessor as a separate location, will have separate service contracts for HVAC
maintenance, landscaping maintenance, etc., and will share only a relatively
small portion of common operating expenses with Lessor’s adjacent property at
21062-92 Forbes Street, Hayward, California (“Lessor’s Adjacent Property”), in
lieu of combining all operating expenses with Lessor’s Adjacent Property and
applying a percentage to calculate Lessee’s share of such combined expenses,
Lessor shall use appropriate methods of fairly allocating Operating Expenses
attributable to the Premises.

 

54.           Lessor’s Maintenance and
Replacement Obligations. Notwithstanding any other provisions of this Lease, except for damage
caused by Lessee which shall be Lessee’s responsibility, upon receipt of
written notice of the need for such repairs, Lessor shall, at Lessor’s expense, keep the
foundations, structural elements of the roof and exterior walls in good order,
condition and repair. Lessor shall not, however, be obligated to paint the
interior or exterior surfaces of the exterior walls or to maintain windows,
doors or plate glass anywhere on the Premises. Except for damage caused by
Lessee, Lessor shall replace the roof covering, at Lessor’s expense, when in
Lessor’s sole judgment such replacement is appropriate.

 

55.           Maintenance and Repairs
by Lessor. Notwithstanding any other provisions of this Lease, Lessor may elect to enter
into contracts for various maintenance services,

 

 

1

 

 

which are the responsibility of
Lessee, including but not limited to, HVAC maintenance, landscaping
maintenance, security lights maintenance and fire sprinkler monitoring, at
Lessee’s expense. Lessor also may elect, from time to time, to make various
needed repairs to the Premises which are Lessee’s responsibility, whether
requested by Lessee or not, at Lessee’s expense. The cost of any such maintenance
contracts and repairs shall be included in Common Area Operating Expenses in
accordance with Paragraph 4.2.

 

56.           Evidence of Insurance.
Lessee shall provide Lessor with evidence of compliance with Lessee’s insurance requirements of
this Lease by providing Lessor with copies of policies or certificates with
endorsements acceptable to Lessor.

 

57.           Parking;
Driveways; Use of Yard Areas.
Lessee shall have the unreserved use of up to 100 parking spaces on the
Premises. The tenant or tenants of Lessor’s Adjacent Property shall have the
unreserved use of up to 33 parking spaces on the Premises. All parking spaces shall be used for the daily parking of
vehicles. Lessee may use vehicle access and maneuvering areas on the
Premises and on Lessor’s Adjacent Property in a reasonable manner. Lessee shall
keep all driveways and turning areas clear at all times of any obstructions
that would interfere in any way with access by and maneuvering of emergency
fire vehicles and/or vehicles serving tenants on Lessor’s Adjacent Property.
Lessee shall not use yard areas for storage or
for other than vehicular uses without the prior written consent of Lessor.

 

58.           No Openings or
Attachments. Lessee shall not create any openings in the roof, floor, walls or ceilings of the building;
cut or remove any paving in yard areas; nor affix or attach any equipment,
signs or other items to the roof or exterior walls without Lessor’s prior written consent. Lessee shall not drill or cut any
holes in the steel roof-support columns within the building. Anything affixed
to steel roof support columns shall be held in place with straps.

 

59.           No Underground Tanks.
Lessee shall not install any underground tanks or piping without Lessor’s prior
written consent.

 

60.           Protection
of Building and Yard. Lessee shall
take appropriate measures to protect the building and yard areas of the
Premises from any of Lessee’s uses or operations which may result in adverse
impacts on or damage to building or yard components, including, but not limited
to, protection of the floor and walls of the building
with respect to Lessee’s operations. If, despite such precautions, there are
spillages or residue accumulations on or damage to building or yard components,
Lessee shall at least annually, and at the termination of this Lease, remove
such spillages or accumulations and clean and restore affected components to
their conditions at the commencement of the Lease, normal wear and tear
excepted. 

 

61.           Control of Materials. Lessee shall control
and contain any materials used in its operations to minimize such materials being blown or
otherwise deposited outside of the Premises. Lessee shall not allow the
discharge of any fluids, except clear water, on yard areas.

 

62.           Hazardous
Substances. Whenever the terms “Hazardous Materials”, “Hazardous Substances”, or similar terms are used
within this Lease, such definitions shall include or shall mean all “pathogen
organisms” (including, but not limited to bacteria,
yeasts, mildew, virus, fungi, mold or their spores, mycotoxins or other
metabolic products) of all types and conditions, whether containing toxic
properties or not. Furthermore, Lessee shall comply with any guidelines
established by the California Department of Health Services, or other
applicable governmental agency, for the prevention or remediation of mold, but
only to the extent documentation of same is delivered to Lessee. In addition to
Lessee’s obligation to endeavor to prevent the existence of mold as required by
this Lease, Lessee shall immediately notify Lessor of any mold or chronic water
intrusion or flood conditions that exist upon or within the Premises. Lessor
also shall endeavor to prevent any moisture or mold conditions, and to the
extent mold is caused by or contributed to by Lessor, Lessor shall remediate
same at its sole cost. Regardless of the cause or responsibility for the
presence of mold or a chronic water intrusion or flood condition, Lessee shall

 

2

 

 

take
steps necessary to prevent the amplification of any contamination problem, and
shall take steps necessary to prevent Lessee's employees, agents, invitees,
customers, etc., from becoming exposed to any mold condition. Lessor
acknowledges and agrees that cosmetic products shall not be considered a
"Hazardous Substance'' and that Lessee may store cosmetic products at the
Premises.

 

63.                                 Security
Lights. Lessor shall maintain security lights mounted on
exterior walls of the building on the premises and on free-standing light poles
on the Premises in good operating condition with the cost thereof to be
included within the definition of Common Area Operating Expenses in paragraph
4.2(a). Lessee shall always leave circuit breakers for security lights in the "on"
position to allow the automatic control of security lights by photocells.
Lessee shall promptly report to Lessor any nonfunctioning or malfunctioning
security lights.

 

64.                                 Evidence
of Completion of Utility Installations and Alterations. Upon completion
of any and all Utility Installations and Alterations by Lessee, Lessee shall
promptly provide Lessor with copies of permits, fully signed inspection cards
and a detailed compilation of all costs for such Utility Installations and
Alterations in addition to all other requirements of Paragraph 7.3.

 

65.                                 Wires
and Cables. Any wires and/or cables installed within the
Premises by Lessee shall be included within the definition of Utility
Installations as defined in Paragraph 7.3(a).

 

66.                                 Options
of Extend Term. Subject to the provisions of Paragraph 39 of this
Lease, Lessee shall have one option to extend the term of this Lease for a
period of five (5) years (commencing August 1, 2010 and ending July 31, 2015).
If the option is timely exercised by Lessee, the initial Base Rent for the
extended term shall be equivalent to the prevailing fair market rent for
comparable single-user warehouse and manufacturing properties in the
Hayward-Union City area under similar lease terms and conditions. The Base Rent
for the extended term shall be adjusted annually during said extended term
based on prevailing market practices at the start of the extended term. The
initial Base Rent at the start of said extended term and the annual adjustments
of said Base Rent during said extended term are hereafter collectively referred
to as "the New Base Rent".

 

The
option may be exercised only between November 1, 2009 and January 31, 2010. To
exercise the option, Lessee shall give Lessor written notice within the
permitted time period. Within 15 days after Lessor receives written notice of
lessee's exercise of the option, Lessor shall provide Lessee with the New Base
Rent, as determined by Lessor ("the Notification"). Lessee shall have
30 days from the Notification to reach agreement with Lessor regarding a New Base
Rent.

 

The
Parties are obligated to negotiate in good faith to agree on the New Base Rent.
If the Parties have not mutually agreed on the New Base Rent within 30 days
following the Notification, Lessee shall elect within 5 days thereafter to
either cancel its exercise of the option or proceed with arbitration as set
forth below. If Lessee does not timely notify Lessor by written notice of its
election within said 5 days, Lessee's exercise of the option shall be
considered canceled. If Lessee timely notifies Lessor of its election to
proceed with arbitration, then, within 10 days after receipt of said written
notice, each Party hereto shall appoint one representative who shall be a
licensed real estate broker with at least 5 years of experience in leasing industrial
space in the County of Alameda to act as an arbitrator. The two arbitrators so
appointed shall attempt to jointly determine the New Base Rent within 30 days
of their appointments and shall deliver such determination to Lessor and Lessee
in writing, signed by said arbitrators. If the two arbitrators agree, such
mutual determination shall be final and binding on the Parties.

 

In
the event the two arbitrators cannot agree on the New Base Rent, said
arbitrators shall promptly appoint a third arbitrator who also shall be a
licensed real estate broker with at least 5 years of experience in leasing
industrial space in the County of Alameda and provide said third arbitrator
with their respective proposed determinations of the New Base Rent. The New
Base Rent shall be independently

 

3

 

determined
by the third of said arbitrators within 30 days of his or her appointment. The
role of the third arbitrator shall be to select from the proposed
determinations of each of the first two arbitrators the one that most closely
approximates the third arbitrator’s determination of the New Base Rent. The
third arbitrator shall have no right to adopt a compromise or middle ground or
any modification of either of the determinations of the first two arbitrators.

 

The
determination selected by the third arbitrator as most closely approximating
his or her opinion of the New Base Rent shall constitute the decision and award
of the arbitrators and be final and binding
upon the Parties. The third arbitrator shall deliver his or her signed final
determination in writing to Lessor and Lessee.

 

The Parties hereto shall pay the fee of the arbitrator
each appoints and any expenses incurred by such arbitrator. The fee and
expenses of the third arbitrator shall be equally shared by the Parties hereto.

 

The
determination of the New Base Rent, whether
determined by negotiation or arbitration, shall be set forth in an amendment of
this Lease.

 

67.                         Confidentiality Agreement. On May
6, 2005, Lessor signed a confidential disclosure agreement with
Lessee (the “Confidentiality Agreement”) regarding financial statements and
other confidential information regarding Lessee and Lessee’s business
operations which were provided to Lessor as part of Lessor’s due diligence
investigations concerning the acceptability of Lessee as a potential lessee of
the Premises under the terms of this Lease. Said Confidentiality Agreement
shall not apply to future estoppel certificates and/or future financial
statements which may be requested of Lessee in accordance with Paragraph 16.

 

68.                         Brokers. Notwithstanding any other
provisions of this Lease, the basis for all relationships between Lessor
and Brokers in connection with this Lease is the Exclusive Authorization to
Lease and Schedule of Real Estate Commissions dated September 27, 2004 between
Lessor and BT Commercial Real Estate, as extended by amendment (the “Listing Agreement”). The obligation to pay commissions
pursuant to the Listing Agreement shall solely be that of Lessor and Lessor
hereby indemnifies and holds Lessee free and harmless from any and all claims
for the payment of commissions under said Listing Agreement.

 

69.                         Partner a Broker. The Parties recognize
that Wallace D. Mersereau, general partner of Lessor, is a
licensed real estate broker in the State of California who is acting solely in
the role of a lessor with regard to this Lease.

 

70.                         Conflict. In the event of any conflict
between this Addendum and the printed provisions of this Lease, the
provisions of this Addendum shall prevail.

 

71.                         Building
Areas. Lessor has calculated the area of the Building on the Premises as of
the Commencement Date as being 68,621 square feet, consisting of 65,600 square
feet of ground floor area and 3,021 square feet of finished mezzanine. Office
and restroom areas have been calculated as being 6,430 square feet, consisting
of 3,409 square feet on the ground floor and 3,021 square feet on the
mezzanine.

 

72.                         ADA Compliance. Notwithstanding anything to the contrary in
this Lease, to the extent the Premises do not comply with the Americans with
Disabilities Act  (“ADA”) as of the
Commencement Date, any costs incurred in achieving ADA compliance as of the Commencement Date shall be at the sole cost of
Lessor regardless of when such compliance is required, unless such
noncompliance is solely due to Lessee’s use of the Premises.

 

4

 

 

[Graphic]

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