FACE Physicians Formula Holdings, Inc. (MM)

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Physicians Formula Holdings, Inc.
1055 West 8th Street
Azusa, California 91702

October 15, 2012

Dear Stockholder:

Our board of directors has unanimously approved an agreement and plan of merger dated September 26, 2012, which we refer to as the merger agreement, providing for the acquisition of Physicians Formula Holdings, Inc. by Markwins International Corporation, a privately held cosmetics and beauty care company.  If the merger contemplated by the merger agreement is completed, you will be entitled to receive $4.90 in cash, without interest and less any applicable withholding tax, for each share of our common stock you own immediately prior to the effective time of the merger (unless you have properly demanded and validly perfected your statutory rights of appraisal with respect to the merger).

At a special meeting of our stockholders, you will be asked to consider and vote on a proposal to adopt the merger agreement. A special committee of our board of directors, consisting entirely of independent directors, negotiated, reviewed and considered the terms and conditions of the merger agreement and the transactions contemplated thereby, including the merger.  Our board of directors, after careful consideration and acting on the unanimous recommendation of the special committee, unanimously determined that the merger agreement and the transactions contemplated thereby, including the merger, are fair to, advisable, and in the best interests of our company and our stockholders and is recommending that our stockholders adopt the merger agreement and approve the merger and any other matters related to the foregoing that require approval of our stockholders.  Our board of directors unanimously recommends that you vote “FOR” the proposal to adopt the merger agreement .

The special meeting will be held on November 8, 2012 at 9:00 a.m. local time, at our corporate office located at 1055 West 8th Street, Azusa, California 91702. Notice of the special meeting and the related proxy statement are enclosed.  The proxy statement provides you with detailed information about the special meeting, the merger agreement and the merger. A copy of the merger agreement is attached as Annex A to the proxy statement. We encourage you to read the entire proxy statement (and any amendments or supplements thereto) and the merger agreement carefully. You may also obtain more information about our company from documents we have filed with the Securities and Exchange Commission, which you can obtain for free at the SEC’s website www.sec.gov.

Your vote is very important regardless of the number of shares you own. We cannot complete the merger unless the holders of a majority of the outstanding shares of our common stock that are entitled to vote at the special meeting vote in favor of the proposal to adopt the merger agreement. The failure of any stockholder to vote on the proposal to adopt the merger agreement will have the same effect as a vote against the proposal. If your shares are held in “street name” by your bank, brokerage firm or other nominee, your bank, brokerage firm or other nominee will be unable to vote your shares without instructions from you. You should instruct your bank, brokerage firm or other nominee to vote your shares following the procedures provided by your bank, brokerage firm or other nominee. The failure to instruct your bank, brokerage firm or other nominee to vote your shares in favor of the proposal to adopt the merger agreement will have the same effect as a vote against the proposal.

Whether or not you plan to attend the special meeting, please complete, date, sign and return, as promptly as possible, the proxy card in the accompanying reply envelope, or submit your proxy by telephone or the Internet, as explained in the proxy voting instructions attached to the proxy card.  If you attend the special meeting and vote in person, your vote by ballot will revoke any proxy previously submitted. If you hold your shares through a bank, brokerage firm or other nominee, you should follow the procedures provided by your bank, brokerage firm or nominee.

Thank you in advance for your cooperation and continued support.

Neither the Securities and Exchange Commission nor any state securities regulatory agency has approved or disapproved the merger, passed upon the merits or fairness of the merger or passed upon the adequacy or accuracy of the disclosure in this document. Any representation to the contrary is a criminal offense.

The accompanying proxy statement is dated October 15, 2012, and is first being mailed to stockholders on or about October 15, 2012.

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Physicians Formula Holdings, Inc.
1055 West 8th Street
Azusa, California 91702

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held On November 8, 2012

To the Stockholders of Physicians Formula Holdings, Inc.:

A special meeting of stockholders of Physicians Formula Holdings, Inc., a Delaware corporation, will be held on November 8, 2012 at 9:00 a.m. local time, at our corporate office located at 1055 West 8th Street, Azusa, California 91702, for the following purposes:

1.             To consider and vote on a proposal to adopt the agreement and plan of merger, dated as of September 26, 2012, as may be amended from time to time, which we refer to as the merger agreement, by and among our company, Markwins International Corporation, a California corporation, which we refer to as Parent, and Markwins Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of Parent, which we refer to as MergerSub. Pursuant to the terms of the merger agreement, MergerSub will merge with and into our company with our company continuing as the surviving corporation of the merger and each share of our common stock, par value $0.01 per share, issued and outstanding immediately prior to the effective time of the merger (other than shares of common stock owned by Parent, MergerSub or our company, or by any direct or indirect wholly-owned subsidiary or affiliate of Parent, and shares of common stock held by stockholders, if any, who have properly demanded and validly perfected their statutory rights of appraisal with respect to the merger), will be converted into the right to receive $4.90 in cash, without interest and less any applicable withholding tax;

2.             To consider and cast an advisory (non-binding) vote on a proposal to approve certain compensation which may become payable to our named executive officers in connection with the merger, which we refer to as the “golden parachute” compensation; and

3.             To consider and vote on a proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the merger agreement.

Only stockholders of record of our common stock as of the close of business on October 10, 2012, which we refer to as the record date, are entitled to notice of and to vote at the special meeting.  All stockholders of record as of the record date are cordially invited to attend the special meeting in person.

The merger agreement, the merger and the “golden parachute” compensation arrangements are more fully described in the accompanying proxy statement, which we urge you to read carefully and in its entirety. A copy of the merger agreement is attached as Annex A to the accompanying proxy statement, which we also urge you to read carefully and in its entirety. The vote on the “golden parachute” compensation is advisory (non-binding) and is not a condition to completion of the merger.

Your vote is very important, regardless of the number of shares of common stock you own. Adoption of the merger agreement requires the affirmative vote of the holders of a majority of the shares of our common stock outstanding on the record date. In connection with the merger agreement, certain of our stockholders entered into voting agreements with Parent that cover approximately 22.1% of the outstanding shares of our common stock as of the record date. Under the terms of these voting agreements, such stockholders have agreed to, among other things, vote, or cause to be voted, their shares of common stock in favor of adoption of the merger agreement.

Our board of directors has unanimously approved the merger agreement and declared it advisable, and unanimously recommends that you vote “FOR” adoption of the merger agreement. Our board of directors also unanimously recommends that you vote “FOR” approval, on an advisory (non-binding) basis, of the “golden parachute” compensation which may become payable to our named executive officers in connection with the merger, and “FOR” approval of the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the merger agreement.

Whether or not you plan to attend the special meeting, please mark, date, sign and return, as promptly as possible, the enclosed proxy card in the accompanying reply envelope, or submit your proxy by telephone or the Internet, as explained in the proxy voting instructions included on the proxy card, to ensure that your shares of common stock will be represented at the special meeting. Stockholders who attend the special meeting may revoke their proxies and vote in person. If you sign, date and mail your proxy card without indicating how you wish to vote, your shares will be voted “FOR” each of the three proposals described above.

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If you fail to submit a proxy to vote your shares or to vote in person at the special meeting, the effect will be that your shares will not be counted for purposes of determining whether a quorum is present at the special meeting and, if a quorum is present, will have the same effect as a vote against the adoption of the merger agreement . If you are a stockholder of record, voting in person at the special meeting will revoke any proxy previously submitted. If you hold your shares through a bank, brokerage firm or other nominee, you must obtain a legal proxy from such nominee in order to vote in person at the special meeting. If your shares are held by a bank, brokerage firm or other nominee, please bring your statement evidencing your beneficial ownership of common stock and photo identification to gain admission to the special meeting.

Our stockholders who do not vote or submit a proxy in favor of the proposal to adopt the merger agreement will have the right to seek appraisal of the fair value of their shares of common stock if the merger is completed, but only if they properly demand and validly perfect statutory rights of appraisal before the vote is taken on the merger agreement and comply with all requirements of Delaware law, which are summarized in the proxy statement, and set forth in Section 262 of the Delaware General Corporation Law, a copy of which is attached to the proxy statement as Annex D.

IF YOU PLAN TO ATTEND THE SPECIAL MEETING: Please note that space limitations make it necessary to limit attendance to stockholders. Registration will begin at 8:30 a.m. (local time). Each stockholder may be asked to present valid picture identification, such as a driver’s license or passport. Stockholders holding stock in brokerage accounts (“street name” holders) will need to bring a copy of the voting instruction card or a brokerage statement reflecting stock ownership as of the record date. Cameras, recording devices and other electronic devices will not be permitted at the meeting. You may obtain directions to the meeting place by calling our corporate offices at (626) 334-3395.

In addition to delivering the proxy materials for the special meeting to be held on November 8, 2012 to stockholders by mail, we have also made the proxy statement for such meeting available at http://investor.physiciansformula.com/sec.cfm.

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Physicians Formula Holdings, Inc.
1055 West 8th Street
Azusa, California 91702

PROXY STATEMENT

SUMMARY TERM SHEET

The following summary highlights selected information in this proxy statement and may not contain all the information that may be important to you. Accordingly, we encourage you to read carefully this entire proxy statement, its annexes and the documents referred to or incorporated by reference in this proxy statement. Each item in this summary includes a page reference directing you to a more complete description of that topic. See “Where You Can Find More Information” beginning on page 75.

The Parties to the Merger (Page 13)

Physicians Formula Holdings, Inc.

Physicians Formula Holdings, Inc. is an innovative cosmetics and skin care company operating in the mass market prestige, or “masstige,” market. Under our Physicians Formula brand name, created in 1937, we develop, market and distribute innovative, premium-priced products for the mass market channel. We differentiate our company by addressing skin imperfections through a problem-solving approach, rather than focusing on changing fashion trends. Currently, our products are sold in over 25,000 stores including those operated by Wal-Mart, Target, CVS and Rite Aid. Physicians Formula Holdings, Inc. is referred to in this proxy statement as “our company,” “we,” “us,” “our,” or “Physicians Formula.”

Our company was incorporated in 2003. Our corporate headquarters and principal executive offices are located at 1055 West 8th Street, Azusa, California 91702, and our telephone number is (626) 334-3395.

Parent

Markwins International Corporation is a California corporation and is referred to in this proxy statement as “Parent.”  Parent’s principal executive offices are located at 22067 Ferrero Parkway, City of Industry, California 91786, and its telephone number is (909) 595-8898.

Parent is a global leader in color cosmetics, cosmetic accessories and beauty collections. Founded by Eric Chen, its chief executive officer, nearly 30 years ago, the privately-held company is recognized as a top 20 purveyor in the global cosmetic industry. Parent’s brands cater to and reach consumers of all ages, ethnicities and skin tones. Parent’s brand portfolio includes wet n wild®, The Color Workshop®, Black Radiance®, The Color Institute® and POP® amongst many others. As of September 2012, Parent’s brands can be found in over 42,000 retail outlets including Department, Specialty, Mass, Drug and Food stores, and are available in more than 60 countries, spanning 6 continents.

MergerSub

Markwins Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of Parent, was formed solely for the purpose of consummating the merger. Markwins Merger Sub, Inc. is referred to in this proxy statement as “MergerSub.”

MergerSub has not carried on any activities to date, except for activities incidental to its formation and activities undertaken in connection with the transactions contemplated by the merger agreement.  MergerSub’s principal executive offices are located at 22067 Ferrero Parkway, City of Industry, California 91786, and its telephone number is (909) 595-8898.

The Merger (Page 50)

The merger agreement provides that MergerSub will merge with and into our company with our company continuing as a wholly-owned subsidiary of Parent. In the merger, each share of our common stock, par value $0.01 per share, that is issued and outstanding immediately prior to the effective time of the merger (other than shares owned by our company, or by Parent, MergerSub or any direct or indirect wholly-owned subsidiary or affiliate of Parent, and shares held by our stockholders, if any, who have properly demanded and validly perfected their statutory rights of appraisal with respect to the merger) will be converted into the right to receive $4.90 in cash, without interest and less any applicable withholding tax, which we refer to as the merger consideration.

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The Special Meeting (Page 14)

Time, Place and Purpose (Page 14)

The special meeting will be held on November 8, 2012 at 9:00 a.m. local time, at our corporate office located at 1055 West 8th Street, Azusa, California 91702. You will be asked to (i) consider and vote on a proposal to adopt the merger agreement, pursuant to which MergerSub will merge with and into our company with our company continuing as the surviving corporation of the merger and a wholly-owned subsidiary of Parent, (ii) consider and cast an advisory (non-binding) vote on a proposal to approve certain compensation which may become payable to our named executive officers in connection with the merger (which we refer to as the “golden parachute” compensation) and (iii) consider and vote on a proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the merger agreement.

Record Date and Quorum (Page  14 )

You are entitled to notice of and to vote at the special meeting if you owned shares of our common stock at the close of business on October 10, 2012, which we refer to as the record date. You will have one vote for each share of common stock that you owned as of the close of business on the record date. As of the close of business on the record date, there were 13,714,447 shares of our common stock issued, outstanding and entitled to vote. A majority of the shares of common stock issued and outstanding on the record date represented at the special meeting in person or by a duly authorized and properly completed proxy constitutes a quorum for the purpose of considering the proposals at the special meeting.

Vote Required for Approval (Page  14 )

Adoption of the merger agreement requires the affirmative vote of the holders of a majority of the shares of our common stock issued and outstanding on the record date. Failure to vote your shares by proxy or in person or an abstention will have the same effect as voting against adoption of the merger agreement .

Approval of the advisory (non-binding) proposal on the “golden parachute” compensation requires the affirmative vote of the holders of a majority of the shares of our common stock present in person or represented by proxy at the special meeting and entitled to vote on the proposal. The vote to approve the “golden parachute” compensation is advisory only and will not be binding on our company or Parent and is not a condition to completion of the merger . If the merger agreement is adopted by our stockholders and completed, the “golden parachute” compensation may be paid to our named executive officers even if stockholders fail to approve the “golden parachute” compensation. Abstentions will be treated as votes against the proposal to approve the “golden parachute” compensation if your shares are otherwise present in person or otherwise represented in proxy at the special meeting. However, any failure to vote will have no effect on the approval of this proposal.

Approval of the proposal to adjourn the special meeting, if necessary or appropriate, for the purpose of soliciting additional proxies if there are insufficient votes at the time of the special meeting to adopt the merger agreement requires the affirmative vote of a majority of the shares of our common stock present in person or represented by proxy at the special meeting and entitled to vote on the proposal.  Abstentions will be treated as votes against this proposal.  However, any failure to vote will have no effect on the approval of this proposal.

As of the close of business on the record date, our directors and executive officers beneficially owned in the aggregate 3,048,967 shares of our common stock (excluding approximately 1,601,163 shares of our common stock, in the aggregate, underlying currently unexercised stock options and warrants), representing approximately 22.2% of the shares entitled to vote at the special meeting.

Voting Agreements (Page 15 and 65)

As condition to the willingness of Parent and MergerSub to enter into the merger agreement and as an inducement and in consideration therefor, Parent and MergerSub required that each of Mill Road Capital, L.P., which we refer to as Mill Road, Ingrid Jackel and Jeffery P. Rogers enter into voting agreements with Parent agreeing to vote for the adoption of the merger agreement and any other proposal in favor of the merger and against any other competing acquisition proposals.  As of the record date, Mill Road, Ms. Jackel and Mr. Rogers are entitled to vote (or control the vote of), in the aggregate, 3,028,967 shares of our common stock, representing approximately 22.1% of the shares entitled to vote at the special meeting.

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Consideration to be Received in the Merger (Page 50)

If the merger is completed, you will be entitled to receive $4.90 in cash, without interest and less any applicable withholding taxes, for each share of our common stock that you own immediately prior to the effective time of the merger, unless you have properly demanded and validly perfected your statutory rights of appraisal with respect to the merger.

Payment for Shares (Page 51)

Promptly following the effective time of the merger, a paying agent will mail to you a letter of transmittal and instructions. The letter of transmittal will tell you how to surrender your stock certificates in exchange for the merger consideration. You should not return your stock certificates with the proxy card, and you should follow the instructions in the letter of transmittal for the return of your stock certificates or the book entry transfer of any uncertificated shares .

Cancellation of Shares (Page 50)

You will not own any shares of the surviving corporation or Parent and you will not have any rights as a stockholder following consummation of the merger.  As a result of the merger, our company will cease to be an independent, publicly-traded company.

Treatment of Stock Options and Warrants (Page 50)

The merger agreement provides that at the effective time of the merger each then-outstanding stock option not previously exercised, whether or not then vested, will be cancelled and converted into the right to receive a cash payment, less any applicable withholding tax and without interest, equal to (A) the excess, if any, of $4.90 over the per share exercise price of such stock option multiplied by (B) the number of shares of common stock subject to such stock option.  The merger agreement also provides that at the effective time of the merger each then-outstanding warrant not previously exercised, whether or not then vested, will be cancelled and converted into the right to receive a cash payment, less any applicable withholding tax and without interest, equal to (A) the excess, if any, of $4.90 over the per share exercise price of such warrant multiplied by (B) the number of shares of common stock subject to such warrant.

Recommendation of our Board of Directors (Page 29)

Our board of directors has unanimously, upon the unanimous recommendation of the special committee, (i) determined that the merger agreement and the transactions contemplated thereby, including the merger, are fair to, advisable and in the best interests of our company and our stockholders, (ii) authorized and approved in all respects the merger agreement, and authorized and directed the execution of the merger agreement and any other ancillary agreements contemplated thereby to which we are a party and (iii) resolved to recommend that our stockholders adopt the merger agreement and approve the merger and any other matters related to the foregoing that require the approval of our stockholders. Our board of directors unanimously recommends that our stockholders vote “FOR” the proposal to adopt the merger agreement.

In reaching its determination that the merger agreement and the transactions contemplated thereby, including the merger, are advisable and in the best interests of our company and our stockholders and its decision to approve the merger agreement and recommend its adoption to our stockholders, our board of directors evaluated a variety of business, financial and market factors described more fully beginning on page 29. Our board of directors based its recommendation in part on the unanimous recommendation of the special committee, which special committee acted with the advice and assistance of independent legal and financial advisors and was comprised at all times of independent directors with no financial interest in a transaction other than as equity holders in our company. See “The Merger (Proposal 1)—Reasons for the Merger; Recommendation of the Board of Directors” beginning on page 29.

Interests of Our Directors and Executive Officers in the Merger (Page 42)

In considering the recommendation of our board of directors, you should be aware that our directors and executive officers may have interests in the merger that are different from, or in addition to, your interests as a stockholder and that may present actual or potential conflicts of interest, including the following:

·                   similar to the manner in which all outstanding stock options will be treated, at the effective time of the merger each then-outstanding stock option held by our directors and executive officers not previously exercised, whether or not then vested, will be cancelled and converted into the right to receive a cash payment, less any applicable withholding tax and without interest, equal to (A) the excess, if any, of $4.90 over the per share stock option exercise price multiplied by (B) the number of shares of common stock subject to such stock option; and

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·                   the merger agreement provides for indemnification arrangements for each of our current and former directors and executive officers that will continue for six years following the effective time of the merger, as well as continued insurance coverage covering such director’s or executive officer’s service to our company as a director or executive officer.

Similar to stock options, the merger agreement also provides that at the effective time of the merger each then-outstanding warrant not previously exercised, whether or not then vested, will be cancelled and converted into the right to receive a cash payment, less any applicable withholding tax and without interest, equal to (A) the excess, if any, of $4.90 over the per share exercise price of such warrant multiplied by (B) the number of shares of common stock subject to such warrant. Mill Road holds a warrant to purchase up to 650,000 shares of our common stock with an exercise price of $0.25 per share. Mr. Lynch, one of our directors, is a Senior Managing Director of Mill Road.

Our board of directors was aware of these potential conflicts of interest and considered them, among other matters, in reaching its decision to approve the merger agreement and the merger and the recommendation that our stockholders vote in favor of the proposal to adopt the merger agreement and approve the merger.

Opinion of Financial Advisor to the Special Committee (Page 32)

Blackstone Advisory Partners L.P., which we refer to as Blackstone, delivered its opinion to the special committee that, as of September 26, 2012 and based on and subject to the assumptions made, matters considered and limitations on the review undertaken by Blackstone described in its opinion, the $4.90 per share in cash to be received by the holders of shares of our common stock in the merger pursuant to the merger agreement was fair to such holders from a financial point of view.  The full text of the written opinion of Blackstone, dated September 26, 2012, which sets forth the assumptions made, matters considered and limitations on the review undertaken by Blackstone in preparing such opinion, is attached to this proxy statement as Annex C. Pursuant to the engagement letter dated February 16, 2012, pursuant to which we engaged Blackstone, we agreed to pay Blackstone fees for its services which are currently estimated to be approximately $2.0 million in the aggregate, the payment of which is contingent upon consummation of the merger.

Financing (Page 40)

Parent and its wholly-owned subsidiary, Markwins Beauty Products, Inc., have obtained equity and debt financing commitments for the transactions contemplated by the merger agreement, the aggregate proceeds of which are expected to be sufficient for Parent and MergerSub to pay the aggregate merger consideration, the amounts payable with respect to stock options and warrants to acquire shares of our common stock, and the related fees and expenses of the transactions contemplated by the merger agreement. The consummation of the merger is not subject to any financing conditions (although funding of the equity and debt financing is subject to the satisfaction of the conditions set forth in the commitment letters under which such financing will be provided).

Material Accounting Treatment (Page 47)

The merger will be accounted for as a purchase under generally accepted accounting principles. The purchase price will be assigned to the fair value of the net tangible and intangible assets acquired, with any amounts in excess thereof being assigned to goodwill.   Goodwill will be capitalized unless and until it is deemed to be impaired, in which case the impairment will be measured and any such amount will be charged against current earnings.

Material U.S. Federal Income Tax Consequences of the Merger to Our Stockholders (Page 47)

The exchange of shares of common stock for cash pursuant to the merger agreement generally will be a taxable transaction for U.S. federal income tax purposes. U.S. persons that exchange their shares of common stock for cash in the merger will recognize gain or loss in an amount equal to the difference, if any, between the cash received in the merger and their adjusted tax basis in their shares of common stock surrendered.  Because individual circumstances may differ, we urge you to consult your tax advisor for a complete analysis of the effect of the merger on your U.S. federal, state and local and non-U.S. taxes.

Regulatory Approvals (Page 48)

Except for the filing of a certificate of merger in Delaware at or before the effective time of the merger, we are unaware of any material federal, state or foreign regulatory requirements or approvals required for the execution of the merger agreement or completion of the merger.

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Litigation Relating to the Merger (Page 48)

Three stockholder class action lawsuits were filed following the announcement that we entered into the merger agreement on August 14, 2012 with Physicians Formula Superior Holdings, LLC and Physicians Formula Merger Sub, Inc. (each of which are affiliates of Swander Pace Capital). We refer to that merger agreement as the Swander Pace merger agreement, and we refer to the affiliates of Swander Pace Capital that were party to the Swander Pace merger agreement as Swander Pace.

To our knowledge, as of the date this proxy statement, plaintiffs in two of the three stockholder class action lawsuits filed previously with respect to the merger contemplated by the Swander Pace merger agreement have filed amended complaints effectively withdrawing the original claims and asserting new claims against our company and the members of our board of directors related to the merger contemplated by the merger agreement we entered into with Parent and MergerSub.  In one of those amended complaints, plaintiffs also asserted claims against Parent and MergerSub.  The amended complaints include claims alleging that the members of our board of directors breached their fiduciary duties to maximize stockholder value in connection with the merger and breached their fiduciary duty of disclosure by failing to disclose all material information in our public filings. Plaintiffs in the third stockholder class action lawsuit filed previously with respect to the merger contemplated by the Swander Pace merger agreement have indicated that they are considering filing an amended complaint to allege the same or similar claims against our company, the members of our board of directors, Parent and MergerSub related to the merger contemplated by the merger agreement we entered into with Parent and MergerSub. We, Parent and MergerSub believe that these lawsuits are without merit and intend to defend them vigorously.

Termination of the Swander Pace Merger Agreement (page 49)

On August 14, 2012, we entered into a merger agreement with Physicians Formula Superior Holdings, LLC and Physicians Formula Merger Sub, Inc., each of which is an affiliate of Swander Pace Capital, pursuant to which such parties agreed to acquire all of the outstanding shares of our common stock at a price of $4.25 per share.

Under the terms of the Swander Pace merger agreement, we were permitted to respond to unsolicited acquisition proposals that met certain conditions. If our board of directors intended to determine that any such acquisition proposal constituted a superior proposal to the merger contemplated by the Swander Pace merger agreement, we were required to notify Swander Pace that our board of directors intended to make such determination. In that event, Swander Pace had the right to offer to amend the terms of the Swander Pace merger agreement such that such acquisition proposal no longer constituted a superior proposal. If Swander Pace did not make such an offer, our board of directors was permitted to change its recommendation to our stockholders that they adopt the Swander Pace merger agreement and we were permitted to terminate the Swander Pace merger agreement. Following the receipt of Parent’s unsolicited acquisition proposal to acquire all of the outstanding shares of our common stock at a price of $4.90 per share and following subsequent negotiations with Parent, on September 26, 2012, we terminated the Swander Pace merger agreement after complying with the terms of the Swander Pace merger agreement and the process described in the preceding sentences and we entered into the merger agreement with Parent and MergerSub. In connection with the termination of the Swander Pace merger agreement, we paid Swander Pace a termination fee of $1,285,000 on September 27, 2012.

Restrictions on Solicitations of Other Offers (Page 56)

The merger agreement restricts our ability to solicit, initiate, facilitate, propose or enter into or engage in discussions or negotiations with third parties regarding a proposal to acquire a significant interest in us or a substantial portion of our assets. However, under certain circumstances, if we receive a bona fide unsolicited written acquisition proposal (as defined in the section entitled “The Merger Agreement—Covenants and Other Agreements—No Solicitation; Acquisition Proposals” below) from a third party that our board of directors determines in good faith (after consultation with outside legal counsel and financial advisors) constitutes a superior proposal (as defined in the section entitled “The Merger Agreement—Covenants and Other Agreements—No Solicitation; Acquisition Proposals” below) or would reasonably be expected to lead to a superior proposal and is from a party reasonably capable of consummating such acquisition proposal in a timely manner, we may furnish information to that third party and engage in negotiations with that third party, subject to specified conditions.

Conditions to the Closing of the Merger (Page 60)

A number of conditions must be satisfied or waived before the merger can be completed, including the following conditions:

·                                           adoption of the merger agreement by the affirmative vote of the holders of a majority of the shares of our common stock outstanding on the record date for the special meeting;

·                                           all material filings with or material permits, authorizations, consents and approvals of or expirations of waiting periods imposed by any governmental entity required to consummate the merger shall have been obtained or filed or shall have occurred;

·                                           the accuracy as of September 26, 2012 and as of the closing of the merger of the representations and warranties made by each of the parties in the merger agreement to the extent specified therein;

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·                                           the aggregate amount of our unpaid obligations and expenses that we incurred in connection with the potential sale of our company and the negotiation and execution of the merger agreement and the consummation of the transactions contemplated thereby as of September 26, 2012, plus the amount that we have and may incur between September 26, 2012 and the closing of the merger in connection with the performance of our obligations (and enforcement of our rights) under the merger agreement shall not exceed an amount agreed upon by the parties by more than $800,000;

·                                           performance of or compliance with the pre-closing covenants and agreements by each of the parties to the merger agreement to the extent specified therein; and

·                                           absence of certain events, circumstances, changes, occurrences, states of fact or effects prior to the effective time of the merger that have had or would reasonably be expected, individually or in the aggregate, to have a material adverse effect on our company.

Neither we nor Parent can offer any assurance that any or all of the conditions will be satisfied or waived or that the merger will occur, or if it occurs, as to its timing.

Termination of the Merger Agreement and Termination Fees (Page 63)

The merger agreement may be terminated by the mutual written consent of our company, Parent and MergerSub, or under certain specified circumstances by either our company or Parent. Upon termination of the merger agreement under specified circumstances, we may be required to pay a termination fee of $1,500,000 to Parent.  In addition, upon termination of the merger agreement under other specified circumstances, Parent may be required to pay us a termination fee of $3,500,000.

Market Price of Common Stock (Page 68)

Our common stock is listed on the NASDAQ Global Select Market under the trading symbol “FACE.” The closing sale price of our common stock on August 14, 2012, the last trading day prior to the announcement of the Swander Pace merger agreement was $3.68. The $4.90 per share to be paid for each share of common stock in the merger represents:

·                   a premium of approximately 33% to the closing price on August 14, 2012; and

·                   a premium of approximately 40% to the one-month volume-weighted average price of $3.50 per share as of
August 14, 2012.

From May 31, 2011 until September 6, 2012, our common stock traded below $4.90 per share and had not exceeded $4.90 per share since May 31, 2011, when it reached $4.99 during intra-day trading, though its closing price that day was $4.60. The closing price of our common stock had been below $4.90 every trading day since May 20, 2011, when it closed at $5.09. On September 6, 2012, we announced the receipt of Parent’s unsolicited, nonbinding proposal to acquire all of our outstanding shares of common stock at a price of $4.90 per share. During the four years prior to September 6, 2012, the closing price of our common stock had been below $4.90 at the end of 95% of the trading days for that period.

The closing sale price of our common stock on the NASDAQ Global Select Market on October 12, 2012, the last trading day before the date of this proxy statement, was $4.89.

Appraisal Rights (Page 71)

Under Section 262 of the Delaware General Corporation Law, which we refer to as the DGCL, holders of our common stock who do not vote in favor of the proposal to adopt the merger agreement will have the right to seek appraisal of the “fair value” of their shares of common stock as determined by the Delaware Court of Chancery if the merger is completed, but only if they comply with all requirements of the DGCL, which are summarized in this proxy statement. The judicially determined appraisal amount could be more than, the same as or less than the merger consideration. Any holder of common stock intending to exercise appraisal rights, among other things, must submit a written demand for an appraisal to us prior to the vote on the proposal to adopt the merger agreement, must not vote in favor of adoption of the merger agreement and must otherwise strictly comply with all of the procedures required by the DGCL. Your failure to follow exactly the procedures specified under the DGCL will result in the loss of your appraisal rights. A copy of Section 262 of the DGCL is attached hereto as Annex D.

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QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER

The following questions and answers, which are for your convenience only, briefly address some commonly asked questions about the merger, the “golden parachute” compensation and the special meeting and are qualified in their entirety by the more detailed information contained elsewhere in this proxy statement. These questions and answers may not address all questions that may be important to you as a stockholder. You should carefully read this entire proxy statement, including the attached annexes. Please refer to the “Summary Term Sheet” and the more detailed information contained elsewhere in this proxy statement, the annexes to this proxy statement and the documents referred to or incorporated by reference in this proxy statement, all of which you should read carefully. See “Where You Can Find More Information” beginning on page 75.

Q.                                    What is the proposed transaction?

A.                                    The proposed transaction is the acquisition of our company by Parent pursuant to the merger agreement. If the merger agreement is adopted by our stockholders and the other closing conditions under the merger agreement have been satisfied or waived, at the effective time of the merger, MergerSub, a wholly-owned subsidiary of Parent, will merge with and into our company. Our company will be the surviving corporation of the merger and will continue as a wholly-owned subsidiary of Parent following the effective time of the merger.

Q.                                    What will I receive in the merger?

A.                                    Upon completion of the merger, you will be entitled to receive $4.90 in cash, without interest and less any applicable withholding taxes, for each share of our common stock that you owned immediately prior to the effective time of the merger, unless you have properly demanded and validly perfected your statutory rights of appraisal with respect to the merger. For example, if you owned 100 shares of common stock immediately prior to the effective time of the merger, you will receive $490.00 in cash in exchange for your shares of common stock, without interest and less any applicable withholding taxes. After the merger, you will not own any shares in the surviving corporation of the merger or Parent whether or not you vote in favor of the proposal to adopt the merger agreement.

Q.                                    When and where is the special meeting?

A.                                    The special meeting will be held on November 8, 2012 at 9:00 a.m. local time, at our corporate office located at 1055 West 8th Street, Azusa, California 91702.

Q.                                    What vote is required to approve the proposal to adopt the merger agreement?

A.                                    The affirmative vote of the holders of a majority of the shares of our common stock outstanding and entitled to vote at the special meeting is required to approve this proposal. Accordingly, failure to vote in person or by proxy or an abstention will have the same effect as a vote against this proposal.

Q.                                    What vote is required to approve the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the merger agreement?

A.                                    Approval of this proposal requires the affirmative vote of a majority of the shares of our common stock present in person or represented by proxy at the special meeting and entitled to vote on the proposal.

Q.                                    Have any stockholders already agreed to vote to adopt the merger agreement?

A.                                   Yes. Mill Road, our largest stockholder, Ingrid Jackel, our Chief Executive Officer and a member of our board of directors, and Jeffery P. Rogers, our President and a member of our board of directors, have each entered into voting agreements with Parent. Under these voting agreements, among other things, these stockholders have irrevocably agreed, on the terms and subject to the conditions specified in the voting agreements, to vote all shares of our common stock owned by such stockholders in favor of the adoption of the merger agreement and against any competing acquisition proposal. The forms of voting agreement entered into by these stockholders are attached as Annex B-1 and Annex B-2 hereto. As of the record date, these stockholders held an aggregate of approximately 3,028,967 shares of our common stock (excluding approximately 1,743,889 shares of common stock, in the aggregate, underlying outstanding stock options and warrants) representing approximately 22.1% of the outstanding shares of our common stock as of the record date. Pursuant to such voting agreements, if such stockholders acquire beneficial or record ownership of any additional shares of our common stock, such shares will also be subject to the voting agreements.

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Q.                                    What effects will the merger have on Physicians Formula?

A.                                    If the merger occurs, after the effective time of the merger, our company will cease to be a publicly-traded company and will be wholly-owned by Parent. After the effective time of the merger, you will no longer have any interest in our future earnings or growth and you will no longer be a stockholder of our company. Following completion of the merger, the registration of our common stock and our reporting obligations with respect to our common stock under the Securities Exchange Act of 1934, which we refer to as Exchange Act, will be terminated. In addition, upon completion of the merger, our common stock will no longer be listed on any stock exchange or quotation system, including the NASDAQ Global Select Market.

Q.                                    What happens if the merger is not consummated?

A.                                    If the proposal to adopt the merger agreement is not approved by our stockholders or if the merger is not completed for any other reason, the merger will not occur and our stockholders will not receive any payment for their shares. Instead, our company will remain an independent public company and our common stock will continue to be registered under the Exchange Act and, provided we continue to comply with applicable continued listing requirements, listed and traded on the NASDAQ Global Select Market. Under specified circumstances, we may be required to pay a fee to Parent, or Parent may be required to pay a fee to us, in the event the merger agreement is terminated as described under the caption “The Merger Agreement—Termination Fees” beginning on page 50.  You should also read “The Merger (Proposal 1)—Reasons for the Merger; Recommendation of the Board of Directors” beginning on page 29 for a discussion of the factors that our board of directors considered in deciding to recommend the adoption of the merger agreement.

Q.                                    What is the “golden parachute” compensation?

A.                                    The “golden parachute” compensation is certain compensation which may become payable to our named executive officers in connection with the merger under specified circumstances. See “Advisory Vote on Golden Parachute Compensation (Proposal 2)” beginning on page 66.

Q.                                    What vote is required to approve the “golden parachute” compensation?

A.                                    The affirmative vote of the majority of the shares of our common stock present in person or represented by proxy and entitled to vote on the proposal is required for approval of this proposal.

Q.                                    What happens if stockholders do not approve the “golden parachute” compensation?

A.                                    Approval of the “golden parachute” compensation is not a condition to completion of the merger. The vote with respect to the “golden parachute” compensation is an advisory vote and will not be binding on our company or Parent. If the merger agreement is adopted by our stockholders and completed, the “golden parachute” compensation may be paid even if our stockholders do not approve the “golden parachute” compensation.

Q.                                    How does the board of directors recommend that I vote?

A.                                    Our board of directors unanimously recommends that you vote “FOR” the proposal to adopt the merger agreement, “FOR” approval of the “golden parachute” compensation, and “FOR” the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the merger agreement. You should read “The Merger (Proposal 1)—Reasons for the Merger; Recommendation of the Board of Directors” beginning on page 29 for a discussion of the factors that our board of directors considered in deciding to recommend the adoption of the merger agreement.

Q.                                    How do I cast my vote?

A.                                    You may vote:

·                   Via Proxy : By marking, signing and dating each proxy card you receive and returning it in the enclosed prepaid envelope. If you return your signed proxy card, but do not mark the boxes showing how you wish to vote, your shares will be voted “FOR” each of the proposals described in this proxy statement. If your shares are held in “street name” through a broker, bank or other nominee, you may vote by completing and returning the voting form provided by your broker, bank or other nominee.

·                   Via the Internet or telephone : If your shares are registered in your name, you may submit a proxy authorizing the voting of your shares over the Internet or telephonically.  Proxies submitted over the Internet or by telephone must be received by 11:59 p.m. (Eastern time) on November 7, 2012, the day prior to the special meeting.  You must have the enclosed proxy card available, and follow the instructions on the proxy card, in order to submit a proxy via the Internet or telephone.  If your shares are held in “street name”, you may cause your shares to be voted via the Internet or telephone through your broker, bank or other nominee if they offer that service. To vote via the Internet or telephone through your broker, bank or other nominee, you should follow the instructions on the voting form provided by your broker, bank or other nominee.

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·                   In person : If your shares are registered in your name, you may attend the special meeting and vote your shares in person.  Even if you plan to attend the special meeting in person, we urge you to complete, sign, date and return the enclosed proxy card or submit a proxy via the Internet or telephone to ensure that your shares will be represented at the special meeting. If your shares are held in “street name” and you wish to attend and vote in person at the special meeting, then you must obtain a legal proxy issued in your name from the broker, bank or other nominee that holds your shares of record.

Q.                                    If my shares are held in “street name” by my broker, bank or other nominee, will my broker, bank or other nominee vote my shares for me?

A.                                    Yes, but only if you instruct your broker, bank or other nominee how to vote. You should follow the procedures provided by your broker, bank or other nominee regarding the voting of your shares. If you do not instruct your broker, bank or other nominee to vote your shares, your shares will not be voted and the effect will be the same as a vote against the proposal to adopt the merger agreement, but will not have an effect on the proposal to approve the “golden parachute” compensation or to adjourn the special meeting.

Q:                                   What happens if I do not return my proxy card, submit a proxy via the Internet or telephone or attend the special meeting and vote in person?

A:                                    Adoption of the merger agreement requires the affirmative vote of the holders of a majority of the shares of our common stock issued and outstanding on the record date. Therefore, if you do not return your proxy card, submit a proxy via the Internet or telephone or attend the special meeting and vote in person, it will have the same effect as if you voted “AGAINST” adoption of the merger agreement. Abstentions are also treated as votes against this proposal.

Approval of the advisory (non-binding) proposal on the “golden parachute” compensation requires the affirmative vote of the holders of a majority of the shares of our common stock present in person or represented by proxy at the special meeting and entitled to vote on the proposal. Abstentions are treated as votes against this proposal if your shares are otherwise present in person or otherwise represented by proxy at the special meeting.  However, any failure to vote your shares by proxy or in person will have no effect on the approval of this proposal.

Approval of the proposal to adjourn the special meeting, if necessary or appropriate, for the purpose of soliciting additional proxies if there are insufficient votes at the time of the special meeting to adopt the merger agreement requires the affirmative vote of a majority of the shares of our common stock present in person or represented by proxy at the special meeting and entitled to vote on the proposal.  Abstentions are treated as votes against this proposal if your shares are otherwise present in person or otherwise represented by proxy at the special meeting.  However, any failure to vote your shares by proxy or in person will have no effect on the approval of this proposal.

Q.                                    How can I change or revoke my proxy?

A.                                    You have the right to change or revoke your proxy in one of three ways:

·                   You can deliver to our corporate secretary a written notice bearing a date later than the proxy you delivered to us stating that you revoke your proxy, provided the notice is received before the vote is taken at the special meeting.

·                   You can complete, execute and deliver to our corporate secretary a later-dated proxy for the same shares.  If you originally submitted the proxy you are seeking to revoke via the Internet or telephone, you may submit a later-dated new proxy using the same method of transmission (Internet or telephone) as the proxy being revoked, provided the new proxy is received by 11:59 p.m. (Eastern time) on November 7, 2012, the date prior to the date of the special meeting.

·                   You can attend the meeting and vote in person.  Your attendance at the special meeting alone will not revoke your proxy.

Any written notice of revocation or subsequent proxy should be delivered to us at Physicians Formula Holdings, Inc., 1055 West 8th Street, Azusa, California 91702, Attention: Corporate Secretary, or hand-delivered to our corporate secretary before the taking of the vote at the special meeting.

If you have instructed a broker, bank or other nominee to vote your shares, the above does not apply and instead you must follow the directions received from your broker, bank or other nominee to change those instructions.

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Q.                                    What do I do if I receive more than one proxy or set of voting instructions?

A.                                    If your shares are registered in different names or are in more than one account, you may receive more than one proxy and/or set of voting instructions relating to the special meeting. Each such proxy or set of voting instructions should be completed, signed and/or returned separately as described elsewhere in this proxy statement in order to ensure that all of your shares are voted.

Q.                                    What happens if I sell my shares before the special meeting or before the completion of the merger?

A.                                    The record date of the special meeting is October 10, 2012, which is prior to the special meeting and prior to the date that the merger is expected to be completed. If you transfer your shares after the record date but before the special meeting, you will retain your right to vote at the special meeting, but will have transferred the right to receive the merger consideration to be received by our stockholders in the merger. In order to receive the merger consideration for your shares, you must hold your shares through the effective time of the merger.

Q.                                    Am I entitled to exercise appraisal rights instead of receiving the merger consideration for my shares?

A.                                    Yes. As a holder of our common stock, you are entitled to appraisal rights under the Delaware General Corporation Law in connection with the merger if you meet certain conditions including strictly complying with the requirements of Section 262 of the Delaware General Corporation Law.  See “Rights of Appraisal” beginning on page 71.

Q.                                    When is the merger expected to be completed?

A.                                    The merger agreement provides that, subject to specified exceptions, either party may terminate the agreement if the closing of the merger does not occur on or before December 31, 2012. Our goal is to close the transaction as soon as practical. However, the exact timing of the completion of the merger cannot be predicted. In order to complete the merger, our stockholders must adopt the merger agreement, and the other closing conditions under the merger agreement must be satisfied or waived.  See “The Merger Agreement—Closing and Effective Time” and “The Merger Agreement—Covenants and Other Agreements—Conditions of the Merger” beginning on pages 50 and 60, respectively.

Q:                                   Who will bear the cost of this solicitation?

A:                                We will bear the expenses of preparing, printing and mailing this proxy statement and the proxies solicited hereby. Additional solicitation may be made by telephone, facsimile or other contact by certain of our directors, officers, employees or agents, none of whom will receive additional compensation for their solicitation efforts. Parent, directly or through one or more affiliates or representatives, may, at its own cost, also make additional solicitation by mail, telephone, facsimile or other contact.

Q.                                    Should I send in my stock certificates now?

A.                                    No.  If the merger agreement is adopted and the merger is completed, a paying agent will send you a letter of transmittal with detailed written instructions for exchanging your shares of common stock (whether certificated or uncertificated) for the merger consideration.  Please do not send your certificates in now.  If your shares are held in “street name” by your broker, bank or other nominee, you will receive instructions from your broker, bank or other nominee as to how to effectuate the surrender of your “street name” shares in exchange for the merger consideration.

Q.                                    What are the U.S. federal income tax consequences of the merger?

A.                                    The receipt of cash by you in exchange for your shares of common stock pursuant to the merger generally will be a taxable transaction for U.S. federal income tax purposes, and also generally will be a taxable transaction under applicable state, local and non-U.S. tax laws. If you are a U.S. person, you will recognize, for U.S. federal income tax purposes, gain or loss equal to the difference, if any, between the amount of cash received and your adjusted tax basis in the shares of common stock exchanged for cash pursuant to the merger agreement. Such gain or loss generally will be capital gain or loss. Capital gains recognized by an individual stockholder are eligible for preferential rates of U.S. federal income tax if the shares of common stock were held for more than one year. If the shares are held for one year or less, such capital gains recognized by an individual stockholder will be subject to tax at ordinary income tax rates. We recommend that you consult your own tax advisors as to the particular tax consequences to you of the merger, including the effect of U.S. federal, state and local tax laws or non-U.S. laws. See “The Merger (Proposal 1)—Material U.S. Federal Income Tax Consequences of the Merger to Our Stockholders” beginning on page 47 for a more detailed description of the U.S. federal income tax consequences of the merger.

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Q.                                    What do I need to do now?

A.                                    We urge you to read this proxy statement carefully, including the annexes and the other documents referred to or incorporated by reference herein, and to consider how the merger affects you. If you are a stockholder of record, you can ensure your shares are voted at the special meeting by completing, signing, dating and mailing the enclosed proxy card or authorizing a proxy by telephone or the Internet. Even if you plan to attend the special meeting, we encourage you to return the enclosed proxy card or to submit your proxy by telephone or the Internet.  If you hold your shares in “street name,” you can ensure that your shares are voted at the special meeting by instructing your broker, bank or other nominee how to vote. Do NOT return your stock certificate(s) with your proxy .

Q.                                    Who can help answer my other questions?

A.                                    If you have additional questions about the merger, need assistance in submitting your proxy or voting your shares of common stock or need additional copies of the proxy statement or the enclosed proxy card, please contact our proxy solicitor:

65 Locust Avenue, Suite 302

New Canaan, CT  06840

Toll Free:  (877) 972-0090

Banks and Brokers:  (203) 972-9300

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CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

This proxy statement and the documents to which we refer you in this proxy statement include forward-looking statements based on estimates and assumptions. There are forward-looking statements throughout this proxy statement, including, without limitation, under the headings “Questions and Answers about the Special Meeting and the Merger,” “Summary Term Sheet,” “The Merger (Proposal 1),” “Opinion of Financial Advisor to the Special Committee,” “Considerations Relating to the Proposed Merger,” and “Unaudited Projected Financial Information” and in statements containing words such as “believes,” “estimates,” “anticipates,” “continues,” “contemplates,” “expects,” “may,” “will,” “could,” “should” or “would” or other similar words or phrases. These statements, which are based on information currently available to us, are not guarantees of future performance and may involve risks and uncertainties that could cause our actual growth, results of operations, performance and business prospects, and opportunities to materially differ from those expressed in, or implied by, these statements. These forward-looking statements speak only as of the date on which the statements were made and we expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statement included in this proxy statement or elsewhere, except as required by law. In addition to other factors and matters contained or incorporated in this document, these statements are subject to risks, uncertainties and other factors, including, among others:

·                   the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement under circumstances that could require us to pay a $1,500,000 termination fee;

·                   the outcome of any legal proceedings that have been or may be instituted against our company and others relating to the merger agreement or the Swander Pace merger agreement;

·                   the timing of, and conditions associated with, the completion of the merger;

·                   the inability to complete the merger due to the failure to obtain stockholder approval or the failure to satisfy other conditions to consummation of the merger;

·                   the failure of the merger to close for any other reason;

·                   the possibility that alternative acquisition proposals will or will not be made;

·                   the failure of Parent or MergerSub to obtain sufficient funds to close the merger;

·                   risks that the proposed merger disrupts our current plans and operations and the potential difficulties in employee retention as a result of the merger;

·                   the effect of the announcement of the merger on our business and customer relationships, operating results and business generally, including our ability to retain key employees;

·                   the merger agreement’s contractual restrictions on the conduct of our business prior to the completion of the merger;

·                   the possible adverse effect on our business and the price of our common stock if the merger is not completed in a timely matter or at all;

·                   the amount of the costs, fees, expenses and charges related to the merger; and

·                   other risks detailed in our current filings with the Securities and Exchange Commission, including our most recent filings on Forms 8-K, 10-Q and 10-K, including but not limited to, the risks detailed in the sections entitled “Risk Factors.” See “Where You Can Find More Information” beginning on page 75.

Many of the factors that will determine our future results are beyond our ability to control or predict. In light of the significant uncertainties inherent in the forward-looking statements contained herein, readers should not place undue reliance on forward-looking statements, which reflect management’s views only as of the date hereof. We cannot guarantee any future results, levels of activity, performance or achievements. The statements made in this proxy statement represent our views as of the date of this proxy statement, and it should not be assumed that the statements made herein remain accurate as of any future date. Moreover, we assume no obligation to update forward-looking statements or update the reasons that actual results could differ materially from those anticipated in forward-looking statements, except as required by law.

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THE PARTIES TO THE MERGER

Physicians Formula Holdings, Inc.

Physicians Formula is an innovative cosmetics and skin care company operating in the mass market prestige, or “masstige,” market. Under our Physicians Formula brand name, created in 1937, we develop, market and distribute innovative, premium-priced products for the mass market channel. We differentiate our company by addressing skin imperfections through a problem-solving approach, rather than focusing on changing fashion trends. Currently, our products are sold in over 25,000 stores including those operated by Wal-Mart, Target, CVS and Rite Aid.

Our company was incorporated in 2003. Our corporate headquarters and principal executive offices are located at 1055 West 8th Street, Azusa, California 91702, and our telephone number is (626) 334-3395.

For more information about our company, please visit our website at www.physiciansformula.com. Our website address is provided as an inactive textual reference only. The information provided on our website is not part of this proxy statement and therefore is not incorporated by reference. See also “Where You Can Find More Information” beginning on page 75. Our common stock is publicly-traded on the NASDAQ Global Select Market under the symbol “FACE.”

Parent

Markwins International Corporation is a California corporation and is referred to in this proxy statement as “Parent.”  Parent’s principal executive offices are located at 22067 Ferrero Parkway, City of Industry, California 91786, and its telephone number is (909) 595-8898.

Parent is a global leader in color cosmetics, cosmetic accessories and beauty collections. Founded by Eric Chen, its chief executive officer, nearly 30 years ago, the privately-held company is recognized as a top 20 purveyor in the global cosmetic industry. Parent’s brands cater to and reach consumers of all ages, ethnicities and skin tones. Parent’s brand portfolio includes wet n wild®, The Color Workshop®, Black Radiance®, The Color Institute® and POP® amongst many others. As of September 2012, Parent’s brands can be found in over 42,000 retail outlets including Department, Specialty, Mass, Drug and Food stores, and are available in more than 60 countries, spanning 6 continents.

MergerSub

Markwins Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of Parent, was formed solely for the purpose of consummating the merger. Markwins Merger Sub, Inc. is referred to in this proxy statement as “MergerSub.”

MergerSub has not carried on any activities to date, except for activities incidental to its formation and activities undertaken in connection with the transactions contemplated by the merger agreement.  MergerSub’s principal executive offices are located at 22067 Ferrero Parkway, City of Industry, California 91786, and its telephone number is (909) 595-8898.

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THE SPECIAL MEETING

Time, Place and Purpose of the Special Meeting

This proxy statement is being furnished to our stockholders as part of the solicitation of proxies by our board of directors for use at the special meeting to be held on November 8, 2012 at 9:00 a.m. local time, at our corporate offices located at 1055 West 8th Street, Azusa, California 91702 , or at any adjournment or postponement thereof.

The purpose of the special meeting is for our stockholders to (i) consider and vote on a proposal to adopt the merger agreement, pursuant to which MergerSub will merge with and into our company with our company continuing as the surviving corporation of the merger and a wholly-owned subsidiary of Parent, (ii) consider and cast an advisory (non-binding) vote on a proposal to approve certain compensation which may become payable to our named executive officers in connection with the merger (which we refer to in this proxy statement as the “golden parachute” compensation) and (iii) consider and vote on a proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the merger agreement.

Our stockholders must adopt the merger agreement in order for the merger to occur. If our stockholders do not adopt the merger agreement or if the other closing conditions set forth in the merger agreement are not satisfied or waived, the merger will not occur. A copy of the merger agreement is attached to this proxy statement as Annex A.

Other than the three proposals described above, we do not expect a vote to be taken on any other matters at the special meeting or any adjournment or postponement thereof. If any other matters are properly presented at the special meeting or any adjournment or postponement thereof for consideration, however, the holders of the proxies will have discretion to vote on these matters in accordance with their best judgment.

Record Date and Quorum

We have fixed the close of business on October 10, 2012 as the record date for the special meeting, and only holders of record of our common stock on the record date are entitled to receive notice of and vote at the special meeting. As of the close of business on the record date, there were 13,714,447 shares of our common stock outstanding and entitled to vote. Each share of our common stock entitles its holder to one vote on all matters properly coming before the special meeting.

The holders of a majority of the outstanding shares of common stock entitled to vote at the special meeting, present in person or represented by a duly authorized and properly completed proxy, constitutes a quorum for the purpose of considering the proposals. Shares of common stock represented at the special meeting but not voted, including shares for which proxies have been received but for which stockholders have abstained and shares held in “street name” as to which voting instructions are provided by the beneficial owner to the bank, brokerage firm or other nominee that holds such shares on at least one of the proposals described in this proxy statement, will be treated as present at the special meeting for purposes of determining the presence or absence of a quorum for the transaction of all business. In the event that a quorum is not present at the special meeting, it is expected that the special meeting will be adjourned to solicit additional proxies. If a quorum is not present, the holders of a majority of the shares present in person or represented by proxy and entitled to vote may adjourn the meeting.

If your shares of common stock are held in “street name,” you will receive instructions from your bank, brokerage firm or other nominee that you must follow in order to have your shares voted. If you have not received such voting instructions or require further information regarding such voting instructions, contact your bank, brokerage firm or other nominee, as the case may be. Brokers who hold shares of our common stock in “street name” for a beneficial owner of those shares typically have the authority to vote in their discretion on “routine” proposals when they have not received instructions from beneficial owners. However, brokers are not allowed to exercise their voting discretion with respect to the approval of matters that are “non-routine,” such as adoption of the merger agreement, without specific instructions from the beneficial owner. Broker non-votes are shares held by a broker or other nominee that are present in person or represented at the meeting, but with respect to which the broker or other nominee is not instructed by the beneficial owner of such shares to vote on the particular proposal and the broker does not have discretionary voting power on such proposal. Because it is expected that brokers and other nominees will not have discretionary authority to vote on any of the three proposals described in this proxy statement, we anticipate that there will not be any broker non-votes in connection with any of the proposals. If your broker or other nominee holds your shares in “street name,” your broker or other nominee will vote your shares only if you provide instructions on how to vote. Please follow the directions on the voting instruction form sent to you by your broker or other nominee.

Vote Required for Approval

Approval of the proposal to adopt the merger agreement requires the affirmative vote of a majority of the shares of our common stock outstanding that are entitled to vote at the special meeting.

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Approval of the advisory (non-binding) proposal on the “golden parachute” compensation requires the affirmative vote of the holders of a majority of the shares of our common stock present in person or represented by proxy at the special meeting and entitled to vote on the proposal. The vote to approve the “golden parachute” compensation is advisory only and will not be binding on our company or Parent and is not a condition to completion of the merger. If the merger is completed, the “golden parachute” compensation may be paid to our named executive officers in certain circumstances even if stockholders fail to approve the “golden parachute” compensation.

Approval of the proposal to adjourn the special meeting, if necessary or appropriate, for the purpose of soliciting additional proxies requires the affirmative vote of a majority of the shares of our common stock present in person or represented by proxy at the special meeting and entitled to vote on the proposal.

If you do not submit a proxy by telephone or the Internet or by returning a signed proxy card by mail or vote your shares in person or if you “ ABSTAIN ” from voting on your proxy card or ballot, it will have the same effect as a vote against the proposal to adopt the merger agreement.

If you do not submit a proxy by telephone or the Internet or by returning a signed proxy card by mail or vote your shares in person, it will have no effect on the proposal to approve the “golden parachute” compensation or on the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the merger agreement. If you “ ABSTAIN ” from voting on your proxy card or ballot, it will have the same effect as a vote against the proposal to approve the “golden parachute” compensation and on the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the merger agreement.

If your shares of common stock are held in street name, you will receive instructions from your broker, bank or other nominee that you must follow in order to have your shares voted. If you do not instruct your broker, bank or other nominee to vote your shares, it will have the same effect as a vote against the proposal to adopt the merger agreement .

As of the record date, our directors and executive officers beneficially owned in the aggregate 3,048,967 shares of our common stock (excluding approximately 1,601,163 shares of our common stock, in the aggregate, underlying currently unexercised stock options and warrants), representing approximately 22.2% of the shares entitled to vote at the special meeting.

Voting Agreements

As condition to the willingness of Parent and MergerSub to enter into the merger agreement and as an inducement and in consideration therefor, Parent and MergerSub required that each of Mill Road, Ingrid Jackel and Jeffery P. Rogers enter into a voting agreement with Parent.  Mill Road is our largest stockholder, and Mr. Lynch a member of our board of directors and of the special committee, is a Senior Managing Director of Mill Road. Ms. Jackel and Mr. Rogers serve as our Chief Executive Officer and President, respectively, and also serve on our board of directors.

Under these voting agreements, among other things, these stockholders have irrevocably agreed, on the terms and subject to the conditions specified in the voting agreements, to vote all shares of our common stock owned by such stockholders in favor of the adoption of the merger agreement and against any competing acquisition proposal. The forms of voting agreements entered into by these stockholders are included as Annex B-1 and Annex B-2 hereto. As of the record date, these stockholders held an aggregate of approximately 3,028,967 shares of our common stock (excluding approximately 1,743,889 shares of common stock, in the aggregate, underlying outstanding stock options and warrants) representing approximately 22.1% of the outstanding shares of our common stock as of the record date. Pursuant to such voting agreements, if such stockholders acquire beneficial or record ownership of any additional shares of common stock, such shares will also be subject to the voting agreements.

Previously, each of Mill Road, Ms. Jackel and Mr. Rogers entered into voting agreements with Swander Pace, requiring such stockholders to vote in favor of the Swander Pace merger agreement. The Swander Pace voting agreements were terminated in accordance with their terms.

Proxies and Revocation

If you submit a proxy by telephone or the Internet or by returning a signed proxy card by mail, your shares will be voted at the special meeting as you direct on your proxy card or by such other method. If you sign your proxy card without indicating instructions as to how to vote your shares, your shares will be voted “ FOR ” the proposal to adopt the merger agreement, “ FOR ” the approval of the “golden parachute” compensation, and “ FOR ” the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the merger agreement.

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The laws of Delaware, under which our company is incorporated, specifically permit electronically transmitted proxies, provided that each proxy contains or is submitted with information that enables the inspectors of election to determine that the proxy was authorized by the stockholder. When you log on to the Internet website address, you will receive instructions on how to proceed with voting your shares. The telephone and Internet voting procedures are designed to authenticate votes cast by use of a personal identification number. These procedures allow our stockholders to appoint a proxy to vote their shares of common stock, and to confirm that their instructions have been properly recorded.

Proxies received at any time before the start of the special meeting and not revoked or superseded before being voted will be voted at the special meeting. You have the right to change or revoke your proxy in one of three ways:

·                   You can deliver to our corporate secretary a written notice bearing a date later than the proxy you delivered to us stating that you revoke your proxy, provided the notice is received before the vote is taken at the special meeting.

·                   You can complete, execute and deliver to our corporate secretary a later-dated proxy for the same shares. If you originally submitted the proxy you are seeking to revoke via the Internet or telephone, you may submit a later-dated new proxy using the same method of transmission (Internet or telephone) as the proxy being revoked, provided the new proxy is received by 11:59 p.m. (Eastern time) on November 7, 2012, the date prior to the date of the special meeting.

·                   You can attend the meeting and vote in person.  Your attendance at the special meeting alone will not revoke your proxy.

Any written notice of revocation or subsequent proxy should be delivered to us at Physicians Formula Holdings, Inc., 1055 West 8th Street, Azusa, California 91702, Attention: Corporate Secretary, or hand-delivered to our corporate secretary before the taking of the vote at the special meeting.

If you hold your shares through a broker, bank or other nominee and you have instructed a broker, bank or other nominee to vote your shares of common stock, the above instructions do not apply and, instead, you must follow the directions received from your broker, bank or other nominee to change those instructions.

Please do not send in your stock certificates with your proxy card.   When the merger is completed, a paying agent will mail to you a separate letter of transmittal that will enable you to receive the merger consideration in exchange for your shares of common stock (whether held in certificated or uncertificated form).

Adjournments and Postponements

Although it is not currently expected, the special meeting may be adjourned for the purpose of soliciting additional proxies if we have not received sufficient votes for adoption of the merger agreement proposal at the special meeting and our stockholders approve the proposal for such adjournment. Any adjournments may be made without notice (if such adjournment is for not more than 30 days), other than an announcement at the special meeting, by approval of the affirmative vote of holders of at least a majority of shares of our common stock who are present in person or represented by proxy at the special meeting. Any signed proxies we receive in which no voting instructions are provided on such matter will be voted “ FOR ” the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the merger agreement. Any adjournment of the special meeting for the purpose of soliciting additional proxies will allow our stockholders who have already sent in their proxies to revoke them at any time prior to their use at the special meeting as adjourned.

At any time prior to convening the special meeting, our board of directors may postpone the special meeting for any reason without the approval of our stockholders. If postponed, we will provide notice of the new meeting date as required by law. Although it is not currently expected, our board of directors may postpone the special meeting for the purpose of soliciting additional proxies if we have not received sufficient proxies to constitute a quorum or sufficient votes for adoption of the merger agreement. Similar to adjournments, any postponement of the special meeting for the purpose of soliciting additional proxies will allow our stockholders who have already sent in their proxies to revoke them at any time prior to their use.

Appraisal Rights of Stockholders

Stockholders are entitled to statutory appraisal rights under Section 262 of the DGCL in connection with the merger. This means that you are entitled to have the “fair value” of your shares determined by the Delaware Court of Chancery and to receive payment in cash for your shares at that value, provided that you strictly comply with requirements under Section 262 of the DGCL. The ultimate amount you receive in an appraisal proceeding may be more than, the same as or less than the amount you would have received under the merger agreement.

To exercise your appraisal rights, you must submit a written demand for appraisal to our company before the vote is taken on the merger agreement and you must not vote in favor of the proposal to adopt the merger agreement. Your failure to follow exactly the procedures specified under the DGCL will result in the loss of your appraisal rights. See “Rights of Appraisal” beginning on page 71 and the text of Section 262 of the DGCL, the Delaware appraisal rights statute, reproduced in its entirety as Annex D.

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Solicitation of Proxies

This proxy solicitation is being made and paid for by our company on behalf of our board of directors. Our directors, officers and employees may also solicit proxies by personal interview, mail, electronic mail, telephone, facsimile or other means of communication. These persons will not be paid additional or special remuneration for their efforts. We may also reimburse brokers, banks and other custodians, nominees and fiduciaries representing beneficial owners of shares of our common stock for their expenses in forwarding soliciting materials to beneficial owners of our common stock and in obtaining voting instructions from those owners. We have also retained InvestorCom, Inc. to assist in the solicitation of proxies for a fee estimated to be approximately $5,000.

Parent, directly or through one or more affiliates or representatives, may, at its own cost, also make additional solicitation by mail, telephone, facsimile or other contact.

Questions and Additional Information

If you have more questions about the merger or how to submit your proxy, or if you need additional copies of this proxy statement or the enclosed proxy card or voting instructions, please call InvestorCom, Inc., our proxy solicitor, toll-free at 877-972-0090 (banks and brokers call 203-972-9300).

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THE MERGER (PROPOSAL 1)

Background of the Merger

As part of our company’s ongoing strategic planning process, our board of directors and members of our management have regularly reviewed and evaluated our strategic direction and alternatives in light of the performance of our business operations, market, economic and competitive developments and other conditions.  In connection with these periodic reviews, our board of directors has, from time to time in the ordinary course of business, received communications and advice from various investment banking firms regarding market conditions and parties that may be interested in exploring a potential strategic transaction involving our company.

In October 2010, our board of directors considered its role in exploring, evaluating and considering a potential strategic transaction. Our board of directors discussed the possible advantages of establishing a committee of independent and disinterested directors to explore, evaluate, consider and negotiate the terms of a potential acquisition or other strategic transaction involving our company. Our board of directors observed that such a committee, due to its size, would be able to more efficiently manage the process of exploring, evaluating, considering and negotiating any potential proposals received by our company.  Following this discussion, our board of directors determined to establish such a committee whose primary purpose and responsibility was to direct and oversee an exploration of the strategic alternatives available to our company to maximize stockholder value. Our board of directors determined that the committee, which we refer to as the special committee, would be comprised of Mr. Padraic L. Spence (Chairman), Mr. Thomas E. Lynch, Mr. Zvi Eiref and Mr. Charles J. Hinkaty. None of the directors appointed to the special committee had or has interests in a potential strategic transaction that differ from those of our stockholders generally. The special committee met two times in 2010. During those meetings, the special committee discussed and considered initiating a process to explore the strategic alternatives available to our company to maximize stockholder value. The special committee identified several investment banks that could potentially serve as its independent financial advisor in connection with that process and selected four investment banks to make a presentation to our board of directors in March 2011.

In March 2011, the four investment banks selected by the special committee each made a presentation to our board of directors regarding the advisability of initiating a process to explore the strategic alternatives available to our company to maximize stockholder value. The special committee met following those presentations and determined not to initiate such a process in part based on the information it reviewed in such presentations and in part because our company had just begun a costly marketing investment program that would depress short-term profitability results and could result in a reduced valuation for our company.

In October 2011, the special committee met. During this meeting it decided to meet again in early 2012 after our company’s annual budget had been finalized. Based upon the special committee’s assessment of our company’s prospects at that time, the special committee planned to consider the advisability of initiating a process to explore the strategic alternatives available to our company to maximize stockholder value.

Mr. Spence resigned from our board of directors in May 2011 and Mr. Lynch was subsequently appointed as chairman of the special committee in October 2011. Mr. Eiref resigned from our board of directors in December 2011.  In June 2011, Mr. Bruce E. Kanter was appointed to our board of directors. He was appointed to the special committee in December 2011. In December 2011, Mr. Alec Taylor was appointed to our board of directors and to the special committee. As of our annual meeting in December 2011 and continuing through today, the special committee members are Messrs. Lynch (Chairman), Hinkaty, Kanter and Taylor, each of whom is an independent director, and none of whom had or has interests in a potential strategic transaction that differ from those of our stockholders generally.

In February 2012, our board of directors adopted a charter for the special committee, which provides that the primary purpose and responsibility of the special committee is to direct and oversee an exploration of strategic alternatives available to our company to maximize stockholder value, and to advise our full board of directors in that regard.

In January and February 2012, the special committee identified several investment banks that could potentially serve as its independent financial advisor in connection with the process of exploring, evaluating, considering and negotiating a potential strategic transaction, and several law firms that could potentially serve as independent legal counsel that would advise our board of directors in connection with that process, but that would primarily report to the special committee. After considering the background, independence and qualifications of each investment bank and law firm interviewed by the special committee, the special committee retained Blackstone Advisory Partners L.P., who we refer to as Blackstone, as its independent financial advisor, and authorized our company to retain Sheppard, Mullin, Richter & Hampton LLP, who we refer to as Sheppard Mullin, as independent legal counsel.  On February 16, 2012, the special committee finalized its engagement of Blackstone as its independent financial advisor.  In connection with Blackstone’s issuance of its fairness opinion referred to elsewhere in this proxy statement, no limitations were imposed by the special committee with respect to the investigations made or procedures followed by Blackstone in connection with the issuance of its opinion.  On February 16, 2012, we engaged Sheppard Mullin as our independent legal counsel.

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On February 13, 2012, we received an unsolicited non-binding letter of interest from Parent. In that letter, Parent indicated that it was interested in engaging in a business combination with our company, and that based on available public information regarding our company, Parent was prepared to offer our stockholders $4.00 per share in cash, subject to, among other things, its due diligence, securing financing, the parties’ agreement on mutually acceptable documentation and appropriate approvals by both its and our company’s board of directors.

On February 17, 2012, the special committee met to, among other things, discuss the February 13 letter of interest received from Parent. The special committee reviewed the terms of the letter of interest with representatives of Blackstone, including an analysis of the $4.00 per share offer price. The special committee discussed appropriate next steps to take with respect to responding to Parent and with respect to the overall strategic process. As to the latter, the special committee discussed requesting that our management prepare a three-year financial forecast, which would be provided to potential buyers later in the strategic process, and which would help the special committee in its evaluation of future potential offers.  The special committee also discussed potential parties we could consider contacting who may be interested in pursuing a strategic transaction involving our company. Following discussion, the special committee instructed Blackstone to contact Parent to inform it that the special committee would be reviewing the letter of interest and would be responding following an analysis and consideration of its terms.  The special committee decided to request that management prepare a three-year financial forecast and also instructed Blackstone to prepare a list of parties based on the discussion at the meeting who may be interested in pursuing a strategic transaction involving our company and to provide such list to the special committee for its review.

On March 2, 2012, the special committee met to, among other things, briefly discuss the letter of interest received from Parent.  In addition, during this meeting, the special committee reviewed with our management and Blackstone a draft of the three-year forecast our management prepared at the request of the special committee.

On March 13, 2012, the special committee met to, among other things, discuss an appropriate response to the February 13 letter of interest received from Parent. After reviewing the terms of the letter with representatives of Sheppard Mullin and Blackstone, and following a discussion of its terms, the special committee instructed Blackstone to contact Parent to inform it that the special committee did not consider the $4.00 per share price offer to be sufficient. The special committee also reviewed and discussed an updated draft of our company’s three-year forecast that was prepared by our management at the request of the special committee and provided to the special committee in advance of the meeting.

On March 16, 2012, in accordance with the request of the special committee, a Blackstone representative contacted Parent to inform it that the special committee did not consider the $4.00 per share offer price to be sufficient and that the special committee would consider granting Parent exclusivity if it materially increased its per share offer price, subject to our right to appropriate fiduciary-outs if negotiations resulted in the parties entering into a definitive agreement.

On March 26, 2012, the compensation committee of our board of directors approved retention bonuses for each of our Chief Executive Officer and President that would be payable following the six month anniversary of the consummation of any change of control transaction, including a merger, if such executive continued to be employed on the six month anniversary of the consummation of the change of control transaction or if his or her employment was terminated without cause any time prior to such six month anniversary. In order to be eligible to receive the retention bonus, the amount of the consideration paid for each outstanding share of our common stock in the change of control transaction must be at least $5.00.

During late March and early April 2012, the special committee, with assistance from Blackstone and our management, developed a list of more than 60 potential buyers that may be interested in pursuing a strategic transaction involving our company.  At the request of the special committee, throughout the course of the strategic process, Blackstone made contact with 68 potential buyers (30 strategic buyers and 38 financial buyers) and coordinated the execution of confidentiality agreements with those potential buyers that indicated an interest in obtaining non-public information regarding our company. In addition, during this time period, at the request of the special committee, our management reviewed with Blackstone certain financial projections covering the remainder of 2012 that were previously prepared by our management.  At the request of the special committee, these financial projections were delivered by Blackstone only to those potential buyers who entered into a confidentiality agreement.

Beginning in April 2012, the special committee instructed Blackstone, with the assistance of our management, to establish an electronic data room and populate it with information regarding our company for purposes of permitting potential buyers to perform their diligence in connection with their evaluation of pursuing a strategic transaction involving our company.

On April 30, 2012, the special committee met to, among other things, discuss the status of the strategic process.  In addition, the special committee reviewed with our management and Blackstone an updated draft of our company’s three-year forecast.  After discussion, the special committee accepted such forecast, which became the management case forecast referred to elsewhere in this proxy statement and in the “—Opinion of Financial Advisor to the Special Committee” section below.

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At the request of the special committee, Blackstone continued to discuss the opportunity with potential buyers through mid-May 2012.  Ultimately 15 parties (three strategic buyers and 12 financial buyers), following the execution of a confidentiality agreement, were provided access to non-public information regarding our company, including our management’s financial projections covering the remainder of 2012 that were part of management’s three-year forecast as discussed above. All such parties were requested to submit a non-binding indication of interest to Blackstone by May 18, 2012 if they had any interest in further pursuing a strategic transaction involving our company. As discussed below, three such parties (Swander Pace, Parent and a potential financial buyer, who we refer to as Financial Bidder B, who evaluated potential strategic transactions involving our company under conditions of confidentiality) submitted a non-binding indication of interest to Blackstone on May 18, 2012.

For convenience and continuity of discussion, references in the balance of this “Background of the Merger” discussion to Swander Pace include Swander Pace Capital and the affiliates of Swander Pace Capital formed for the purpose of acquiring our company, Physicians Formula Superior Holdings, LLC and Physicians Formula Merger Sub, Inc.

Between early April 2012 and May 18, 2012, Swander Pace, Parent and Financial Bidder B continued to perform their preliminary due diligence review of our company and each held discussions with certain members of our management and Blackstone regarding our business.

On May 18, 2012, Parent submitted a non-binding indication of interest that superseded its letter of interest dated February 13, 2012. In its May 18 indication of interest, Parent indicated that, based on its initial review of the material provided to it to date and on publicly available information, it was prepared to offer a price per share in cash of between $4.35 and $4.80, subject to the completion of due diligence, financing, appropriate employment agreements with members of our senior management, regulatory approvals and negotiation of a mutually agreeable definitive agreement.

On May 18, 2012, Financial Bidder B submitted a non-binding indication of interest in which it indicated that, based on its preliminary review of our company and our operations, it would propose acquiring all of our outstanding common stock for $4.00 per share. Its offer was subject to the completion of due diligence and the execution of a definitive agreement.

On May 18, 2012, Swander Pace submitted a non-binding indication of interest in which it indicated that, based on its review of the information provided to it to date, it believed that our company had a total enterprise value that would yield a price of $4.50 per share.

On May 22, 2012, the special committee met to, among other things, discuss the strategic process and the results of the first round bidding process and to evaluate appropriate next steps in the strategic process.  Members of our management and representatives of Sheppard Mullin and Blackstone participated in portions of the meeting. At the request of the special committee, Blackstone representatives reviewed a summary of the three indications of interest, all of which were previously provided to the special committee. At the request of the special committee, Blackstone representatives also reviewed with the special committee the information they had learned about the three potential buyers during the process.  Following a discussion of the terms of the three indications of interest, including the potential buyers who submitted the indications of interests, and other potential buyers who could potentially enter the process at a later stage, the implied valuation of our company based on the terms of these indications of interest and our company’s 2012 performance relative to such implied valuations, the special committee instructed Blackstone to coordinate management presentations for Swander Pace, Parent and Financial Bidder B and to coordinate the continuing due diligence effort. The special committee also instructed Blackstone to contact certain potential international strategic buyers.

During the end of May 2012 and through June 2012, Swander Pace, Parent and Financial Bidder B continued their due diligence and participated in management presentations.  In connection with such management presentations, the management case forecast was provided to the three potential buyers.

On June 11, 2012, at the request of the special committee, Blackstone provided a draft of the agreement and plan of merger along with a process letter, to Swander Pace, Parent and Financial Bidder B. The process letter invited such parties to submit a revised, non-binding offer to acquire all of our company’s outstanding securities, together with any proposed revisions to the merger agreement that was provided to such parties and an indication of any required closing conditions. Such offers were requested to be delivered no later than June 26, 2012.

In June 2012, we engaged Potter Anderson & Corroon LLP, who we refer to as Potter Anderson, as special Delaware legal counsel to advise our company on matters of Delaware law. Sheppard Mullin consulted with Potter Anderson throughout the process.

During the period between May 18, 2012 and June 26, 2012, our management, with Blackstone’s assistance, responded to due diligence requests of each of Swander Pace and Financial Bidder B and updated information in the electronic data room.

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On June 26, 2012, Financial Bidder B communicated to Blackstone that its financial analyses of a possible acquisition of our company did not result in future performance metrics that warranted its further continuation in the process and Financial Bidder B decided not to submit a revised, non-binding offer.

On June 26, 2012, Swander Pace submitted a non-binding letter of intent to acquire all of our company’s outstanding securities at a per share price of $4.25, subject to the grant of an exclusivity period, further due diligence, the negotiation of a definitive merger agreement, and the execution of debt and equity commitment letters in connection with financing the acquisition. In addition, the letter of intent provided that if we entered into any definitive agreement concerning the sale or other disposition of our company with a party other than Swander Pace or if we terminated discussions with Swander Pace on or prior to December 26, 2012, we would be required to reimburse Swander Pace for up to $500,000 of its out-of-pocket expenses incurred in connection with its evaluation of our company and the negotiation of the terms of a transaction.

On June 27, 2012, at the request of the special committee, Blackstone contacted the financial adviser to Parent to inquire if Parent would be interested in submitting a non-binding offer even though the June 26th deadline for such offers had passed. A representative of Parent’s financial adviser indicated that he would contact Parent and contact Blackstone thereafter.

On June 28, 2012, the special committee met to, among other things, discuss the strategic process and the results of the second round bidding process. At the request of the special committee, Blackstone representatives provided the special committee with an update regarding the second round of non-binding proposals solicited on our company’s behalf and informed the special committee that the only proposal submitted was the June 26 Swander Pace letter of intent. Blackstone representatives also informed the special committee that none of the potential international strategic buyers that the special committee instructed Blackstone to contact expressed interest in evaluating a strategic transaction involving our company. The special committee reviewed the terms of the June 26 Swander Pace letter of intent with representatives of Blackstone and Sheppard Mullin. The special committee then discussed the terms of that letter of intent, including the price being offered and the financing required by Swander Pace to complete the proposed transaction. At the request of the special committee, Sheppard Mullin representatives reviewed the fiduciary duties of our directors in considering a sale of our company.  After further discussion of the terms of the June 26 Swander Pace letter of intent and taking into account that it was the only proposal submitted during the second round of the process, the special committee instructed Blackstone to communicate to Swander Pace that if Swander Pace increased its per share offer price from $4.25 to $4.75, the special committee would consider granting Swander Pace a 30-day exclusivity period during which Swander Pace could continue its evaluation of a strategic transaction involving our company, and that we would be willing to reimburse Swander Pace for its out-of-pocket expenses incurred in connection with its evaluation of our company and the negotiation of the terms of a transaction if we terminated the exclusivity period early, but that there would be no other expense reimbursement requirements. The special committee also instructed Blackstone to clarify with Swander Pace certain of the terms in its June 26 letter of intent and to follow-up with Parent’s financial adviser regarding their conversation on June 27, 2012.

On July 2, 2012, the special committee met to discuss the status of the strategic process and to receive a report from Blackstone regarding the communications it was instructed to have since the previous special committee meeting.  Blackstone representatives reported that in exchange for a 30-day exclusivity period Swander Pace might offer $4.35 per share and that Parent indicated that it would need at least 60 additional days to complete its due diligence and that, based on its due diligence and evaluation completed to date, it did not expect that it would be able to make an offer above $4.00 per share.  Following a discussion with representatives of Sheppard Mullin and Blackstone, the special committee instructed Blackstone to clarify with Swander Pace certain of the terms in the June 26 Swander Pace letter of intent and to offer to Swander Pace a 30-day exclusivity period to allow it to continue its evaluation of a strategic transaction involving our company, subject to our right to terminate the exclusivity period early for any reason upon reimbursement to Swander Pace for up to $250,000 of its out-of-pocket expenses incurred in connection with its evaluation of our company and the negotiation of the terms of a transaction, but that there would be no other expense reimbursement requirements. The special committee also instructed Blackstone to contact Parent and Financial Bidder B to inquire as to their respective interest in continuing to evaluate a strategic transaction involving our company.

On July 5, 2012, Swander Pace submitted a revised non-binding letter of intent to acquire all of our company’s outstanding securities at a per share price of $4.25, subject to the grant of a 30-day exclusivity period, further due diligence, the negotiation of a definitive merger agreement, and the execution of debt and equity commitment letters in connection with financing the acquisition. While Swander Pace had previously orally indicated to Blackstone that it might offer $4.35 per share, as explained in the paragraph below, Swander Pace decided to offer $4.25 per share after analyzing certain additional capitalization information.

On July 11, 2012, the special committee met to discuss the status of the strategic process and to receive a report from Blackstone regarding the communications it had since the previous special committee meeting.  Blackstone representatives reported that Financial Bidder B reiterated that the maximum price it might be prepared to offer is $4.00 per share and Parent indicated that it would require a 90-day exclusivity period to continue in the process and that, in any event, it did not expect to offer more than $4.00 per share.  With respect to Swander Pace, Blackstone representatives reported that, although Swander Pace had previously orally indicated to Blackstone that it might offer $4.35 per share, after taking into account outstanding options and warrants to acquire shares of our common stock, Swander Pace indicated that it was unwilling to offer more than $4.25 per share as reflected in its July 5 letter.

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The special committee reviewed the terms of the July 5 Swander Pace letter of intent with representatives of Blackstone and Sheppard Mullin. After discussing the terms of the July 5 Swander Pace letter of intent, and taking into account that the $4.25 per share offer contained therein represented an approximately 24% premium to the closing price of our common stock on July 11, 2012, the special committee instructed Blackstone and Sheppard Mullin to prepare a 30-day exclusivity agreement to be entered into between our company and Swander Pace and to provide the same to Swander Pace for its review and execution.  Under the proposed exclusivity agreement, we could terminate the agreement at any time prior to the end of the 30-day exclusivity period for any reason upon reimbursement to Swander Pace of up to $250,000 of expenses it incurred in connection with its evaluation of pursuing the proposed transaction.  The special committee also instructed Blackstone to inform Parent and Financial Bidder B that we would be granting a 30-day exclusivity period to another potential buyer.

On July 13, 2012, we entered into a 30-day exclusivity agreement with Swander Pace containing the early termination provisions described in the immediately preceding paragraph. The exclusivity agreement did not contain any offer price or other material term of the proposed transaction.

On July 20, 2012, the special committee met to review the status of the strategic process with Blackstone, the ongoing due diligence being performed by Swander Pace and our management’s ability to accommodate Swander Pace’s due diligence requests in a timely manner especially in light of the limited resources available to our management and its ongoing obligations with respect to running our business in the ordinary course. Following discussion, the special committee determined it would continue to monitor our management’s ability to meet Swander Pace’s diligence needs while still being able to effectively run our business.

On July 26, 2012, legal counsel to Swander Pace, Kirkland & Ellis, LLP, who we refer to as K&E, delivered, on behalf of Swander Pace, to Sheppard Mullin a revised draft of the merger agreement that was provided to Swander Pace on June 11, 2012. Between July 26, 2012 and through the time the parties signed the Swander Pace merger agreement, representatives of Sheppard Mullin and K&E engaged in extensive negotiations regarding the terms of the Swander Pace merger agreement.

During the month of July 2012 and through the time the parties signed the Swander Pace merger agreement, Swander Pace continued its due diligence.  In connection with its due diligence, we provided Swander Pace with updated financial projections for all of 2012 reflecting actual results through June 30, 2012.

On July 27, 2012, a representative of Parent made an unsolicited contact to Blackstone to indicate that Parent may be willing to increase its per share offer price modestly to something above $4.00 but less than $5.00.  Blackstone did not engage in discussions and informed this representative of Parent that our company was bound by an exclusivity agreement with another potential buyer.

On July 31, 2012, the special committee met to discuss the status of the strategic process and to receive a report from Blackstone regarding the unsolicited contact made by a representative of Parent on July 27, 2012.  The special committee reviewed with Sheppard Mullin and Blackstone representative the terms of the exclusivity agreement with Swander Pace, which permitted our company to terminate the exclusivity agreement prior to its August 13, 2012 termination date for any reason upon reimbursement to Swander Pace of up to $250,000 of expenses it incurred in connection with its evaluation of the proposed transaction. Following discussion of the status of the negotiations with Swander Pace, and in light of the prior statements made by Parent with respect to the amount of time it needed to consummate a transaction and the absence of a definitive offer price that was significantly greater than the $4.25 per share offer price previously communicated by Swander Pace, the special committee determined to continue negotiating exclusively with Swander Pace in accordance with the terms of the exclusivity agreement.  At the request of the special committee, Sheppard Mullin representatives reviewed the terms of the merger agreement proposed to be entered into with Swander Pace, including conditions to closing, representations and warranties, the termination provisions and provisions related to the conditions under which termination fees would be payable and the amount of such fees and specific performance.  The special committee discussed the terms of such merger agreement at length and, after such discussion, determined that it would be able to more efficiently manage the process of directing negotiations with Swander Pace if it formed a negotiation subcommittee, as permitted under the special committee charter, that would be empowered to direct and oversee such negotiations and that would keep the special committee updated and informed regarding the status of such negotiations as necessary and appropriate. The special committee appointed Messrs. Lynch and Taylor to the negotiation subcommittee due, in part, to their previous experience in the sale of public companies and their professional backgrounds.

At the end of July 2012 and the beginning of August 2012, our management met with Blackstone representatives as Blackstone was completing its financial analysis in connection with the preparation of its fairness opinion.  At the request of the special committee, our management prepared a revised set of financial projections covering the remainder of 2012 through the end of 2015, which formed the management sensitivity case forecast referred to elsewhere in this proxy statement in the “—Opinion of Financial Advisor to the Special Committee” and “—Unaudited Projected Financial Information” sections below. This forecast was prepared in recognition of, and to assist the special committee in understanding and evaluating, the risks inherent in the management case forecast, including the risk of decelerating growth within the U.S. color cosmetics sector, the uncertainty with respect to performance of certain new products, and the uncertainty with respect to the scope of future business opportunities within a concentrated customer base, and the impact on the value of our company in the event our company was unable to achieve the financial

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projections in the management case forecast.  To achieve that objective, for the management sensitivity case forecast, our management reduced the projected revenue compound annual growth rate, or CAGR, for 2012 through 2015 to 6.0% (as compared to 15.6% assumed in the management case forecast), and reduced target 2015 adjusted earnings before interest, taxes, depreciation, and amortization, or EBITDA, margin to 15.0% (as compared to 17.7% assumed in the management case forecast). The management sensitivity case forecast was not shared with Swander Pace, Parent or any other potential buyer prior to its inclusion in the preliminary proxy statement that our company filed with the SEC on the evening of September 10, 2012.

On August 2, 2012, the negotiation subcommittee met to discuss the terms of the revised draft of the merger agreement that was delivered on July 26, 2012 by K&E on behalf of Swander Pace. At the instruction of the negotiation subcommittee, Sheppard Mullin representatives reviewed the terms of the revised draft that were the subject of ongoing negotiation. After discussion, the negotiation subcommittee determined that certain of those terms should be considered by the special committee.

On August 3, 2012, the special committee met to discuss the terms of the revised draft of the merger agreement that was delivered on July 26, 2012 by K&E on behalf of Swander Pace. At the request of the special committee, Sheppard Mullin representatives reviewed the terms of the revised draft that were the subject of ongoing negotiation.  After discussion, the special committee instructed Sheppard Mullin regarding the special committee’s position as to such terms.

On August 6, 2012, at the request of the negotiation subcommittee, Sheppard Mullin, on behalf of the Company, delivered a revised draft of the merger agreement to K&E.

On August 8, 2012, the negotiation subcommittee met to discuss, among other things, the status of the Blackstone fairness opinion and the status of negotiations of the merger agreement proposed to be entered into with Swander Pace.  At the request of the negotiation subcommittee, Sheppard Mullin representatives reviewed the terms of the merger agreement that were the subject of ongoing negotiations.  After discussion, the negotiation subcommittee instructed Sheppard Mullin regarding the negotiation subcommittee’s position as to such terms.

On August 9, 2012, K&E, on behalf of Swander Pace, delivered a revised draft of the merger agreement to Sheppard Mullin and drafts of the voting agreements that Swander Pace requested be entered into by each of Mill Road, Ingrid Jackel, a member of our board of directors and our Chief Executive Officer, and Jeffrey Rogers, a member of our board of directors and our President. Mr. Lynch, a member of our board of directors and the Chairperson of the special committee, is a Senior Managing Director of Mill Road.

Mill Road, on the one hand, and Ms. Jackel and Mr. Rogers, on the other, each engaged separate legal counsel to advise them with respect to their voting agreements. Between August 9, 2012 and the time the parties signed their respective voting agreements, respective counsel to Mill Road, Ms. Jackel and Mr. Rogers, and K&E, on behalf of Swander Pace, engaged in extensive discussions over the terms of the voting agreements.

On August 9, 2012, K&E, on behalf of Swander Pace, also delivered a draft of the equity commitment letters and limited guarantee to Sheppard Mullin. Between August 9, 2012 and through the time the parties signed the Swander Pace merger agreement, representatives of Sheppard Mullin and K&E engaged in extensive discussions over the terms of the equity commitment letter and the limited guarantee.

On August 10, 2012, the negotiation subcommittee met to discuss the terms of the revised draft of the merger agreement dated August 9, 2012 that was delivered by K&E on behalf of Swander Pace. At the instruction of the negotiation subcommittee, Sheppard Mullin representatives reviewed the terms of such revised draft that were the subject of ongoing negotiation.  After discussion, the negotiation subcommittee instructed Sheppard Mullin regarding the negotiation subcommittee’s position as to such terms.

On August 10, 2012, at the instruction of the negotiation subcommittee, Sheppard Mullin, on behalf of the Company, delivered a revised draft of the merger agreement to K&E.

On August 11, 2012, the negotiation subcommittee met to discuss the status of the merger agreement negotiations.  After discussion, the negotiation subcommittee instructed Sheppard Mullin regarding the negotiation subcommittee’s position as to the terms of the merger agreement that were the subject of ongoing negotiation.

On August 12, 2012, K&E, on behalf of Swander Pace, delivered a draft of the debt commitment letters to Sheppard Mullin. Over the course of the next two days, representatives of Sheppard Mullin and K&E engaged in discussions over the terms of the debt commitment letters.

On August 13, 2012, the negotiation subcommittee met to discuss the status of the negotiations of the merger agreement proposed to be entered into with Swander Pace, the equity and debt commitment letters and the limited guarantee.  At the instruction of the negotiation subcommittee, Sheppard Mullin representatives discussed the terms of such merger agreement that were the subject of ongoing negotiation.  After discussion, the negotiation subcommittee instructed Sheppard Mullin regarding the negotiation subcommittee’s position as to such terms.

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Later on August 13, 2012, the special committee met.  During this meeting, the negotiation subcommittee, and at the request of the negotiation subcommittee, Sheppard Mullin representatives, provided the special committee with an update on the status of negotiations of the merger agreement proposed to be entered into with Swander Pace and related agreements.  After discussion, the special committee instructed Sheppard Mullin regarding the special committee’s position as to terms of such merger agreement and related agreements that were the subject of ongoing negotiation. Representatives of Sheppard Mullin and Potter Anderson reviewed again with the special committee the fiduciary duties of all directors in the context of the transaction contemplated by such merger agreement.

After the term of the exclusivity agreement with Swander Pace expired on August 13, 2012, at the instruction of the special committee, Blackstone representatives contacted a representative of Parent to inquire if the price per share at which Parent would consider pursuing a strategic transaction involving our company had changed from the price previously communicated to the special committee, which was something modestly above $4.00 but less than $5.00. Such representative indicated that affiliates of Parent were in the process of selling or refinancing certain assets and, upon completion of that sale or refinancing, Parent may be in a position to increase its most-recently-communicated offer price for our company. However, no commitment to do so was made at that time. At no time during these discussions did Blackstone reveal the identity of Swander Pace or the amount of its per share offer price.

On the morning of August 14, 2012, the special committee met.  During this meeting, at the request of the special committee, Sheppard Mullin representatives provided the special committee with an update on the status of negotiations of the terms of the merger agreement proposed to be entered into with Swander Pace since the previous meeting of the special committee. The special committee also discussed the management case and management sensitivity case forecasts, including the considerable execution risks (especially during 2014 and 2015) related to the forecasts. After discussion, the special committee instructed Sheppard Mullin regarding the special committee’s position as to the terms of such merger agreement that were the subject of ongoing negotiation.

Later on August 14, 2012, as previously scheduled, we released our second quarter 2012 financial results and held our regularly scheduled conference call to discuss our second quarter results.

Later on August 14, 2012, the special committee met again. At the invitation of the special committee, the other two members of our board of directors, Ms. Jackel and Mr. Rogers, attended portions of the meeting.  During this meeting, at the request of the special committee, Sheppard Mullin representatives reviewed in detail the proposed final terms of the merger agreement proposed to be entered into with Swander Pace, the debt and equity commitment letters, the limited guarantee and the voting agreements, drafts of which had been provided to the special committee and Ms. Jackel and Mr. Rogers.  The special committee members asked a number of questions regarding the proposed final terms of such documents.  Representatives of Blackstone presented to the special committee the financial analyses they had used in connection with the preparation of their fairness opinion.  The Blackstone representatives informed the special committee that, based on discussions with our management and the special committee regarding the risks underlying, and uncertainty of achieving, the management case forecast, Blackstone gave less weight to the management case forecast and more weight to the management sensitivity case forecast for purposes of its analyses.  Blackstone then delivered its oral opinion that, as of August 14, 2012, the merger consideration of $4.25 per share to be received by our stockholders pursuant to the terms of the Swander Pace merger agreement was fair, from a financial point of view, to such stockholders. Blackstone subsequently confirmed its oral opinion in writing, dated August 14, 2012. At this time, Ms. Jackel and Mr. Rogers left the meeting. At the request of the special committee, Sheppard Mullin representatives reviewed with the special committee the fiduciary duties of our directors with respect to the Swander Pace merger agreement and the merger contemplated thereby. Following a discussion of the terms of the Swander Pace merger agreement and the related transaction documents, our second quarter 2012 financial results, our management’s projections for full year 2012 performance and our long-term financial projections, including the risks and uncertainties related to the achievement of the long-term financial projections, the special committee unanimously adopted resolutions approving the Swander Pace merger agreement and the related transaction documents and recommending that our board of directors approve the Swander Pace merger agreement and the related transaction documents and submit the Swander Pace merger agreement to our stockholders with a recommendation that they adopt it.

Following the meeting of the special committee, our board of directors met. At the invitation of our board of directors, Sheppard Mullin and Blackstone representatives also participated in the meeting. At the request of the special committee, Blackstone representatives reviewed the process overseen and directed by the special committee and discussed the alternatives considered by the special committee. Our board of directors then reviewed all information available to and considered by the special committee, including our second quarter 2012 financial results, our management’s projections for full year 2012 performance and our long-term financial projections, including the risks and uncertainties related to the achievement of the projections for full year 2012 and the long-term financial projections. At the request of our board of directors, members of the special committee reviewed the special committee’s reasons for recommending that our board of directors approve our company entering into the Swander Pace merger agreement and our board of directors considered the special committee’s determination that remaining as a stand-alone company was less favorable to our stockholders than the proposed merger with Swander Pace pursuant to the terms of the Swander Pace merger

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agreement and related transaction documents. At the request of our board of directors, Sheppard Mullin representatives reviewed with our board of directors its fiduciary duties with respect to the Swander Pace merger agreement and the merger contemplated thereby, and then reviewed with our board of directors the resolutions proposed to approve the Swander Pace merger agreement and the related transaction documents and the special committee’s unanimous recommendation regarding such matters.  Following such discussion, our board of directors, having received the recommendation of the special committee, unanimously approved the Swander Pace merger agreement and the related transaction documents, declared the Swander Pace merger agreement advisable and resolved to recommend that our stockholders adopt the Swander Pace merger agreement.

Later in the evening on August 14, 2012, the parties executed and delivered the Swander Pace merger agreement, the debt commitment letter, the equity commitment letter, the guarantee, and the voting agreements.

On the morning of August 15, 2012, the parties issued a joint press release announcing the execution of the Swander Pace merger agreement. Later that same day and continuing through the next day, in accordance with the requirements of the Swander Pace merger agreement, we requested that all confidential information previously provided to potential buyers pursuant to the terms of the confidentiality agreements referred to above be destroyed (with a customary certification thereof) or returned to Sheppard Mullin on our behalf.

On August 17, 2012, Blackstone representatives received an unsolicited non-binding indication of interest from Parent and forwarded it to the special committee. The indication of interest contemplated an acquisition of all outstanding shares of our common stock for $4.78 per share in cash. The per share price assumed that Parent would not be responsible for paying the $1,285,000 break-up fee or similar fee under the terms of the Swander Pace merger agreement, and was subject to various conditions, including the completion of due diligence, the negotiation of a mutually agreeable definitive agreement, negotiation of appropriate employment agreements with members of our senior management, securing financing and regulatory approvals.

On August 18, 2012, the special committee met to discuss the August 17 indication of interest from Parent and our company’s rights and obligations related thereto under the Swander Pace merger agreement.  The special committee reviewed the material terms of the indication of interest with Sheppard Mullin and Blackstone representatives. The special committee, together with its advisors, considered the capability of Parent to complete the acquisition contemplated by its indication of interest in a timely manner, including Parent’s financial position and its ability to obtain financing for the potential acquisition of our company, in light of the statements made by Parent earlier in the process that it was pursuing other transactions and that it needed 60 days to complete its diligence. At the request of the special committee, Sheppard Mullin representatives also reviewed with the special committee the fiduciary duties of our directors. Subject to our board of directors determining that the acquisition proposal contemplated by the indication of interest would reasonably be expected to lead to a “superior proposal” (as such term was defined in the Swander Pace merger agreement, which is identical to the way such term is defined in the merger agreement we entered into with Parent as further explained under “The Merger Agreement—Covenants and Other Agreements—No Solicitation; Acquisition Proposals” below) and is from a party reasonably capable of consummating such acquisition proposal in a timely manner, and subject to our company’s compliance with its obligations under the terms of the Swander Pace merger agreement, the special committee instructed Blackstone to contact the representatives of Parent to clarify certain terms of its offer and to communicate the special committee’s position with respect to the per share offer price, the assumption regarding the payment of any break-up fee or similar fee under the terms of the Swander Pace merger agreement and the conditions indicated in the indication of interest.

Later on August 18, 2012, our board of directors met to discuss the August 17 indication of interest from Parent and our company’s rights and obligations related thereto under the Swander Pace merger agreement.  Our board of directors reviewed the material terms of the indication of interest with Sheppard Mullin and Blackstone representatives and considered the capability of Parent, financial and otherwise, to close the acquisition contemplated by its indication of interest in a timely manner.  At the request of our board of directors, Sheppard Mullin representatives also reviewed with our board of directors the fiduciary duties of our directors.  Following a discussion, our board of directors (after consultation with Sheppard Mullin and Blackstone) determined that the acquisition proposal described in the indication of interest would reasonably be expected to lead to a superior proposal and is from a party reasonably capable of consummating such acquisition proposal in a timely manner. Pursuant to the terms of the Swander Pace merger agreement, we provided Swander Pace with a copy of the indication of interest on August 18, 2012.

On August 19, 2012, Blackstone representatives received a revised non-binding indication of interest from Parent and forwarded it to the special committee. This indication of interest, which superseded the indication of interest dated August 17, 2012, contemplated an acquisition of all outstanding shares of our common stock for $4.90 per share in cash. Similar to the August 17 indication of interest, the $4.90 per share price assumed that Parent would not be responsible for paying any topping or similar fee under the terms of the Swander Pace merger agreement, and was subject to various conditions, including the completion of due diligence, the negotiation of a mutually agreeable definitive agreement, negotiation of appropriate employment agreements with members of our senior management (but the employment of members of our management would not be a condition to closing a transaction), securing financing and regulatory approvals.

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On August 20, 2012, the special committee met to discuss the August 19 indication of interest from Parent. At the instruction of the special committee, Sheppard Mullin representatives reviewed the material terms of the indication of interest and the relevant terms of the Swander Pace merger agreement and our company’s rights and obligations thereunder with respect to the indication of interest.  The special committee instructed Blackstone to contact Parent’s representatives to further clarify Parent’s offer terms and timeline. Pursuant to the terms of the Swander Pace merger agreement, we provided Swander Pace with a copy of the August 19 indication of interest on August 20, 2012.

On August 20, 2012, Blackstone representatives received another revised non-binding indication of interest from Parent and forwarded it to the special committee. This revised indication of interest contemplated an acquisition of all outstanding shares of our common stock for $4.90 per share in cash. The August 20 indication of interest assumed that we would pay any topping or similar fee under the terms of the Swander Pace merger agreement, but indicated that such payment would not reduce the $4.90 per share offer price. The offer described in the August 20 indication of interest included the same conditions contained in the August 19 indication of interest. Pursuant to the terms of the Swander Pace merger agreement, we provided Swander Pace with a copy of the August 20 indication of interest on August 21, 2012.

During the weeks of August 20, 2012, August 27, 2012, September 3, 2012, September 10, 2012 and September 17, 2012, we responded to due diligence requests that Parent submitted, and Parent’s representatives participated in management presentations and performed due diligence on our company.

On August 23, 2012, Blackstone representatives received a proposed merger agreement from Parent. The terms of the proposed merger agreement contained substantially the same terms as the Swander Pace merger agreement with the following notable differences: (i) references to equity financing, including the limitations on our right to seek specific performance with respect to the equity financing, were deleted, thereby expanding our ability to seek specific performance of Parent’s obligations under the merger agreement, (ii)  references to the limited guarantee were deleted because Parent, an operating company, was going to be a party to the merger agreement as opposed to a newly formed entity for purposes of entering into the merger agreement such as was the case under the Swander Pace merger agreement, and (iii) the amounts of the termination fees payable by us and Parent were increased to $1.5 million and $2.0 million, respectively.  Pursuant to the terms of the Swander Pace merger agreement, we provided Swander Pace with a copy of the proposed merger agreement that was submitted by Parent on August 23, 2012.

On August 24, 2012, members of the special committee informally discussed the terms of the August 23 proposed merger agreement received from Parent and authorized the negotiation subcommittee to oversee negotiations of such agreement as it did with respect to the Swander Pace merger agreement.

On August 25, 2012, the negotiation subcommittee met to discuss the August 23 proposed merger agreement received from Parent and the status of discussions and negotiations with Parent. At the request of the negotiation subcommittee, Blackstone representatives reviewed the status of discussions with Parent, including information provided to Blackstone by Parent representatives regarding Parent’s ongoing discussions with potential lenders who would provide debt financing to Parent.  At the request of the negotiation subcommittee, Sheppard Mullin representatives reviewed the differences between the terms of the Swander Pace merger agreement and the terms of the August 23 proposed merger agreement received from Parent.  After discussion, the negotiation subcommittee instructed Sheppard Mullin regarding the negotiation subcommittee’s position as to certain of the terms of the proposed merger agreement being negotiated with Parent. The negotiation subcommittee also instructed Blackstone to contact Parent’s representatives regarding the timing of Parent’s completion of its due diligence and its efforts to secure debt financing, and also instructed Blackstone to contact Swander Pace regarding the preparation and filing of a preliminary proxy statement with respect to the Swander Pace merger agreement.

On August 27, 2012, at the instruction of the negotiation subcommittee, Sheppard Mullin, on behalf of the Company, delivered a revised draft of the proposed merger agreement to Buchalter Nemer, legal counsel to Parent.

During the weeks of August 20, 2012, August 27, 2012, September 3, 2012 and September 10, 2012, representatives of Sheppard Mullin and representatives of Buchalter Nemer engaged in negotiations regarding the terms of a proposed merger agreement between our company and Parent and the related debt and equity commitment letters and other ancillary documents.

On August 29, 2012, in order to allow us time to discuss the acquisition proposal made by Parent with Parent and its advisors, Swander Pace waived our compliance with the requirement in the Swander Pace merger agreement that required us to file the proxy statement within 15 days of the date of the Swander Pace merger agreement.  Swander Pace agreed not to assert any right or remedy that Swander Pace may have against us as a result of such non-compliance, so long as we filed the proxy statement on or before September 7, 2012.

On September 5, 2012, the special committee met to discuss the status of discussions and negotiations with Parent. At the request of the special committee, Blackstone representatives reviewed the status of discussions and negotiations with Parent and its representatives, including the status of its due diligence and its efforts to secure debt financing. At the request of the special

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committee, Sheppard Mullin representatives provided the special committee with an update on the status of negotiations of the terms of the proposed merger agreement with Parent. The special committee then discussed the heavy trading volume of our common stock on September 4 th  and 5 th , and that our common stock closed at $4.37 on September 5 th  after reaching an intraday trading high of $4.48, both of which exceeded the $4.25 per share merger consideration set forth in the Swander Pace merger agreement.

Following the meeting of the special committee, our board of directors met. At the invitation of our board of directors, Sheppard Mullin and Blackstone representatives also participated in the meeting. At the request of the special committee, Blackstone representatives reviewed the status of discussions and negotiations with Parent and its representatives, including the status of its due diligence and its efforts to secure debt financing. Sheppard Mullin representatives provided our board of directors with an update on the status of negotiations of the terms of the proposed merger agreement with Parent. Our board of directors then discussed the heavy trading volume of our common stock on September 4 th  and 5 th , and that our common stock closed at $4.37 on September 5 th  after reaching an intraday trading high of $4.48, both of which exceeded the $4.25 per share merger consideration set forth in the Swander Pace merger agreement.

On September 6, 2012, due to the increase in the trading price and trading volume of our common stock, we issued a press release announcing the existence of the acquisition proposal made by Parent.

On September 7, 2012, in order to allow us additional time to discuss the acquisition proposal made by Parent with Parent, Swander Pace executed another waiver with respect to the requirement that we file the proxy statement on or before September 7, 2012.  Swander Pace agreed not to assert any right or remedy that Swander Pace may have against us as a result of such non-compliance, so long as we filed the proxy statement on or before September 10, 2012.

On the evening of September 10, 2012, we filed a preliminary proxy statement with the SEC.

On September 16, 2012, representatives of Parent, on behalf of Parent, provided drafts of equity and debt commitment letters to Sheppard Mullin that Parent would enter into in connection with entering into a merger agreement with our company.

On September 16, 2012, the negotiation subcommittee met to discuss the terms of the equity and debt commitment letters submitted on behalf of Parent. At the request of the negotiation subcommittee, Sheppard Mullin and Blackstone representatives attended the meeting. At the request of the negotiation subcommittee, Sheppard Mullin representatives provided a summary of the terms of such commitment letters.  After discussion, the negotiation subcommittee instructed Blackstone to contact Parent’s representatives regarding the needed modifications in the commitment letters in order that they provide sufficient comfort with respect to Parent’s ability to consummate its acquisition proposal.

Over the course of the week of September 17, 2012, representatives of Sheppard Mullin and of Blackstone and representatives of Parent and of Buchalter Nemer engaged in discussions over the terms of the equity and debt commitment letters.

On September 23, 2012, Buchalter Nemer, on behalf of Parent, provided revised drafts of the equity and debt commitment letters to Sheppard Mullin.

Later on September 23, 2012, the negotiation subcommittee met to discuss the terms of the revised drafts of equity and debt commitment letters submitted on behalf of Parent earlier that day. At the request of the negotiation subcommittee, Sheppard Mullin and Blackstone representatives attended the meeting. At the request of the negotiation subcommittee, Sheppard Mullin representatives provided a summary of the terms of such commitment letters.  After discussion, the negotiation subcommittee instructed Sheppard Mullin to contact Parent’s representatives regarding the needed modifications in the commitment letters in order that they provide sufficient comfort with respect to Parent’s ability to consummate its acquisition proposal.

In the morning of September 24, 2012, representatives of Sheppard Mullin and representatives of Buchalter Nemer engaged in discussions over the terms of the equity and debt commitment letters.

In the afternoon of September 24, 2012, the special committee met to discuss the status of discussions and negotiations with Parent regarding the terms of a proposed merger agreement between our company and Parent and the terms of the equity and debt commitment letters that Parent was attempting to secure. At the request of the special committee, Sheppard Mullin representatives reviewed the status of discussions and negotiations with Buchalter Nemer representatives earlier in the day that were held at the request of the negotiation subcommittee.

In the evening of September 24, 2012, Buchalter Nemer, on behalf of Parent, provided the following documents to Sheppard Mullin, which documents constituted the acquisition proposal submitted on behalf of Parent as a result of discussions and negotiations following the submission by Parent of its non-binding offer to acquire all of our outstanding shares of our common stock for $4.90 per share: (1) an agreement and plan of merger proposed to be entered into by and among our company, Parent and MergerSub, which was executed by Parent and MergerSub, (2) a debt commitment letter executed by Parent and the lender party thereto, (3) an equity

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commitment letter executed by Parent and the sole shareholders of Parent, (4) voting agreements proposed to be entered into between Parent and MergerSub, on the one hand, and each of Mill Road, Ms. Jackel and Mr. Rogers, on the other hand, which were executed by Parent and MergerSub and (5) an escrow letter pursuant to which the signature page to the merger agreement that was executed by Parent and MergerSub was being delivered.

On September 25, 2012, the special committee met to discuss the documents described in the paragraph above. At the invitation of the special committee, the other two members of our board of directors, Ms. Jackel and Mr. Rogers, attended portions of the meeting, and Sheppard Mullin and Blackstone representatives also participated in the meeting.  During this meeting, at the request of the special committee, Sheppard Mullin representatives reviewed in detail the key differences between the terms of the merger agreement proposed to be entered into with Parent and MergerSub and the Swander Pace merger agreement, the related debt and equity commitment letters and voting agreements. The special committee reviewed the materials and other information provided by Parent regarding the financing sources that were or would be available to the sole shareholders of Parent in order for them to contribute the funds contemplated by the equity commitment letter.  The special committee members asked a number of questions regarding the proposed terms of the documents that constituted Parent’s acquisition proposal.  At this time, Ms. Jackel and Mr. Rogers left the meeting. Following discussion, the special committee unanimously recommended that our board of directors resolve that it intends to determine that the acquisition proposal contemplated by the merger agreement proposed to be entered into with Parent and MergerSub constitutes a superior proposal for purposes of the Swander Pace merger agreement, unless Swander Pace offers to amend the terms of the Swander Pace merger agreement such that such acquisition proposal no longer constitutes a superior proposal, and that Parent is reasonably capable of consummating such proposal in a timely manner.

Immediately following the meeting of the special committee on September 25, 2012, our board of directors met. At the invitation of our board of directors, Sheppard Mullin and Blackstone representatives also participated in the meeting. At the request of our board of directors, Sheppard Mullin representatives reviewed with our board of directors what was required under the terms of the Swander Pace merger agreement in order for our board of directors to determine that the acquisition proposal contemplated by the merger agreement proposed to be entered into with Parent and MergerSub constitutes a superior proposal for purposes of the Swander Pace merger agreement, thereby starting the matching period contemplated by the Swander Pace merger agreement, including the fiduciary duties of our directors under applicable law in making such a determination. Following a discussion of the key differences between the terms of the merger agreement proposed to be entered into with Parent and MergerSub and the Swander Pace merger agreement, our board of directors, having received the recommendation of the special committee, unanimously adopted resolutions authorizing our company to notify Swander Pace that our board of directors intended to determine that the acquisition proposal contemplated by the merger agreement proposed to be entered into with Parent and MergerSub constituted a superior proposal for purposes of the Swander Pace merger agreement, unless Swander Pace offered to amend the terms of the Swander Pace merger agreement such that such acquisition proposal no longer constituted a superior proposal, and that Parent is reasonably capable of consummating such proposal in a timely manner.

Immediately following the meeting of our board of directors, we provided the notice described in the paragraph above to Swander Pace. Pursuant to the terms of the Swander Pace merger agreement, that notice commenced a four-business-day period during which, if Swander Pace so requested, our company was required to negotiate in good faith with Swander Pace to make such adjustments to the terms and conditions of the Swander Pace merger agreement such that Parent’s acquisition proposal would no longer be a superior proposal.

On September 26, 2012, Swander Pace notified us that it had determined not to further negotiate the terms of the Swander Pace merger agreement pursuant to its rights under the Swander Pace merger agreement. In such notice, Swander Pace also stated that it would not object if, prior to the expiration of the four-business-day negotiating period, our board of directors determined that Parent’s acquisition proposal was a superior proposal for purposes of the Swander Pace merger agreement and our board of directors changed its recommendation to our stockholders that they adopt the Swander Pace merger agreement.

In the evening of September 26, 2012, the special committee met.  At the invitation of the special committee, Ms. Jackel and Mr. Rogers attended portions of the meeting, and Sheppard Mullin and Blackstone representatives also participated in the meeting. Blackstone representatives presented to the special committee the financial analyses they had used in connection with the preparation of their fairness opinion.  The Blackstone representatives informed the special committee that, based on discussions with our management and the special committee regarding the risks underlying, and uncertainty of achieving, the management case forecast, Blackstone gave less weight to the management case forecast and more weight to the management sensitivity case forecast for purposes of its analyses. At the request of the special committee, Blackstone then delivered its oral opinion that, as of September 26, 2012, the merger consideration of $4.90 per share to be received by our stockholders pursuant to the terms of the merger agreement proposed to be entered into with Parent and MergerSub was fair, from a financial point of view, to such stockholders. Blackstone subsequently confirmed its oral opinion in writing, dated September 26, 2012. At this time, Ms. Jackel and Mr. Rogers left the meeting. Upon completing deliberations, the special committee resolved to recommend that our board of directors approve our company entering into the merger agreement with Parent and MergerSub and terminating the Swander Pace merger agreement.

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Immediately following the meeting of the special committee, our board of directors met and received the recommendation of the special committee. At the invitation of our board of directors, Sheppard Mullin and Blackstone representatives also participated in the meeting. At the request of our board of directors, members of the special committee communicated the special committee’s reasons for recommending that our board of directors approve our company entering into the merger agreement with Parent and MergerSub and terminating the Swander Pace merger agreement. Following discussion, our board of directors, having received the recommendation of the special committee, unanimously approved the merger agreement with Parent and MergerSub and the related transaction documents, declared the merger agreement advisable, resolved to recommend that our stockholders adopt the merger agreement with Parent and MergerSub, and authorized the termination of the Swander Pace merger agreement.

Following the meeting of our board of directors in the evening of September 26, 2012, we notified Swander Pace that we were terminating the Swander Pace merger agreement, and we entered into the merger agreement with Parent and MergerSub.

On the morning of September 27, 2012, we and Parent issued a joint press release announcing the entry into the merger agreement, and later in the day, we paid the termination fee to Swander Pace.

Reasons for the Merger; Recommendation of the Board of Directors

Our board of directors, after considering the recommendation of the special committee, which special committee acted with the advice and assistance of our management and independent financial and legal advisors, evaluated the proposed merger, including the terms and conditions of the merger agreement.

At a meeting on September 26, 2012, the special committee unanimously recommended that our board of directors adopt resolutions that, among other things: (i) authorize and direct our company to terminate the Swander Pace merger agreement and pay the termination fee thereunder to Swander Pace, (ii) authorize and direct our company to enter into and deliver the merger agreement, (iii) approve and declare advisable the merger agreement and the transactions contemplated by the merger agreement, including the merger, (iv) determine that the merger agreement and the transactions contemplated by the merger agreement, including the merger, are fair to, advisable and in the best interests of our company and our stockholders, and (v) recommend that our stockholders adopt the merger agreement.

At a meeting on September 26, 2012, our board of directors unanimously approved the resolutions recommended by the special committee.

In the course of reaching their respective determinations, the special committee and our board of directors considered the following substantive factors and potential benefits of the merger, each of which the special committee and our board of directors believed supported their respective decisions, but which are not listed in any relative order of importance:

·                                           that a robust process was conducted during which 68 buyers, including 38 potential financial buyers and 30 potential strategic buyers, were approached on our behalf by Blackstone, and that two potential buyers (Swander Pace Capital and Parent) performed detailed due diligence on our business and ultimately executed definitive merger agreements with us regarding a potential merger;

·                                           the current volatile state of the economy and general uncertainty surrounding forecasted economic conditions in both the near-term and the long-term, nationally as well as within the masstige cosmetic and skin care product industry;

·                                           our financial plan and the initiatives and the potential execution risks associated with such plan, and the effects of an economic downturn on our business specifically, and on the industry in which we compete generally, and in connection with these considerations, the attendant risk that the price that might be received by our stockholders selling stock in the open market, over the longer-term, could be much less than the merger consideration;

·                                           the risks to our company’s ability to achieve the management case forecast over the next three years despite our management’s outlook for the remainder of 2012 due to, among other things, the competitive industry in which we operate in which there is a concentrated group of major retail customers who, as a result, have significant negotiating leverage, the risks and consequences of losing a significant customer on our business operations and the trading price of our common stock, the risk of having the material terms of our business relationships with existing customers changed in a manner that is adverse to our interests and certain retailer trends of reducing shelf space for cosmetics;

·                                           the recognition of challenges we may face in attempting to increase stockholder value as a smaller independent publicly-traded company, including competition from companies with substantially greater resources, financial and otherwise, than we currently have and who often have a greater share of the market than we currently have, and the risks involved in establishing and maintaining relationships with retailers;

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·                                           the knowledge of the members of the special committee and of our board of directors of our business, financial condition, results of operations, prospects and competitive position and their belief that the merger is more favorable to our stockholders than any other alternative reasonably available to our company and our stockholders, including remaining as a smaller independent publicly-traded company;

·                                           the substantial relative costs of operating as a small public company, including public company costs and the diversion of our management’s attention and time to investor relations and corporate governance that could otherwise be focused on growing our business;

·                                           our reliance on a few key employees any one of whom could resign at any time and the associated risks to our business operations;

·                                           the challenges and risks associated with our new product initiatives, including those in the skin care space, and with our pending new facilities lease given the limited resources available to us as a smaller independent publicly-traded company;

·                                           the view of the special committee and our board of directors that, given the due diligence that Parent had already completed and the discussions Parent already had with potential financing sources, Parent could successfully consummate the merger in a timely manner;

·                                           the understanding of the special committee and our board of directors that neither Parent nor any other potential buyer gave discernible weight to the management case forecast as evidenced by formal and informal bids;

·                                           the possible alternatives to the sale of our company, including continuing to operate our company on a stand-alone basis, and the risks associated with those alternatives, that were considered by the special committee;

·                                           following its formation, the special committee’s independent control of the sale process and the negotiations with potential financial and strategic buyers, with the advice and assistance of Blackstone and Sheppard Mullin as independent financial and legal advisors, respectively, and as to Blackstone, reporting solely to the special committee, and as to Sheppard Mullin, reporting primarily to the special committee;

·                                           that the consideration and negotiation of both the Swander Pace merger agreement and the merger agreement entered into with Parent and MergerSub were conducted through arm’s-length negotiations under the oversight of the special committee and the extensive use of independent financial and legal advisors;

·                                           in the case of the determination by our board of directors, the unanimous recommendation of the special committee with respect to the merger and the other transactions contemplated by the merger agreement;

·                                           the $4.90 per share consideration to be paid by Parent under the merger agreement and its relationship to other indicia of valuation considered by the special committee and our board of directors;

·                                           the current and historical market prices of our common stock, including the 33% premium to the closing price of our common stock on August 14, 2012, the last trading day prior to the announcement of the signing of the Swander Pace merger agreement, represented by the $4.90 per share price to be paid in the merger. The $4.90 per share price also represents a 40% premium to our one-month volume-weighted average price of $3.50 per share for the one month period prior to August 14, 2012. From May 31, 2011 until September 6, 2012, our common stock traded below $4.90 per share and had not exceeded $4.90 per share since May 31, 2011, when it reached $4.99 during intra-day trading, though its closing price that day was $4.60. The closing price of our common stock had been below $4.90 every trading day since May 20, 2011, when it closed at $5.09. On September 6, 2012, we announced the receipt of Parent’s unsolicited, nonbinding proposal to acquire all of our outstanding shares of common stock at a price of $4.90 per share. During the four years prior to September 6, 2012, the closing price of our common stock had been below $4.90 at the end of 95% of the trading days for that period;

·                                           the financial analyses reviewed and discussed with the special committee and, at the instruction of the special committee, with our board of directors, by Blackstone representatives, including the fact that Blackstone gave less weight to the management case forecast and more weight to the management sensitivity case forecast for purposes of its analyses, as well as Blackstone’s oral opinion to the special committee on September 26, 2012 (which was subsequently confirmed in writing by delivery of Blackstone’s written opinion dated the same date) with respect to the fairness, from a financial point of view, of the consideration to be received by our stockholders in the merger pursuant to the merger agreement;

·                                           the all cash merger consideration, which will allow our stockholders to immediately realize liquidity for their investment and provide our stockholders certainty of value for their shares;

·                                           the limited trading volume of our common stock;

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·                                           the volatile nature of the trading price of our common stock and that positive earnings releases following our third and fourth quarters of 2011 and the first quarter of 2012 did not result in a sustained increase in our stock price;

·                                           that our stockholders have the right to demand appraisal of their shares in accordance with the procedures of Section 262 of the DGCL; and

·                                           the terms of the merger agreement and the equity and debt commitment letters, including:

·                                           our ability, under certain circumstances, to furnish information to and conduct negotiations with third parties regarding other proposals and, under certain circumstances, withdraw or modify the recommendation of our board of directors regarding the merger;

·                                           that we are a named third party beneficiary of the equity commitment letter provided in favor of Parent and we may seek specific performance of the obligations of Parent and the financing parties thereto;

·                                           the receipt of an executed debt commitment letter from the lender and the terms of such debt commitment letter and the reputation of the lender which, in the reasonable judgment of the special committee and our board of directors, increases the likelihood of such financing being completed;

·                                           our ability, subject to compliance with the terms and conditions of the merger agreement, to terminate the merger agreement prior to the completion of the merger in order to accept an alternative transaction proposed by a third party that is a “superior proposal” (as defined in the merger agreement and further explained under “The Merger Agreement—Covenants and Other Agreements—No Solicitation; Acquisition Proposals” below), upon the payment to Parent of a $1,500,000 termination fee;

·                                           the $3,500,000 reverse termination fee that Parent is required to pay if the merger agreement is terminated in certain circumstances; and

·                                           our ability to seek specific performance of Parent’s obligation to consummate the merger.

The special committee and our board of directors also considered a variety of potentially negative factors discussed below concerning the merger agreement and the merger, which are not listed in any relative order of importance:

·                                           the risks and costs to our company if the merger does not close, including the diversion of management and employee attention, potential employee attrition and the potential effect on our business and our company’s relationships with customers and suppliers;

·                                           that our stockholders will not participate in any future earnings or growth of our company and will not benefit from any appreciation in value of our company, including any appreciation in the value that could be realized as a result of improvements to our company’s operations;

·                                           the effect of the public announcement of the merger on our company’s operations, stock price, customers and employees;

·                                           the restrictions on the conduct of our business prior to the completion of the merger, requiring us to conduct our business only in the ordinary course, subject to specific limitations, which may delay or prevent us from undertaking business opportunities that may arise pending completion of the merger;

·                                           the taxability of an all cash transaction to our stockholders for U.S. federal income tax purposes;

·                                           the possibility that Parent may be unable or unwilling to complete the merger;

·                                           closing under the merger agreement is subject to certain conditions that are beyond our company’s control;

·                                           under no circumstances are we entitled to monetary damages in excess of the $3,500,000 reverse termination fee payable by Parent (plus collection costs, if any);

·                                           the payment of the $3,500,000 reverse termination fee (plus collection costs, if any) is our sole remedy if we may terminate the merger agreement under circumstances where all of the conditions to Parent and MergerSub’s obligation to close have been satisfied, we are, at such time, ready and willing to consummate the merger and MergerSub has not received the proceeds of the debt financing by December 31, 2012;

·                                           that if the merger is not completed under certain circumstances, we will incur fees and expenses associated with the transaction that will not be reimbursed by Parent;

·                                           the risk that the debt financing contemplated by the debt commitment letter or the equity financing contemplated by the equity commitment letter might not be obtained;

·                                           that certain of our directors and executive officers have interests in the merger that are different from, or in addition to, those of our stockholders. See section entitled “The Merger (Proposal 1)—Interests of Our Directors and Executive Officers in the Merger” beginning on page 42 and “Advisory Vote on Golden Parachute Compensation (Proposal 2)” beginning on page 66;

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·                                           that our company’s remedy of specific performance pursuant to the merger agreement may be difficult to enforce;

·                                           the $1,285,000 termination fee that we paid to Swander Pace pursuant to the terms of the Swander Pace merger agreement; and

·                                           the $1,500,000 termination fee that we may be required to pay to Parent under certain circumstances if the merger agreement is terminated or upon acceptance of a superior proposal, and the possibility that such termination fee could deter third parties from submitting acquisition proposals.

The foregoing discussion of information and factors considered by the special committee and our board of directors is not intended to be exhaustive, but includes a number of the factors considered by the special committee and our board of directors.  In view of the wide variety of factors considered by the special committee and our board of directors, neither the special committee nor our board of directors found it practicable to, and neither did quantify or otherwise assign relative weights to the foregoing factors in reaching its conclusion.  In addition, individual members of the special committee and our board of directors may have given different weights to different factors and may have viewed some factors more positively or negatively than others.  In reaching its determination that the merger agreement and the transactions contemplated thereby, including the merger, are fair to, and in the best interests of our company and our stockholders and its decision to approve the merger agreement and recommend that our stockholders adopt the merger agreement, our board of directors considered the analysis and recommendation of the special committee and the factors examined by our board of directors and the special committee as described above based upon the totality of the information presented to and considered by it.

Our board of directors unanimously recommends that you vote “FOR” the proposal to adopt the merger agreement.

Opinion of Financial Advisor to the Special Committee

At the meeting of the special committee held on September 26, 2012, Blackstone Advisory Partners L.P., or Blackstone, rendered its oral opinion to the special committee that, as of that date and based on and subject to the assumptions made, matters considered and limitations on the review undertaken by Blackstone described in Blackstone’s opinion, the consideration provided for in the merger agreement of $4.90 in cash per share of Physicians Formula common stock was fair to the holders of Physicians Formula common stock from a financial point of view.  Blackstone’s opinion was subsequently confirmed in writing and provided to the special committee and, at the instruction of the special committee, to the Physicians Formula board of directors.

The full text of the written opinion of Blackstone, dated September 26, 2012, which sets forth the assumptions made, matters considered and limitations on the review undertaken by Blackstone in rendering its opinion, is attached as Annex C to this proxy statement and is incorporated into this proxy statement by reference.  At the September 26, 2012 meeting of the special committee, Blackstone presented its financial analyses and rendered its opinion to the special committee and, at the direction of the special committee, to the additional members of the Physicians Formula board of directors (which, together with the members of the special committee, constituted the full board of directors), who were invited to the special committee meeting.  Physicians Formula encourages its stockholders to read the opinion carefully and in its entirety.  Blackstone’s opinion was limited to the fairness, from a financial point of view, of the consideration provided for in the merger agreement of $4.90 in cash per share of Physicians Formula common stock to the holders of Physicians Formula common stock.  Blackstone assumed no responsibility for updating or revising its opinion based on circumstances or events occurring after the date of its opinion.  Blackstone’s opinion was addressed to the special committee and does not constitute a recommendation to any stockholder as to how such stockholder should vote with respect to the merger or any other matter, and should not be relied upon by any stockholder as such.  The summary of Blackstone’s opinion set forth in this proxy statement is qualified in its entirety by reference to the full text of the opinion, which is attached as Annex C to this proxy statement.

In arriving at its opinion, Blackstone, among other things:

·                                           reviewed certain publicly available information concerning the business, financial condition, and operations of Physicians Formula that Blackstone believed to be relevant to its inquiry;

·                                           reviewed certain internal information concerning the business, financial condition, and operations of Physicians Formula prepared and furnished to Blackstone by the management of Physicians Formula that Blackstone believed to be relevant to its inquiry;

·                                           reviewed certain internal financial analyses, estimates and forecasts relating to Physicians Formula, prepared and furnished to Blackstone by the management of Physicians Formula, including both the management case forecast and the management sensitivity case forecast, which are described more fully in the “—Unaudited Projected Financial Information” section below;

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·                                           reviewed the publicly available, audited financial statements of Physicians Formula from the fiscal year ended December 31, 2008 through the fiscal year ended December 31, 2011 and the unaudited financial statements for the fiscal quarters ended March 31, 2012 and June 30, 2012;

·                                           held discussions with members of senior management of Physicians Formula concerning their evaluations of the merger and Physicians Formula’s businesses, operating and regulatory environments, financial conditions, prospects and strategic objectives, as well as such other matters as Blackstone deemed necessary or appropriate for purposes of rendering its opinion;

·                                           reviewed the historical market prices and trading activity for Physicians Formula common stock;

·                                           compared certain publicly available financial and stock market data for Physicians Formula with similar information for certain other publicly traded companies that Blackstone deemed to be relevant;

·                                           assessed the financial terms of certain other business combinations transactions and the consideration received for and paid in such transactions that Blackstone believed to be generally relevant;

·                                           performed an illustrative leveraged buyout analysis utilizing information prepared and furnished to Blackstone by the management of Physicians Formula and illustrative capital structure assumptions provided by the lenders of Swander Pace;

·                                           performed a discounted cash flow analysis utilizing information prepared and furnished to Blackstone by the management of Physicians Formula;

·                                           reviewed the draft merger agreement, dated September 23, 2012, which is the latest draft provided to Blackstone; and

·                                           performed such other financial studies, analyses and investigations, and considered such other matters as Blackstone deemed necessary or appropriate for purposes of rendering its opinion.

In preparing its opinion, at the special committee’s direction, Blackstone relied without assuming responsibility or liability for independent verification upon the accuracy and completeness of all financial and other information that was available from public sources and all projections and other information provided to Blackstone by Physicians Formula or otherwise discussed with or reviewed by or for Blackstone.  Blackstone assumed with the special committee’s consent that the financial and other projections prepared by Physicians Formula and the assumptions underlying those projections, including the amounts and the timing of all financial and other performance data, had been reasonably prepared in accordance with industry practice and represented Physicians Formula’s management’s best estimates and judgments as of the date of their preparation.  Based on discussions with Physicians Formula’s management and the special committee regarding the risks underlying, and uncertainty of achieving, the projections reflected in the management case forecast, with the special committee’s consent, Blackstone gave greater weight to the management sensitivity case forecast for purposes of its analysis.  Blackstone assumed at the special committee’s direction no responsibility for and expressed no opinion as to such analyses or forecasts or the assumptions on which they are based.  Blackstone further relied with the special committee’s consent upon the assurances of management of Physicians Formula that they are not aware of any facts that would make the information and the projections provided by them inaccurate, incomplete or misleading.

Blackstone was not asked to undertake, and did not undertake, an independent verification of any information, nor was Blackstone furnished with any such verification and Blackstone does not assume any responsibility or liability for the accuracy or completeness of such information.  Blackstone did not conduct a physical inspection of any of the properties or assets of Physicians Formula.  Blackstone did not make an independent evaluation or appraisal of the assets or the liabilities (contingent or otherwise) of Physicians Formula, nor did Blackstone evaluate the solvency of Physicians Formula or Parent under any state or federal laws.

Blackstone also assumed with the special committee’s consent that the final executed form of the merger agreement did not differ in any material respects from the draft dated September 23, 2012 and the consummation of the merger will be effected in accordance with the terms and conditions of the merger agreement, without waiver, modification or amendment of any material term, condition or agreement, and that, in the course of obtaining the necessary regulatory or third party consents and approvals (contractual or otherwise) for the merger, no delay, limitation, restriction or condition will be imposed that would have an adverse effect on Physicians Formula or the contemplated benefits of the merger.  Blackstone is not a legal, tax or regulatory advisor and relied upon without independent verification the assessment of Physicians Formula and its legal, tax and regulatory advisors with respect to such matters.

Blackstone did not consider the relative merits of the merger as compared to any other business plan or opportunity that might be available to Physicians Formula or the effect of any other arrangement in which Physicians Formula might engage.  Blackstone’s opinion was limited to the fairness, from a financial point of view, to the holders of Physicians Formula common stock of the consideration to be paid in the merger, and Blackstone expressed no opinion as to the fairness of the merger to the holders of any other class of securities, creditors or other constituencies of Physicians Formula or as to the underlying decision by Physicians Formula to engage in the merger.  Blackstone’s opinion did not address any other aspect or implication of the merger, the merger

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agreement or any other agreement or understanding entered into in connection with the merger or otherwise.  Blackstone’s opinion is necessarily based upon economic, market, monetary, regulatory and other conditions as they exist and can be evaluated, and the information made available to Blackstone, as of the date of its opinion.

Blackstone did not express any opinion as to the fairness of the amount or nature of the compensation to any of Physicians Formula’s officers, directors or employees, or any class of such persons, relative to the compensation to the public stockholders of Physicians Formula.  Blackstone did not express any opinion as to the prices or trading ranges at which Physicians Formula common stock will trade at any time.  Furthermore, Blackstone did not express any opinion as to the impact of the merger on the solvency or viability of the surviving corporation in the merger or the ability of the surviving corporation to pay its obligations when they become due.

Blackstone’s opinion does not constitute a recommendation to any stockholder as to how such holder should vote with respect to the merger or any other matter, and should not be relied upon by any stockholder as such.  Blackstone assumed no responsibility for updating or revising its opinion based on circumstances or events occurring after the date of its opinion.  Blackstone’s opinion was approved by a fairness committee in accordance with established procedures.

The merger consideration was determined through negotiations between Physicians Formula and Parent and was approved by the special committee and the board of directors of Physicians Formula.  Blackstone provided advice to the special committee during these negotiations, but did not recommend any specific consideration to Physicians Formula or the special committee or suggested that any specific consideration constituted the only appropriate consideration for the merger.  In addition, Blackstone’s opinion and its presentation to the special committee were one of many factors taken into consideration by the special committee in deciding to recommend approval of the merger to the board of directors.  Consequently, the analyses described below should not be viewed as determinative of the opinion of the special committee or the board of directors with respect to the consideration to be paid to the holders of shares of Physicians Formula common stock or of whether the special committee or the board of directors would have been willing to agree to a different consideration.

Summary of Financial Analyses

In accordance with customary investment banking practice, Blackstone employed generally accepted valuation methods in reaching its financial opinion.  The following is a summary of the material financial analyses contained in the presentation that was made by Blackstone to the special committee (and, at the direction of the special committee, to the Physicians Formula board of directors) on September 26, 2012 and that were utilized by Blackstone in connection with providing its opinion.  The following summary, however, does not purport to be a complete description of the financial analyses performed by Blackstone, nor does the order of analyses described represent the relative importance or weight given to those analyses by Blackstone.  Some of the summaries in the financial analyses include information presented in tabular format.  The tables must be read together with the full text of each summary and are alone not a complete description of Blackstone’s financial analyses.  The following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before September 21, 2012, and is not necessarily indicative of current or future market conditions.

For purposes of its standalone analyses performed on Physicians Formula, Blackstone utilized Physicians Formula internal financial projections for calendar years ended December 31, 2012 through December 31, 2015 set forth in the management case forecast and management sensitivity case forecast prepared and furnished to Blackstone by the management of Physicians Formula.  Information regarding the net debt and the number of fully-diluted shares of common stock outstanding for Physicians Formula was provided by management.

Selected Comparable Companies Analysis

Blackstone reviewed and compared certain financial information for Physicians Formula to corresponding financial information, ratios and public market multiples of the following publicly traded companies, or the selected companies, which, in the exercise of its professional judgment, Blackstone determined to be relevant to its analysis:

·                                           L’Oréal SA

·                                           The Estée Lauder Companies Inc.

·                                           Avon Products, Inc.

·                                           Elizabeth Arden, Inc.

·                                           Shiseido Company, Limited

·                                           Inter Parfums, Inc.

·                                           Revlon, Inc.

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Blackstone derived multiples for the selected companies from financial metrics and projections obtained from Capital IQ and equity analyst research and for Physicians Formula from the projections included in the management case forecast.  In its analysis, Blackstone compared multiples for the selected companies and Physicians Formula, calculated as follows:

·                                           the total enterprise value, or TEV, as a multiple of estimated adjusted earnings before interest, taxes, depreciation and amortization, or EBITDA, for calendar year 2012, which is referred to below as 2012E TEV/EBITDA; and

·                                           the TEV as a multiple of estimated EBITDA for calendar year 2013, which is referred to below as 2013E TEV/EBITDA.

For these purposes, total enterprise value means market capitalization plus net debt plus minority interest less equity investments in affiliates.  For these purposes, EBITDA means net income (loss) attributable to continuing operations of Physicians Formula, adjusted to exclude the following items: (a) amortization; (b) depreciation; (c) interest expense, net of interest income; (d) income tax expense or benefit; (e) stock-based employee and director compensation; and (f) non-cash inventory obsolescence charges.

This analysis indicated the following:

*  Represents the multiple for Physicians Formula.

**  Median multiple excludes Physicians Formula.

Based upon the foregoing and applying its professional judgment, Blackstone selected representative ranges of multiples of 2012E TEV/EBITDA and 2013E TEV/EBITDA (in each case based on the management case forecast) taking into consideration, among other things, that since August 2007 Physicians Formula common stock traded at an average discount of 6.5x TEV to last twelve months, or LTM, EBITDA relative to the multiple of TEV/EBITDA of the selected companies.  Blackstone then applied the selected representative ranges to Physicians Formula’s estimates of EBITDA for calendar years 2012 and 2013 and calculated ranges of implied total enterprise values.  These total enterprise values were further adjusted for Physicians Formula’s net debt as of June 30, 2012 to calculate ranges of implied equity values.  These implied equity value ranges were then divided by the fully diluted number of outstanding shares of Physicians Formula common stock as of September 21, 2012 (taking into account certain adjustments resulting from price differences) as reported by Physicians Formula to Blackstone, to calculate the following ranges of implied equity values per share of Physicians Formula common stock:

Blackstone noted that the range of prices of Physicians Formula common stock implied by this analysis was between $2.98 and $4.01 per share, compared to the consideration of $4.90 per share in cash to be paid to the holders of Physicians Formula common stock in the merger.

Although Blackstone chose the selected companies reviewed in the analysis because, among other things, their businesses are reasonably similar to that of Physicians Formula, no selected company is identical to Physicians Formula.  In evaluating the financial multiples for the selected companies, Blackstone made judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters.  Accordingly, Blackstone’s comparison of selected companies to Physicians Formula and analysis of the results of such comparisons was not purely quantitative, but instead necessarily involved qualitative considerations and professional judgments concerning differences in financial and operating characteristics and other factors that could affect the relative values of the selected companies and Physicians Formula.  Mathematical analysis (such as determining the median) is not in itself a meaningful method of using selected company data.

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Illustrative Stand-Alone Discounted Cash Flow Analysis

Blackstone conducted an illustrative discounted cash flow analysis for Physicians Formula on a standalone basis, which is designed to estimate an implied value of a company by calculating the present value of the estimated future unlevered free cash flows and terminal value of the company.  Blackstone calculated a range of implied equity values per share of Physicians Formula common stock based on forecasts of future unlevered free cash flows for the second half of fiscal year 2012 through fiscal year 2015 set forth in the financial projections contained in each of the management case forecast and management sensitivity case forecast provided by management of Physicians Formula.  Blackstone first calculated unlevered free cash flows (calculated as adjusted earnings before interest and taxes, less taxes assuming a tax rate of 30% for calendar year 2012 and 40% for calendar year 2013 and subsequent calendar years, plus depreciation and amortization, less capital expenditures, and less the amount of any increase, or plus the amount of any decrease, in net working capital) of Physicians Formula for the period from June 30, 2012 to December 31, 2015.

Blackstone then calculated a terminal value for Physicians Formula by applying a range of terminal LTM EBITDA multiples of 4.5x to 5.5x (which range was selected based on Blackstone’s professional judgment after consideration of the trading multiples for the selected companies as adjusted to take account of Physicians Formula’s historical discount to such trading multiples) to the projections of EBITDA for fiscal year 2015 included in the management case and the management sensitivity case forecasts.  These unlevered free cash flows and terminal values were then discounted to present values as of June 30, 2012, using a range of discount rates of 17.5% to 19.5% (which range was selected based on Blackstone’s professional judgment and derived from an analysis of the estimated weighted average cost of capital using industry comparables) to calculate a range of implied total enterprise values for Physicians Formula.  These total enterprise values were further adjusted for Physicians Formula’s total debt and cash and cash equivalents as of June 30, 2012 to calculate a range of implied equity values.  This implied equity value range was then divided by the fully diluted number of outstanding shares of Physicians Formula common stock as of September 21, 2012 (taking into account certain adjustments resulting from price differences), as reported by Physicians Formula to Blackstone, to calculate a range of implied equity values per share.

Blackstone noted that the range of prices for Physicians Formula common stock implied by this analysis was between $4.91 and $6.12 per share, based on the management case forecast, and between $3.29 and $4.06 per share, based on the management sensitivity case forecast, in each case compared to the consideration of $4.90 per share in cash to be paid to the holders of Physicians Formula common stock in the merger.  As discussed above, with the consent of the special committee, Blackstone gave greater weight to the management sensitivity case forecast for purposes of its analysis.

Selected Precedent Transactions Analysis

Blackstone also performed a selected precedent transactions analysis to imply a value for Physicians Formula based on certain financial metrics of selected transactions in the U.S. color cosmetics sector.  Blackstone considered, among others, the following three transactions, for which the relevant financial metrics were not publicly disclosed, relevant:

Although the relevant financial metrics were not publicly disclosed, according to market speculation, the LTM EBITDA multiples for these transactions ranged from 5.0x to 7.0x.

Blackstone applied the LTM EBITDA as of June 30, 2012 for Physicians Formula to this reference range of multiples and derived a range of implied equity value per share for Physicians Formula common stock of $4.21 to $5.93, compared to the consideration of $4.90 in cash per share to be paid to the holders of Physicians Formula common stock in the merger.

No company or transaction utilized in the selected precedent transactions analysis is identical to Physicians Formula or the merger.  In evaluating the precedent transactions, Blackstone made judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of Physicians Formula, such as the impact of competition on the business of Physicians Formula or the industry generally, industry growth and the absence of any adverse material change in the financial condition and prospects of Physicians Formula or the industry or in the financial markets in general, which could affect the value of the transactions selected for comparison.  Mathematical analysis is not in itself a meaningful method of using selected transaction data.

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Illustrative Leveraged Buyout Analysis

Blackstone performed an illustrative leveraged buyout analysis of Physicians Formula based on both the management case forecast and the management sensitivity case forecast to determine the range of prices per share of Physicians Formula common stock a financial buyer would be willing to pay to acquire Physicians Formula on a stand-alone basis.  For purposes of this analysis, Blackstone assumed (i) a three and a half year investment period ending December 31, 2015, (ii) a range of 2.5x to 3.5x for Physicians Formula’s ratio of assumed total debt to LTM EBITDA, (iii) a target implied rate of return of 20% to 30%, and (iv) an exit multiple of 5.0x LTM EBITDA at December 31, 2015.  The assumptions utilized by Blackstone were selected based on Blackstone’s professional judgment and experience and reflected recent trends it observed in leveraged acquisitions with respect to, among other things, the internal rate of returns targeted by financial sponsors.  For purposes of this analysis, Blackstone assumed a level of total debt leverage that Swander Pace Capital had indicated on June 26, 2012 it could obtain from lenders.  This analysis resulted in a range of per share purchase prices for Physicians Formula common stock from $4.56 to $5.80 based on the management case forecast and from $3.30 to $4.14 based on the management sensitivity case forecast, in each case compared to the consideration of $4.90 per share in cash to be paid to the holders of Physicians Formula common stock in the merger.  As discussed above, with the consent of the special committee, Blackstone gave greater weight to the management sensitivity case forecast for purposes of its analysis.

Historical Trading Price Analysis

Blackstone reviewed the historical trading price per share of Physicians Formula common stock for the 52-week period ending on September 21, 2012.  Blackstone noted that the lowest and highest intraday sale prices per share of Physicians Formula common stock during the 52-week period ended on September 21, 2012 were $2.54 and $4.90, respectively, and that the price per share was $3.68 on August 14, 2012, the last trading day immediately preceding the announcement of the Swander Pace merger agreement, compared to the consideration of $4.90 per share in cash to be paid to the holders of Physicians Formula common stock in the merger.

Miscellaneous

The foregoing summary of material financial analyses does not purport to be a complete description of the analyses or data presented by Blackstone.  The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description.  Blackstone believes that the foregoing summary and its analyses must be considered as a whole and that selecting portions of it, without considering all of its analyses, could create an incomplete view of the processes underlying the analyses and its opinion.  No single factor or analysis was determinative of Blackstone’s fairness determination.  Rather, Blackstone considered the totality of the factors and analyses performed in arriving at its opinion.  Blackstone based its analyses on assumptions that it deemed reasonable, including those concerning general business and economic conditions and industry-specific factors.  The other principal assumptions upon which Blackstone based its analyses have been described under the description of each analysis in the foregoing summary.  Analyses based upon forecasts of future results are inherently uncertain, as they are subject to numerous factors or events beyond the control of the parties and their advisors.  Accordingly, forecasts and analyses used or made by Blackstone are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by those analyses.  Moreover, Blackstone’s analyses are not and do not purport to be appraisals or otherwise reflective of the prices at which securities may trade at the present time or at any time in the future or at which businesses actually could be bought or sold.

As part of its investment banking business, Blackstone and its affiliates are continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, investments for passive and control purposes, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes.  Blackstone was selected as the special committee’s financial advisor with respect to the merger on the basis of Blackstone’s experience and its familiarity with Physicians Formula and the industry in which Physicians Formula operates.

Pursuant to the engagement letter dated February 16, 2012, Physicians Formula agreed to pay Blackstone fees for its services which are currently estimated to be approximately $2.0 million in the aggregate, the payment of which is contingent upon consummation of the merger. No part of such fees were payable upon delivery of Blackstone’s opinion and no fees are payable until the consummation of the merger.  In addition, Physicians Formula has agreed to reimburse Blackstone for its out-of-pocket expenses and to indemnify it for certain liabilities arising out of the performance of such services (including the rendering of its opinion).  During the two years prior to being retained for the merger, neither Physicians Formula, Parent, nor any affiliate thereof, retained Blackstone for any services or paid any compensation to Blackstone.  Notwithstanding the foregoing, representatives of Blackstone, during those two years, in the ordinary course of their business, regularly contacted representatives of Physicians Formula and other companies in the color cosmetics industries and related industries to discuss, among other things, market conditions, potential strategic transactions, takeover preparedness and related strategies, and other matters relating to the companies’ products, market positioning, and prospects.  In the ordinary course of Blackstone’s and its affiliates’ businesses, Blackstone and its affiliates may actively trade or hold the securities of Physicians Formula or Parent or any of their affiliates for Blackstone’s or Physicians Formula’s or Parent’s (or its affiliates’) account or for others and, accordingly, may at any time hold a long or short position in such securities.

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Blackstone’s analyses were prepared solely as part of Blackstone’s analysis of the fairness, from a financial point of view, as of September 26, 2012, of the consideration to be paid to the holders of Physicians Formula common stock in the merger and were provided to the special committee in that connection.  The opinion of Blackstone was only one of the factors taken into consideration by the special committee in making its determination to approve the merger agreement and the merger.

Unaudited Projected Financial Information

We do not as a matter of course publicly disclose detailed forecasts or internal projections as to future performance, revenues, earnings or financial condition. However, in the course of the sale process described above under the “—Background of the Merger” section, we provided Parent, its representatives and our advisors, selected, non-public prospective financial information, which we refer to as the management case forecast, prepared by our management at the request of the special committee.  In addition to the management case forecast, our management prepared a management sensitivity case forecast in recognition of, and to assist the special committee in understanding and evaluating, the risks inherent in the management case forecast and the impact on the value of our company in the event our company was unable to achieve the financial projections in the management case forecast.  The management sensitivity case forecast was made available to our advisors prior to its inclusion in the preliminary proxy statement that we filed with the SEC in the evening of September 10, 2012.  We have included the material portions of the projected financial information included in the management case forecast and management sensitivity case forecast below in order to give our stockholders access to this information as well. The prospective financial information was prepared for purposes of our board of directors’ and the special committee’s consideration and evaluation of the merger and to facilitate Blackstone’s financial analyses in connection with the merger. The inclusion of the prospective financial information below should not be regarded as an indication that our management team, our board of directors, the special committee, Blackstone, or Parent considered, or now considers, any of the projected financial information to be predictive of actual future results.

Our senior management team advised the special committee, our board of directors, Blackstone, and Parent that its internal financial forecasts, upon which the following prospective financial information was based, were subjective in many respects. The projected financial information set forth below reflects numerous assumptions with respect to industry performance, general business, economic, geo-political, market and financial conditions and other matters, all of which are difficult to predict and beyond our control. The projected financial information set forth below also reflects numerous estimates and assumptions related to our business that are inherently subject to significant economic and competitive uncertainties, all of which are difficult to predict and many of which are beyond our control. As a result, although the projected financial information set forth below was prepared in good faith based on assumptions believed to be reasonable at the time the information was prepared, there can be no assurance that the assumptions made in preparing such information will prove accurate or that the projected results reflected therein will be realized.

The projected financial information set forth below was not prepared with a view toward public disclosure. Accordingly, the projected financial information set forth below was not prepared with a view toward complying with the published guidelines of the Securities Exchange Commission, or SEC, regarding projections or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information or U.S. generally accepted accounting principles, or GAAP, and some of the projections present financial metrics that were not prepared in accordance with GAAP, including EBITDA and EBIT. We define EBITDA as net income (loss) attributable to our continuing operations, adjusted to exclude the following items: (a) amortization; (b) depreciation; (c) interest expense, net of interest income; (d) income tax expense or benefit; (e) stock-based employee and director compensation; and (f) non-cash inventory obsolescence charges.  We define EBIT as EBITDA less depreciation and amortization.  We believe that these measures provide our management with a useful alternative method for assessing its operating results. However, these measures do not provide a complete picture of our operations and should not be considered a substitute for or superior to GAAP results. Neither our independent auditors nor any other independent accountants have compiled, examined or performed any procedures with respect to the projected financial information contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, the projected financial information. The projected financial information set forth below does not take into account any circumstances or events occurring since the date such information was prepared or which may occur in the future, and, in particular, does not take into account any revised prospects of our business, changes in general business, geo-political or economic conditions or any other transaction or event that has occurred since the date on which such information was prepared or which may occur in the future. The projected financial information consists of forward-looking statements and is based on estimates and assumptions that are inherently subject to factors such as industry performance, general business, economic, regulatory, geo-political, market and financial conditions, as well as changes to our business, financial condition or results of operation, including the factors described under “Cautionary Note Concerning Forward-Looking Statements” beginning on page 12, that could cause actual results to differ materially from those shown below. Since the projected financial information set forth below covers multiple years, such information by its nature is subject to greater uncertainty with each successive year. In addition, the projected financial information does not take into account any of the transactions contemplated by the merger agreement, including the merger, which might also cause actual results to differ materially.

We have made publicly available our actual results for the fiscal year ended December 31, 2011. You should review our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 to obtain this information. See “Where You Can Find More Information” beginning on page 75. You are cautioned not to place undue reliance on the specific portions of the prospective financial information set forth in the projected financial information. No one has made or makes any representation to any stockholder regarding the information included in the prospective financial information set forth in the projected financial information.

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For the foregoing reasons, as well as the bases and assumptions on which the information set forth in the projected financial information was compiled, the inclusion of the projected financial information in this proxy statement should not be regarded as an indication that such information will be predictive of actual future results or events, and it should not be relied on as such. Except as required by applicable laws, we have not updated nor do we intend to update or otherwise revise the prospective financial information set forth below, including, without limitation, to reflect circumstances existing after the date such information was prepared or to reflect the occurrence of future events, including, without limitation, changes in general economic, geo-political or industry conditions, even in the event that any or all of the assumptions underlying the prospective financial information is shown to be in error.

The following summary of the financial forecasts is not included in this document in order to induce any stockholder to vote in favor of the merger or any of the other proposals to be voted on at the special meeting.

The projected financial information included the following estimates of our future financial performance for fiscal years 2012 through 2015:

Management Case Forecast ($ in millions ) :

(1)          The following table provides a reconciliation of EBITDA and EBIT to Net Income (totals may not add due to rounding):

Management Sensitivity Case Forecast ($ in millions ) :

(2)          As stated elsewhere in this proxy statement, the management sensitivity case EBITDA forecast was computed based solely on revising the 2015 target EBITDA margin.  Therefore, our management did not prepare a reconciliation to projected EBITDA and no such reconciliation was provided to our advisors or any other person.  Furthermore, projected capital expenditures were scaled proportionally to the reduction in net revenue for a given year.

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Below is a summary of some of the assumptions our management used in connection with the preparation of the management case forecast:

·                         U.S. color cosmetics volume and price/mix growth due to, among other things, continued investment in the brand through contra-revenue and marketing;

·                         annual merit increases, inflation for general expenses, hiring additional employees to manage skin care and international growth, and increased capital and fixtures spending during certain years;

·                         an implied projected net revenue compound annual growth rate, or CAGR, for 2012 through 2015 of 15.6%; and

·                         an implied 2015 EBITDA margin of 17.7%.

To reflect the risks underlying, and the uncertainty of achieving, the forecasts reflected in the management case forecast, for purposes of its management sensitivity case forecast our management:

·                         reduced projected net revenue CAGR for 2012 through 2015 to 6.0% to make it more aligned with recent category growth trends within the U.S. color cosmetics sector; and

·                         reduced the target EBITDA margin to 15.0% to reflect less fixed cost operating leverage, upside in skin care and achievement of various cost savings measures in the management case forecast.

In connection with preparing the management sensitivity case forecast, our management also considered the potential decelerating growth within the U.S. color cosmetics sector, the uncertainty with respect to performance of certain new products, and the uncertainty with respect to the scope of future business opportunities within a concentrated customer base.

In addition, in preparing both the management case and management sensitivity case forecasts, our management made the following material assumptions:

·                         the merger is not consummated, and all transaction costs associated with the merger are excluded;

·                         there would be no significant economic or regulatory changes to our key product markets; and

·                         there would be no significant impact from any litigation.

BY INCLUDING IN THIS PROXY STATEMENT A SUMMARY OF ITS INTERNAL FINANCIAL FORECASTS, PHYSICIANS FORMULA UNDERTAKES NO OBLIGATIONS TO UPDATE, OR PUBLICLY DISCLOSE ANY UPDATE TO, THESE FINANCIAL FORECASTS TO REFLECT CIRCUMSTANCES OR EVENTS, INCLUDING UNANTICIPATED EVENTS, THAT MAY HAVE OCCURRED OR THAT MAY OCCUR AFTER THE PREPARATION OF THESE FINANCIAL FORECASTS, EVEN IN THE EVENT THAT ANY OR ALL OF THE ASSUMPTIONS UNDERLYING THE FINANCIAL FORECASTS ARE SHOWN TO BE IN ERROR OR CHANGE.

Financing of the Merger

In connection with the merger, Parent will cause approximately $74.9 million to be paid to our stockholders and holders of stock options and warrants to acquire shares of our common stock. This amount is expected to come from a combination of Parent’s cash on hand, equity contributions by shareholders of Parent, borrowings by Parent, and our cash, cash equivalents and marketable securities on hand.  As of June 30, 2012, we had approximately $1.2 million in cash and cash equivalents.

Debt Financing

Parent and its wholly-owned subsidiary Markwins Beauty Products, Inc., which we refer to as the borrowers, have received a debt commitment letter, dated September 24, 2012, from Cathay Bank to provide the following debt financing to the borrowers, subject to the conditions set forth therein:

·                   a $10.0 million senior secured term loan, which we refer to as the senior term facility, for the purposes of financing the merger, repaying existing indebtedness of the borrowers and providing funds for working capital and general corporate purposes of the borrowers and their subsidiaries; and

·                   an up to $35.0 million senior secured revolving credit facility, which we refer to as the revolving credit facility, and which together with the senior term facility, we refer to as the debt facilities, to be used for financing the merger, repaying existing indebtedness of the borrowers and providing funds for working capital and general corporate purposes of the borrowers and their subsidiaries.

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The documentation governing the debt facilities has not been finalized and, accordingly, the actual terms may differ from those described in this proxy statement. In addition, the borrowers may obtain financing from different sources in amounts and on terms that may vary from those described herein.

Conditions Precedent to the Debt Commitment

The availability of the debt facilities will be subject to, in addition to customary corporate and documentation conditions, repayment of certain existing indebtedness and the payment of fees and expenses, the satisfaction or waiver of certain other conditions precedent, including the following:

·                   Parent shall have received the financing contemplated by the equity commitment letter;

·                   the merger must be completed substantially concurrently with the fundings under the debt facilities in accordance with applicable law and the merger agreement and without amendment, modification or waiver of any of the terms thereof in a manner material and adverse to the lender under the debt facilities unless the lender has consented to the change;

·                   no development, change, circumstance or condition which, individually or in the aggregate, has had a material adverse effect on our company shall have occurred since September 24, 2012;

·                   all legal, regulatory and third party approvals necessary to consummate the merger and required to have been obtained under the merger agreement must have been obtained; and

·                   the lender must have been granted perfected security interests in the collateral.

Equity Financing

Parent has received an equity commitment letter dated September 24, 2012 from Eric Chen and Lina Chen, the sole shareholders of Parent, pursuant to which the Chens have agreed to, and to cause certain of their affiliates to, contribute $45 million in cash equity financing to Parent.

The equity commitment is subject to the satisfaction of all of the conditions in the merger agreement to Parent’s obligation to consummate the merger.  The equity commitment will terminate upon the earlier to occur of the funding of the commitment and the termination of the merger agreement.

We are a third-party beneficiary of the equity commitment letter and may enforce the terms of it directly against the Chens.

Considerations Relating to the Proposed Merger

Set forth below are various risks relating to the proposed merger. The following is not intended to be an exhaustive list of the risks relating to the merger and should be read in conjunction with the other information in this proxy statement. In addition, you should refer to the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, which is incorporated in this proxy statement by reference, for risks relating to our business.

Failure to complete the merger could negatively impact the market price of our common stock.

If the merger is not completed for any reason, we will be subject to a number of material risks, including the following:

·                   the market price of our common stock may decline to the extent that the current market price of our common stock reflects a market assumption that the merger will be completed;

·                   costs relating to the merger agreement, such as legal and accounting fees, and in specified circumstances, the payment of a termination fee to Parent, must be paid by us even if the merger is not completed; and

·                   the diversion of management’s attention from our day-to-day business and the potential disruption to our employees and our relationships with customers and suppliers during the period before the completion of the merger may make it difficult for us to achieve our business goals if the merger does not occur.

If the merger agreement is not adopted by our stockholders, we will not be permitted under Delaware law to complete the merger and both we and Parent will have the right to terminate the merger agreement. In the event the merger agreement is terminated due to the failure of our stockholders to adopt the merger agreement and, within nine months of such termination, we enter into a definitive agreement with respect to any acquisition proposal or an acquisition proposal is consummated, we will be required to pay to Parent a termination fee of $1,500,000 upon such consummation. See “The Merger Agreement—Termination Fees” beginning on page 50 of this proxy statement.

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Further, if the merger agreement is terminated and our board of directors seeks another merger or business combination, stockholders cannot be certain that we will be able to find a party willing to pay an equivalent or better price than the price to be paid in the merger.

Uncertainties associated with the merger may cause us to lose key personnel.

Our current and prospective employees may be uncertain about their future roles and relationships with us following the completion of the merger. This uncertainty may adversely affect our ability to attract and retain key management and personnel.

Interests of Our Directors and Executive Officers in the Merger

In considering the recommendation of our board of directors that our stockholders vote “FOR” the proposal to adopt the merger agreement and approve the merger and any other matters related to the foregoing that require the approval of our stockholders, our stockholders should be aware that certain of our directors and executive officers have interests in the merger that are different from, or in addition to, the interests of our stockholders generally. These interests may present our directors and executive officers with actual or potential conflicts of interest, and these interests, to the extent material, are described below.  Each of the special committee and our board of directors was aware of these potential conflicts of interest and considered them, among other matters, in reaching its decision to recommend approval of, or to approve, the merger agreement and the merger and to recommend that our stockholders vote in favor of the proposal to adopt the merger agreement.

Employment Agreements and other Compensation Arrangements for Our Named Executive Officers

We have employment agreements with each of our named executive officers.  Our named executive officers and the office they hold are set forth in the table below.

Under their respective employment agreements, the named executive officer would be entitled to continue to receive his or her annual base salary for a period of 24 months if, in the year following the consummation of a change in control transaction, such as the merger, the officer’s employment is terminated without “cause” (as such term is defined below). Each of our named executive officers is also entitled to receive, within 30 days of such termination of employment, the greater of (i) a proportionate portion of the annual bonus award such named executive officer would have earned if the performance period had terminated on the date of the change of control and (ii) a portion of the target annual bonus for the year of termination prorated for the elapsed portion of the year to the date of the termination of employment. Each named executive officer is also entitled to use of a company car and participation in our employee benefit programs for senior executive employees for a period of two years after the date of termination of employment.

The employment agreements generally define “cause” as the occurrence of one or more of the following: (i) the executive’s conviction of (or entry of a plea of guilty or nolo contendere to) a felony or other crime involving moral turpitude or dishonesty, disloyalty or fraud with respect to our company or any of our subsidiaries, customers or suppliers, (ii) the executive reporting to work under the influence of alcohol or illegal drugs or the use of illegal drugs (whether or not at the workplace) or other repeated conduct causing our company or any of our subsidiaries substantial public disgrace or disrepute or substantial economic harm, (iii) willful and repeated failure to substantially perform duties as reasonably directed by our board of directors which is not cured within 15 days after written notice thereof, (iv) a breach of the executive’s duty of loyalty to our company or any of our subsidiaries or affiliates or any act of dishonesty or fraud with respect to our company or our subsidiaries, or (v) the executive’s material breach of the employment agreement, nonsolicitation and confidentiality agreement or any other agreement between the executive and our company which is not cured within 15 days after written notice thereof.

The severance benefits, including any payments, to the named executive officers in connection with a change of control transaction, such as the merger, are subject to each named executive officer signing a release in favor of our company within 60 days of his or her respective termination date and such named executive officer not revoking or breaching the provisions of such release or the nonsolicitation and confidentiality agreement previously signed with our company.  In addition, as partial consideration for the benefits described above, each named executive officer must agree not to apply for unemployment compensation chargeable to our company during the 24 months for which the named executive officer is receiving payments from our company.  The nonsolicitation and confidentiality agreement impose various restrictions on each of the named executive officers for our benefit, including maintaining the confidentiality of our information and a one year post-employment prohibition on solicitation of our employees, customers, suppliers, licensees, licensors or other business relations.

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In addition to the employment agreements, we have also entered into a retention bonus agreement with each of our named executive officers. Under the terms of these agreements, upon the consummation of certain change of control transactions, including a transaction such as the merger, the named executive officers would each be entitled to a retention bonus if such named executive officer (i) has remained continuously employed by our company or one of our affiliates through the sixth month anniversary of the date the change of control transaction is completed or (ii) is terminated without cause (as such term is defined in each respective employment agreement) after the change in control transaction, but prior to the six month anniversary date. In order to be eligible to receive the retention bonus, the consideration per outstanding share of our common stock in the change of control transaction must be at least $5.00.  The per share consideration in the merger is less than $5.00 and therefore the named executive officers will not be entitled to receive any payments pursuant to the retention bonus agreements.

The named executive officers were previously granted stock option awards under our 2003 Stock Option Plan and our 2006 Amended and Restated Equity Incentive Plan.  In connection with the merger, all outstanding stock options as of immediately prior to the effective time of the merger will become fully vested and exercisable. Each stock option outstanding will, to the extent not previously exercised, be cancelled and terminated and converted into the right to receive a cash payment, for each share of our common stock subject to such option, equal to the excess, if any, of (i) the per share merger consideration over (ii) the per share option exercise price payable in respect of such share of our common stock issuable under such option, without interest and less any applicable withholding taxes. Any outstanding options with an exercise price equal to or greater than the merger consideration will be cancelled without payment.

Additionally, Mr. Rogers is a participant in our 2005 Nonqualified Deferred Compensation Plan. Participants in the plan are fully vested in the amounts they defer into their deferred compensation accounts.  Under the plan, participants are entitled to receive the balance of their deferred compensation account upon the occurrence of a change in control, such as the merger.

Cash Payable for Outstanding Shares Pursuant to the Merger

If our directors and executive officers own shares of our common stock, they will receive the same cash consideration per share on the same terms and conditions as our other stockholders in the merger. As of October 12, 2012, our directors and executive officers owned in the aggregate 3,048,967 shares of our common stock, representing approximately 22.2% of our outstanding common stock.  As a result, our directors and executive officers holding such shares of common stock would be entitled to an aggregate cash amount equal to approximately $14.9 million, less any applicable withholding tax, in respect of such shares upon the consummation of the merger.

The following table sets forth, as of October 12, 2012, the cash consideration that each director and executive officer would be entitled to receive for such person’s shares of our common stock in the merger (without taking into account any applicable tax withholdings):

The table above does not include any shares of common stock that may be issued upon the exercise of options or warrants to purchase shares of common stock prior to the closing of the merger held by any of our directors or executive officers. See “—Treatment of Stock Options,” below. Mill Road holds a warrant to purchase up to 650,000 shares of our common stock with an exercise price of $0.25 per share. Mr. Lynch is a Senior Managing Director of Mill Road. See “The Merger Agreement—Treatment of Stock Options and Warrants,” below.

Treatment of Stock Options

The merger agreement provides that at the effective time of the merger each then-outstanding stock option (including those held by our executive officers and directors)  not previously exercised, whether or not then vested, will be cancelled and converted into the right to receive a cash payment, less any applicable withholding tax and without interest, equal to (A) the excess, if any, of $4.90 over the per share exercise price of such stock option (which excess we refer to as the cash-out value of such stock option) multiplied by (B) the number of shares of common stock subject to such stock option.

As of October 12, 2012, our directors and executive officers held, in the aggregate, stock options to purchase 968,889 shares of our common stock with an exercise price per share less than $4.90, including unvested options to purchase 241,685 shares of common stock. Assuming none of those stock options are exercised as of the effective time of the merger, the aggregate cash-out value of all such stock options would be equal to $3.0 million, less any applicable withholding tax.

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The following table shows, for our directors and executive officers, the aggregate number of shares of our common stock subject to outstanding stock options, whether vested or unvested and the cash-out value of all such stock options with a per share exercise price less than $4.90 (without taking into account any applicable tax withholdings).  The information in the table is as of October 12, 2012.

Golden Parachute Compensation Arrangements

We have entered into employment agreements with our named executive officers (as discussed in more detail above under “—Employment Agreements and Other Compensation Arrangements for Our Named Executive Officers”) that specify the severance payments and benefits to be provided by our company upon various circumstances of termination of employment (including a termination without cause by our company within one year following a change in control, such as the merger).  The following table sets forth the estimated amounts of compensation that each named executive officer could receive from our company in connection with the merger. The information below assumes the following:

·                   the merger hypothetically closed on October 12, 2012;

·                   the price per share of common stock paid in the merger was $4.90, the per share price payable under the merger agreement; and

·                   where applicable, each named executive officer hypothetically experiences a qualifying termination of employment without cause (as discussed in more detail above under “—Employment Agreements and Other Compensation Arrangements for Our Named Executive Officers”) as of the day after the merger.

Certain of the amounts payable may vary depending on the actual date of completion of the merger and any qualifying termination. Our payment of the compensation and/or benefits described in the table below is conditioned on (i) the executive executing a release of all claims against our company and our directors, officers and affiliates within 60 days of his or her termination date, (ii) the executive does not breach or revoke such release, and (iii) the executive does not breach his or her nonsolicitation and confidentiality agreement as discussed in more detail above under “—Employment Agreements and Other Compensation Arrangements for Our Named Executive Officers.”  No named executive officer is entitled to any tax reimbursement payments from our company.

Golden Parachute Compensation

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(a)           The amounts in this column reflect an annual base salary as of October 12, 2012 for Ms. Jackel and Mr. Rogers of $425,000 and $378,560, respectively.

(b)          The fiscal 2012 target bonus for Ms. Jackel and Mr. Rogers was 100% and 50%, respectively, of their annual base salary in effect at the time of her or his hypothetical termination.

(2)           Equity . Represents the aggregate payments to be made by our company in respect of unvested stock options with a per share exercise price that is less than the $4.90, for which vesting will be accelerated in connection with the merger, as described in greater detail above in the section entitled “—Treatment of Stock Options” and as quantified in the “Consideration from Unvested Options” column corresponding to each named executive officer’s name in the table set forth in that section.  Amounts included in this column are all “single-trigger” in nature; meaning that eligibility to receive the payment is conditioned solely on the occurrence, and being employed as, of a change in control.

(3)           Perquisites/benefits. Represents the value to the named executive officer of: (a) continued participation in our benefit plans (including medical, dental, vision, life insurance and short and long-term disability insurance premiums) for 24 months following his or her termination date; and (b)  continued use of a company car (which includes lease payments, automobile insurance and license and registration fees and excludes all fuel and mileage expenses incurred) during the 24 months following the named executive officer’s termination date. The following table shows, for each named executive officer, the value attributed to each component part of these severance benefits provided under the named executive officer’s employment agreement.  These benefits are all “double trigger” in nature; meaning that eligibility to receive these benefits requires both the occurrence of a change in control and a qualifying termination of employment without cause within one year following the change in control.

(4)           Total . The following table shows, for each named executive officer, the amounts which are single trigger or double trigger in nature.

(5)           Mr. Berry resigned on December 9, 2011 as our Chief Financial Officer in order to pursue other professional interests, effective January 13, 2012.  Accordingly, Mr. Berry will not receive any golden parachute compensation based on or related to the merger.

Directors’ and Officers’ Indemnification and Insurance

The merger agreement provides that, for a period of six years following the effective time of the merger, the surviving corporation will indemnify and hold harmless to the fullest extent authorized or permitted by law each person who was at September 26, 2012 or during the period from September 26, 2012 through the effective time of the merger serving as a director, officer, trustee or fiduciary of our company or our subsidiaries, from and against any expenses including reasonable attorneys’ fees and all other reasonable costs, expenses and obligations (including experts’ fees, travel expenses, court costs, retainers, transcript fees, duplicating, printing and binding costs, as well as telecommunications, postage and courier charges) paid or incurred in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to investigate, defend, be a witness in or participate in, any claim arising out of or pertaining to matters that relate to such indemnified party’s service as such a director, officer, trustee or fiduciary, and from and against any judgments, fines, penalties and amounts paid in settlement (including all interest, assessments and other charges paid or payable in connection with or in respect of such judgments, fines, penalties or amounts paid in settlement) resulting therefrom, and will advance expenses, to the fullest extent permitted by law, incurred by such parties in defending or serving as a witness in connection with such claims, subject to the receipt by each such party of an undertaking to reimburse such expenses if it is ultimately determined that such party is not entitled to indemnification. In addition, the merger agreement requires that the certificate of incorporation and bylaws of the surviving corporation contain provisions with respect to indemnification and advancement no less favorable to the current and former officers and directors than those contained in our certificate of incorporation and bylaws in effect immediately prior to the effective time of the merger and that such provisions shall remain in full force and effect for at least six years from the effective time of the merger.

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The merger agreement provides that, prior to the effective time of the merger, we will purchase a directors’ and officers’ liability “tail” insurance policy with a claims period of at least six year from the effective time of the merger in an amount and scope at least as favorable as our policies as of the date of the merger agreement.

Pursuant to the merger agreement, the indemnification and directors’ and officers’ insurance covenants described above will survive the consummation of the merger and are intended to benefit, and will be enforceable by, any person or entity entitled to be indemnified under the provisions of the merger agreement (whether or not parties to the merger agreement).

Section 16 Matters

Pursuant to the merger agreement, we must take all steps as may be required to cause any dispositions of our equity securities (including derivative securities) by each individual who is subject to the reporting requirements of Section 16(a) of the Exchange Act with respect to our company to be exempt under Rule 16b-3 promulgated thereunder.

New Employment Arrangements

As of the date of this proxy statement, none of our executive officers nor any member of our board of directors has entered into or is in negotiations to enter into any amendments or modifications to existing employment agreements with us or our subsidiaries in anticipation of the merger, nor has any executive officer who has plans or is expected to remain with the surviving corporation of the merger entered into or is in negotiations to enter into any agreement, arrangement or understanding with Parent, the surviving corporation of the merger or any of their respective affiliates regarding employment with Parent or the surviving corporation or any such affiliates. Although no such agreement, arrangement or understanding currently exists for any executive officer at this time, Parent may request some of our executive officers to remain after the merger is completed, and such executive officers may, prior to the closing of the merger, enter into new arrangements with Parent or its affiliates regarding employment with Parent or the surviving corporation.

Continued Employee Benefits

Under the terms of the merger agreement, Parent is to cause the surviving corporation to maintain in effect until at least March 31, 2013, the employee benefit plans that provide the employees of the surviving corporation, as of the effective time of the merger, base salary and wages (disregarding equity incentive arrangements) which are no less favorable than those we provided immediately prior to the effective time of the merger and benefits that are substantially comparable in the aggregate to those in effect as of the effective time of the merger (disregarding change in control, retention, deferred compensation and equity incentive arrangements).  All of our executive officers currently participate or are eligible to participate in health and welfare benefit plans, which include medical, dental, vision, life insurance, accidental death and dismemberment insurance, short term and long term disability, employee assistance program, flexible spending accounts and other welfare benefit plans.

The Special Committee

In October 2010, our board of directors established the special committee. The primary purpose and responsibility of the special committee was to direct and oversee an exploration of the strategic alternatives available to our company to maximize stockholder value. The special committee is, and has been at all times, composed of independent and disinterested directors who have no financial interest in a transaction other than as equity holders in our company.  The special committee was specifically authorized to explore, review, negotiate, consider and advise our full board of directors on strategic alternatives that maximize stockholder value. Our board of directors did not place any limitations on the authority of the special committee regarding its investigation and evaluation of strategic alternatives.  The special committee, however, did not have the power or authority to authorize or approve a transaction or agree on behalf of our board of directors to do so, which power and authority was expressly reserved to our board of directors.

Upon formation, the special committee was composed of Mr. Padraic L. Spence (Chairman), Mr. Thomas E. Lynch, Mr. Zvi Eiref and Mr. Charles J. Hinkaty. Mr. Spence resigned from our board of directors in May 2011. Mr. Eiref resigned from our board of directors in December 2011.  In June 2011, Mr. Bruce E. Kanter was appointed to our board of directors. He was appointed to the special committee in December 2011. In December 2011, Mr. Alec Taylor was appointed to our board of directors and to the special committee. As of our annual meeting in December 2011 and continuing through today, the special committee members are Messrs. Lynch (Chairman), Hinkaty, Kanter and Taylor.

Commencing in January 2012, we paid each member of the special committee, and will continue to pay each such member, $417 per month (or $5,000 per year) in exchange for their service on the special committee.

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Material Accounting Treatment

The merger will be accounted for as a purchase under generally accepted accounting principles. The purchase price will be assigned to the fair value of the net tangible and intangible assets acquired, with any amounts in excess thereof being assigned to goodwill. Goodwill will be capitalized unless and until it is deemed to be impaired, in which case the impairment will be measured and any such amount will be charged against current earnings.

Material U.S. Federal Income Tax Consequences of the Merger to Our Stockholders

The following is a summary of the material U.S. federal income tax consequences of the merger to U.S. persons (as defined below) and non-U.S. persons (as defined below) whose shares of common stock are converted into the right to receive cash in the merger. This summary does not purport to consider all aspects of U.S. federal income taxation that might be relevant to our stockholders. For purposes of this discussion, we use the term “U.S. person” to mean a beneficial owner of shares of our common stock that is, for U.S. federal income tax purposes:

·                   an individual who is a citizen or resident of the United States;

·                   a corporation created or organized under the laws of the United States or any of its political subdivisions;

·                   a trust that (i) is subject to the supervision of a court within the United States and the control of one or more U.S. persons or (ii) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person; or

·                   an estate the income of which is subject to U.S. federal income tax regardless of its source.

For purposes of this discussion, we use the term “non-U.S. person” to mean a beneficial owner, other than a partnership, of shares of Common Stock that is not a U.S. person (as defined above).

If a partnership (including an entity treated as a partnership for U.S. federal income tax purposes) holds common stock, the tax treatment of a partner will depend on the status of the partner and the activities of the partnership. A partner of a partnership holding Common Stock should consult its tax advisor.

This discussion is based on current law, which is subject to change, possibly with retroactive effect. It applies only to beneficial owners that hold shares of our common stock as capital assets, and may not apply to shares of common stock received in connection with the exercise of employee stock options or otherwise as compensation, stockholders that validly exercise their rights under Delaware law to object to the merger or to certain types of beneficial owners who may be subject to special rules (such as insurance companies, banks, tax-exempt organizations, financial institutions, broker-dealers, partnerships, stockholders subject to the alternative minimum tax, U.S. persons that have a functional currency other than the U.S. dollar, certain former citizens or residents of the United States or stockholders that hold common stock as part of a hedge, straddle, integration, constructive sale or conversion transaction). This discussion does not address the assumption of or receipt of consideration in connection with restricted stock, stock appreciation rights, restricted stock units or options to purchase shares of common stock, or any other matters relating to equity compensation or benefit plans. This discussion also does not address any aspect of state, local or non-U.S. tax laws.

U.S. Persons

Exchange of Shares of Common Stock for Cash Pursuant to the Merger Agreement . The exchange of shares of our common stock for cash in the merger by a U.S. person will be a taxable transaction for U.S. federal income tax purposes. In general, a stockholder whose shares of common stock are converted into the right to receive cash in the merger will recognize capital gain or loss for U.S. federal income tax purposes equal to the difference, if any, between the amount of cash received with respect to such shares and the stockholder’s adjusted tax basis in such shares. Gain or loss must be determined separately for each block of shares (i.e., shares acquired at the same cost in a single transaction). Such gain or loss will be long-term capital gain or loss provided that a stockholder’s holding period for such shares is more than twelve (12) months at the time of the consummation of the merger. Long-term capital gains of individuals are eligible for reduced rates of taxation. There are limitations on the deductibility of capital losses.

Backup Withholding and Information Reporting . Backup withholding of tax may apply to cash payments to which a non-corporate stockholder is entitled under the merger agreement, unless the stockholder or other payee provides a taxpayer identification number, certifies that such number is correct and otherwise complies with the backup withholding rules. Each of our stockholders should complete and sign the Form W-9 that will be included as part of the letter of transmittal and return it to the paying agent, in order to provide the information and certification necessary to avoid backup withholding, unless an exemption applies and is established in a manner satisfactory to the paying agent. Cash received in the merger also generally will be subject to information reporting.

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Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowable as a refund or a credit against a stockholder’s U.S. federal income tax liability, provided the required information is timely furnished to the Internal Revenue Service.

Non-U.S. Persons

Exchange of Shares of Common Stock for Cash Pursuant to the Merger Agreement . The receipt of cash in exchange for shares of common stock in the merger by a non-U.S. person generally will be exempt from U.S. federal income tax, unless:

·                   the gain on shares of common stock, if any, is effectively connected with the conduct by the non-U.S. person of a trade or business in the United States (and, if certain income tax treaties apply, is attributable to the non-U.S. person’s permanent establishment in the United States), in which event (i) the non-U.S. person will be subject to U.S. federal income tax as described under “—U.S. Persons” above, but such non-U.S. person should provide a Form W-8ECI instead of a Form W-9, and (ii) if the non-U.S. person is a corporation, it also may be subject to branch profits tax on such gain at a 30 percent rate (or such lower rate as may be specified under an applicable income tax treaty); or

·                   the non-U.S. person is an individual who was present in the United States for 183 days or more in the taxable year and certain other conditions are met, in which event the non-U.S. person will be subject to tax at a flat rate of 30 percent (or such lower rate as may be specified under an applicable income tax treaty) on the gain from the exchange of the shares of common stock net of applicable U.S. losses from sales or exchanges of other capital assets recognized during the year.

Backup Withholding and Information Reporting . In general, if you are a non-U.S. person, you will not be subject to backup withholding and information reporting on a payment made with respect to shares of our common stock exchanged for cash in the merger if you have provided an IRS Form W-8BEN (or a Form W-8ECI if your gain is effectively connected with the conduct of a U.S. trade or business) as part of the letter of transmittal. If shares are held through a foreign partnership or other flow-through entity, certain documentation requirements may also apply to the partnership or other flow-through entity.

Backup withholding is not an additional tax and any amounts withheld under the backup withholding rules may be refunded or credited against a non-U.S. person’s U.S. federal income tax liability, if any, provided the required information is timely furnished to the Internal Revenue Service.

The U.S. federal income tax consequences described above are not intended to constitute a complete description of all tax consequences relating to the merger. Because individual circumstances may differ, each stockholder should consult with the stockholder’s own tax advisor regarding the applicability of the rules discussed above to the stockholder and the particular tax effects to the stockholder of the merger in light of such stockholder’s particular circumstances, the application of state, local and non-U.S. tax laws, and, if applicable, the tax consequences of the assumption of or receipt of consideration in connection with options to purchase common stock, restricted stock, stock appreciation rights or restricted stock units .

Regulatory Approvals

Except for the filing of a certificate of merger in Delaware at or before the effective time of the merger, we are unaware of any material federal, state or foreign regulatory requirements or approvals required for the execution of the merger agreement or completion of the merger.

Litigation Relating to the Merger

To our knowledge, as of the date this proxy statement, plaintiffs in two of the three stockholder class action lawsuits filed previously with respect to the merger contemplated by the Swander Pace merger agreement have filed amended complaints effectively withdrawing the original claims and asserting new claims against our company and the members of our board of directors related to the merger contemplated by the merger agreement we entered into with Parent and MergerSub. Plaintiffs in the third stockholder class action lawsuit have indicated that they are considering filing an amended complaint to allege the same or similar claims against our company, the members of our board of directors, Parent and MergerSub related to the merger contemplated by the merger agreement we entered into with Parent and MergerSub.

Lawsuits Related to the Merger Agreement

Continuum Capital vs. Ingrid Jackel, et al. was filed in Los Angeles County Superior Court for the State of California. This lawsuit asserts generally that the members of our board of directors breached their fiduciary duties to maximize stockholder value in the merger and as a result our stockholders will not receive adequate or fair value for their shares of common stock in the merger. This lawsuit also asserts that the members of our board of directors breached their fiduciary duties of disclosure by concealing material information in our filings with the SEC regarding the merger.  This lawsuit further asserts that our company and Parent and MergerSub aided those breaches of duty.  The complaint seeks, among other relief, an order enjoining the consummation of the merger, rescission of the merger if it is consummated, other damages in an unspecified amount and an award of attorneys’ fees and expenses of litigation.  We, Parent and MergerSub believe that this lawsuit is without merit and intend to defend it vigorously.

Bushansky v. Physicians Formula Holdings, Inc., et al. was filed in the Court of Chancery of the State of Delaware.  This lawsuit asserts generally that the members of our board of directors breached their fiduciary duties to maximize stockholder value in the merger and the Swander Pace merger agreement and as a result our stockholders will not receive adequate or fair value for their shares of common stock in the merger.  The complaint seeks, among other relief, an order enjoining the consummation of the merger, rescission of the merger if it is consummated, other damages in an unspecified amount and an award of attorneys’ fees and expenses of litigation.  We believe that this lawsuit is without merit and intend to defend it vigorously.

Lawsuit Related to the Swander Pace Merger Agreement

                 L2 Opportunity Fund v. Charles Hinkaty, et al . was filed in the Court of Chancery of the State of Delaware.  This lawsuit asserts generally that the members of our board of directors breached their fiduciary duties to maximize stockholder value in the Swander Pace merger and as a result our stockholders will not receive adequate or fair value for their shares of common stock in the Swander Pace merger.  This lawsuit also asserts that the members of our board of directors breached their fiduciary duties of disclosure by concealing material information in our filings with the SEC regarding the Swander Pace merger.  This lawsuit further asserts that our company, Mill Road Capital, L.P., Swander Pace Capital and Swander Pace (by which we mean the affiliates of Swander Pace Capital who were party to the Swander Pace merger agreement) aided and abetted those alleged breaches of duty.  The complaint seeks, among other relief, an order enjoining the consummation of the Swander Pace merger, an order requiring our board of directors to determine whether the proposal leading to the merger with Parent and MergerSub constitutes a superior proposal pursuant to the Swander Pace merger agreement, rescission of the Swander Pace merger if it is consummated, other damages in an unspecified amount and an award of attorneys’ fees and expenses of litigation.  We believe that this lawsuit is without merit and intend to defend it vigorously.

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Termination of the Swander Pace Merger Agreement

On August 14, 2012, we entered into the Swander Pace merger agreement pursuant to which Swander Pace agreed to acquire all of the outstanding shares of our common stock at a price of $4.25 per share. Under the terms of the Swander Pace merger agreement, we were permitted to respond to unsolicited acquisition proposals that met certain conditions. If our board of directors intended to determine that any such acquisition proposal constituted a superior proposal to the merger contemplated by the Swander Pace merger agreement, we were required to notify Swander Pace that our board of directors intended to make such determination. In that event, Swander Pace had the right to offer to amend the terms of the Swander Pace merger agreement such that such acquisition proposal no longer constituted a superior proposal. If Swander Pace did not make such an offer, our board of directors was permitted to change its recommendation to our stockholders that they adopt the Swander Pace merger agreement and we were permitted to terminate the Swander Pace merger agreement. Following the receipt of Parent’s unsolicited acquisition proposal to acquire all of the outstanding shares of our common stock at a price of $4.90 per share and following subsequent negotiations with Parent, on September 26, 2012, we terminated the Swander Pace merger agreement after complying with the terms of the Swander Pace merger agreement and process described in the preceding sentences and we entered into the merger agreement with Parent and MergerSub. In connection with the termination of the Swander Pace merger agreement, we paid Swander Pace a termination fee of $1,285,000 on September 27, 2012.

Delisting and Deregistration of Common Stock

If the merger is completed, our common stock will be delisted from the NASDAQ Global Select Market and deregistered under the Exchange Act, we will no longer file periodic reports with the SEC and our company will cease to be an independent, publicly-traded company.  If the merger is not completed, then our company will remain an independent public company and our common stock will continue to be registered under the Exchange Act, and provided we continue to comply with applicable continued listing requirements, listed and traded on the NASDAQ Global Select Market.

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THE MERGER AGREEMENT

The following sections describe the material provisions of the merger agreement but do not purport to describe all of the terms of the merger agreement. The summary of the material terms of the merger agreement below and elsewhere in this proxy statement is qualified in its entirety by the merger agreement. The full text of the merger agreement is attached to this proxy statement as Annex A and is incorporated by reference into this proxy statement. This summary may not contain all of the information about the merger agreement that is important to you. You are urged to carefully read the merger agreement in its entirety because it is the legal document that governs the merger.

The merger agreement should be read in conjunction with the disclosures in our filings with the SEC available at the SEC’s website, www.sec.gov. The provisions contained in the merger agreement are intended to govern the contractual rights and relationships of the parties thereto. The representations, warranties and covenants contained in the merger agreement were made only for the purposes of such agreement and as of specific dates, were made solely for the benefit of the parties to the merger agreement and may be intended not as statements of fact, but rather as a way of allocating risk to one of the parties if those statements prove to be inaccurate. In addition, the representations and warranties made by our company, Parent and MergerSub to one another in merger agreement were negotiated between the parties, and any inaccuracies in the representations and warranties may be waived by the beneficiary of such representations and warranties. Moreover, the representations and warranties are qualified in a number of important respects, including through the use of exceptions for certain matters disclosed by the party that made the representations and warranties to the other party and may be subject to a contractual standard of materiality in a way that is different from what may be viewed as material by our stockholders. Our stockholders are not third-party beneficiaries under the merger agreement and should not rely on the representations, warranties and covenants or any descriptions thereof as characterizations of the actual state of facts or conditions of our company, Parent, MergerSub or any of their respective subsidiaries or affiliates.

The Merger

At the effective time of the merger, MergerSub will be merged with and into our company. The separate corporate existence of MergerSub will cease and our company will continue as the surviving corporation and a wholly-owned subsidiary of Parent. MergerSub was created solely for purposes of the merger and has no material assets or operations of its own.

Closing and Effective Time

The closing of the merger shall occur on the third business day after the date that all of the closing conditions set forth in the merger agreement (other than conditions which by their terms are required to be satisfied or waived at the closing, but subject to the satisfaction or waiver of such conditions) shall have been satisfied or waived by the party entitled to the benefit of the same.

The merger shall become effective upon such time as the certificate of merger has been duly filed with the Secretary of State of the State of Delaware, or such later time (not to exceed 30 days after the certificate of merger has been filed) which the parties shall have agreed upon and designated in such certificate of merger.

Consideration to be Received in the Merger

The merger agreement provides that, at the date and time at which the merger becomes effective, each share of our common stock issued and outstanding immediately prior to the effective time of the merger (excluding shares owned by stockholders who dissent from the merger in accordance with Delaware law and shares of common stock owned by our company, Parent, MergerSub or their subsidiaries) shall automatically be converted into the right to receive $4.90 per share in cash, without any interest and less any applicable withholding taxes.

Cancellation of Shares

At the effective time of the merger, all of our common stock shall cease to be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of a stock certificate formerly representing any of our common stock shall cease to have any rights with respect to such common stock, except the right to receive the merger consideration to be paid in consideration therefor upon the surrender of such certificates.

Treatment of Stock Options and Warrants

In connection with the merger, outstanding and unexercised stock options and warrants will be fully vested and exercisable.  Immediately prior to the effective time of the merger, all outstanding stock options and warrants will be cancelled.  In exchange for this cancellation, and, in the case of stock options issued under the 2003 Stock Option Plan, subject to the optionholders entering into a stock option cancellation agreement, each holder of a stock option or warrant will receive a single lump sum cash payment from

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Parent or our company equal to the value, if any, of such stock options or warrants as fully vested, based on the $4.90 per share merger consideration, less the exercise price for such stock option or warrant and less any applicable withholding taxes and without interest.  Stock options and warrants having an exercise price per share that is equal to or greater than $4.90 will be canceled as of the effective time of the merger without any payment.

Payment for Shares

Prior to the effective time of the merger, Parent shall appoint a bank or trust company reasonably satisfactory to our company to act as exchange and paying agent for the payment or exchange of the merger consideration.  Promptly following the effective time of the merger (and in no event later than 5:00 p.m. Pacific time on the closing date), Parent shall deposit with the paying agent the aggregate merger consideration for the benefit of the holders of common stock.

Promptly after the effective time of the merger (but in any event within five business days after the effective time of the merger), we shall cause the paying agent to mail to each person who immediately prior to the effective time held shares of common stock that were converted into the right to receive the merger consideration:  (i) a letter of transmittal; and (ii) instructions for use in effecting the surrender of the holder’s certificates (or affidavits of loss in lieu thereof) in exchange for the merger consideration to which the holder is entitled as a result of the merger.  Upon delivery to the paying agent of such letter of transmittal by any holder of common stock, duly completed and signed in accordance with its instructions, together with such other documents as may be reasonably required pursuant to such instructions and surrender of the certificate that immediately prior to the effective time of the merger represented such common stock, such holder shall be entitled to receive a cash amount by wire transfer or check of immediately available funds to an account designated by such holder (less any required tax withholding) equal to the merger consideration payable in respect of such holder’s common stock, and, if applicable, the certificate so surrendered shall forthwith be canceled.

You should not return your stock certificates with the enclosed proxy card, and you should not forward your stock certificates to the paying agent without a letter of transmittal.

At the effective time of the merger, holders of our common stock shall cease to be, and shall have no rights as, stockholders of our company other than the right to receive the merger consideration or to exercise appraisal rights under Delaware law.  The merger consideration paid upon the surrender for exchange of certificates shall be deemed to have been paid in full satisfaction of all rights and privileges pertaining to the common stock exchanged theretofore and represented by such certificates.

Any portion of the aggregate merger consideration held by the paying agent which remains undistributed to the holders of common stock 180 days after the effective time of the merger shall be delivered to the surviving corporation. Any holders of common stock prior to the merger (other than stockholders who have properly exercised appraisal rights under Delaware law) shall thereafter look only to the surviving corporation for payment of the merger consideration to which such holder is entitled as a result of the merger.

If you have lost a certificate, or if it has been stolen or destroyed, then before you will be entitled to receive the per share merger consideration, you will have to make an affidavit of the loss, theft or destruction, and if required by Parent, post a bond in a reasonable amount as indemnity against any claim that may be made against it with respect to such certificate. These procedures will be described in the letter of transmittal that you will receive, which you should read carefully in its entirety .

Representations and Warranties

The merger agreement contains a number of representations and warranties made by our company, including representations and warranties relating to:

·                   corporate organization, good standing and similar matters;

·                   corporate power and authority to execute and deliver the merger agreement and to consummate the transactions contemplated by the merger agreement;

·                   authorization of the merger agreement, the merger and the other transactions contemplated by the merger agreement and enforceability of the merger agreement;

·                   required governmental filings and consents and absence of violation of applicable laws in connection with the execution, delivery and performance of the merger agreement and the consummation of the merger and the other transactions contemplated by the merger agreement;

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·                   absence of conflicts with, violation or breach of, defaults under, organizational documents of our company and our subsidiaries and certain contracts and permits in connection with the execution, delivery and performance of the merger agreement and the consummation of the merger and the other transactions contemplated by the merger agreement;

·                   our capitalization and capital structure;

·                   our ownership of all subsidiaries;

·                   accuracy and sufficiency of our SEC filings;

·                   compliance with listing and corporate governance rules and regulations of NASDAQ;

·                   preparation of our consolidated financial statements in accordance with United States GAAP on a consistent basis and in compliance with applicable SEC rules and regulations;

·                   internal controls over financial reporting;

·                   absence of certain changes or events and the conduct of business in the ordinary course of business since December 31, 2011;

·                   absence of undisclosed material liabilities;

·                   compliance with applicable laws, court orders and certain regulatory matters, including FDA laws and regulations;

·                   accuracy of the information in this proxy statement;

·                   restriction on business activities;

·                   governmental authorizations;

·                   absence of litigation, investigations and governmental orders;

·                   real property;

·                   intellectual property;

·                   environmental matters and compliance with environmental laws;

·                   tax matters;

·                   brokers’, finders’ and similar fees payable in connection with the merger and the other transactions contemplated by the merger agreement;

·                   opinion of financial advisor;

·                   transactions with affiliates;

·                   employee compensation and benefits matters and matters relating to the Employee Retirement Income Securities Act of 1974, as amended;

·                   insurance;

·                   Investment Company Act of 1940, as amended;

·                   material contracts;

·                   the inapplicability of state takeover statutes;

·                   labor matters;

·                   change of control contracts;

·                   indebtedness;

·                   product warranty, product liability and recalls;

·                   major customers and suppliers; and

·                   the prior proposed transaction with Swander Pace.

The merger agreement also contains a number of representations and warranties by Parent and MergerSub, including representations and warranties relating to:

·                   corporate organization, good standing and similar matters;

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·                   corporate power and authority to execute and deliver the merger agreement and to consummate the transactions contemplated by the merger agreement;

·                   authorization of the merger agreement, the merger and the other transactions contemplated by the merger agreement, and enforceability of the merger agreement;

·                   required governmental filings and consents and absence of violation of applicable laws in connection with the execution, delivery and performance of the merger agreement and the consummation of the merger and the other transactions contemplated by the merger agreement;

·                   absence of conflicts with, violation or breach of, defaults under, the organizational documents of Parent or MergerSub and certain contracts and permits in connection with the execution, delivery and performance of the merger agreement and the consummation of the merger and the other transactions contemplated by the merger agreement;

·                   absence of litigation, investigations and governmental orders;

·                   the accuracy of information supplied by Parent or MergerSub specifically in connection with this proxy statement;

·                   the sufficiency of Parent’s financing commitments to pay the aggregate merger consideration, other consideration, and all fees and expenses related to the transactions contemplated by the merger agreement;

·                   “interested stockholder” (as defined in Section 203 of the DGCL) status and the ownership of shares of our common stock;

·                   the limited operations of MergerSub since its formation; and

·                   brokers’, finders’ and similar fees payable in connection with the merger and the other transactions contemplated by the merger agreement.

Significant portions of the representations and warranties of our company, Parent and MergerSub are qualified as to “materiality” or “material adverse effect.” Under the merger agreement, a material adverse effect means, when used in connection with our company, an effect that, individually or in the aggregate, (i) prevents or materially delays, or is reasonably expected to prevent or materially delay, our ability and the ability of our subsidiaries to perform their respective obligations under the merger agreement or to consummate the merger and the other transactions contemplated by the merger agreement, or (ii) is, or is reasonably expected to be, materially adverse to the assets, liabilities, business, results of operations or condition (financial or otherwise) of our company and of our subsidiaries taken as a whole, other than, solely with respect to the immediately preceding clause “(ii)”, an effect arising out of or resulting from, and none of the following shall constitute or be taken into account in determining whether a material adverse effect, solely with respect to the immediately preceding clause “(ii)”, has occurred or may, would or could occur:

·                   general legal, regulatory, political, business, economic, financial or securities market conditions in the U.S. or other countries where we or our subsidiaries operate (including fluctuations, in and of themselves, in the price or trading volume of our common stock; provided, that the effects giving rise to or contributing to such effect that are not otherwise excluded from being taken into account in determining whether a material adverse effect has occurred for purposes of the merger agreement, shall be taken into account in determining whether there has been a material adverse effect);

·                   changes in conditions in the U.S. economy or the economy of other countries where we or our subsidiaries operate (except to the extent such effect affects our company or our subsidiaries in a materially disproportionate manner as compared to other participants in the industry in which we or our subsidiaries operate);

·                   changes in conditions in the industry in which we or our subsidiaries operate (except to the extent such effect affects our company or our subsidiaries in a materially disproportionate manner as compared to other participants in the industry in which we or our subsidiaries operate);

·                   the negotiation, execution or the announcement of the merger agreement, the identity of Parent, the undertaking and performance or observance of the obligations required by the merger agreement or the consummation or pendency of the merger, including the impact thereof on relationships, contractual or otherwise, with customers, suppliers, distributors, regulators, partners or employees, or any litigation relating to the merger agreement, the merger or the other transactions contemplated by the merger agreement or our compliance with the terms of the merger agreement;

·                   changes in laws or any changes in the interpretation or enforcement of laws (except to the extent such effect affects the our company or our subsidiaries in a materially disproportionate manner as compared to other participants in the industry in which we or our subsidiaries operate);

·                   changes or prospective changes in GAAP, accounting standards or the accounting rules or regulations of the SEC or any changes or prospective changes in the interpretation of any of the foregoing (except to the extent such effect affects our company or our subsidiaries in a materially disproportionate manner as compared to other participants in the industry in which we or our subsidiaries operate);

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·                   our failure to meet internal budgets, projections, forecasts or estimates of revenue, earnings, cash flow or cash position, in each case, whether or not publicly disclosed, or financial analyst projections or forecasts (provided, that the effects giving rise to or contributing to such failure that are not otherwise excluded from being taken into account in determining whether a material adverse effect has occurred, shall be taken into account in determining whether there has been a material adverse effect for purposes of the merger agreement);

·                   acts of war (whether or not declared), armed hostilities, sabotage or terrorism, or any escalation or worsening of any such acts of war, armed hostilities, sabotage or terrorism threatened or underway as of September 26, 2012;

·                   pandemics, earthquakes, hurricanes, tornados or other natural disasters; or

·                   any action we or our subsidiaries take that is required by the merger agreement or at the express written request or with the express written consent of Parent or MergerSub.

Covenants and Other Agreements

Conduct of Our Business Pending the Merger

We have agreed that, during the period from September 26, 2012 until the effective time of the merger (except as expressly required or expressly permitted by the merger agreement and except with the prior written consent of Parent), we will conduct our business only in the ordinary course of business consistent with past practice and, to the extent consistent therewith, we shall use our commercially reasonable efforts to (i) preserve substantially intact our business organization, (ii) maintain existing relations with governmental authorities, customers, suppliers, distributors, employees and business associates, (iii) keep available the services of our current officers, key employees and consultants, (iv) maintain all assets in good repair and condition (except for ordinary wear and tear), (v) maintain all insurance and permits necessary to the conduct of our business as currently conducted, (vi) maintain our books of account and records in the usual, regular and ordinary manner, and (vii) maintain, enforce and protect all of our material intellectual property in a manner consistent in all material respects with past practice.

In addition, during the period from September 26, 2012 until the effective time of the merger (except as expressly required or expressly permitted by the merger agreement and except with the prior written consent of Parent), we may not do any of the following:

·                   declare any dividend on, or other distribution (whether in cash, stock, property or otherwise) in respect of, any of our or any our subsidiaries’ capital stock;

·                   purchase, redeem or otherwise acquire any of our or any of our subsidiaries’ capital stock or any other of our securities or any options, warrants, calls or rights to acquire any such shares or other securities except for repurchases from employees following their termination pursuant to the terms of their pre-existing agreements;