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

Section 1.2.           Prepayments of Notes .

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

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

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

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

 

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

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

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

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

 

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

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

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

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

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

SECTION 2.                                 COMMITMENT; CLOSING DATE.

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

 

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

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

SECTION 3.                                 CLOSING CONDITIONS.

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

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

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

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

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

Section 3.2.           Closing Certificates .  You shall have received:

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

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

 

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

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

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

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

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

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

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

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

 

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

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

Section 3.7.           Senior Credit Agreements and Related Agreements .

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

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

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

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

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

 

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

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

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

SECTION 4.                                 REPRESENTATIONS.

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

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

 

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

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

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

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

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

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

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

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

(d)           Subsidiaries.

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

 

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

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

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

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

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

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

 

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

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

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

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

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

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

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

 

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

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

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

(s)           OFAC; PATRIOT Act .

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

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

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

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

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

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

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

 

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

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

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

(iv)          the Source is a governmental plan; or

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

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

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

SECTION 5.                                 COVENANTS.

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

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

 

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

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

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

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

 

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

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

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

 

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

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

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

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

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

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

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

Section 5.3.           Limitation on Restricted Payments and Distributions .

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

 

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

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

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

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

 

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

Section 5.7.           Restrictions on Liens .  The Company will not, and will not p