INTERCREDITOR AND SUBORDINATION AGREEMENT

Exhibit 10.5

INTERCREDITOR AND SUBORDINATION AGREEMENT

This INTERCREDITOR AND SUBORDINATION AGREEMENT (“ Agreement ”), dated as of September 4, 2009, is made by (1) MILL ROAD CAPITAL, L.P., a Delaware limited liability company (the “ Subordinated Creditor ”), (2) PHYSICIANS FORMULA, INC., a New York corporation (the “ Borrower ”) and (3) UNION BANK, N.A., as administrative agent (the “ Agent ”) for the Lenders (as defined in the Credit Agreement referred to below, the “ Lenders ”).

RECITALS

A.           The Borrower, the Lenders and the Agent have entered into that certain Credit Agreement dated as of November 14, 2006, as amended by that certain First Amendment to Credit Agreement dated as of July 8, 2008, that certain Second Amendment to Credit Agreement dated as of September 9, 2008, that certain Third Amendment to Credit Agreement dated as of December 5, 2008, that certain Fourth Amendment to Credit Agreement dated as of March 30, 2009, that certain Fifth Amendment to Credit Agreement dated as of July 29, 2009 and that certain Sixth Amendment to Credit Agreement (the “ Sixth Amendment ”) dated as of even date herewith (as so amended, the “ Credit Agreement ”).  Pursuant to the Sixth Amendment, the Agent and the Lenders have agreed to waive certain Events of Default, and amend certain provisions of the Credit Agreement, as requested by the Borrower and as more fully set forth therein.

B.           In connection with the Credit Agreement, the Borrower has executed in favor of the Agent a Security Agreement, pursuant to which the Borrower has assigned, pledged and granted to the Agent a security interest in certain collateral as described therein (as it may be amended, modified, supplemented or restated from time to time, the “ Senior Security Agreement ”).  Capitalized terms used herein and not defined shall have the meanings assigned to them in the Credit Agreement.

C.           Concurrently herewith, the Borrower is entering into that certain Term Loan Agreement dated as of even date herewith between the Borrower and the Subordinated Creditor (the “ Subordinated Loan Agreement ”) and that certain Term Note dated as of even date herewith, executed by the Borrower in favor of the Subordinated Creditor in the face amount of $4,200,000 (the “ Subordinated Note ”), pursuant to which the Subordinated Creditor is concurrently herewith making a term loan in such amount on a subordinated basis to the Borrower (the “ Subordinated Loan ”).  The Subordinated Loan will be secured, on a subordinate basis, by that certain Security Agreement dated as of even date herewith, executed by the Borrower and certain of its Subsidiaries in favor of the Subordinated Creditor (the “ Subordinated Security Agreement ”). In addition, Holdings and certain of the Subsidiaries will execute, in favor of the Subordinated Creditor, those certain Subordinated Guarantees dated as of even date herewith (the “ Subordinated Guarantees ”), and Holdings will execute, in favor of the Subordinated Creditor, that certain Subordinated Pledge Agreement dated as of even date herewith in favor of the Subordinated Creditor (the “ Subordinated Pledge Agreement ”).

D.           It is a condition precedent to the effectiveness of the Sixth Amendment that the Subordinated Creditor and the Borrower shall have executed and delivered this Agreement in favor of the Agent.

Accordingly, the parties hereto agree as follows:

AGREEMENT

SECTION 1.    Definitions .

“ Blockage Notice ”:  written notice of a Non-Payment Default given by the Agent to Subordinated Creditor.

“ Non-Payment Default ”:  any Event of Default other than a Payment Default.

“ Obligors ”:  collectively, the Borrower, Holdings and the Subsidiaries.

“ Payment Default ”:  an Event of Default with respect the payment of principal, interest, fees, expenses or other amounts payable under the Credit Agreement or the other Loan Documents.

“Secured Parties ”:  the Agent, the Lenders and each counterparty to a Hedging Agreement entered into pursuant to the Credit Agreement, provided that such counterparty is a Lender or an affiliate of a Lender.

“ Subordinated Debt ”:  all debt, liabilities and obligations of the Obligors to the Subordinated Creditor, whether now existing or hereafter arising, under or relating to the Subordinated Debt Documents, all interest on such debt and any and all fees, indemnifications or other liabilities incurred in connection therewith.

“Subordinated Debt Documents ”:  the Subordinated Loan Agreement, the Subordinated Note, the Subordinated Security Agreement, the Subordinated Guarantees and the Subordinated Pledge Agreement and any other documents, agreements or instruments executed in connection therewith from time to time.

“ Subordinated Liens ”:  any pledge, charge, hypothecation, assignment, lien, security interest or other encumbrance existing or created in support of the Subordinated Debt, including those created by the Subordinated Security Agreement and the Subordinated Pledge Agreement.

SECTION 2.    Agreement To Subordinate .  The Subordinated Creditor and the Obligors represent and agree that (i) the Subordinated Debt (including, without limitation, interest accruing after the filing of a petition initiating any proceeding referred to in Section 4(a) hereof), is and shall be unconditionally subordinate, to the extent and in the manner hereinafter set forth, in right of payment to the prior payment in full in cash of all obligations of the Obligors now or hereafter existing to the Secured Parties under the Loan Documents and any other documents or instruments executed in connection therewith, including but not limited to principal, interest (including, without limitation, interest as provided in the Credit Agreement after the filing of a petition initiating any proceeding referred to in Section 4(a) hereof), fees, expenses (including attorneys’ fees and expenses) or otherwise (such obligations being called the “ Obligations ”) and (ii) the Subordinated Liens are and shall be junior and unconditionally subordinate to all Liens in favor of the Agent or any Lender and securing any part of the Obligations.  For the purposes of this Agreement, the Obligations shall not be deemed to have been paid in full until and unless the holders or owners of the Obligations shall have received indefeasible payment in full in cash, and all Commitments and Letters of Credit shall have expired or been terminated.

SECTION 3.    No Payment on the Subordinated Debt, Etc .  (a)  Except as set forth in Sections 3(b) and 3(c) below, the Subordinated Creditor agrees not to ask for, demand, sue for, take or receive from any Obligor, directly or indirectly, in cash or other property, by setoff or in any other manner (including, without limitation, from or by way of collateral, including by way of any Subordinated Lien), or commence (or join with any other creditor in commencing) any proceeding against any Obligor (including any bankruptcy, insolvency or similar proceeding) for, payment of all or any of the Subordinated Debt, or accelerate all or any portion of the Subordinated Debt, or exercise or seek to exercise any rights or remedies with respect to any Subordinated Lien or institute any action or proceeding with respect to such rights or remedies (including any action of foreclosure), unless and until the Obligations shall have been paid in full.

(b)           Notwithstanding the foregoing Section 3(a), the Borrower may pay in cash, on final maturity of the Subordinated Debt (which shall be not earlier than the first to occur of (i) the 90 th day after the Sixth Amendment Effective Date and (ii) the date the New Financing is funded in full) and the Subordinated Creditor may receive, the outstanding principal amount of the Subordinated Debt and all interest accrued thereon under the Subordinated Note (provided that the rate of interest applicable to the Subordinated Debt shall not at any time exceed 15.0% per annum plus, if applicable, interest at the default rate contemplated by Section 4.5 of the Subordinated Loan Agreement on the date hereof (the “ Default Rate ”)), so long as (i) no Default has occurred and is continuing at the time of such payment and the Borrower has provided to the Agent a Covenant Compliance Certificate to such effect and (ii) concurrently with such payment, the Borrower is receiving an equity contribution or the proceeds of replacement subordinated debt in an amount at least equal to $4,200,000 plus interest and any other amounts required to satisfy the Subordinated Debt in full (the “ New Financing ”), on terms and conditions acceptable to the Agent.

(c)           Notwithstanding the foregoing Section 3(a), but subject to Section 3(b), the Subordinated Creditor may exercise its rights and remedies under the Subordinated Debt unless (i) a Nonpayment Default has occurred and is continuing and the Agent has given a Blockage Notice to the Subordinated Creditor, and fewer than 180 days have elapsed since the giving of such notice or (ii) a Payment Default has occurred and is continuing and the Agent has given a Blockage Notice to the Subordinated Creditor; provided that the foregoing shall not prohibit or limit the accruing of interest on the Subordinated Debt at the Default Rate.  In no event shall the Subordinated Creditor exercise any rights or remedies against any Obligor (except for the accrual of interest at the Default Rate as set forth in the previous sentence) without first providing the Agent with 30 days’ prior written notice describing the event(s) of default that have occurred under the Subordinated Debt Documents and the action(s) the Subordinated Creditor plans to take with respect to them.

SECTION 4.    In Furtherance of Subordination .  The Subordinated Creditor agrees as follows:

(a)           Upon any distribution of all or any of the assets of any Obligor to creditors of any Obligor upon its dissolution, winding up, liquidation, arrangement, or reorganization, whether in any bankruptcy, insolvency, arrangement, reorganization or receivership proceedings or upon any assignment for the benefit of creditors or any other marshalling of the assets and liabilities of any Obligor or otherwise, any payment or distribution of any kind (whether in cash, property or securities) that otherwise would be payable or deliverable upon or with respect to the

Subordinated Debt shall be paid or delivered directly to the Agent for application (in the case of cash) to or as collateral (in the case of non-cash property or securities) for the payment or prepayment of the Obligations until the Obligations shall have been paid in full.

(b)           If any proceeding referred to in subsection (a) above is commenced by or against any Obligor at any time prior to payment of the Obligations in full:

(c)           All payments or distributions upon or with respect to the Subordinated Debt that are received by the Subordinated Creditor contrary to the provisions of this Agreement shall be received in trust for the benefit of the Agent, shall be segregated from other funds and property held by the Subordinated Creditor and shall be forthwith paid over to the Agent for the benefit of the Secured Parties in the same form as so received (with any necessary endorsement) to be applied (in the case of cash) to or held as collateral (in the case of non-cash property or securities) for the payment or prepayment of the Obligations in accordance, at such times and in such manner as the Agent shall elect.

(d)           The Subordinated Creditor will not contest, protest or object to any foreclosure proceeding or other action brought by the Agent, whether in conjunction with a proceeding referred to in Section 4(a) or otherwise, or any other exercise by the Agent of any rights an