Document:

f8k012910ex10i_atlgreen.htm

     

    Exhibit 10.1

    
      ATLANTIC
GREEN POWER HOLDING COMPANY

      EQUITY
INCENTIVE PLAN

       

      
        	
                1.  

              	
                PURPOSE.

              

      

       

      The
purpose of this Atlantic Green Power Holding Company Equity Incentive Plan (the
“Plan”) is to advance the interests of Stadium Entertainment Holding Corp. (the
“Company”) and its subsidiaries by enhancing the ability of the Company to (i)
attract and retain employees and other persons or entities who are in a position
to make significant contributions to the success of the Company and its
subsidiaries; (ii) reward such persons for such contributions; and (iii)
encourage such persons or entities to take into account the long-term interest
of the Company through ownership of shares of the Company’s common stock, par
value $.000001 per share (the “Common Stock”).

       

      The Plan
is intended to accomplish these objectives by enabling the Company to grant
awards (“Awards”) in the form of incentive stock options (“ISOs”), nonqualified
stock options (“Nonqualified Options”) (ISOs and Nonqualified Options shall be
collectively referred to herein as “Options”), stock appreciation rights
(“SARs”), restricted stock (“Restricted Stock”), deferred stock (“Deferred
Stock”), or other stock based awards (“Other Stock Based Awards”), all as more
fully described below.

       

      
        	
                2.  

              	
                ADMINISTRATION.

              

      

       

      
        	
                (a)  

              	
                The
      Plan will be administered by the Board of Directors of the Company (the
      “Board”) or, upon its delegation, by the Compensation Committee (the
      “Committee”) of the Board of Directors (such party administering the Plan
      to be referred to herein as the “Administrator”).  The
      Administrator may be constituted to permit the Plan to comply with the
      “outside director” requirement of Section 162(m)(4)(c)(i) of the Internal
      Revenue Code of 1986, as amended (the “Code”), and the regulations
      promulgated thereunder, or any successor rules.  The
      Administrator will determine the recipients of Awards, the times at which
      Awards will be made, the size and type or types of Awards to be made to
      each recipient, and will set forth in each such Award the terms,
      conditions and limitations applicable to the Award
      granted.  Awards may be made singly, in combination or in
      tandem.  The Administrator will have full and exclusive power to
      interpret the Plan, to adopt rules, regulations and guidelines relating to
      the Plan, to grant waivers of Plan restrictions and to make all of the
      determinations necessary for its administration.  Such
      determinations and actions of the Administrator, and all other
      determinations and actions of the Administrator made or taken under
      authority granted by any provision of the Plan, will be conclusive and
      binding on all parties.  Except to the extent otherwise required
      under Code Section 409A, related regulations, or other guidance, the
      Administrator shall have the authority, in its sole discretion, to
      accelerate the date that any Award which was not otherwise exercisable,
      vested or earned shall become exercisable, vested or earned in whole or in
      part without any obligation to accelerate such date with respect to any
      other Award granted to any recipient. In addition, the Administrator shall
      have the authority and discretion to establish terms and conditions of
      Awards as the Administrator determines to be necessary or appropriate to
      conform to the applicable requirements or practices of jurisdictions
      outside of the United States. In addition to action by meeting in
      accordance with applicable laws, any action of the Administrator with
      respect to the Plan may be taken by a written instrument signed by all of
      the members of the Administrator, and any such action so taken by written
      consent shall be as fully effective as if it had been taken by a majority
      of the members at a meeting duly held and
  called.

              

      

       

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

       

      
        	
                3.  

              	
                EFFECTIVE DATE AND
      TERM OF PLAN.

              

      

       

      The Plan
will become effective on February 3, 2010.

       

      The Plan
will terminate on February 2, 2020, subject to earlier termination of the Plan
by the Board pursuant to Section 18 herein.  No Award may be granted
under the Plan after the termination date of the Plan, but Awards previously
granted may extend beyond that date pursuant to the terms of such
Awards.

       

      
        	
                4.  

              	
                SHARES SUBJECT TO THE
      PLAN.

              

      

       

      Subject
to adjustment as provided in Section 16 herein, the aggregate number of shares
of Common Stock reserved for issuance pursuant to Awards granted under the Plan
shall be ten million (10,000,000) shares; provided, however, that
within sixty (60) days of the end of each fiscal year following the adoption of
the Plan, the Board, in its discretion, may increase the aggregate number of
shares of Common Stock available for issuance under the Plan by an amount not
greater than the difference between (i) the number of shares of Common Stock
available for issuance under the Plan on the last day of the immediately
preceding fiscal year, and (ii) the number of shares of Common Stock equal to
15% of the shares of Common Stock outstanding on the last day of the immediately
preceding fiscal year.

       

      The
shares of Common Stock delivered under the Plan may be either authorized but
unissued shares of Common Stock or shares of the Company’s Common Stock held by
the Company as treasury shares, including shares of Common Stock acquired by the
Company in open market and private transactions.  No fractional shares
of Common Stock will be delivered pursuant to Awards granted under the Plan and
the Administrator shall determine the manner in which fractional share value
will be treated.

       

      If any
Award requiring exercise by a Participant for delivery of shares of Common Stock
is cancelled or terminates without having been exercised in full, or if any
Award payable in shares of Common Stock or cash is satisfied in cash rather than
Common Stock, the number of shares of Common Stock as to which such Award was
not exercised or for which cash was substituted will be available for future
Awards of Common Stock; provided, however, that
Common Stock subject to an Option cancelled upon the exercise of a SAR shall not
again be available for Awards under the Plan unless, and to the extent that, the
SAR is settled in cash.  Shares of Restricted Stock and Deferred Stock
forfeited to the Company in accordance with the Plan and the terms of the
particular Award shall be available again for Awards under the Plan unless the
Administrator determines otherwise.

       

       

      
        
           

        

        
          2

          
            

          

        

        
           

        

      

       

      
        	
                5.  

              	
                ELIGIBILITY AND
      PARTICIPATION.

              

      

       

      Those
eligible to receive Awards under the Plan (each, a “Participant” and
collectively, the “Participants”) will be persons in the employ of the Company
or any of its subsidiaries designated by the Administrator (“Employees”) and
other persons or entities who, in the opinion of the Administrator, are in a
position to make a significant contribution to the success of the Company or its
subsidiaries, including, without limitation, consultants and agents of the
Company or any subsidiary.  A “subsidiary” for purposes of the Plan
will be a present or future corporation or other entity of which the Company
owns or controls, or will own or control, more than 50% of the total combined
voting power of all classes of stock or other equity interests.

       

      
        	
                6.  

              	
                OPTIONS.

              

      

       

      
        	
                (a)  

              	
                Nature of
      Options.  An Option is an Award entitling the Participant
      to purchase a specified number of shares of Common Stock at a specified
      exercise price.  Both ISOs, as defined in Section 422 of the
      Code, and Nonqualified Options may be granted under the Plan; provided, however, that
      ISOs may be awarded only to
Employees.

              

      

       

      
        	
                (b)  

              	
                Exercise
      Price.  The exercise price of each Option shall be equal
      to the “Fair Market Value” (as defined below) of the Common Stock on the
      date the Award is granted to the Participant; provided, however, that
      (i) in the Administrator’s discretion, the exercise price of a
      Nonqualified Option may be less than the Fair Market Value of the Common
      Stock on the date of grant; (ii) with respect to a Participant who owns
      more than ten percent (10%) of the total combined voting power of all
      classes of stock of the Company, the option price of an ISO granted to
      such Participant shall not be less than one hundred and ten percent (110%)
      of the Fair Market Value of the Common Stock on the date the Award is
      granted; and (iii) with respect to any Option repriced by the
      Administrator, the exercise price shall be equal to the Fair Market Value
      of the Common Stock on the date such Option is repriced unless otherwise
      determined by the Administrator.  For purposes of this Plan,
      Fair Market Value shall mean the closing price of the Common Stock as
      reported on the principal securities exchange on which the Common Stock is
      listed, or if not so listed, the last sale price (or the average of the
      high asked and low bid prices of the Common Stock if sales price
      information is not reported) of the Common Stock as reported by the Nasdaq
      Stock Market or, if not reported on the Nasdaq Stock Market, by the NASD
      OTC Bulletin Board, “Pink Sheets” or similar quotation
      service.  If the Common Stock is not publicly traded, Fair
      Market Value shall be determined in good faith by the
    Board.

              

      

       

       

      
        
           

        

        
          3

          
            

          

        

        
           

        

      

       

      
        	
                (c)  

              	
                Duration of
      Options.  The term of each Option granted to a
      Participant pursuant to an Award shall be determined by the Administrator;
      provided, however, that in no case shall an Option be exercisable more
      than ten (10) years (five (5) years in the case of an ISO granted to a ten
      percent (10%) stockholder as defined in (b) above) from the date of the
      Award.

              

      

       

      
        	
                (d)  

              	
                Exercise of Options
      and Conditions.  Except as otherwise provided in Sections
      18 and 19 herein, and except as otherwise provided below with respect to
      ISOs, Options granted pursuant to an Award will become exercisable at such
      time or times, and subject to such conditions, as the Administrator may
      specify at the time of the Award.  The Options may be subject to
      such restrictions, conditions and forfeiture provisions as the
      Administrator may determine, including, but not limited to, restrictions
      on transfer, continuous service with the Company or any of its
      subsidiaries, achievement of business objectives, and individual, division
      and Company performance.  To the extent exercisable, an Option
      may be exercised either in whole at any time or in part from time to
      time.  With respect to an ISO granted to a Participant, the Fair
      Market Value of the shares of Common Stock on the date of grant which are
      exercisable for the first time by a Participant during any calendar year
      shall not exceed $100,000.

              

      

       

      
        	
                (e)  

              	
                Payment for and
      Delivery of Stock. Full payment for shares of Common Stock
      purchased will be made at the time of the exercise of the Option, in whole
      or in part.  Payment of the purchase price will be made in cash
      or in such other form as the Administrator may permit, including, without
      limitation, delivery of shares of Common
Stock.

              

      

       

      
        	
                7.  

              	
                STOCK APPRECIATION
      RIGHTS.

              

      

       

      
        	
                (a)  

              	
                Nature of Stock
      Appreciation Rights.  A SAR is an Award entitling the
      recipient to receive payment, in cash and/or shares of Common Stock,
      determined in whole or in part by reference to appreciation in the value
      of a share of Common Stock.  A SAR entitles the recipient to
      receive in cash and/or shares of Common Stock, with respect to each SAR
      exercised, the excess of the Fair Market Value of a share of Common Stock
      on the date of exercise over the Fair Market Value of a share of Common
      Stock on the date the SAR was
granted.

              

      

       

      
        	
                (b)  

              	
                Grant of
      SARs.  SARs may be subject to Awards in tandem with, or
      independently of, Options granted under the Plan.  A SAR granted
      in tandem with an Option which is not an ISO may be granted either at or
      after the time the Option is granted.  A SAR granted in tandem
      with an ISO may be granted only at the time the ISO is granted and may
      expire no later than the expiration of the underlying
  ISO.

              

      

       

       

      
        
           

        

        
          4

          
            

          

        

        
           

        

      

       

      
        	
                (c)  

              	
                Exercise of
      SARs.  A SAR not granted in tandem with an Option will
      become exercisable at such time or times, and on such conditions, as the
      Administrator may specify.  A SAR granted in tandem with an
      Option will be exercisable only at such times, and to the extent, that the
      related Option is exercisable.  A SAR granted in tandem with an
      ISO may be exercised only when the market price of the shares of Common
      Stock subject to the ISO exceeds the exercise price of the ISO, and the
      SAR may be for no more than one hundred percent (100%) of the difference
      between the exercise price of the underlying ISO and the Fair Market Value
      of the Common Stock subject to the underlying ISO at the time the SAR is
      exercised.  At the option of the Administrator, upon exercise, a
      SAR may be settled in cash, Common Stock or a combination of
      both.

              

      

       

      
        	
                8.  

              	
                RESTRICTED
      STOCK.

              

      

       

      A
Restricted Stock Award entitles the recipient to acquire shares of Common Stock,
subject to certain restrictions or conditions, for no cash consideration, if
permitted by applicable law, or for such other consideration as may be
determined by the Administrator.  The Award may be subject to such
restrictions, conditions and forfeiture provisions as the Administrator may
determine, including, but not limited to, restrictions on transfer, continuous
service with the Company or any of its subsidiaries, achievement of business
objectives, and individual, division and Company performance.  Subject
to such restrictions, conditions and forfeiture provisions as may be established
by the Administrator, any Participant receiving an Award of Restricted Stock
will have all the rights of a stockholder of the Company with respect to the
shares of Restricted Stock, including the right to vote the shares and the right
to receive any dividends thereon.

       

      
        	
                9.  

              	
                DEFERRED
      STOCK.

              

      

       

      A
Deferred Stock Award entitles the recipient to receive shares of Common Stock to
be delivered in the future.  Delivery of the shares of Common Stock
will take place at such time or times, and on such conditions, as the
Administrator may specify.  At the time any Deferred Stock Award is
granted, the Administrator may provide that the Participant will receive an
instrument evidencing the Participant’s right to future delivery of Deferred
Stock.

       

      
        	
                10.  

              	
                OTHER STOCK BASED
      AWARDS.

              

      

       

      The
Administrator shall have the right to grant Other Stock Based Awards under the
Plan to Employees which may include, without limitation, the grant of shares of
Common Stock as bonus compensation and the issuance of shares of Common Stock in
lieu of an Employee’s cash compensation.

       

      
        	
                11.  

              	
                AWARD
      AGREEMENTS.

              

      

       

      The grant
of any Award under the Plan may be evidenced by an agreement which shall
describe the specific Award granted and the terms and conditions of the
Award.  Any Award shall be subject to the terms and conditions of any
such agreement required by the Administrator.

       

       

       

      
        
           

        

        
          5

          
            

          

        

        
           

        

      

       

      
        	
                12.  

              	
                TRANSFERS.

              

      

       

      No Award
(other than an outright Award in the form of Common Stock without any
restrictions) may be assigned, pledged or transferred other than by will or by
the laws of descent and distribution and, during a Participant’s lifetime, will
be exercisable only by the Participant or, in the event of a Participant’s
incapacity, by the Participant’s guardian or legal representative.

       

      
        	
                13.  

              	
                RIGHTS OF A
      STOCKHOLDER.

              

      

       

      Except as
specifically provided by the Plan, the receipt of an Award will not give a
Participant rights as a stockholder of the Company.  The Participant
will obtain such rights, subject to any limitations imposed by the Plan, or the
instrument evidencing the Award, upon actual receipt of shares of Common
Stock.

       

      
        	
                14.  

              	
                CONDITIONS ON DELIVERY
      OF STOCK.

              

      

       

      The
Company will not be obligated to deliver any shares of Common Stock pursuant to
the Plan or to remove any restrictions or legends from shares of Common Stock
previously delivered under the Plan until, (a) in the opinion of the Company’s
counsel, all applicable federal and state laws and regulations have been
complied with, (b) until the shares of Common Stock to be delivered have been
listed or authorized to be listed on the exchange or quotation system on which
shares of Common Stock may be then listed or quoted, and (c) until all other
legal matters in connection with the issuance and delivery of such shares of
Common Stock have been approved by the Company’s counsel.  If the sale
of shares of Common Stock has not been registered under the Securities Act of
1933, as amended (the “Act”), and qualified under the appropriate “blue sky”
laws, the Company may require, as a condition to exercise of the Award, such
representations and agreements as counsel for the Company may consider
appropriate to avoid violation of such Act and laws and may require that the
certificates evidencing such shares of Common Stock bear an appropriate legend
restricting transfer.

       

      If an
Award is exercised by a Participant’s legal representative, the Company will be
under no obligation to deliver shares of Common Stock pursuant to such exercise
until the Company is satisfied as to the authority of such
representative.

       

      
        	
                15.  

              	
                TAX
      WITHHOLDING.

              

      

       

      The
Company will have the right to deduct from any cash payment under the Plan or
otherwise payable to the Participant taxes that are required to be withheld and
to condition the obligation to deliver or vest shares of Common Stock under this
Plan upon the Participant’s paying the Company such amount as the Company may
request to satisfy any liability for applicable withholding
taxes.  The obligations of the Company under this Plan shall be
conditioned upon such payment or the making of arrangements satisfactory to the
Company regarding such payments, and the Company, or any of its subsidiaries,
shall, to the extent permitted by law, have the right to deduct any such taxes
from any payment otherwise due to the Participant.  The Administrator
may in its discretion permit Participants to satisfy all or part of their
withholding liability either by delivery of shares of Common Stock held by the
Participant or by withholding shares of Common Stock to be delivered to a
Participant upon the grant or exercise of an Award.

       

      
        
           

        

        
          6

          
            

          

        

        
           

        

      

       

       

      
        	
                16.  

              	
                ADJUSTMENT OF
      AWARD.

              

      

       

      
        	
                (a)  

              	
                The
      Administrator may make or provide for such adjustments in the numbers of
      shares of Common Stock covered by outstanding Awards granted hereunder,
      and any applicable exercise price provided in outstanding Awards and in
      the kind of shares covered thereby, as the Administrator, in its sole
      discretion, may determine is equitably required to prevent dilution or
      enlargement of the rights of Participants that otherwise would result from
      (i) any stock dividend, stock split, combination of shares,
      recapitalization or other change in the capital structure of the Company,
      or (ii) any merger, consolidation, spin-off, split-off, spin-out,
      split-up, reorganization, partial or complete liquidation or other
      distribution of assets or, issuance of rights or warrants to purchase
      securities, or (iii) any other corporate transaction or event having an
      effect similar to any of the foregoing.  Moreover, in the event
      of any such transaction or event, the Administrator, in its discretion,
      may provide in substitution for any or all outstanding awards under this
      Plan such alternative consideration (including cash), if any, as it may
      determine to be equitable in the circumstances and may require in
      connection therewith the surrender of all Awards so
      replaced.  The Administrator may also make or provide for such
      adjustments in the numbers of shares specified in Section 4 of this Plan
      as the Administrator in its sole discretion may determine is appropriate
      to reflect any transaction or event described in this Section 16(a);
      provided, however, that any such adjustment to the number specified in
      Section 4 will be made only if and to the extent that such adjustment
      would not cause any Option intended to qualify as an ISO to fail to so
      qualify.

              

      

       

      
        	
                (b)  

              	
                In
      the event of (i) a proposal, which is approved by the Board, of any merger
      or consolidation involving the Company where the Company is not the
      surviving entity or pursuant to which any shares of Common Stock would be
      converted into cash, securities or other property of another corporation
      or business entity (other than a merger or consolidation in which the
      holders of Common Stock immediately prior to the merger or consolidation
      continue to own at least 50% of the Common Stock after the merger or
      consolidation, or if the Company is not the surviving corporation, at
      least 50% of the common stock, or other voting securities, of the
      surviving corporation or other business entity immediately after the
      merger, consolidation or share exchange), or any sale of substantially all
      of the Company’s assets or (ii) any other transaction or series of related
      transactions as a result of which a single person or several persons
      acting in concert own a majority of the Company’s then outstanding Common
      Stock (such merger, consolidation, sale of assets or other transaction
      being hereinafter referred to as a “Transaction”), unless otherwise
      provided in a resolution adopted by the Board prior to the effectiveness
      of the Transaction, all outstanding Options and SARs shall become
      exercisable immediately before or contemporaneously with the consummation
      of such Transaction and each outstanding share of Restricted Stock and
      each outstanding Deferred Stock Award shall immediately become free of all
      restrictions and conditions upon consummation of such
      Transaction.  Unless otherwise approved in a resolution adopted
      by the Board prior to the effectiveness of such Transaction, immediately
      following the consummation of the Transaction, all outstanding Options and
      SARs shall terminate and cease to be
  exercisable.

              

      

       

       

      
        
           

        

        
          7

          
            

          

        

        
           

        

      

       

      In lieu
of the foregoing, if the Company will not be the surviving corporation or
entity, the Administrator may arrange to have such acquiring or surviving
corporation or entity, or an “Affiliate” (as defined below) thereof, grant
replacement Awards which shall be immediately exercisable to Participants
holding outstanding Awards.

       

      The term
“Affiliate,” with respect to any Person, shall mean any other Person who is, or
would be deemed to be an “affiliate” or an “associate” of such Person within the
respective meanings ascribed to such terms in Rule 12b-2 of the General Rules
and Regulations under the Securities Exchange Act of 1934, as
amended.  The term “Person” shall mean a corporation, association,
partnership, joint venture, limited liability company, trust, organization,
business, individual or government or any governmental agency or political
subdivision thereof.

       

      
        	
                (c)  

              	
                In
      the event of the dissolution or liquidation of the Company (except a
      dissolution or liquidation relating to a sale of assets or other
      reorganization of the Company referred to in the preceding sections), the
      outstanding options and SARs shall terminate as of a date fixed by the
      Administrator; provided,
      however, that not less than thirty (30) days written notice of the
      date so fixed shall be given to each Participant who shall have the right
      during such period to exercise the Participant’s Options or SARs as to all
      or any part of the shares of Common Stock covered
      thereby.  Further, in the event of the dissolution or
      liquidation of the Company, each outstanding share of Restricted Stock and
      each outstanding Deferred Stock Award shall immediately become free of all
      restrictions and conditions.

              

      

       

      
        	
                17.  

              	
                TERMINATION OF
      SERVICE.

              

      

       

      Upon a
Participant’s termination of service with the Company or a subsidiary (if an
employee only of a subsidiary), any outstanding Award shall be subject to the
terms and conditions set forth below, unless otherwise determined by the
Administrator:

       

      
        	
                (a)  

              	
                In
      the event a Participant leaves the employ or service of the Company or a
      subsidiary of the Company whether voluntarily or otherwise but other than
      by reason of the Participant’s death or “disability” (as such term is
      defined in Section 22(e)(3) of the Code), each Option and SAR granted to
      the Participant shall terminate upon the earlier to occur of (i) the
      expiration of the period three (3) months after the date of such
      termination and (ii) the date specified in the Option or SAR; provided, that, prior
      to the termination of such Option or SAR, the Participant shall be able to
      exercise any part of the Option or SAR which is exercisable as of the date
      of termination.  Further, each outstanding share of Restricted
      Stock and each outstanding Deferred Stock Award which remains subject to
      any restrictions or conditions of the Award shall be forfeited to the
      Company upon such date of
termination.

              

      

       

      
        
           

        

        
          8

          
            

          

        

        
           

        

      

       

       

      
        	
                (b)  

              	
                In
      the event a Participant’s employment with or service to the Company or its
      subsidiaries terminates by reason of the Participant’s death or
      “disability” (as such term is defined in Section 22(e)(3) of the Code),
      each Option and SAR granted to the Participant shall become immediately
      exercisable in full and shall terminate upon the earlier to occur of (i)
      the expiration of the period six (6) months after the date of such
      termination and (ii) the date specified in the option or
      SAR.  Further, each outstanding share of Restricted Stock and
      each outstanding Deferred Stock Award shall immediately become free of all
      restrictions and conditions upon the date of such
    termination.

              

      

       

      
        	
                18.  

              	
                AMENDMENTS AND
      TERMINATION.

              

      

       

      
        	
                (a)  

              	
                The
      Plan may be amended, altered and/or terminated at any time by the Board;
      provided, that
      (i) approval of an amendment to the Plan by the stockholders of the
      Company shall be required to the extent, if any, that stockholder approval
      of such amendment is required by applicable law, rule or regulation; and
      (ii) except for adjustments made pursuant to Section 5(c), the exercise
      price for any outstanding Option or base price of any outstanding SAR may
      not be decreased after the date of grant, nor may any outstanding Option
      or SAR be surrendered to the Company as consideration for the grant of a
      new Option or SAR with a lower exercise price or base price than the
      original Option or SAR, as the case may be, without stockholder approval
      of any such action. No action to amend or terminate the Plan shall permit
      the acceleration of the time or schedule of any payment of amounts deemed
      to involve the deferral of compensation under Code Section 409A, except as
      may be otherwise permitted under Code Section 409A, related regulations,
      or other guidance.

              

      

       

      
        	
                (b)  

              	
                The
      Administrator may amend, alter or terminate any Award granted under the
      Plan, prospectively or retroactively, but such amendment, alteration or
      termination of an Award shall not, without the consent of the recipient of
      an outstanding Award, materially adversely affect the rights of the
      recipient with respect to the
Award.

              

      

       

      
        	
                (c)  

              	
                Notwithstanding
      Section 18(a) and Section 18(b) herein, the following provisions shall
      apply:

              

      

       

      
        	
                (i)  

              	
                The
      Administrator shall have unilateral authority to amend the Plan and any
      Award (without Participant consent and without stockholder approval,
      unless such stockholder approval is required by applicable laws, rules or
      regulations) to the extent necessary to comply with applicable laws, rules
      or regulations or changes to applicable laws, rules or regulations
      (including, but not limited to, Code Section 409A and Code Section 422 or
      related regulations or other guidance and federal securities
      laws).

              

      

       

       

      
        
           

        

        
          9

          
            

          

        

        
           

        

      

       

      
        	
                (ii)  

              	
                The
      Administrator shall have unilateral authority to make adjustments to the
      terms and conditions of Awards in recognition of unusual or nonrecurring
      events affecting the Company or any Affiliate, or the financial statements
      of the Company or any Affiliate, or of changes in accounting principles,
      if the Administrator determines that such adjustments are appropriate in
      order to prevent dilution or enlargement of the benefits or potential
      benefits intended to be made available under the Plan or necessary or
      appropriate to comply with applicable accounting
    principles.

              

      

       

      
        	
                (d)  

              	
                Notwithstanding
      any provision of the Plan, an Award or an Award Agreement to the contrary,
      the Administrator may (subject to any requirements imposed under Code
      Section 409A, related regulations, or other guidance) cause any Award (or
      portion thereof) granted under the Plan to be canceled in consideration of
      an alternative Award or cash payment of an equivalent cash value, as
      determined by the Administrator in its sole discretion, made to the holder
      of such canceled Award.

              

      

       

      
        	
                19.  

              	
                COMPLIANCE WITH CODE
      SECTION 409A

              

      

       

      
        	
                (a)  

              	
                Notwithstanding
      any other provision in the Plan or an Award to the contrary, if and to the
      extent that Code Section 409A is deemed to apply to the Plan or any Award
      granted under the Plan, it is the general intention of the Company that
      the Plan and all such Awards shall comply with Code Section 409A, related
      regulations, or other guidance, and the Plan and any such Award shall, to
      the extent practicable, be construed in accordance
      therewith.  Deferrals of shares issuable pursuant to an Option,
      a SAR settled in shares of Common Stock, a Restricted Award or any other
      Award otherwise exempt from Code Section 409A, in a manner that would
      cause Code Section 409A to apply, shall not be
      permitted.  Without in any way limiting the effect of the
      foregoing, in the event that Code Section 409A, related regulations or
      other guidance require that any special terms, provisions or conditions be
      included in the Plan or any Award, then such terms, provisions and
      conditions shall, to the extent practicable, be deemed to be made a part
      of the Plan or Award, as applicable. Further, in the event that the Plan
      or any Award shall be deemed not to comply with Code Section 409A or any
      related regulations or other guidance, then neither the Company, the
      Administrator nor their designees or agents shall be liable to any
      Participant or other person for actions, decisions or determinations made
      in good faith.

              

      

       

      
        	
                (b)  

              	
                Without
      limiting the effect of Section 19(a), above, and notwithstanding any other
      provision in the Plan to the contrary, the following provisions shall, to
      the extent required under Code Section 409A, related regulations, or other
      guidance, apply with respect to Awards deemed to involve the deferral of
      compensation under Code Section
409A:

              

      

       

       

      
        
           

        

        
          10

          
            

          

        

        
           

        

      

       

      
        	
                (i)  

              	
                Distributions
      may be made with respect to Awards subject to Code Section 409A not
      earlier than upon the occurrence of one or more of the following events:
      (A) separation of service; (B) disability; (C) death; (D) a specified time
      or pursuant to a fixed schedule; (E) a change in the ownership or
      effective control of the Corporation, or in the ownership of a substantial
      portion of the assets of the Corporation; or (F) the occurrence of an
      unforeseeable emergency. Each of the preceding distribution events shall
      be defined and interpreted in accordance with Code Section 409A and
      related regulations or other
guidance.

              

      

       

      
        	
                (ii)  

              	
                With
      respect to Participants who are “key employees” (as defined in Code
      Section 409A, related regulations, or other guidance), a distribution due
      to separation of service may not be made before the date that is six
      months after the date of separation of service (or, if earlier, the date
      of death of the Participant), except as may be otherwise permitted
      pursuant to Code Section 409A, related regulations, or other guidance. To
      the extent that a Participant is subject to this section and a
      distribution is to be paid in installments, through an annuity, or in some
      other manner where payment will be periodic, the Participant shall be
      paid, during the seventh month following separation from service, the
      aggregate amount of payments he or she would have received but for the
      application of this section; all remaining payments shall be made in their
      ordinary course.  The previous sentence shall be applicable only
      if and to the extent that it complies with Code Section 409A, related
      regulations, and other applicable
guidance.

              

      

       

      
        	
                (iii)  

              	
                Unless
      permissible under Code Section 409A, related regulations, or other
      guidance, acceleration of the time or schedule of any payment under the
      Plan is prohibited, except that, to the extent permitted by the
      Administrator and to the extent such exceptions do not violate Code
      Section 409A, the following accelerations may be permitted in an
      Award:

              

      

       

      
        	
                (A)  

              	
                As
      necessary to fulfill a domestic relations order (as defined in Code
      Section 414(p)(1)(B));

              

      

       

      
        	
                (B)  

              	
                As
      necessary to comply with a certificate of divestiture (as defined in Code
      Section 1043(b)(2)); and

              

      

       

      
        	
                (C)  

              	
                To
      pay the Federal Insurance Contributions Act tax imposed under Code
      Sections 3101 and 3121(v)(2) on amounts deferred under the Plan (the “FICA
      Amount”), including the income tax at source on wages imposed under Code
      Section 3401 on the FICA Amount, and to pay the additional income tax at
      source of wages attributable to additional Code Section 3401 wages and
      taxes.

              

      

       

      
        	
                (iv)  

              	
                Except
      to the extent otherwise required or permitted under Code Section 409A,
      related regulations or other guidance, the Administrator shall (unless an
      individual Award Agreement provides otherwise) provide that distributions
      pursuant to Awards must be made no later than the later of (A) the date
      that is 2-1/2 months from the end of the Participant’s first taxable year
      in which the amount is no longer subject to a substantial risk of
      forfeiture; or (B) the date that is 2-1/2 months from the end of the
      Corporation’s first taxable year in which the amount is no longer subject
      to a substantial risk of
forfeiture.

              

      

       

       

      
        
           

        

        
          11

          
            

          

        

        
           

        

      

       

       

      
        	
                (v)  

              	
                Deferral
      Elections:

              

      

       

      
        	
                (A)  

              	
                In
      the sole discretion of the Administrator, a Participant may be permitted
      to make an election as to the time and form of any distribution from an
      Award, provided that,
      except as specified in (B) and (C) below, such election is made not later
      than the close of the taxable year preceding the taxable year in which the
      services for which the Award is granted are to be performed, or at such
      other time or times as may be permitted under Code Section 409A, related
      regulations, or other guidance.

              

      

       

      
        	
                (B)  

              	
                In
      the case of the first year in which the Participant becomes eligible to
      participant in the Plan, the election described in (A) may be made with
      respect to services to be performed subsequent to the election within
      thirty (30) days after the date the Participant becomes eligible to
      participate in the Plan.

              

      

       

      
        	
                (C)  

              	
                In
      the case of any performance-based compensation (as that term is defined in
      Code Section 409A, related regulations, or other guidance), where such
      compensation is based on services performed over a period of at least
      twelve months, the election described in (A) may be made no later than six
      months before the end of the
period.

              

      

       

      
        	
                (vi)  

              	
                To
      the extent that the Administrator, in its sole discretion, permits a
      subsequent election to delay a payment or change the form of payment that
      has been specified under (A), (B) or (C) above, the following provisions
      shall apply:

              

      

       

      
        	
                (A)  

              	
                Such
      election may not take effect until twelve months after the date on which
      the election is made;

              

      

       

      
        	
                (B)  

              	
                Where
      the payment is to be made for reasons other than death, disability or
      unforeseen hardship, as those terms are defined in Section 18(b)(i),
      above, the first payment with respect to which such election is made must
      be deferred for a period of not less than five years from the date such
      payment would otherwise have been made;
and

              

      

       

      
        	
                (C)  

              	
                Any
      election related to a payment based upon separation from service, as that
      term is defined in Section 18(b)(i), above, may not be made less than
      twelve months prior to the date of the first scheduled payment
      hereunder.

              

      

       

       

      
        
           

        

        
          12

          
            

          

        

        
           

        

      

       

       

      
        	
                20.  

              	
                SUCCESSORS AND
      ASSIGNS.

              

      

       

      The
provisions of this Plan shall be binding upon all successors and assigns of any
such Participant including, without limitation, the estate of any such
Participant and the executors, administrators, or trustees of such estate, and
any receiver, trustee in bankruptcy or representative of the creditors of any
such Participant.

       

      
        	
                21.  

              	
                MISCELLANEOUS.

              

      

       

      
        	
                (a)  

              	
                This
      Plan shall be governed by and construed in accordance with the laws of the
      State of Delaware.

              

      

       

      
        	
                (b)  

              	
                Any
      and all funds received by the Company under the Plan may be used for any
      corporate purpose.

              

      

       

      
        	
                (c)  

              	
                Nothing
      contained in the Plan or any Award granted under the Plan shall confer
      upon a Participant any right to be continued in the employment of the
      Company or any subsidiary, or interfere in any way with the right of the
      Company, or its subsidiaries, to terminate the employment relationship at
      any time.

              

      

       

       

       

       

       

       

       

      13firstamendmenttonpa.htm

Exhibit 10.1

 

FIRST AMENDMENT TO

SENIOR SUBORDINATED NOTE PURCHASE AND SECURITY AGREEMENT

 

Physicians Formula, Inc.

1055 West 8th Street

Azusa, CA 91702

 

 

Dated as of February 3, 2010

 

Mill Road Capital, L.P.,

   as the Purchaser, a Holder and

   the Holder Representative,

Two Sound View Drive

Greenwich, CT 06830

 

Ladies and Gentlemen:

 

    Physicians Formula, Inc., a New York corporation (the “Borrower”), Physicians Formula Holdings, Inc., a Delaware corporation (“Holdings”),
and the direct parent of the Borrower, and the other direct and indirect Subsidiaries of Holdings from time to time party to the Purchase and Security Agreement (as defined below), as Guarantors, hereby agree with you as follows:

 

    WHEREAS, the Borrower, Holdings and the other direct and indirect Subsidiaries of Holdings are parties to a Senior Subordinated Note Purchase and Security Agreement, dated as of November 6, 2009 (the “Purchase
and Security Agreement”), providing for the issuance and sale of Senior Subordinated Notes due May 6, 2013 of the Borrower (the “Notes”) to Mill Road Capital, L.P. (“MRC”).

 

    WHEREAS, the Purchase and Security Agreement contemplates that upon the approval of certain terms and conditions by the stockholders of Holdings, the parties shall amend the terms of the Notes and issue warrants to MRC, upon the terms and conditions set forth in
the Purchase and Security Agreement and the Annexes thereto, and the parties to the Purchase and Security Agreement shall execute and deliver documentation to effect these terms and conditions, including an amendment to the Purchase and Security Agreement substantially in the form of Annex A-1 to the Purchase and Security Agreement, and a warrant substantially in the form of Annex A-3 to
the Purchase and Security Agreement.

 

    WHEREAS, the Purchase and Security Agreement and the Annexes thereto contemplate that the number of warrants issuable upon the approval by the stockholders of Holdings shall be determined based on a formula tied to the 30-day average closing price of Holdings’
common stock (the “Common Stock”) as of the date of the amendment contemplated by Annex A to the Purchase and Security Agreement.

 

    WHEREAS, the parties desire to enter into an amendment to the Purchase and Security Agreement (the “First Amendment”) to amend Annexes
A, A-1, A-2 and A-3 thereto, to agree upon the number shares of Holdings’ Common Stock issuable upon exercise of the warrants, in lieu of determining such number based on a formula.

 

    NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration (the receipt of which is hereby acknowledged), the parties hereto agree as follows:

 

    1.1 The Amendments.

 

       (a) Annex
A to the Purchase and Security Agreement is hereby superseded and replaced in its entirety with the form attached hereto as Annex A.

 

 

-1-

 

 

       (b) Annex
A-1 to the Purchase and Security Agreement is hereby superseded and replaced in its entirety with the form attached hereto as Annex A-1.

 

       (c) Annex
A-2 to the Purchase and Security Agreement is hereby superseded and replaced in its entirety with the form attached hereto as Annex A-2.

 

       (d) Annex
A-3 to the Purchase and Security Agreement is hereby superseded and replaced in its entirety with the form attached hereto as Annex A-3.

 

    1.2 Acknowledgement.  The parties
hereby acknowledge and agree that if the stockholders of Holdings approve the issuance of the warrants to MRC, the number of shares of Holdings’ Common Stock issuable upon exercise of the warrants shall be 650,000.

 

    1.3 Miscellaneous Provisions.

 

       (a) Conditions
to Effectiveness.  This First Amendment shall become effective upon execution and delivery of this First Amendment by each of the parties hereto.

 

       (b) Survival
of Other Provisions.  Unless specifically amended herein, all of the other covenants, agreements, representations, warranties or other terms and conditions of the Purchase and Security Agreement shall remain in full force and effect without any change whatsoever.

 

       (c) Defined
Terms.  Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Purchase and Security Agreement.

 

       (d) Governing
Law.  THIS FIRST AMENDMENT IS A CONTRACT UNDER THE LAWS OF THE STATE OF NEW YORK AND SHALL FOR ALL PURPOSES BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF SAID STATE (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW).

 

       (e) Section
Headings; Construction.  The descriptive headings in this First Amendment have been inserted for convenience only and shall not be deemed to limit or otherwise affect the construction of any provision thereof or hereof.

 

       (f) Counterparts.  This
First Amendment may be executed simultaneously in any number of counterparts, each of which when so executed and delivered shall be taken to be an original; but such counterparts shall together constitute but one and the same document.  Any counterpart may be executed by the delivery of a facsimile signature thereon by telecopier or by electronic mail, each of which shall be of the same legal effect, validity and enforceability as an original manually executed signature page.

 

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

 

 

-2-

 

 

    IN WITNESS WHEREOF, the parties hereto have duly authorized and executed this First Amendment under seal as of the date first above written.

 

	 	BORROWER:	 
	 	 	 	 
	 	
PHYSICIANS FORMULA, INC.,

a New York Corporation 
	 
	 	 	 	 
	 	By: 	 /s/ Jeff Rogers	 
	 	 	Name: Jeff Rogers 	 
	 	 	Title: President 	 
	 	 	 	 
	 	
Federal Employer Identification No. 13-3015258

Organization Identification No. N/A 
	 
	 	 	 	 
	 	GUARANTORS:	 
	 	 	 	 
	 	
PHYSICIANS FORMULA HOLDINGS, INC.,

a Delaware Corporation 
	 
	 	 	 	 
	 	By: 	 /s/ Jeff Rogers	 
	 	 	Name: Jeff Rogers 	 
	 	 	Title: President 	 
	 	 	 	 
	 	
PHYSICIANS FORMULA COSMETICS, INC.,

a Delaware Corporation 
	 
	 	 	 	 
	 	By: 	 /s/ Jeff Rogers	 
	 	 	Name: Jeff Rogers 	 
	 	 	Title: President 	 
	 	 	 	 
	 	
PHYSICIANS FORMULA DRTV, LLC,

a Delaware Limited Liability Company 
	 
	 	 	 	 
	 	By: 	 /s/ Jeff Rogers	 
	 	 	Name: Jeff Rogers 	 
	 	 	Title: President 	 

 

 

-3-

 

 

	 	ACCEPTED AND AGREED:	 
	 	 	 	 
	 	
PURCHASER AND INITIAL

HOLDER REPRESENTATIVE:
	 
	 	 	 	 
	 	
MILL ROAD CAPITAL, L.P.,

a Delaware Limited Partnership 
	 
	 	 	 	 
	 	By: 	 /s/ Charles Goldman	 
	 	 	Name: Charles Goldman	 
	 	 	Title: Managing Director	 

 

 

-4-

 

 

ANNEX A

 

MEZZANINE FINANCING

If Holdings Stockholder approval is obtained, then the terms of the Operative Documents shall be modified as follows and Holdings shall issue warrants to MRC under the terms set forth below.  The parties will execute and deliver documentation to effect the below changes.

SENIOR SUBORDINATED NOTES MODIFICATIONS

	
Maturity:
	
5 years from the Closing Date of the existing Senior Subordinated Notes Purchase and Security Agreement.

	
Coupon:
	
10.0% per annum payable in cash and 4.0% per annum payable-in-kind

 

Cash interest payable monthly by automatic bank draft in arrears on a 360 day basis and actual days elapsed; PIK accrued annually and added to the principal balance of the Senior Subordinated Notes

 

 

	
Fees:
	
No additional fees; provided, that, whether closing occurs or not, all reasonable out-of-pocket expenses, including legal expenses, will be reimbursed.

 

	
Security:
	
The same as set forth in the existing Senior Subordinated Notes Purchase and Security Agreement and the other Operative Documents, except that there shall be no cap on MRC’s lien.

 

	
Optional Redemption:
	
The Senior Subordinated Notes will be redeemable at the option of the Company, in whole or in part, at any time prior to maturity, at the following redemption prices (expressed as a percentage of principal amount), together, in each case, with accrued and unpaid interest, if any, to the date of redemption:

	  	  	
Percentage

	
5 years prior to Maturity Date
	
105%

	
4 years prior to Maturity Date
	
104%

	
3 years prior to Maturity Date
	
102%

	
2 years prior to Maturity Date
	
101%

	
1 year prior to Maturity Date
	
100%

	
Closing Conditions:
	
As set forth for the initial closing of the existing Senior Subordinated Notes Purchase and Security Agreement plus the following:

 

    · Approval by the Issuer’s shareholders of the transaction as set forth in this Term Sheet, all in accordance with Section 203 of the Delaware
General Corporation Law and the Nasdaq Rules.

WARRANTS

	
Issuer:
	
Physicians Formula Holdings, Inc. (“Holdings”)

 

	
Amount:
	
650,000 warrants

 

	
Strike Price:
	
$0.25

 

	
Maturity:
	
Seven (7) Years

 

	
Registration Rights:
	
Holdings agrees, at its expense,  (1) to file a registration statement on Form S-3 (or on Form S-1 if the filing has not been made on or prior to April 30, 2010) providing for the resale of the shares of Common Stock underlying the warrants within 30 days of the closing date of the mezzanine financing
(i.e. the closing date of the amendment of the Senior Subordinated Notes) and (2) to use its reasonable efforts to cause the registration statement to be declared effective within 120 days of the closing date; provided that Holdings shall use reasonable efforts to cause the registration statement to be declared effective promptly, but in any event, within five days after the SEC reaches a no comment position with respect to the registration statement.  Holdings shall pay liquidated damages in the amount
of 0.5% of the invested amount per month for up to 6 months and 1.0% for the following 6 months if it fails to file on time or fails to cause the registration statement to become effective on time.  In addition, MRC will have piggyback rights to participate in any underwritten offerings by Holdings, subject to customary underwriter cut backs. The agreement covering MRC’s registration rights shall cover additional terms usual and customary in transactions such as this, including required periods
of effectiveness and penalties for lapse.

 

In the event Holdings is not currently S-3 eligible, Holdings may delay the initial filing of the registration statement until April 30, 2010 without penalty.

 

 

-5-

 

 

Annex A-1

 

SECOND AMENDMENT TO

SENIOR SUBORDINATED NOTE PURCHASE AND SECURITY AGREEMENT

 

    THIS SECOND AMENDMENT TO SENIOR SUBORDINATED NOTE PURCHASE AND SECURITY AGREEMENT dated as of ________, 20__ (the “Amendment”) amends the Senior Subordinated Note Purchase
and Security Agreement dated as of November 6, 2009 (the “Original Agreement”), by and among Mill Road Capital, L.P., a Delaware limited partnership (the “Holder”), Physicians Formula, Inc., a New York corporation (the “Borrower”), Physicians Formula Holdings, Inc., a Delaware corporation
(“Holdings”) and the Guarantors party to the Original Agreement.

 

    WHEREAS, the Holder, the Borrower, Holdings and the Guarantors desire to amend the Original Agreement to change the terms of the Notes sold under the Original Agreement and to permit the issuance and sale by Holdings of warrants to the Holder; and

 

    WHEREAS, the Holder holds Notes representing at least a majority of the aggregate principal amount of the Notes outstanding on the date hereof;

 

    NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, the receipt and sufficiency of which are hereby acknowledged, the parties to this Amendment hereby agree as follows:

 

   1. Defined Terms

 

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

 

   2. Original Agreement Modifications

 

       (a) Section
1.1(a) of the Original Agreement is hereby amended and restated in its entirety as follows:

 

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

 

       (b) The
third sentence of Section 1.1(b) of the Original Agreement is hereby amended by amending and restating such sentence in its entirety as follows:

 

          “All accrued PIK Interest shall be compounded annually on the first day of each calendar year.”

 

       (c) Section
1.4(a) of the Original Agreement is hereby amended by deleting the reference to “May 6, 2013” in the first sentence of such section and replacing it with “November 6, 2014”.

 

 

-6-

 

 

       (d) Section
1.4(d) of the Original Agreement is amended and restated in its entirety as follows:

 

          “(d) Prepayment Premium.  In
the event of any prepayment or repurchase of the Notes prior to the Maturity Date pursuant to clauses (b) or (c) above, the Borrower shall pay to the Holder Representative (on behalf of the Holders) the prepayment premium indicated below corresponding to the time period in which such prepayment or repurchase occurs or is required to occur (the “Prepayment Premium”) (which prepayment premium shall be paid to the Holder Representative
(on behalf of the Holders) as liquidated damages and compensation for the costs of making funds available with respect to the loans evidenced by the Notes):

 

 

	 	
 Period

 

 
	
 Prepayment Premium

(% of the aggregate principal amount of the Notes prepaid or repurchased)

 
	 
	 	Closing Date through November 5, 2010 	5% 	 
	 	November 6, 2010 through November 5, 2011 	4% 	 
	 	November 6, 2011 through November 5, 2012 	2% 	 
	 	November 6, 2012 through November 5, 2013 	1% 	 
	 	November 6, 2013 and thereafter 	0% 	 

          ”

 

       (e) Section
1.8 of the Original Agreement is amended and restated in its entirety as follows:

 

          “1.8 Transfer and Exchange of Notes and Warrants.  The
Borrower shall keep a register in which it shall provide for the registration of the Notes and the Warrants and the registration of transfers of Notes and the Warrants.  The Holder of any Note or Warrant may, prior to maturity, prepayment or repurchase of such Note or the expiration of such Warrant, surrender such Note or Warrant at the principal office of the Borrower for transfer or exchange.  Any Holder desiring to transfer or exchange any Note or Warrant (including, but not limited to,
any assignment of a Note or Notes or a Warrant or Warrants contemplated by Section 11.5 hereof) shall first notify the Borrower in writing at least ten (10) Business Days in advance of such transfer or exchange.  Promptly, but in any event within ten (10) Business Days after such notice to the Borrower from the Holder Representative (on behalf of a Holder of one or more Notes) of  a Holder’s intention to make such an exchange
of such Holder’s Note(s) and without expense (other than transfer taxes, if any) to such Holder, the Borrower shall issue in exchange therefor another Note or Notes in the same aggregate principal amount, as of the date of such issuance, as the unpaid principal amount of the Note so surrendered and having the same maturity and rate of interest, containing the same provisions and subject to the same terms and conditions as the Note so surrendered (provided that
no minimum shall apply to a liquidating distribution of Notes to investors in a Holder and any Notes so distributed may be subsequently transferred by such investor and its successors in the original denomination thereof without further restriction).  Each new Note shall be made payable to such Person or Persons, or assigns, as the Holder of such surrendered Note may designate, and such transfer or exchange shall be made in such a manner that no gain or loss of principal or interest shall result therefrom.  The
Borrower shall have no obligation or liability under any Note to any Person other than the registered Holder of each such Note.  Assignments and transfers of Notes by the Holders shall be made in compliance with Section 11.5 hereof.  Assignments, transfers and exchanges of Warrants shall be made in compliance with the terms set forth in the Warrants.

 

       (f) Section
2.10 of the Original Agreement is hereby deleted in its entirety.

 

 

-7-

 

 

       (g) The Original
Agreement is hereby amended by inserting the following new Article IIA as follows:

 

ARTICLE IIA

ISSUANCE OF THE WARRANTS

 

    2A.1 The Warrants.  Holdings has authorized the issuance and sale of warrants for the purchase of an aggregate
of 650,000 shares of Common Stock (the “Warrant Shares”) (subject to adjustment as provided therein) in the form set forth as Exhibit G attached hereto (referred to herein individually as a “Warrant” and collectively as the “Warrants”,
which terms shall also include any warrants delivered in exchange therefor or replacement thereof).  The Warrants shall be exercisable at a purchase price equal to $0.25 per Warrant Share (subject to adjustment as provided in the Warrants).

 

    2A.2 Purchase and Sale of the Warrants.  For no additional consideration, Holdings agrees to issue to the Purchaser on the Second Amendment Effective Date, the Warrant.

 

    2A.3 Registration Rights.  The Purchaser and its successors and assigns shall have the registration rights with respect to the Common Stock purchasable under the Warrants
as set forth in the Registration Rights Agreement.

 

    2A.4 Representations and Warranties of the Purchaser regarding the Warrants.

 

       The Purchaser hereby represents and warrants, which representations and warranties shall survive the Second Amendment Effective Date, that:

 

       (a) It is the present intention of the Purchaser to acquire its Warrant and the Warrant Shares for its own account, and not as nominee or agent.

 

       (b) The Warrants and the Warrant Shares are being and will be acquired for the purpose of investment and not with a view to distribution or resale thereof in violation of
the securities laws; subject, nevertheless, to the condition that, except as otherwise provided herein and subject to compliance with applicable securities laws, the disposition of the property of the Purchaser shall at all times be within its control.  The Purchaser was not formed solely for the purpose of making an investment in the Borrower.  The Purchaser is an “accredited investor” as that term is defined in Regulation D promulgated under the Securities Act with such knowledge
and experience in financial and business matters as are necessary in order to evaluate the merits and risks of an investment in the Warrants and Warrant Shares.  In making its decision to acquire the Warrant, the Purchaser has relied upon independent investigations made by the Purchaser and the Purchaser’s representatives, including the Purchaser’s own professional, tax and other advisors.  The Purchaser and its representatives have been given the opportunity to ask questions of,
and to receive answers from, the Borrower concerning the terms and conditions of the acquisition of the Warrant.  The Purchaser has reviewed, or has had the opportunity to review, all information it deems necessary and appropriate for the Purchaser to evaluate the financial risks inherent in the acquisition of the Warrant.  The Purchaser understands that its acquisition of the Warrant involves a high degree of risk and that no governmental authority has passed on or made any recommendation
or endorsement of the Warrant.

 

       (c) The Purchaser understands that it must bear the economic risk of its investment for an indefinite period of time because the Warrants and the Warrant Shares are not, and
will not be, registered under the Securities Act or any applicable state securities laws and may not be resold unless subsequently registered under the Securities Act and such other laws or unless an exemption from such registration is available.  The Purchaser acknowledges that, in issuing the Purchaser’s Warrant and the Warrant Shares, the Borrower is relying on the representations and warranties of the Purchaser in this Section 2A.4.

 

 

-8-

 

 

       (d) The Purchaser hereby acknowledges that its Warrant and each certificate, if any, representing Warrant Shares (unless
no longer required in the written opinion of counsel delivered to the Borrower, which opinion and counsel shall be reasonably satisfactory to the Borrower and its legal counsel, it being agreed that Foley Hoag LLP shall be satisfactory counsel) shall bear a legend substantially in the following form (in addition to any other legend required by the Operative Documents):

 

    NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS
AND THE SECURITIES MAY NOT BE SOLD OR TRANSFERRED WITHOUT COMPLIANCE WITH THE REGISTRATION OR QUALIFICATION PROVISIONS OF APPLICABLE FEDERAL AND STATE SECURITIES LAWS OR APPLICABLE EXEMPTIONS THEREFROM.

 

    The acquisition by the Purchaser of the its Warrant Shares shall constitute a confirmation by it of the foregoing representations.

 

    2A.5 Representations and Warranties of Holdings regarding the Warrants.

 

       Holdings hereby represents and warrants, which representations and warranties shall survive the Second Amendment Effective Date, that:

 

       (a) Authority; No Conflicts.

 

          (i) The execution, delivery and performance of the Operative Documents and the transactions contemplated
thereby by Holdings (including the issuance of the Warrants and the issuance of the Warrant Shares upon exercise of the Warrants) are within the power and authority of Holdings and have been authorized by all corporate or other organizational proceedings of Holdings and its stockholders and do not and will not (i) contravene any provision of the certificate of incorporation or bylaws or any other organizational documents of Holdings or any law, rule or regulation applicable to Holdings, (ii) contravene any provision
of, or constitute an event of default or event that, but for the requirement that time elapse or notice be given, or both, would constitute an event of default under, any order, agreement, lease, mortgage, note, bond, indenture, license, or other instrument or undertaking to which Holdings is a party or by which any of its properties are bound, or (iii) result in or require the imposition of any Lien on any of the properties, assets or rights of Holdings, except in favor of the Holders.

 

          (ii) The Warrants being purchased hereunder and the Warrant Shares issuable upon exercise of the Warrants,
when issued, delivered and paid for in the manner set forth in this Agreement or, in the case of the Warrant Shares, when issued, delivered and paid for in the manner set forth in the Warrant, will be duly authorized and validly issued and outstanding.  No preemptive rights or other rights of any Person to subscribe for or purchase, and no anti-dilution adjustment or similar rights of any Person, exist or will be triggered with respect to the issuance and sale of the Warrants or the issuance of the
Warrant Shares upon the exercise of the Warrants.  Holdings will at all times hereafter keep available, solely for issuance and delivery upon exercise of the Warrants, such number of shares of Common Stock as from time to time shall be issuable upon exercise of the Warrants.

 

       (b) Securities Act.  Neither Holdings, nor anyone acting on its behalf has offered or will offer
to sell Warrants, Common Stock or other securities to, or has solicited or will solicit offers with respect thereto from, or has entered into or will enter into any preliminary conversations or negotiations relating thereto with, any Person, so as to bring the issuance and sale of the Warrants, or the issuance of the Warrant Shares issuable upon exercise of the Warrants, under the registration provisions of the Securities Act or the registration provisions of any securities or Blue Sky laws of any applicable
jurisdiction.  Assuming the accuracy of the representations and warranties of the Purchaser set forth herein, neither the issuance of the Warrants, nor the issuance of the Warrant Shares upon exercise of the Warrants, is required to be registered under the Securities Act or any applicable state securities laws, and such issuances shall be in compliance with all applicable federal and state securities laws.

 

 

-9-

 

 

    (h) Section 3.1 of the Original Agreement is hereby amended by amending and restating the following definitions therein:

 

       “Holder” or “Holders”
shall mean the Purchaser (so long as it holds one or more Notes or one or more Warrants, as the context requires) and any other holder or holders from time to time of one or more Notes and/or one or more Warrants, as the context requires.

 

       “Maturity Date” shall be November 6, 2014.

 

       “Operative Documents” means this Agreement, the Notes, the Guaranties, the Security Documents, the
Intercreditor Agreement, the Warrants, the Registration Rights Agreement and each other agreement, instrument or document now or hereafter executed and pursuant to or in connection with any of the foregoing.

 

    (i) Section 3.1 of
the Original Agreement is hereby further amended by inserting the following definitions therein in appropriate alphabetical order:

 

       “Common Stock” is the common stock, par value $0.01 per share, of Holdings.

 

       “Second Amendment Effective Date” is _______, 20__ .

 

       “Registration Rights Agreement” means that certain Registration Rights Agreement dated as of the Second
Amendment Effective Date among Purchaser, Holdings and the other Persons party thereto in the form attached hereto as Exhibit H.

 

       “Warrant” or “Warrants”
shall have the meaning given to such term in Section 2A.1 hereof.

 

       “Warrant Shares” shall have the meaning given to such term in Section
2A.1 hereof.

 

    (j) The third sentence of Section
3.2 of the Original Agreement is hereby amended by amending and restating such sentence in its entirety as follows:

 

       “The words “party” or “parties” when used with reference to this Agreement shall include each party to this Agreement and, by their acceptance of
a Note or Warrant, each Holder.”

 

    (k) Section 8.1 of
the Original Agreement is hereby amended by inserting the following new sentence at the end thereof as follows:

 

       “Without in any way limiting the rights of the Holders, Holdings hereby agrees that the Holders of the Warrants or the Warrant Shares would have no adequate remedy at law,
for monetary compensation or otherwise, for the damages that would be suffered if Holdings or the Borrower were to fail to comply with its obligations under Article IIA and/or Article VII hereof, and that Holdings therefore agrees that the Holders of the Warrants and the Warrant Shares shall be entitled to obtain specific performance of the Holdings’ obligations under Article IIA and/or Article VII hereof.”

 

    (l) Article X of
the Original Agreement is hereby amended by deleting the references to the clause “Each Holder, by acceptance of any Note(s) held by it,” throughout such Article and replacing it with the clause “Each Holder, by acceptance of any Note(s) or Warrant(s) held by it,”.

 

    (m) Section 10.8 of
the Original Agreement is hereby amended by deleting the references to the clause “with respect to its Note” throughout such Section and replacing it with the clause “with respect to its Note and its Warrant”.

 

 

-10-

 

 

    (n) Section 11.2 of the Original Agreement is hereby amended and restated in its entirety
as follows:

 

       “11.2 Amendments, Waivers and Consents.  Any provision in this Agreement, the Notes or the
other Operative Documents (other than the Warrants) to the contrary notwithstanding, changes in or additions to this Agreement and the other Operative Documents may be made, and compliance with any covenant or provision set forth herein or therein may be omitted or waived, if the Borrower shall obtain consent thereto in writing from the Required Holders, and shall, in any case, deliver copies of such consent in writing to all other Holders of Notes and/or Warrants; provided that (i) without the consent of all
Holders of Notes, no such consent or waiver shall be effective to reduce the amount of, to postpone the date fixed for the payment of, the principal of (including any required redemption) or interest or Prepayment Premium payable on any Note, to decrease the Interest Rate or the Prepayment Premium, to decrease or postpone any prepayments or redemptions, to increase the proportion of interest payable as PIK Interest rather than as cash interest, to alter, amend or waive compliance with Section 8.1(a), to alter
or amend the consent mechanism provided for under Section 8.3 or this Section 11.2, or to release any material Guarantor from its guaranty hereunder or any Guaranty, and (ii) without the consent of the Holder Representative, no such consent or waiver shall be effective to alter the rights or obligations of the Holder Representative.  The provisions of the Warrants may be amended or waived in the manner provided, and with the consent of the Persons required, under Section 12 of the Warrants.  If
the Required Holders vote to alter, amend or waive compliance with the Intercreditor Agreement or any subordination or intercreditor agreement relating to any Subordinated Debt, then all Holders shall be bound by such vote and agree to sign such consent or other document as may be necessary to effectuate such alteration, amendment or waiver.  Any waiver or consent may be given subject to satisfaction of conditions stated therein and any waiver or consent shall be effective only in the specific instance
and for the specific purpose for which given.  Written notice of any waiver or consent effected under this subsection shall promptly be delivered by the Borrower to any Holders who did not execute the same.”

 

    (o) The last sentence of Section
11.4(a) of the Original Agreement is hereby amended by amending and restating such sentence in its entirety as follows:

 

       “In addition, the Borrower agrees to pay the expenses of preparing Notes and Warrants from time to time in connection with exchanges and transfers of Notes and/or Warrants
and the expenses of delivering copies of Operative Documents to Holders, and the Borrower agrees to indemnify, pay and hold each Holder harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay taxes (other than transfer taxes) and filing fees with respect to such transfer.”

 

    (p) Section 11.4(c) of
the Original Agreement is hereby amended and restated in its entirety as follows:

 

       “(c) The provisions of this Section 11.4 shall survive the payment in full of all amounts due under
this Agreement, the Notes and the other Operative Documents, the exercise in full or termination of the Warrants, and the termination of this Agreement and the other Operative Documents.”

 

    (q) Section 11.5 of
the Original Agreement is hereby amended by inserting the following new sentence at the end thereof as follows:

 

       “Any holder of one or more Warrants may assign its Warrants in compliance with the terms set forth in the Warrants.”

 

 

-11-

 

 

    (r) Section 11.7 of
the Original Agreement is hereby amended and restated in its entirety as follows:

 

       “11.7 Payments in Respect of Warrants.  The Holders of the Warrants, by their acceptance thereof,
agree that, with respect to the sale to, or repurchase by, Holdings or any Person directly or indirectly affiliated with Holdings or any of its managers, directors, officers, members or other equityholders, of the Warrants, equitable adjustment will be made among them so that, in effect, all such sums shall be shared ratably by all of the Holders of the Warrants in proportion to their respective holdings of Warrants.  If any Holder of one or more Warrants receives any such sum in respect of its Warrants
in excess of its pro rata portion, then such Holder receiving such excess payment shall purchase for cash from the other Holders of Warrants an interest in their Warrants in such amount as shall result in a ratable participation by all of the Holders of the Warrants in the aggregate of all Warrants then outstanding.”

 

    (s) Clause (ii) of Section
11.8 of the Original Agreement is hereby amended and restated in its entirety as follows:

 

       “(ii) the Holders’ agreement to purchase the Notes and Warrants, or the use or intended use of the proceeds of the Notes and Warrants hereunder,”

 

    (t) The last sentence of Section
11.8 of the Original Agreement is hereby amended by amending and restating such sentence in its entirety as follows:

 

       “This indemnification shall survive the payment and satisfaction of all Obligations, the exercise in full or termination of the Warrants, and the termination of this Agreement
and the other Operative Documents, and shall remain in force beyond the expiration of any applicable statute of limitations and payment or satisfaction in full of any single claim under this indemnification.”

 

    (u) The parenthetical in the first sentence of Section
11.14 of the Original Agreement is hereby amended by amending and restating such parenthetical in its entirety as follows:

 

       “(BY ACCEPTANCE OF ANY NOTE(S) OR WARRANT(S) HELD BY IT)”

 

    (v) Section 11.20 of
the Original Agreement is hereby amended and restated in its entirety as follows:

 

       “11.20 Specific Performance.  Upon breach or default by the Borrower or any Guarantor with
respect to any obligation hereunder under the Notes, the Warrants (or the Warrant Shares) or under any other Operative Document, each Holder shall be entitled to protect and enforce its rights at law, or in equity or by other appropriate proceedings for specific performance of such obligation, or for an injunction against such breach or default, or in aid of the exercise of any power or remedy granted hereby or thereby or by law.”

 

    (w) The parenthetical in the first sentence of Section
11.22 of the Original Agreement is hereby amended by amending and restating such parenthetical in its entirety as follows:

 

       “(by the acceptance of any Note(s) or Warrant(s) held by it)”

 

    (x) Clause (f)(A) of Section
11.22 of the Original Agreement is hereby amended and restated in its entirety as follows:

 

       “(A) any assignee of or participant in, or any prospective assignee of or participant in, any of its rights or obligations under this Agreement, any Note(s) or any Warrant(s)
or”

 

 

-12-

 

 

   3. Amendments to Exhibits

 

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

 

   4. Amendment to Operative Documents; Consistent Changes

 

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

 

    5. Confirmation of Certain Terms and Other Matters

 

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

 

    6. Collateral Security

 

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

 

    7. Representations and Warranties

   

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

 

 

-13-

 

 

    8. Conditions to Holder's Obligations

 

       The willingness of the Holder to consent to and enter into this Amendment is subject to the satisfaction of the following conditions concurrently with the execution and delivery
of this Amendment:

 

       (a) The
Holder shall have received approving resolutions of the Board of Directors (or other appropriate governing body) and the shareholders or members of each of the Borrower, Holdings and the Guarantors, certified as of the date hereof by the Secretary of the Borrower, Holdings and the Guarantors authorizing the execution and delivery by the Borrower, Holdings and the Guarantors of this Amendment and all documents referenced herein.

 

       (b) The
Borrower, Holdings and the Guarantors shall have executed and delivered to the Holder, as applicable, (i) this Amendment, (ii) the Amended and Restated Senior Subordinated Note attached hereto as Annex B, (iii) the Warrant attached hereto as Annex C, and (iv) the Registration Rights Agreement attached hereto as Annex D.

 

       (c) The
Holder shall have received a certificate of a Responsible Officer of each of the Borrower and Holdings as to the accuracy of the Borrower’s and Holdings’ representations and warranties in the Original Note Purchase Agreement in all material respects and in this Amendment and as to such other matters as the Holder may reasonably request.

 

       (d) The
Holder shall have received the favorable written opinion of Kirkland & Ellis LLP, counsel to the Borrower and the Guarantors regarding, among other things, the issuance of the warrants, in form and substance reasonably satisfactory to the Holder.

 

       (e) This
Amendment and all documents referenced herein or to be delivered in connection herewith shall be on terms reasonably satisfactory to Holder’s tax counsel.

 

       (f) The
Borrower shall have paid to the Holder all outstanding legal and other out of pocket fees and expenses incurred relative to the Holder’s relationship with the Borrower and all costs and fees associated with this Amendment.

 

       (g) The
Holder shall have received such other documents, certificates, instruments, and agreements from the Borrower as the Holder may reasonably request.

 

    9. Miscellaneous

 

       (a) This Amendment shall be governed by, and construed and
enforced in accordance with, the substantive laws of the State of New York, without regard to its principles of conflicts of laws.

 

       (b) This
Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

 

       (c) Each
of the Borrower, Holdings and the Guarantors shall, from time to time, at its expense, execute and deliver to the Holder all such other and further instruments, agreements and documents and take or cause to be taken all such other and future action as the Holder shall reasonably request in order to effect and confirm or vest more securely all rights contemplated by this Amendment, the Original Agreement or any Operative Document.

 

<The remainder of this page is intentionally left blank>

 

 

-14-

 

 

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

	 	BORROWER:	 
	 	 	 	 
	 	
PHYSICIANS FORMULA, INC.,

a New York Corporation 
	 
	 	 	 	 
	 	By: 	 	 
	 	 	Name: 	 
	 	 	Title: 	 
	 	 	 	 
	 	GUARANTORS:	 
	 	 	 	 
	 	
PHYSICIANS FORMULA HOLDINGS, INC.,

a Delaware Corporation 
	 
	 	 	 	 
	 	By: 	 	 
	 	 	Name: 	 
	 	 	Title: 	 
	 	 	 	 
	 	
PHYSICIANS FORMULA COSMETICS, INC.,

a Delaware Corporation 
	 
	 	 	 	 
	 	By: 	 	 
	 	 	Name: 	 
	 	 	Title: 	 
	 	 	 	 
	 	
PHYSICIANS FORMULA DRTV, LLC,

a Delaware Limited Liability Company 
	 
	 	 	 	 
	 	By: 	 	 
	 	 	Name: 	 
	 	 	Title: 	 

 

 

-15-

 

 

	 	
HOLDER:
	 
	 	 	 	 
	 	
MILL ROAD CAPITAL, L.P.,

a Delaware Limited Partnership 
	 
	 	 	 	 
	 	By: 	 	 
	 	 	Name: 	 
	 	 	Title: 	 

 

 

-16-

 

 

Annex A

Exceptions to Representations

 

[Borrower to complete]

 

 

-17-

 

Annex A-2

 

THIS INSTRUMENT AND THE RIGHTS AND OBLIGATIONS EVIDENCED HEREBY ARE SUBORDINATE IN THE MANNER AND TO THE EXTENT SET FORTH IN THAT CERTAIN INTERCREDITOR AGREEMENT (THE “INTERCREDITOR AGREEMENT”) DATED AS OF NOVEMBER 6, 2009 BY AND AMONG WELLS FARGO BANK, NATIONAL ASSOCIATION ACTING THROUGH ITS WELLS FARGO BUSINESS
CREDIT OPERATING DIVISION, MILL ROAD CAPITAL, L.P. AND PHYSICIANS FORMULA, INC.; AND EACH HOLDER OF THIS INSTRUMENT, BY ITS ACCEPTANCE HEREOF, IRREVOCABLY AGREES TO BE BOUND BY THE PROVISIONS OF THE INTERCREDITOR AGREEMENT.

 

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD OR TRANSFERRED WITHOUT COMPLIANCE WITH THE REGISTRATION OR QUALIFICATION PROVISIONS OF APPLICABLE FEDERAL AND STATE SECURITIES LAWS OR APPLICABLE EXEMPTIONS THEREFROM.

 

THIS NOTE HAS BEEN ISSUED WITH ORIGINAL ISSUE DISCOUNT FOR U.S. FEDERAL INCOME TAX PURPOSES.  FOR FURTHER INFORMATION REGARDING THE ISSUE PRICE, AMOUNT OF OID, ISSUE DATE, THE YIELD TO MATURITY OF THIS NOTE AND ANY OTHER INFORMATION REQUIRED UNDER TREASURY REGULATIONS SECTION 1.275-3(b)(1)(i), THE HOLDER OF THIS
NOTE SHOULD CONTACT THE OFFICE OF THE CHIEF FINANCIAL OFFICER OF PHYSICIANS FORMULA INC. AT 1055 WEST 8TH STREET, AZUSA, CA 91702, TEL NO. (626) 334-3395 AT ANY TIME BEGINNING 10 DAYS AFTER THE DATE OF ISSUANCE.

 

PHYSICIANS FORMULA, INC.

 

AMENDED AND RESTATED SENIOR SUBORDINATED NOTE

 

$8,000,000.00                                                                                                                [_________],
20__

 

    FOR VALUE RECEIVED, Physicians Formula, Inc., a New York corporation (the “Maker”), hereby promises to pay to the order of Mill
Road Capital, L.P., a Delaware limited partnership (“MRC”), or its registered assigns and transferees (collectively, the “Payee”) the principal sum of Eight Million Dollars ($8,000,000.00), plus the aggregate amount of accrued interest from time to time capitalized thereon, less the aggregate amount of principal prepaid or repaid from time to time, in each case,
pursuant to the terms and conditions of and at the times provided in the Purchase Agreement (as defined below).

 

    1. Notes.  This Senior Subordinated
Note (this “Note”) is issued pursuant to, and is subject to the terms and entitled to the benefits of, the Senior Subordinated Note Purchase and Security Agreement dated as of November 6, 2009 among the Maker, MRC and the Guarantors (as defined therein), as amended, restated, supplemented or otherwise modified from time to time, including by that certain First Amendment to Senior Subordinated Note Purchase and Security Agreement dated
as of February __, 2010 and that certain Second Amendment to Senior Subordinated Note Purchase and Security Agreement dated as of the date hereof (the “Purchase Agreement”), in accordance with its terms.  The Payee is entitled to enjoy the benefits of and to enforce the provisions of the Purchase Agreement as a Holder and is subject to the obligations thereunder of Holder.  Terms used herein and not otherwise defined
herein shall have the meanings ascribed thereto in the Purchase Agreement.

 

    2. Interest.  Commencing on the date
of issuance, this Note will accrue interest on the unpaid principal amount thereof at the Interest Rate specified in, and subject to adjustment as provided in, the Purchase Agreement.  Interest on this Note shall be computed based on a 360-day year and actual days elapsed, and all PIK Interest on this Note shall be compounded annually on the first day of each calendar year.  Cash interest on this Note shall be payable monthly in arrears on each Interest Payment Date commencing on [___________] by
wire transfer of immediately available funds to one or more accounts designated by the Payee.  The records of the Payee shall, absent manifest error, be conclusive evidence of the outstanding principal balance of this Note, including all PIK Interest added to the principal amount thereof and the compounding thereof, but any failure of the Payee to record, or any error in so recording, any such amount on the Payee’s records shall not limit or otherwise affect the obligations of the Maker under
this Note to make all payments of principal of and interest thereon when due.

 

 

-18-

 

 

    If an Event of Default has occurred and is continuing, from and after the date such Event of Default has occurred the entire outstanding unpaid principal balance of this Note and any unpaid interest from time to time in default shall (both before and after acceleration and
entry of judgment) bear interest, payable in cash on demand, at a rate per annum equal to the Interest Rate payable pursuant to Section 1.1 of the Purchase Agreement plus three percent (3%); provided, however, that upon the cessation or cure of such Event
of Default, if no other Event of Default is then continuing, this Note shall again bear interest at the applicable Interest Rate as set forth in Section 1.1 of the Purchase Agreement.

 

    The obligations of the Maker to pay interest under this Note are subject in all events to the provisions of Section 1.6 of the Purchase Agreement relating to Excess Interest and the Maximum Rate.

   

    3. Maturity; Required Redemption.  Unless
the maturity of this Note is accelerated pursuant to Article VIII of the Purchase Agreement, this Note shall mature and be redeemed by the Maker in one installment which shall be paid on November 6, 2014.  On the stated or accelerated maturity date of the Notes, the Maker will pay in cash the principal amount of the Notes then outstanding together with all accrued and unpaid interest thereon, including, without limitation, all PIK interest.

 

    4. Optional Prepayments.  The Maker
may voluntarily prepay this Note, in whole or in part, at any time.  Optional prepayments permitted pursuant to the Purchase Agreement may only be made upon payment to the Payee of an amount equal to the sum of the principal amount to be prepaid, together with all accrued and unpaid interest (including PIK Interest) on the amount so prepaid through the date of prepayment, plus the Prepayment Premium, if any, as provided in the Purchase
Agreement.

 

    5. Repurchase upon a Change of Control.  The
Maker is obligated upon the occurrence of a Change of Control to repurchase this Note in whole on the terms and conditions set forth in Section 1.4(c) of the Purchase Agreement.

 

    6. Prepayment Premium.  In the event
of any prepayment of this Note prior to the Maturity Date pursuant to Sections 1.4(b) and (c) of the Purchase Agreement, the Maker shall pay to the Payee the Prepayment Premium indicated in the Purchase Agreement corresponding to the time period in which such prepayment occurs or is required to occur.

 

    7. Guaranty and Security.  The payment
and performance of this Note is and shall at all times be guaranteed (the “Guaranty”) by each Guarantor pursuant to Article IX of the Purchase Agreement.  This Note is secured pursuant to the terms of (a) the security interest granted by the Borrower under Article II of the Purchase Agreement, (b) the Guarantor Security Agreement dated as of November 6, 2009 among
the Guarantors and the Payee and (c) the other Security Documents.  The Payee is entitled to the benefits of the Guaranty, the Guarantor Security Agreement, the other Security Documents and the other Operative Documents, and may enforce the agreements of the Maker contained therein, and the Payee may exercise the remedies provided for thereby or otherwise available in respect thereof, all in accordance with the terms thereof.

 

    8. Remedies on Default. Etc.  Reference
is made to the Purchase Agreement for the remedies available to the Payee upon the occurrence of an Event of Default as described in the Purchase Agreement.  The Maker hereby agrees to pay on demand all reasonable costs and expenses, including without limitation attorneys’ fees and costs of collection, incurred or paid by the holder of this Note in enforcing this Note in accordance with the Purchase Agreement.

 

 

-19-

 

 

    9. No Impairment.  No provision of the Purchase
Agreement or this Note shall alter or impair the obligation of the Maker, which is absolute and unconditional, to pay the principal and interest on this Note at the times, places and rates, and in the currency, provided.

 

    10. Waivers; Amendments.  The Maker
and each endorser and guarantor hereby waives presentment, demand, protest and notice of any kind.  No failure or delay on the part of the Maker or the Payee or holder hereof in exercising any right, power, privilege or remedy hereunder or under the Purchase Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power, privilege or remedy preclude any other or further exercise thereof or the exercise of any other right, power, privilege or remedy.  The
remedies provided for herein and in the Purchase Agreement are cumulative and are not exclusive of any remedies that may be available to the Maker or the Payee at law or in equity or otherwise.  This Note may not be amended and the provisions hereof may not be waived, except in accordance with the terms of the Purchase Agreement.

 

    11. Lost Notes, etc.  If this Note
is mutilated, destroyed, lost or stolen, upon receipt of evidence satisfactory to the Maker of such loss, theft, destruction or mutilation of this Note and, if requested in the case of any such loss, theft or destruction, upon delivery of an indemnity agreement reasonably satisfactory to the Maker, or, in the case of any such mutilation, upon surrender and cancellation of this Note, the Maker shall issue a new Note of like tenor and amount and dated the date to which interest has been paid, in lieu of this Note; provided, however,
if Payee, its nominee, or any of its partners or members is the holder of this Note and this Note is lost, stolen or destroyed, the affidavit of an authorized partner, member or officer of such holder setting forth the circumstances with respect to such loss, theft or destruction shall be accepted as satisfactory evidence thereof, and no indemnification shall be required as a condition to the execution and delivery by the Maker of a new Note in replacement of this Note other than the holder’s written agreement
to indemnify the Maker.

 

    12. Waiver of Jury Trial.  EACH OF
THE MAKER, EACH GUARANTOR AND THE PAYEE HEREBY WAIVES ITS RIGHT TO JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THE PURCHASE AGREEMENT, THIS NOTE OR ANY OF THE OTHER OPERATIVE DOCUMENTS, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THEREUNDER OR THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY, INCLUDING , WITHOUT LIMITATION, ANY COURSE OF CONDUCT, COURSE OF DEALINGS,
STATEMENTS OR ACTIONS OF THE PAYEE RELATING TO THE ADMINISTRATION OR ENFORCEMENT OF THE NOTES AND THE OPERATIVE DOCUMENTS, AND AGREES THAT IT WILL NOT SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED.  EXCEPT AS PROHIBITED BY LAW, EACH OF THE MAKER, EACH GUARANTOR AND THE PAYEE HEREBY WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION REFERRED TO IN THE PRECEDING SENTENCE ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL
DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES.  EACH OF THE MAKER, EACH GUARANTOR AND THE PAYEE (a) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER OF SUCH PERSONS HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT  SUCH PERSON WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS AND (b) ACKNOWLEDGES THAT EACH OTHER SUCH PERSON HAS BEEN INDUCED TO ENTER INTO THE PURCHASE AGREEMENT AND THE OTHER OPERATIVE DOCUMENTS TO WHICH IT IS A
PARTY BECAUSE OF, AMONG OTHER THINGS, THE WAIVERS AND CERTIFICATIONS CONTAINED THEREIN.

 

    13. Governing Law; Jurisdiction; Venue.  THIS
NOTE AND EACH OF THE OTHER OPERATIVE DOCUMENTS ARE CONTRACTS UNDER THE LAWS OF THE STATE OF NEW YORK AND SHALL FOR ALL PURPOSES BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF SAID STATE (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW).  THE MAKER AND EACH GUARANTOR CONSENT TO THE JURISDICTION OF THE FEDERAL AND STATE COURTS LOCATED IN NEW YORK COUNTY IN THE STATE OF NEW YORK IN CONNECTION WITH ANY SUIT TO ENFORCE THE RIGHTS OF THE PAYEE UNDER THIS NOTE OR ANY OF THE OTHER OPERATIVE
DOCUMENTS AND CONSENT TO SERVICE OF PROCESS IN ANY SUCH SUIT BEING MADE UPON THE MAKER OR ANY SUCH GUARANTOR, AS THE CASE MAY BE, BY MAIL AT THE MAKER’S OR SUCH GUARANTOR’S ADDRESS SET FORTH IN THE PURCHASE AGREEMENT.  THE MAKER AND EACH GUARANTOR IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH ACTION BROUGHT IN THE COURTS REFERRED TO IN THIS SECTION AND IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH ACTION THAT SUCH
ACTION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.  ANY SUIT OR JUDICIAL PROCEEDING BY THE MAKER OR ANY GUARANTOR AGAINST THE PAYEE INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH THIS NOTE OR ANY OTHER OPERATIVE DOCUMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THE OPERATIVE DOCUMENTS SHALL BE BROUGHT ONLY IN A FEDERAL OR STATE COURT LOCATED IN NEW YORK COUNTY IN THE STATE OF NEW YORK.

 

 

-20-

 

 

    14. This Note amends and restates and is substituted for that certain promissory note dated November 6, 2009 in the original
principal amount of $8,000,000 made by Borrower in favor of Payee (the “Prior Note”) and this Note is in substitution for (but not in payment of) the Prior Note.

 

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

 

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    IN WITNESS WHEREOF, the Maker has caused this Amended and Restated Senior Subordinated Note to be duly executed under seal on the date set forth above by a duly authorized representative of the Maker.

 

	 	
PHYSICIANS FORMULA, INC.
	 
	 	 	 	 
	 	By: 	 	 
	 	 	Name: 	 
	 	 	Title: 	 

 

 

-22-

 

 

Annex A-3

 

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS AND THE SECURITIES MAY NOT BE SOLD OR TRANSFERRED WITHOUT COMPLIANCE WITH THE REGISTRATION
OR QUALIFICATION PROVISIONS OF APPLICABLE FEDERAL AND STATE SECURITIES LAWS OR APPLICABLE EXEMPTIONS THEREFROM.

	
Warrant No. [20__] - #__

 

 

Void After [____, 20___]
	
Right to Purchase 650,000 (subject to the qualifications and adjustments set forth herein) shares of  Common Stock of Physicians Formula Holdings, Inc.

PHYSICIANS FORMULA HOLDINGS, INC.

Common Stock Purchase Warrant

[_______, 20___]

 

    Physicians Formula Holdings, Inc., a Delaware corporation (the “Company”), hereby certifies that for good and valuable consideration, MILL ROAD CAPITAL, L.P., and its successors and assigns (the “Holder”),
is entitled to subscribe for and purchase from the Company an aggregate of 650,000 validly issued, fully paid and nonassessable shares of Common Stock, par value $0.01 per share, of the Company (“Common Stock”) at a purchase price per share equal to $0.25 (the “Exercise Price”), all subject to the terms, conditions and adjustments as hereinafter provided.  The
Exercise Price shall be subject to adjustment from time to time pursuant to the provisions of Section 6 hereof.

 

    This Warrant is issued pursuant to, and in accordance with, the Senior Subordinated Note Purchase and Security Agreement dated as of November 6, 2009 by and among the Company, Physicians Formula, Inc. (a wholly-owned subsidiary of the Company), the Guarantors party
thereto and Holder, as amended, restated, supplemented or otherwise modified from time to time, including by that certain First Amendment to Senior Subordinated Note Purchase and Security Agreement dated as of February 3, 2010 and that certain Second Amendment to Senior Subordinated Note Purchase and Security Agreement dated as of the date hereof (the “Purchase Agreement”), and is subject to the terms thereof.

 

    Section 1. Definitions.  Unless otherwise defined herein, capitalized terms shall have the meaning given to them in the Purchase Agreement.  As used herein, the following terms shall have the following meanings, unless the context
otherwise requires:

 

       (a) “Fair Market Value” shall mean, as of the date of determination: (i) if the Common Stock is listed on a national securities exchange, the Fair Market Value shall
be the last reported sale price of the Common Stock on such exchange or market system on the last Business Day prior to the date of exercise of this Warrant or, if no such sale is made on such day, the average closing bid and asked price for such day on such exchange or market system; (ii) if the Common Stock is not listed, the Fair Market Value shall be the mean of the last reported bid and asked prices reported by OTC Bulletin Board or other similar over-the-counter quotation service on the last Business Day
prior to the date of exercise of this Warrant or (iii) if the Common Stock is not so listed and bid and asked prices are not so reported, the Fair Market Value shall be an amount determined mutually by (x) a majority of the members of the Board of Directors of the Company, and (y) the Holder.  If the Board of Directors and the Holder are unable to agree on the Fair Market Value within five (5) Business Days, the Fair Market Value shall be determined by an Independent Appraiser (as defined below) selected
by agreement of the Board of Directors and the Holder. If the parties cannot agree upon an Independent Appraiser within five (5) Business Days, then, within a further five (5) Business Days, the parties shall each select one Independent Appraiser and the two Independent Appraisers shall, within a further five (5) Business Days, select a third Independent Appraiser who shall determine the Fair Market Value.  “Independent Appraiser”
shall mean any nationally recognized independent auditing firm or investment banking firm that does not provide services directly to either party.  Any determination of the Fair Market Value by an Independent Appraiser shall be based on a valuation of the Company as an entirety without regard to any discount for minority interests or disparate voting rights among classes of Capital Stock.

 

 

-23-

 

 

       (b) “Warrant Expiration Date” shall mean 5:00 p.m., Pacific Time, on the seventh anniversary of the date of this Warrant; provided,
that, if such date is not a Business Day, the next Business Day immediately thereafter.

 

    Section 2. Transfers; Negotiability.  This Warrant and the shares of Common Stock issuable upon exercise of this Warrant may not be transferred or assigned in whole or in part without compliance with applicable federal and state securities
laws by the transferor and the transferee.  Subject to compliance with any applicable securities laws, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company, together with a written assignment of this Warrant duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer.  Upon such surrender and, if required, such payment,
the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denomination or denominations specified in such instrument of assignment, and this Warrant shall promptly be cancelled.  Until this Warrant is transferred on the books of the Company, the Company may treat the registered holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary.

 

    Section 3. Exercise of Warrant.

 

       3.1 Manner of Exercise.  Subject to the terms and conditions set forth herein, this Warrant may be exercised, in whole or in part (but not as to a fractional share of
Common Stock), by the Holder at any time or from time to time, on any Business Day on or prior to the Warrant Expiration Date by (i) the delivery of a duly executed exercise form in the form attached as Exhibit A hereto (an “Exercise Form”) to the Company at its office at 1055 West 8th Street,
Azusa, California 91702, or at such other office as the Company may designate by notice in writing, and (ii) the delivery of payment to the Company by cash, check made payable to the order of the Company, wire transfer of funds to a bank account designated by the Company or any other means approved by the Company, an amount equal to the aggregate Exercise Price for all shares of Common Stock as to which this Warrant is exercised.  In lieu of payment of the aggregate Exercise Price, the Holder may from
time to time convert this Warrant, in whole or in part, into a number of shares of Common Stock determined by using the following net issuance formula:

X=((P)(A-B))/A

where

 

	 X	= 	the number of shares of Common Stock to be issued to the holder for the portion of this Warrant being exercised; 
	
 P

 
	
= 

 
	the number of shares of Common Stock purchasable under this Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being exercised, at the date of calculation; 
	 A	= 	the Fair Market Value of one share of Common Stock as of the exercise date; and 
	 B	= 	the Exercise Price as in effect on the exercise date. 

        

 

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       3.2 Issuance of Common Stock.

 

          (a) Upon receipt of the documents and payments described in Section 3.1 hereof, the Company shall, within five
(5) Business Days, (x) if a registration statement relating to the shares of Common Stock issuable upon exercise of this Warrant is effective, and the Company’s transfer agent for its Common Stock (the “Transfer Agent”) is participating in The Depository Trust Company (“DTC”) Fast Automated Securities Transfer Program, upon the request of the Holder, cause
to be credited such aggregate number of shares of Common Stock to which the Holder is entitled pursuant to such exercise to the Holder’s or its designee’s balance account with DTC through its Deposit Withdrawal Agent Commission system, or (y) issue and deliver to the address as specified in the Exercise Form, a certificate, registered in the name of the Holder or its designee, for the number of shares of Common Stock to which the Holder is entitled pursuant to such exercise, together with an amount
in cash in lieu of any fraction of a share, as hereinafter provided.  The credit or stock certificate or certificates so delivered shall be in the denomination specified in the Exercise Form and shall be registered in the name of the Holder or its permitted designee (as specified in the Exercise Form).  This Warrant shall be deemed to have been exercised and a certificate or certificates for shares of Common Stock shall be deemed to have been issued, and the Holder or its permitted designee
(as specified in the Exercise Form) shall be deemed to have become a holder of such shares for all purposes as of the close of business on the date on which the Exercise Form and payments described in Section 3.1 hereof, are received by the Company as aforesaid.  The Holder of the Warrant shall tender this Warrant to the Company within a reasonable period of time after exercise pursuant to Section
3.1, but in any event within five (5) Business Days.  Upon receipt of the tendered Warrant, unless this Warrant has expired or all of the purchase rights represented hereby have been exercised, the Company shall deliver to the Holder or its permitted designee (as specified in the Exercise Form) a new Warrant evidencing the rights of such holder to purchase the unpurchased shares of Common Stock called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.  The
tender and exchange of this Warrant when partially exercised and the delivery by the Company of a replacement Warrant pursuant to the preceding sentence, shall not be required for the Holder to exercise this Warrant to purchase any unpurchased shares of Common Stock called for by this Warrant.  The Company shall pay any documentary or issue stamp taxes attributable to the issuance of this Warrant, a replacement Warrant or the shares of Common Stock issuable upon exercise of this Warrant.

 

          (b) Upon any exercise of this Warrant, the Company may require customary representations from the Holder that the Holder is an “accredited investor” as defined in
501(a) under the Securities Act, to assure that the issuance of the Common Stock hereunder shall not require registration or qualification under the Securities Act of 1933, as amended (the “Securities Act”), or any state securities laws.

 

       3.3 Fractional Shares.  No fractional Shares shall be issuable upon exercise of the Warrant and the number of shares of Common Stock to be issued upon exercise of the
Warrant shall be rounded down to the nearest whole share of Common Stock.  If a fractional share interest arises upon any exercise of the Warrant, the Company shall eliminate such fractional share interest by paying Holder the amount computed by multiplying the fractional interest by the Fair Market Value of a whole share of Common Stock as of the exercise date over the Exercise Price for such fractional share.

 

    Section 4. Mutilated or Missing Warrant.  In case this Warrant shall be mutilated, lost, stolen, or destroyed, the Company shall issue in exchange and substitution of and upon cancellation of the mutilated Warrant, or in lieu of and substitution
for the Warrant lost, stolen or destroyed, a new Warrant of like tenor and for the purchase of a like number of shares of Common Stock, but only upon receipt of a written statement reasonably satisfactory to the Company of such loss, theft or destruction of the Warrant, and with respect to a lost, stolen or destroyed Warrant, indemnity reasonably satisfactory to the Company with respect thereto.

 

    Section 5. Reservation of Common Stock.  The Company hereby represents and warrants that there have been reserved, and the Company shall at all applicable times keep reserved until issued (if necessary) as contemplated by this Section
5, out of the authorized and unissued shares of Common Stock, 100% of the number of shares issuable upon exercise of the rights of purchase represented by this Warrant.  The Company agrees that all shares of Common Stock issued upon due exercise of the Warrant shall be, at the time of delivery of the certificates for such shares of Common Stock, duly authorized, validly issued, fully paid and non-assessable shares of Common Stock of the Company.

 

 

-25-

 

 

    Section 6. Adjustments.  Subject and pursuant to the provisions of this Section 6, the Exercise Price and number of shares of Common Stock subject to this Warrant shall be subject to
adjustment from time to time as set forth hereinafter.

 

       6.1 Dividend, Subdivision or Combination of Common Stock.  If the Company at any time or from time to time, after the issuance of this Warrant but prior to the exercise
thereof subdivides (by any stock split, stock dividend, recapitalization or otherwise) its outstanding shares of Common Stock into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision shall be proportionately reduced and the aggregate number of shares of Common Stock for which this Warrant is exercisable (the “Warrant Share Number”) shall be proportionately increased.  If the Company
at any time combines (by reverse stock split, recapitalization or otherwise) its outstanding shares of Common Stock into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall be proportionately increased and the Warrant Share Number shall be proportionately decreased.  An adjustment made pursuant to this Section 6.1 shall become effective retroactively (x) in the case of any such dividend
or distribution, to a date immediately following the close of business on the record date for the determination of holders of shares of Common Stock entitled to receive such dividend or distribution or (y) in the case of any such subdivision, combination or reclassification, to the close of business on the day upon which such corporate action becomes effective.

 

       6.2 Certain Distributions.  In case the Company shall at any time or from time to time, after the issuance of this Warrant but prior to the exercise hereof, distribute
to all holders of shares of Common Stock (including any such distribution made in connection with a merger or consolidation in which the Company is the resulting or surviving entity and shares of Common Stock are not changed or exchanged) cash, evidences of indebtedness of the Company or another issuer, securities of the Company or another issuer or other assets (excluding dividends or distributions payable in shares of Common Stock for which adjustment is made under Section
6.1) or rights or warrants to subscribe for or purchase any of the foregoing, then, and in each such case, (i) the Exercise Price then in effect shall be adjusted (and any other appropriate actions shall be taken by the Company) by being multiplied by a fraction (x) the numerator of which shall be the Fair Market Value of Common Stock immediately prior to the date of distribution less the then fair market value (in the case of distributions other than cash, as determined by a majority of the members of
the Board of Directors of the Company) of the portion of the cash, evidences of indebtedness, securities, other assets or rights so distributed or of such rights or warrants applicable to one share of Common Stock and (y) the denominator of which shall be the Fair Market Value of the Common Stock immediately prior to the date of distribution (but such fraction shall not be greater than one) and (ii) the Warrant Share Number shall be increased by being multiplied by a fraction (x) the numerator of which shall
be the Fair Market Value of one share of Common Stock immediately prior to the record date for the distribution of such cash, evidences of indebtedness, securities, other assets or rights or warrants and (y) the denominator of which shall be the Fair Market Value of one share of Common Stock immediately prior to such record date less the fair market value (in the case of distributions other than cash, as determined by a majority of the members of the Board of Directors of the Company) of the portion of such cash,
evidences of indebtedness, securities, other assets or rights or warrants so distributed.  Such adjustment shall be made whenever any such distribution is made and shall become effective retroactively to a date immediately following the close of business on the record date for the determination of stockholders entitled to receive such distribution.

 

       6.3 Consolidation, Merger, etc.  If any (i) capital reorganization, (ii) reclassification, (iii) consolidation, merger,
tender offer or other business combination of the Company with another entity that involves a transfer of more than fifty percent (50%) of the voting power of the Company, (iv) the sale of all or substantially all of the Company’s assets to another entity, or (v) voluntary sale, conveyance, exchange or transfer of the voting Capital Stock of the Company that involves the sale, conveyance, exchange or transfer of more than fifty percent (50%) of the voting power of the Company (each, an “Extraordinary
Event”) shall be effected, then, prior to the consummation of such Extraordinary Event, the Company shall make appropriate provision, including providing written notice of the Extraordinary Event to the Holder at least ten (10) Business Days prior to effecting such Extraordinary Event, to ensure that the Holder shall thereafter have the right to purchase and receive, upon exercise hereof and the payment of the Exercise Price, in lieu of the shares of Common Stock of the Company immediately theretofore
purchasable and receivable upon the exercise of this Warrant, such shares of stock, securities or property (including cash) as may be issued or payable with respect to or in exchange for a number of shares of Common Stock of the Company immediately theretofore purchasable and receivable upon the exercise of this Warrant had such Extraordinary Event not taken place, and in any such case appropriate provision shall be made with respect to the rights and interests of the Holder to the end that the provisions hereof
(including, without limitation, provisions for adjustments of the Exercise Price and of the number of shares purchasable upon the exercise of this Warrant) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or property thereafter deliverable upon the exercise hereof (without duplication with Sections 6.1 and 6.2 hereof).  The Holder agrees to keep all information it receives regarding the Extraordinary Event confidential until such time as the Company
has disclosed such information publicly. The foregoing provisions shall similarly apply to successive Extraordinary Events.

 

 

-26-

 

 

       6.4 Other Changes.  In case the Company at any time or from time to time, after the issuance of this Warrant but prior to the exercise hereof, shall take any action affecting its
Common Stock similar to or having an effect similar to any of the actions described in any of Sections 6.1, 6.2 or 6.3 (but not including any action described in any such Section) and it would be equitable in the circumstances to adjust the Exercise Price and Warrant Share Number as a result of such action, then, and in each such case, the Exercise Price and Warrant Share Number shall be adjusted in such manner and at such time as a majority of
the Board of Directors and the Holder in good faith determine would be equitable in the circumstances.

 

       6.5 No Impairment.  The Company shall not, by amendment of its Certificate of Incorporation or through a reorganization, transfer of assets, consolidation, merger, dissolution,
issue, or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under this Warrant by the Company, but shall at all times in good faith assist in carrying out of all the provisions of this Warrant and in taking all such action as may be necessary or appropriate to protect Holder’s rights against impairment.

 

       6.6 Certificate as to Adjustments.  Upon each adjustment of the Exercise Price, and/or number of shares of Common Stock, the Company shall promptly notify Holder in writing,
and, at the Company’s expense, promptly compute such adjustment, and furnish Holder with a certificate of its Chief Financial Officer setting forth such adjustment and the facts upon which such adjustment is based. The Company shall, upon written request, furnish Holder a certificate setting forth the Exercise Price and number of shares of Common Stock in effect upon the date thereof and the series of adjustments leading to such Exercise Price and number of shares of Common Stock.

 

    Section 7. Notices.  Unless otherwise provided, any notice required or permitted under this Warrant shall be given in writing and shall be deemed effectively given as hereinafter described (i) if given by personal delivery, then such notice
shall be deemed given upon such delivery, (ii) if given by telex or facsimile, then such notice shall be deemed given upon receipt of confirmation of complete transmittal, (iii) if given by mail, then such notice shall be deemed given upon the earlier of (A) receipt of such notice by the recipient or (B) five days after such notice is deposited in first class mail, postage prepaid, and (iv) if given by an internationally recognized overnight air courier, then such notice shall be deemed given one day after delivery
to such carrier.  All notices to Holder shall be addressed to the Holder’s address set forth on the signature page hereto, or at such other address as shall have been furnished to the other parties hereto in writing, or if to the Company at: 1055 West 8th Street, Azusa, California 91702.

 

    Section 8. Registration Rights.  The initial holder of this Warrant is entitled to the benefit of certain registration rights with respect to the shares of Common Stock issuable upon the exercise of this Warrant as provided in the Registration
Rights Agreement dated as of the date hereof, by and between the Holder and the Company, and any subsequent holder hereof shall be entitled to such rights to the extent provided in the Registration Rights Agreement.

 

 

-27-

 

 

    Section 9. Successors.  All the covenants and provisions hereof by or for the benefit of the Holder shall bind and inure to the benefit of its respective successors and assigns hereunder.

 

    Section 10. Governing Law.  This Warrant shall be governed by, and construed in accordance with, the internal laws of the State of New York, without regard to the provisions thereof relating to conflict of laws.

 

    Section 11. No Rights as Shareholder.  Prior to the exercise of this Warrant, the Holder shall not have or exercise any voting rights or other rights as a shareholder of the Company by virtue of its ownership of this Warrant.

 

    Section 12. Amendments.  This Warrant shall not be amended without the prior written consent of the Company and the Holder; provided, that with the written consent of the Holder (which consent shall not be unreasonably withheld) the Company
may amend this Warrant in a manner not adverse to the Holder to effect any adjustments required to comply with the Company’s obligations hereunder as described in Section 6.3.

 

    Section 13. Section Headings.  The section headings in this Warrant are for the convenience of the Company and the Holder and in no way alter, modify, amend, limit or restrict the provisions hereof.

 

[remainder of this page intentionally left blank]

 

 

-28-

 

 

    IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed, as of the ___ day of [_______, 20___].

 

	 	
PHYSICIANS FORMULA HOLDINGS, INC.
	 
	 	 	 	 
	 	By: 	 	 
	 	Name: 	 	 
	 	Title: 	 	 

 

	HOLDER	 
	 	 	 	 
	MILL ROAD CAPITAL, L.P.	 	 
	 	 	 	 
	
By: 

 
	
Mill Road Capital GP LLC,

its General Partner 
	 	 
	 	 	 	 
	By: 	 	 	 
	Name: 	 	 	 
	Title: 	 	 	 
	
Address:

 
	
Two Sound View Drive, Suite 300

Greenwich, Connecticut 06830 
	 	 

 

 

-29-

 

 

APPENDIX A

PHYSICIANS FORMULA HOLDINGS, INC.

WARRANT EXERCISE FORM

To: PHYSICIANS FORMULA HOLDINGS, INC.

 

    The undersigned hereby irrevocably elects to exercise the right of purchase represented by the within Warrant (“Warrant”) for, and to purchase thereunder by the payment of the Exercise Price and surrender of the Warrant, _______________ shares
of Common Stock (“Warrant Shares”) provided for therein, and requests that certificates for the Warrant Shares be issued as follows:

_______________________________

Name

________________________________

Address

________________________________

________________________________

Federal Tax ID or Social Security No.

 

    and delivered by

 

	 	r	certified mail to the above address, or 
	 	r	electronically (provide DWAC Instructions:___________________), or 
	 	r	other (specify: __________________________________________).

 

and, if the number of Warrant Shares shall not be all the Warrant Shares purchasable upon exercise of the Warrant, that a new Warrant for the balance of the Warrant Shares purchasable upon exercise of this Warrant be registered in the name of the undersigned Holder or the undersigned’s Assignee as below indicated and delivered to
the address stated below.

Dated: ___________________, ____

Signature:______________________

______________________________

Name (please print)

______________________________

______________________________

Address:

______________________________

Assignee:

_______________________________

_______________________________

_______________________________

 

 

-30-

 

 

APPENDIX B

PHYSICIANS FORMULA HOLDINGS, INC.

NET ISSUE ELECTION NOTICE

To: PHYSICIANS FORMULA HOLDINGS, INC.

Date:_________________________

 

    The undersigned hereby elects under Section 3.1 of the Warrant to surrender the right to purchase ____________ shares of Common Stock pursuant to this Warrant and hereby requests the issuance of _____________ shares of Common Stock.  The certificate(s)
for the shares issuable upon such net issue election shall be issued in the name of the undersigned or as otherwise indicated below.

_________________________________________

Signature

_________________________________________

Name for Registration

_________________________________________

Mailing Address

 

 

-31-

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