Exhibit 10.3

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THE RIGHTS OF THE BENEFICIARY OF THIS INSTRUMENT ARE SUBJECT AND SUBORDINATE TO
THE LIENS SECURING ALL OBLIGATIONS OF THE GRANTORS TO THE “AGENT” AND THE
“LENDERS” REFERRED TO IN THAT CERTAIN CREDIT AGREEMENT DATED AS OF NOVEMBER 14,
2006 WITH PHYSICIANS FORMULA, INC., PURSUANT TO THE TERMS OF AN INTERCREDITOR
AND SUBORDINATION AGREEMENT DATED AS OF SEPTEMBER 4, 2009 AMONG UNION BANK,
N.A., MILL ROAD CAPITAL, L.P., PHYSICIANS FORMULA HOLDINGS, INC. AND THE OTHER
PARTIES REFERRED TO THEREIN.

SECURITY AGREEMENT
 
This SECURITY AGREEMENT (this “Agreement”) is dated as of September 4, 2009, and
made by PHYSICIANS FORMULA, INC., a New York corporation (the “Borrower”) and
each other entity listed on the signature pages hereof (with the Borrower, each
a “Grantor” and collectively, the “Grantors”), whose obligations are joint and
several, in favor of MILL ROAD CAPITAL, L.P. (the “Lender”).
 
 
RECITALS
 
A.           The Lender has entered into that certain Term Loan Agreement dated
as of September 4, 2009 (said Agreement, as it may hereafter be amended,
restated, supplemented or otherwise modified from time to time, being called the
“Loan Agreement”) with the Borrower.
 
B.           Concurrently herewith each Grantor other than the Borrower is
executing a Guarantee dated as of even date herewith, in favor of the Lender,
which Guarantee supports the Loan Agreement and the Lender’s loan to the
Borrower will result in a direct and substantial benefit to such Grantors.
 
C.           It is a condition precedent to the extension of credit by the
Lender under the Loan Agreement that each Grantor shall have executed and
delivered this Agreement.
 
D.           Terms defined in the Loan Agreement and not otherwise defined
herein have the same respective meanings when used herein, and the rules of
interpretation set forth in Section 1.2 of the Loan Agreement are incorporated
herein by reference.  Schedule and Exhibit references are to this Agreement
unless otherwise specified, and each such Schedule and Exhibit is incorporated
herein.  The words “include,” “includes” and “including” shall be deemed to be
followed by the phrase “without limitation”.
 
 
AGREEMENT
 
NOW, THEREFORE, in order to induce the Lender to enter into the Loan Agreement
and for other good and valuable consideration, the receipt and adequacy of which
hereby is acknowledged, each Grantor hereby represents, warrants, covenants,
agrees, assigns and grants as follows:
 
 
 

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1.           Definitions.  Unless the context otherwise requires, terms defined
in the Uniform Commercial Code of the State of New York (the “Uniform Commercial
Code”) and not otherwise defined in this Agreement or in the Loan Agreement
shall have the meanings defined for those terms in the Uniform Commercial
Code.  In addition, the following terms shall have the meanings respectively set
forth after each:
 
“Asset Disposition” shall have the meaning described to such term in the UB
Credit Agreement.
 
“Capital Stock” means  any and all shares, interests, participation or other
equivalents (however designated) of capital stock of a corporation, any and all
equivalent ownership interests in a Person (other than a corporation), any and
all warrants, options or rights to purchase or any other securities convertible
into any of the foregoing.
 
“Certificates” means all certificates, instruments and other documents now or
hereafter representing or evidencing any Pledged Securities or any Pledged
Limited Liability Company Interests.
 
“Collateral” means all present and future right, title and interest of each
Grantor in or to any property or assets whatsoever, whether now owned or
existing or hereafter arising or acquired and wheresoever located, and all
rights and powers of such Grantor to transfer any interest in or to any property
or assets whatsoever, including, any and all of the following property:
 
(a)           All present and future accounts, accounts receivable, agreements,
guarantees, contracts, leases, licenses, contract rights, health-care-insurance
receivables, letter-of-credit rights and other rights to payment (collectively,
the “Accounts”), together with all instruments, documents, chattel paper,
security agreements, guaranties, undertakings, surety bonds, insurance policies,
notes and drafts, all other supporting obligations, and all forms of obligations
owing to such Grantor or in which such Grantor may have any interest, however
created or arising;
 
(b)           All present and future general intangibles and payment
intangibles; and all other forms of obligations owing to such Grantor or in
which such Grantor may have any interest, however created or arising; all tax
refunds of every kind and nature to which such Grantor now or hereafter may
become entitled, however arising, all other refunds, all commitments to extend
financing to such Grantor, and all deposits, goodwill, choses in action, trade
secrets, computer programs, software, customer lists, trademarks, trade names,
patents, licenses, copyrights, technology, processes, proprietary information,
insurance proceeds and warranties including, the Copyrights, the Patents, the
Marks and the goodwill of such Grantor’s business connected with and symbolized
by the Marks;
 
(c)           All present and future demand, time, savings, passbook, deposit
and like accounts (general or special) (collectively, the “Deposit Accounts”) in
which such Grantor has any interest which is maintained with any bank, savings
and loan association, credit union or like organization, including, each account
listed on Schedule E (as such Schedule may be supplemented from time to time in
accordance with the terms of this Agreement), and all money, cash and cash
equivalents of such Grantor, whether or not deposited in any Deposit Account;
 
 
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(d)           All present and future books and records, including, books of
account and ledgers of every kind and nature, all electronically recorded data
relating to such Grantor or the business thereof, all receptacles and containers
for such records, and all files and correspondence;
 
(e)           All present and future goods, including, (i) all presses,
furnaces, ovens, conveyors, motors, pumps, containers, compressors, hoists,
loaders, lifts, saws, mills and drills and (ii) all furniture, fixtures,
furnishings, machinery, automobiles, trucks, other vehicles, spare parts,
supplies, equipment, tooling, molds, patterns, dies and other tangible property
owned by such Grantor and used, held for use or useful in connection with its
business, wherever located, and all other goods used in connection with or in
the conduct of such Grantor’s business or otherwise owned by such Grantor
(collectively, the “Equipment”);
 
(f)           All present and future inventory and merchandise, including, all
present and future goods held for sale or lease or to be furnished under a
contract of service, all extruded aluminum and thermal management products, all
raw materials, work in process and finished goods, all packing materials,
supplies and containers relating to or used in connection with any of the
foregoing, and all bills of lading, warehouse receipts and documents of title
relating to any of the foregoing (collectively, the “Inventory”);
 
(g)          All present and future stocks, bonds, debentures, certificated and
uncertificated securities, security entitlements, subscription rights, options,
warrants, puts, calls, certificates, securities accounts, commodity contracts,
commodity accounts, partnership interests, limited liability company interests,
joint venture interests and investment and/or brokerage accounts, and all other
investment property, including, the Certificates, the Pledged Securities, the
Pledged Partnership Interests and the Pledged Limited Liability Company
Interests, and all rights, preferences, privileges, dividends, distributions (in
cash or in kind), redemption payments or liquidation payments with respect
thereto;
 
(h)           All present and future accessions, appurtenances, components,
repairs, repair parts, spare parts, replacements, substitutions, additions,
issue and/or improvements to or of or with respect to any of the foregoing;
 
(i)           All other tangible and intangible personal property of such
Grantor;
 
(j)           All rights, remedies, powers and/or privileges of such Grantor
with respect to any of the foregoing; and
 
(k)          Any and all proceeds and products of the foregoing, including, all
money, accounts, general intangibles, deposit accounts, documents, instruments,
letter-of-credit rights, investment property, chattel paper, goods, insurance
proceeds and any other tangible or intangible property received upon the sale or
disposition of any of the foregoing;
 
provided, that the Collateral shall not include, and no Grantor grants to the
Lender, a Lien in any lease, license or other contract which prohibits the
assignment thereof or the grant of a security interest therein to the extent
such provisions are not rendered ineffective pursuant to Sections 9-406, 9-407,
9-408 and 9-409 of the Uniform Commercial Code.
 
 
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“Control Agreement”:  means all control agreements, restricted account agreement
or similar agreement or document, in each case in form and substance
satisfactory to the Lender and entered into for the purpose of perfecting a
security interest in one or more deposit accounts or securities accounts of the
Borrower or its Subsidiaries.
 
“Copyrights” means all:
 
(a)           copyrights, whether or not published or registered under the
Copyright Act of 1976, 17 U.S.C. Section 101 et seq., as the same shall be
amended from time to time, and any predecessor or successor statute thereto (the
“Copyright Act”), and applications for registration of copyrights, and all works
of authorship and other intellectual property rights therein, including,
copyrights for computer programs, source code and object code data bases and
related materials and documentation, and including the registered copyrights and
copyright applications listed on Schedule B (as such Schedule may be
supplemented from time to time in accordance with the terms of this Agreement),
and (i) all renewals, revisions, derivative works, enhancements, modifications,
updates, new releases and other revisions thereof, (ii) all income, royalties,
damages and payments now and hereafter due and/or payable with respect thereto,
including, payments under all licenses entered into in connection therewith and
damages and payments for past or future infringements thereof, (iii) the right
to sue for past, present and future infringements thereof and (iv) all of each
Grantor’s rights corresponding thereto throughout the world;
 
(b)           rights under or interests in any copyright license agreements with
any other party, whether any Grantor is a licensee or licensor under any such
license agreement, including, the copyright license agreements listed on
Schedule B (as such Schedule may be supplemented from time to time in accordance
with the terms of this Agreement), and the right to use the foregoing in
connection with the enforcement of the Lender’s rights under the Loan Documents;
and
 
(c)           copyrightable materials now or hereafter owned by any Grantor, all
tangible property embodying the copyrights or copyrightable materials described
herein, and all tangible property covered by the licenses described in
clause (b) hereof.
 
“Domestic Subsidiary” means each Subsidiary organized under the laws of the
United States or any state thereof.
 
“Foreign Subsidiary: means any Subsidiary other than a Domestic Subsidiary.
 
“Limited Liability Company Acknowledgement” shall have the meaning ascribed to
it in Section 4(b) of this Agreement.
 
“Limited Liability Company Assets” means all assets, whether tangible or
intangible and whether real, personal or mixed (including, all limited liability
company capital and interests in other limited liability companies), at any time
owned or represented by any Limited Liability Company Interests.
 
“Limited Liability Company Interests” means the entire limited liability company
interest at any time owned by any Grantor in any Pledged Entity.
 
 
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“Limited Liability Company Notice” shall have the meaning ascribed to it in
Section 4(b) of this Agreement.
 
“Marks” means all (i) trademarks, trademark registrations, interests under
trademark license agreements, trade names, trademark applications, service
marks, business names, trade styles, designs, logos and other source or business
identifiers which are used in the United States or any state, territory or
possession thereof, or in any other place, nation or jurisdiction anywhere in
the world, including the trademarks, trademark registrations, applications,
service marks, business names, trade styles, design logos and other source or
business identifiers listed on Schedule B (as such Schedule may be supplemented
from time to time in accordance with the terms of this Agreement), (ii) licenses
pertaining to any such mark, whether any Grantor is a licensor or licensee
including, the licenses listed on Schedule B (as such Schedule may be
supplemented from time to time in accordance with the terms of this Agreement),
(iii) all income, royalties, damages and payments now and hereafter due and/or
payable with respect to any such mark or any such license, including, damages
and payments for past, present or future infringements thereof, (iv) rights to
sue for past, present and future infringements thereof, (v) rights corresponding
thereto throughout the world, (vi) all product specification documents and
production and quality control manuals used in the manufacture of products sold
under or in connection with such marks, (vii) all documents that reveal the name
and address of all sources of supply of, and all terms of purchase and delivery
for, all materials and components used in the production of products sold under
or in connection with such marks, (viii) all documents constituting or
concerning the then current or proposed advertising and promotion by any
Grantor, its subsidiaries or licensees of products sold under or in connection
with such marks, including all documents that reveal the media used or to be
used and the cost for all such advertising and (ix) renewals and proceeds of any
of the foregoing.
 
“Patents” means all (i) letters patent, design patents, utility patents,
inventions and trade secrets, all patents and patent applications in the United
States Patent and Trademark Office, and all interests under patent license
agreements, including the inventions and improvements described and claimed
therein, including those letters patent, design patents, utility patents,
inventions, trade secrets, patents, patent applications and patent license
agreements listed on Schedule B (as such Schedule may be supplemented from time
to time in accordance with the terms of this Agreement), (ii) licenses
pertaining to any patent whether any Grantor is a licensor or licensee,
(iii) income, royalties, damages and payments now and hereafter due and/or
payable under and with respect thereto, including, damages and payments for
past, present or future infringements thereof, (iv) rights to sue for past,
present and future infringements thereof, (v) rights corresponding thereto
throughout the world and (vi) the reissues, divisions, continuations, renewals,
extensions and continuations-in-part of any of the foregoing.
 
“Pledged Collateral” means the Certificates, the Pledged Securities, the Pledged
Partnership Interests and the Pledged Limited Liability Company
Interests.  Notwithstanding the foregoing, the security interest granted herein
shall not include, and the term Pledged Collateral shall not include, equity
interests in any direct Foreign Subsidiary of any Grantor in excess of 65% of
the Capital Stock having voting power in such Foreign Subsidiary (unless a
greater amount of such equity interests shall not cause such Grantor to incur
material adverse tax consequences under Section 956 of the Code).
 
 
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“Pledged Entity” means each limited liability company set forth in Schedule A
(as such Schedule may be supplemented from time to time in accordance with the
terms of this Agreement), together with any other limited liability company in
which any Grantor may have an interest at any time.
 
“Pledged Limited Liability Company Interests” means all interests in each
Pledged Entity held by any Grantor, including those Limited Liability Company
Interests identified in Schedule A (as such Schedule may be supplemented from
time to time in accordance with the terms of this Agreement), including (i) all
the capital thereof and such Grantor’s interests in all profits, losses, Limited
Liability Company Assets and other distributions in respect thereof; (ii) all
other payments due or to become due to such Grantor in respect of such Limited
Liability Company Interests; (iii) all of such Grantor’s claims, rights, powers,
privileges, authority, options, security interests, liens and remedies in
respect of such Limited Liability Company Interests; (iv) all of such Grantor’s
rights to exercise and enforce every right, power, remedy, authority, option and
privilege relating to such Limited Liability Company Interests; and (v) all
other property delivered in substitution for or in addition to any of the
foregoing and all certificates and instruments representing or evidencing such
other property received, receivable or otherwise distributed in respect of or in
exchange for any or all thereof.
 
“Pledged Partnership Interests” means all interests in any partnership or joint
venture held by each Grantor, including those partnerships and/or joint ventures
identified in Schedule A (as such Schedule may be supplemented from time to time
in accordance with the terms of this Agreement) and all dividends, cash,
instruments and other properties from time to time received, to be received or
otherwise distributed in respect of or in exchange for any or all of such
interests.
 
“Pledged Securities” means all shares of capital stock of any issuer in which
any Grantor has an interest, including, those shares of stock identified in
Schedule A (as such Schedule may be supplemented from time to time in accordance
with the terms of this Agreement) and all dividends, cash, instruments and other
properties from time to time received, to be received or otherwise distributed
in respect of or in exchange for any or all of such shares.
 
“Subordination Agreement” means that certain Intercreditor and Subordination
Agreement dated as of September 4, 2009 among the Borrower, the Lender, UB (for
the benefit of the Lenders under the UB Credit Agreement) and the other parties
referred to therein, as such Subordination Agreement may be amended, modified or
restated from time to time.
 
2.      Creation of Security Interest.  Each Grantor hereby collaterally assigns
and pledges to the Lender, and grants to the Lender a security interest in and
to, all right, title and interest of such Grantor in and to all presently
existing and hereafter acquired Collateral.
 
3.      Security for Obligations.  This Agreement and the pledges made and
security interests granted herein secure the prompt payment, in full in cash,
and full performance of, the Obligations.
 
 
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4.      Delivery of Pledged Collateral.
 
(a)           With respect to any provision in this Agreement which requires any
Grantor to deliver possession or control of any negotiable document, instrument,
certificated securities, promissory notes, deposit accounts, security accounts,
commodity accounts, and letter of credit rights or other Collateral requiring
possession or control thereof in order to perfect the security interest of the
Lender therein under the Uniform Commercial Code, no such delivery or giving of
control to the Lender shall be required to the extent such Collateral is
required to be delivered to or control is required to be given to UB in
accordance with the UB Credit Agreement, it being understood that the UB is
acting as agent and bailee for the benefit of the Lender pursuant to the terms
of the Subordination Agreement.
 
(b)           Each Certificate shall, on (i) the Closing Date (with respect to
Certificates existing on such date) and (ii) on the date of receipt or
acquisition by any Grantor (with respect to Certificates received or acquired
after the Closing Date), be delivered to and held by the Lender and shall be in
suitable form for transfer by delivery, or shall be accompanied by duly executed
undated endorsements, instruments of transfer or assignment in blank, all in
form and substance reasonably satisfactory to the Lender, provided that, the
Grantors shall not be obligated to deliver any of the foregoing to the extent
inconsistent with the Subordination Agreement.
 
(c)           With respect to each Limited Liability Company Interest, on
(i) the Closing Date (with respect to Limited Liability Company Interests
existing on such date) and (ii) the date of acquisition by any Grantor (with
respect to Limited Liability Company Interests acquired after the Closing Date)
of any Limited Liability Company Interest, a notice substantially in the form
set forth in Schedule G (the “Limited Liability Company Notice”) shall be
appropriately completed and delivered to each Pledged Entity, notifying each
Pledged Entity of the existence of this Agreement and such Grantor shall have
received and delivered to the Lender a copy of such Limited Liability Company
Notice, along with an acknowledgment in the form set forth in Schedule G (the
“Limited Liability Company Acknowledgment”), duly executed by the relevant
Pledged Entity.
 
(d)           The Lender shall have the right, upon the occurrence and during
the continuance of an Event of Default, without notice to any Grantor, to
transfer to or to direct each Grantor or any nominee of such Grantor to register
or cause to be registered in the name of the Lender or any of its nominees any
or all of the Pledged Collateral.  In addition, the Lender shall have the right
at any time to exchange certificates or instruments representing or evidencing
Pledged Collateral for certificates or instruments of smaller or larger
denominations.
 
5.      Further Assurances.
 
(a)           At any time and from time to time, at the written request of the
Lender, each Grantor shall execute and deliver to the Lender, at such Grantor’s
expense, all such financing statements and other instruments, certificates and
documents in form and substance reasonably satisfactory to the Lender, and
perform all such other acts as shall be necessary or as the Lender shall
reasonably request to fully perfect or protect or maintain, when filed,
recorded, delivered or performed, the Lender’s security interests granted
pursuant to this Agreement or to enable the
 
 
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Lender and the Lenders to exercise and enforce their rights and remedies
hereunder with respect to any Collateral.  Without limiting the generality of
the foregoing, each Grantor shall:  (i) at the reasonable request of the Lender,
mark conspicuously each document included in the inventory and each other
contract relating to the Accounts, and all chattel paper, instruments and other
documents and each of their records pertaining to the Collateral with a legend,
in form and substance reasonably satisfactory to the Lender, indicating that
such document, contract, chattel paper, instrument or Collateral is subject to
the security interests granted hereby, provided that, the Grantors shall not be
obligated to deliver any of the foregoing to the extent inconsistent with the
Subordination Agreement; (ii) if any Account or contract or other writing
relating thereto shall be evidenced by a promissory note or other instrument
with an individual face value in excess of $50,000 or with an aggregate value in
excess of $250,000, deliver and pledge to the Lender such note and/or other
instrument duly endorsed and accompanied by duly executed undated instruments of
transfer or assignment, all in form and substance reasonably satisfactory to the
Lender; (iii) execute and file, and authorize the filing of (where permitted),
such financing or continuation statements, or amendments thereto, and such other
instruments or notices, as may be necessary or desirable, or as the Lender may
request, in order to perfect and preserve, with the required priority, the
security interests granted, or purported to be granted hereby; (iv) upon such
Grantor’s registration, or application therefor, of any copyright under the
Copyright Act, at the Lender’s request execute and deliver to the Lender for
recordation and filing in the United States Copyright Office a copy of this
Agreement or another appropriate copyright mortgage document in form and
substance satisfactory to the Lender; (v) upon such Grantor’s registration, or
application therefor, of any Patent or Mark, at the Lender’s request execute and
deliver to the Lender for recordation and filing in the United States Patent and
Trademark Office a copy of this Agreement or another appropriate patent or
trademark mortgage document, as applicable, in form and substance satisfactory
to the Lender; and (vi) at the request of the Lender, cause Control Agreements
to be executed by all parties necessary to establish “control” under the Uniform
Commercial Code with respect to all deposit accounts, investment property,
letter-of-credit rights and electronic chattel paper of such Grantor.
 
(b)           At any time and from time to time, the Lender shall be entitled to
file and/or record any or all such financing statements, instruments and
documents held by it, and any or all such further financing statements,
documents and instruments, relative to the Collateral or any part thereof in
each instance, and to take all such other actions as the Lender may deem
appropriate to perfect and to maintain perfected the security interests granted
herein.
 
(c)           Each Grantor hereby (i) authorizes the Lender to file, one or more
financing or continuation statements and amendments thereto that describe the
Collateral as “all assets” or words of similar effect and that contain any other
information required by Part 5 of Article 9 of the Uniform Commercial Code for
the sufficiency or filing office acceptance of any financing statement,
continuation statement or amendment, including, without limitation, whether such
Grantor is an organization, the type of organization and any organization number
issued to such Grantor and (ii) ratifies such authorization to the extent that
the Lender has filed any such financing statements, continuation statements, or
amendments thereto, prior to the date hereof.  A carbon, photographic or other
reproduction of this Agreement or any financing statement covering the
Collateral or any part thereof shall be sufficient as a financing statement
where permitted by law.
 
 
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(d)           Each Grantor shall furnish to the Lender, concurrently with the
delivery of quarterly financial statements, schedules further identifying and
describing the Collateral and such other reports in connection with the
Collateral as the Lender may reasonably request or as required by the Loan
Agreement.  Upon any Grantor’s obtaining any rights or interests in any Deposit
Accounts, securities accounts or other investment property (other than that
referred to on Schedule A), such Grantor shall, in addition to all other acts
required to be performed in respect thereof pursuant to this Agreement,
supplement Schedule E to reflect such additional Deposit Accounts, securities
accounts or other investment property.  Upon any Grantor’s publication or
registration, or application for registration, of any copyright under the
Copyright Act, such Grantor shall, in addition to all other acts required to be
performed in respect thereof pursuant to this Agreement, supplement Schedule B
to reflect the publication or registration of such copyright or application
therefor.  Upon any Grantor’s obtaining any rights or interests in any Marks,
such Grantor shall, in addition to all other acts required to be performed in
respect thereof pursuant to this Agreement, supplement Schedule B to reflect
such additional Marks.  Upon any Grantor’s obtaining any rights or interests in
any Patents, such Grantor shall, in addition to all other acts required to be
performed in respect thereof pursuant to this Agreement, supplement Schedule B
to reflect such Patents.  Upon any Grantor’s receipt or acquisition of any
additional shares of capital stock of any Person, any additional partnership
interests in any partnership or joint venture or any additional Limited
Liability Company Interests, such Grantor shall, in addition to all other acts
required to be performed in respect thereof pursuant to this Agreement,
supplement Schedule A to reflect such additional Pledged Collateral.  Upon any
Grantor’s obtaining any rights or interests in any chattel paper or electronic
chattel paper, such Grantor shall, in addition to all other acts required to be
performed in respect thereof pursuant to this Agreement, promptly notify the
Lender of such rights or interests.
 
(e)           With respect to any Collateral with an individual value of $50,000
consisting of certificates of title or the like as to which the Lender’s
security interest need be perfected by, or the priority thereof need be assured
by, notation on the certificate of title pertaining to such Collateral, each
Grantor will (i) promptly notify the Lender of the acquisition thereof and
(ii) at the request of the Lender, cause such security interest to be noted on
such certificate of title.
 
(f)           With respect to any Collateral consisting of certificates of
stock, securities, instruments, partnership or joint venture interests,
interests in limited liability companies, or the like, each Grantor hereby
consents and agrees that, upon the occurrence and during the continuance of an
Event of Default, the issuers of, or obligors on, any such Collateral, or any
registrar or transfer agent or trustee for any such Collateral, shall, subject
to the Subordination Agreement, be entitled to accept the provisions of this
Agreement as conclusive evidence of the right of the Lender to effect any
transfer or exercise any right hereunder or with respect to any such Collateral
subject to the terms hereof, notwithstanding any other notice or direction to
the contrary heretofore or hereafter given by such Grantor or any other Person
to such issuers or such obligors or to any such registrar or transfer agent or
trustee.
 
6.      Voting Rights; Dividends; Etc.  So long as no Event of Default shall
have occurred and be continuing:
 
(a)           Voting Rights.  Each Grantor shall be entitled to exercise any and
all voting and other consensual rights pertaining to the Pledged Securities, the
Pledged Partnership Interests
 
 
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and the Pledged Limited Liability Company Interests (including, all voting,
consent, administration, management and other rights and remedies under any
partnership agreement or any operating agreement or otherwise with respect to
the Pledged Securities, the Pledged Partnership Interests or the Pledged Limited
Liability Company Interests), or any part thereof, for any purpose not
inconsistent with the terms of this Agreement, the Loan Agreement or the other
Loan Documents; provided, however, that such Grantor shall not exercise any such
right if it would result in a Default.
 
(b)           Dividend and Distribution Rights.  Subject to the terms of the
Loan Agreement, each Grantor shall be entitled to receive and to retain and use
any and all dividends or distributions paid in respect of the Pledged
Securities, the Pledged Partnership Interests or the Pledged Limited Liability
Company Interests; provided, however, that any and all
 
(i)     non-cash dividends or distributions in the form of capital stock,
certificated limited liability company interests, instruments or other property
received, receivable or otherwise distributed in respect of, or in exchange for,
any Pledged Securities, Pledged Partnership Interests or Pledged Limited
Liability Company Interests,
 
(ii)    dividends and other distributions paid or payable in cash in respect of
any Pledged Securities, Pledged Partnership Interests or Pledged Limited
Liability Company Interests in connection with a partial or total liquidation or
dissolution or in connection with a reduction of capital, capital surplus or
paid-in-surplus, and
 
(iii)   cash paid, payable or otherwise distributed in redemption of, or in
exchange for, any Pledged Securities, Pledged Partnership Interests or Pledged
Limited Liability Company Interests,
 
shall forthwith be delivered to the Lender to be held as Collateral or applied
to the Obligations in accordance with the Loan Agreement, as the Lender may
elect; and, if received by such Grantor, shall be received in trust for the
benefit of the Lender, be segregated from the other property of such Grantor and
forthwith be delivered to the Lender in the same form as so received (with any
necessary endorsements).
 
7.      Rights as to Pledged Collateral During Event of Default.  When an Event
of Default has occurred and is continuing:
 
(a)           Voting, Dividend and Distribution Rights.  At the option of the
Lender, all rights of any Grantor to exercise the voting and other consensual
rights which it would otherwise be entitled to exercise pursuant to Section 6(a)
above, and to receive the dividends and distributions which it would otherwise
be authorized to receive and retain pursuant to Section 6(b) above, shall cease,
and all such rights shall thereupon become vested in the Lender who shall
thereupon have the sole right to exercise such voting and other consensual
rights and to receive and to hold as Pledged Collateral such dividends and
distributions.
 
(b)           Dividends and Distributions Held in Trust.  All dividends and
other distributions which are received by any Grantor contrary to the provisions
of Section 7(a) of this Agreement shall be received in trust for the benefit of
the Lender, shall be segregated from other funds of
 
 
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such Grantor and forthwith shall be paid over to the Lender as Collateral in the
same form as so received (with any necessary endorsements).
 
(c)           Registration.  Determination by the Lender to exercise its right
to sell pursuant to Section 16 hereof any or all of the Pledged Securities
without registering the Pledged Securities under the Securities Act of 1933
shall not, by the sole fact of such sale, be deemed to be commercially
unreasonable.
 
After any and all Events of Default have been cured or waived, each Grantor
shall have the right to exercise the voting and other consensual rights it would
otherwise be entitled to exercise pursuant to Section 6(a) hereof and the Loan
Agreement and receive the distributions which it would be authorized to receive
and retain pursuant to Section 6(b) hereof and the Loan Agreement.
 
8.      Irrevocable Proxy.  Each Grantor hereby revokes (except for any proxies
granted in favor of UB) all previous proxies with regard to the Pledged
Securities, the Pledged Partnership Interests (if such interests are limited
partnership interests) and the Pledged Limited Liability Company Interests and
appoints the Lender as its proxyholder and attorney-in-fact to (i) attend and
vote at any and all meetings of the shareholders of the corporation(s) which
issued the Pledged Securities (whether or not transferred into the name of the
Lender), and any adjournments thereof, held on or after the date of the giving
of this proxy and to execute any and all written consents, waivers and
ratifications of shareholders of such corporation(s) executed on or after the
date of the giving of this proxy with the same effect as if such Grantor had
personally attended the meetings or had personally voted its shares or had
personally signed the written consents, waivers or ratification, and (ii) attend
and vote at any and all meetings of the members of the Pledged Entities (whether
or not such Pledged Limited Liability Company Interests or Pledged Partnership
Interests are transferred into the name of the Lender), and any adjournments
thereof, held on or after the date of the giving of this proxy and to execute
any and all written consents, waivers and ratifications of the Pledged Entities
executed on or after the date of the giving of this proxy with the same effect
as if such Grantor had personally attended the meetings or had personally voted
on its Limited Liability Company Interests or Pledged Partnership Interests or
had personally signed the consents, waivers or ratifications; provided, however,
that the Lender as proxyholder and attorney-in-fact shall have rights hereunder
only upon the occurrence and during the continuance of an Event of
Default.  Each Grantor hereby authorizes the Lender to substitute another Person
(which Person shall be a successor to the rights of the Lender hereunder or a
nominee appointed by the Lender to serve as proxyholder) as the proxyholder and,
upon the occurrence or during the continuance of any Event of Default, hereby
authorizes and directs the proxyholder to file this proxy and the substitution
instrument with the secretary of the appropriate corporation, limited
partnership or limited liability company.  This proxy is coupled with an
interest and is irrevocable until such time each Commitment and each Letter of
Credit has expired and all Obligations have been paid in full.
 
9.      Copyrights.
 
(a)           Royalties.  Each Grantor hereby agrees that the use by the Lender
of the Copyrights as authorized hereunder in connection with the Lender’s
exercise of their rights and
 
 
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remedies hereunder shall be without any liability for royalties or other related
charges from the Lender to such Grantor.
 
(b)           Restrictions on Future Agreements.  Subject to the terms hereof
and of the Loan Agreement, each Grantor shall be permitted to manage, license
and administer its Copyrights in such manner as such Grantor in its reasonable
business judgment deems desirable; provided, however, that such Grantor will
not, without the Lender’s prior written consent, (i) abandon any Copyright in
which such Grantor now owns or hereafter acquires any rights or interests,
(ii) enter into any license agreements or (iii) fail to take any action, or
permit any others (including licensees) to fail to take any action, which would
customarily be taken by a Person in the same business and in similar
circumstances as such Grantor.
 
(c)           Duties of Grantor.  Each Grantor agrees to:  (i) prosecute in
accordance with its reasonable business judgment any copyright application
included in the Copyrights, (ii) upon an Event of Default, make application for
registration of such uncopyrighted but copyrightable material owned by such
Grantor as the Lender reasonably deems appropriate, (iii) place notices of
copyright on all copyrightable property produced or owned by such Grantor
embodying the Copyrights and cause its licensees to do the same, (iv) file and
prosecute opposition and cancellation proceedings in its reasonable business
judgment, and (v) take all action necessary in its reasonable business judgment
to preserve and maintain all of such Grantor’s rights in those Copyrights that
are or shall be necessary in the operation of such Grantor’s business, including
making timely filings for renewals and extensions of registered Copyrights and
diligently monitoring unauthorized use thereof.  Any expenses incurred in
connection with the foregoing shall be borne by the Grantors.  Each Grantor
shall give proper statutory notice in connection with its use of each Copyright
to the extent necessary for the protection thereof.  Each Grantor shall notify
the Lender of any suits it commences to enforce any Copyright and shall provide
the Lender with copies of any documents requested by the Lender relating to such
suits.  The Lender shall not have any duty with respect to the Copyrights other
than to act lawfully and without gross negligence or willful
misconduct.  Without limiting the generality of the foregoing, the Lender shall
not be under any obligation to take any steps necessary to preserve rights in
the Copyrights against any other party, but the Lender may do so at its option
upon the occurrence and during the continuance of an Event of Default, and all
reasonable expenses incurred in connection therewith shall be for the account of
such Grantor and shall be added to the Obligations.
 
10.      Patents and Marks.
 
(a)           Royalties.  Each Grantor hereby agrees that any rights granted
hereunder to the Lender with respect to Patents and Marks shall be applicable to
all territories in which such Grantor has the right to use such Patents and
Marks, from time to time, and without any liability for royalties or other
related charges from the Lender to such Grantor.
 
(b)           Restrictions on Future Agreements.  Subject to the terms hereof
and of the Loan Agreement, each Grantor shall be permitted to manage, license
and administer its Patents and Marks in such manner as such Grantor in its
reasonable business judgment deems desirable; provided, however, that such
Grantor will not, without the Lender’s prior written consent, (i) abandon any
Patent or Mark in which such Grantor now owns or hereafter acquires any rights
 
 
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or interests, (ii) enter into any license agreements or (iii) fail to take any
action, or permit any others (including licensees) to fail to take any action,
which would customarily be taken by a Person in the same business and in similar
circumstances as such Grantor.
 
(c)           Duties of Grantor.  Each Grantor agrees to: (i) prosecute in
accordance with its reasonable business judgment any patent application or
trademark application included in the Patents or Marks, (ii) upon an Event of
Default, make application on unpatented but patentable inventions owned by such
Grantor and on unregistered Marks, as the case may be, as the Lender reasonably
deems appropriate, (iii) file and prosecute opposition and cancellation
proceedings in its reasonable business judgment and (iv) take all action
necessary in its reasonable business judgment to preserve and maintain all
rights in those Patents and Marks that are or shall be necessary in the
operation of such Grantor’s business, including, making timely filings for
renewals and extensions of any Patents and Marks and diligently monitoring
unauthorized use thereof.  Any expenses incurred in connection with the
foregoing shall be borne by such Grantor.  Each Grantor shall give proper
statutory notice in connection with its use of each Mark and each Patent to the
extent necessary for the protection thereof.  Each Grantor shall notify the
Lender of any suit it commences to enforce any Patent or Mark and shall provide
the Lender with copies of any documents requested by the Lender relating to such
suit.  The Lender shall not have any duty with respect to the Patents and Marks
other than to act lawfully and without gross negligence or willful
misconduct.  Without limiting the generality of the foregoing, the Lender shall
not be under any obligation to take any steps necessary to preserve rights in
the Patents and Marks against any other party, but the Lender may do so at its
option upon the occurrence and during the continuance of an Event of Default,
and all reasonable expenses incurred in connection therewith shall be for the
account of such Grantor and shall be added to the Obligations.
 
11.      Grantor’s Representations and Warranties.  Each Grantor represents and
warrants as follows:
 
(a)           (i) Schedule C sets forth each location at which (A) inventory
and/or equipment is located or (B) such Grantor conducts business and, with
respect to each such location, whether such Grantor is duly qualified and in
good standing under the laws of such location; (ii) the chief executive office
of such Grantor, where such Grantor keeps its records concerning the Collateral
and the chattel paper evidencing the Collateral, is located at the address set
forth for such Grantor on Schedule D; (iii) all records concerning any Accounts
and all originals of all contracts and other writings which evidence any
Accounts are located at the addresses listed on Schedule D; (iv) such Grantor
has exclusive possession and control of the Equipment and the Inventory, except
as set forth on Schedule C; (v) such Grantor’s exact legal name, and the place
of formation of such Grantor, are as set forth in the preamble to this
Agreement; (vi) each trade name or other fictitious name under which such
Grantor conducts business, or has conducted business at any time during the five
years immediately preceding the Closing Date, is set forth on Schedule 3.6 to
the UB Credit Agreement; and (vii) such Grantor’s state organizational
identification number, if any, is set forth on Schedule F.
 
(b)           Each Grantor is the legal and beneficial owner of the Collateral
free and clear of all Liens except for Liens permitted by Section 6.3 of the UB
Credit Agreement and Liens created hereby.  Each Grantor has the power,
authority and legal right to grant the security interests in the Collateral
purported to be granted hereby, and to execute, deliver and perform
 
 
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this Agreement.  The pledge of the Collateral pursuant to this Agreement creates
a valid security interest in the Collateral.  Upon the filing of appropriate
financing statements in the filing offices set forth on Schedule F (and the
payment of the applicable filing fees), the recordation of appropriate
documentation with the United States Copyright Office and the United States
Patent and Trademark Office, as applicable, the execution of Control Agreements
with respect to the deposit accounts and the securities accounts of such
Grantor, the giving of a Limited Liability Company Notice to the Pledged
Entities and the delivery to the Lender of the Certificates, as the case may be,
the Lender will have a perfected security interest (except for Liens permitted
by Section 6.3 of the UB Credit Agreement) in the Collateral to the extent a
security interest in such Collateral can be perfected by such filings,
recordations, the giving of such notices and the delivery of such Certificates.
 
(c)           The Pledged Securities and the Pledged Limited Liability Company
Interests have been duly authorized and validly issued and are fully paid and
nonassessable.  All of the Pledged Securities and the Pledged Limited Liability
Company Interests are in certificated form and are securities (as contemplated
by Article 8 of the Uniform Commercial Code).
 
(d)           No consent of any Person, including, any partner in a partnership
with respect to which such Grantor has pledged its interest as a Pledged
Partnership Interest or any member in a Pledged Entity, is required for the
pledge by such Grantor of the Collateral.
 
(e)           Subject to Section 5(d), the Pledged Securities described on
Schedule A constitute (i) all of the shares of capital stock of any Person owned
by such Grantor and (ii) that percentage of the issued and outstanding shares of
the respective issuers thereof indicated on Schedule A, and there is no other
class of shares issued and outstanding of the respective issuers thereof except
as set forth on Schedule A.  Subject to Section 5(d), the Pledged Partnership
Interests described on Schedule A constitute (i) all of the partnerships or
joint ventures in which such Grantor has an interest and (ii) such Grantor’s
respective percentage interests in each such partnership or joint venture are as
set forth on such Schedule A, and there is no other class of interests therein
issued and outstanding except as set forth on Schedule A.  Subject to Section
5(d), the Pledged Limited Liability Company Interests described on Schedule A
constitute (i) all of the Limited Liability Company Interests of such Grantor
and (ii) such Grantor’s respective percentage interests in each such Pledged
Entity are as set forth on Schedule A, and there is no other class of interests
therein issued and outstanding except as set forth on Schedule A.
 
(f)           No authorization, approval or other action by, and no notice to or
filing with, any Governmental Authority (other than such authorizations,
approvals and other actions as have already been taken and are in full force and
effect) is required (A) for the pledge of the Collateral or the grant of the
security interest in the Collateral by such Grantor hereby or for the execution,
delivery or performance of this Agreement by such Grantor, or (B) for the
exercise by the Lender of the voting rights in the Pledged Securities, the
Pledged Partnership Interests and the Pledged Limited Liability Company
Interests or of any other rights or remedies in respect of the Collateral
hereunder except as may be required in connection with any disposition of
Collateral consisting of securities by laws affecting the offering and sale of
securities generally.
 
(g)           Such Grantor does not own, is not a licensee of, nor has such
Grantor applied for any Copyrights, Marks or Patents, other than those set forth
on Schedule B.  Except as set forth
 
 
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on Schedule B, none of such Copyrights, Marks or Patents has been registered
with any Governmental Authority, nor has an application for such registration
been made.
 
(h)           Subject to Section 5(d), Schedule E sets forth (i) all of such
Grantor’s deposit accounts, (ii) all of such Grantor’s securities accounts and
other investment property (other than that referred to on Schedule A) and (iii)
all letters of credit issued for the benefit of such Grantor.  Such Grantor has
no chattel paper or electronic chattel paper.
 
(i)            Such Grantor does not own or lease any vehicle having a value in
excess of $50,000.
 
12.      Grantor’s Covenants.  In addition to the other covenants and agreements
set forth herein and in the other Loan Documents, each Grantor covenants and
agrees as follows:
 
(a)           Such Grantor will take all reasonable steps to preserve and
protect the Collateral.
 
(b)           Such Grantor will promptly notify the Lender in writing in the
event of any material damage to the Collateral from any source whatsoever.
 
(c)           Such Grantor will (i) not establish any location of Inventory or
Equipment not listed on Schedule C, (ii) not move its principal place of
business, chief executive office or any other office listed on Schedule D,
(iii) not adopt, use or conduct business under any trade name or other corporate
or fictitious name not disclosed on Schedule 3.6 to the UB Credit Agreement,
(iv) not acquire or open, as applicable, any deposit account or securities
account, or acquire any letter of credit issued for the benefit of such Grantor,
(v) not create any chattel paper without placing a legend on the chattel paper
acceptable to the Lender indicating the Lender’s security interest therein, (vi)
not change its legal name, its place of incorporation, formation or organization
(as applicable) or its state organizational identification number, from those
specified in the preamble to this Agreement and Schedule F; (vii) not permit any
issuer of Pledged Securities to issue any securities in uncertificated form or
seek to convert all or any part of any Pledged Securities into uncertificated
form (as contemplated by Article 8 of the Uniform Commercial Code), (viii) not
permit any issuer of Pledged Limited Liability Company Interests to issue any
Limited Liability Company Interests in uncertificated form, seek to convert all
or any part of any Limited Liability Company Interests into uncertificated form
or render any Limited Liability Company Interests to no longer be a security (as
contemplated by Article 8 of the Uniform Commercial Code) or (ix) not permit any
issuer of Pledged Securities or any Pledged Entity to issue any additional
Capital Stock or membership interests or any other rights or options with
respect thereto, as applicable, other than to such Grantor, except, in each case
set forth in clause (i) – (ix) above, upon not less than 30 days’ prior written
notice to the Lender and such Grantor’s prior compliance with all applicable
requirements of Section 5 hereof necessary to perfect the Lender’s security
interests hereunder, and in each case subject to the terms of the Loan
Agreement.
 
(d)           Such Grantor shall not permit any Equipment or Inventory to be in
the possession of a third party unless written notice of the Lender’s security
interest therein has been given to such third party, and such third party has
acknowledged in writing that it is holding such Collateral for the benefit of
the Lender, such notice and acknowledgement to be in form
 
 
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acceptable to the Lender; provided, however, that no such notice and
acknowledgment shall be required to the extent that the aggregate fair market
value of the Equipment and Inventory that the Grantors have permitted to be in
possession of any and all third parties does not exceed $100,000.
 
(e)           Such Grantor shall not withdraw as a member of any Pledged Entity
or a partner in any partnership with respect to which such Grantor has pledged
any interest, or file or pursue or take any action which may, directly or
indirectly, cause a dissolution or liquidation of or with respect to any Pledged
Entity or any such partnership or seek a partition of any property of any
Pledged Entity or any such partnership.
 
(f)           Such Grantor shall promptly notify the Lender in writing in the
event that such Grantor becomes a licensee of any Copyright, Mark or Patent,
other than those set forth on Schedule B, that is necessary for its business and
shall execute any and all documents, instruments or agreements and perform any
and all actions reasonably requested by the Lender to give an assignment thereof
including procuring the consent of the licensor thereto.
 
13.  Lender’s Rights Regarding Collateral.  At any time and from time to time,
the Lender may, to the extent necessary or desirable to protect the security
hereunder, but the Lender shall not be obligated to:  (a) upon reasonable notice
and at such reasonable times during usual business hours (whether or not a
Default has occurred), itself or through its representatives, visit and inspect
each Grantor’s properties and examine and make abstracts from any of its books
and records at any reasonable time and as often as may reasonably be desired and
discuss the business, operations, properties and financial and other condition
of such Grantor with, and be advised as to the same by, officers of such Grantor
or (b) if an Event of Default has occurred and is continuing, at the expense of
the Grantors, subject to the Subordination Agreement, perform any obligation of
any Grantor under this Agreement.  At any time and from time to time after an
Event of Default has occurred and is continuing, at the expense of the Grantors,
the Lender may, to the extent necessary or desirable to protect the security
hereunder, but the Lender shall not be obligated to:  (i) notify obligors on the
Collateral that the Collateral has been assigned as security to the Lender;
(ii) at any time and from time to time request from obligors on the Collateral,
in the name of any Grantor or in the name of the Lender, information concerning
the Collateral and the amounts owing thereon; and (iii) direct obligors under
the contracts included in the Collateral to which any Grantor is a party to
direct their performance to the Lender.  Each Grantor shall keep proper books
and records and accounts in which full, true and correct entries in conformity
with GAAP and all applicable laws shall be made of all material dealings and
transactions pertaining to the Collateral.  The Lender shall at all reasonable
times have full access to any and all of the Grantors’ books and records
pertaining to the Collateral.  The Lender shall not be under any duty or
obligation whatsoever to take any action to preserve any rights of or against
any prior or other parties in connection with the Collateral, to exercise any
voting rights or managerial rights with respect to any Collateral or to make or
give any presentments for payment, demands for performance, notices of
non-performance, protests, notices of protest, notices of dishonor or notices of
any other nature whatsoever in connection with the Collateral or the
Obligations.  The Lender shall not be under any duty or obligation whatsoever to
take any action to protect or preserve the Collateral or any rights of any
Grantor therein, or to make collections or enforce payment thereon, or to
participate in any foreclosure or other proceeding in connection
therewith.  Nothing contained herein shall constitute an assumption by the
Lender
 
 
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of any obligations of any Grantor under any contracts assigned hereunder unless
the Lender shall have given written notice to the counterparty to such assigned
contract of the Lender’s intention to assume such contract.  Each Grantor shall
continue to be liable for performance of its obligations under such contracts.
 
Nothing contained herein shall be construed to make the Lender liable as a
stockholder of any corporation, member of any Pledged Entity or partner in any
partnership with respect to which any Grantor has pledged its interests in
Pledged Securities, Pledged Limited Liability Company Interests or Pledged
Partnership Interests, and the Lender by virtue of this Agreement or otherwise
(except as referred to in the following sentence) shall not have any of the
duties, obligations or liabilities of a stockholder of any such corporation,
member of any such Pledged Entity or partner in such partnership.  The parties
hereto expressly agree that, unless the Lender shall become the absolute owner
of any Pledged Securities or Pledged Limited Liability Company Interests or
Pledged Partnership Interests pursuant hereto, this Agreement shall not be
construed as creating a partnership or joint venture among the Lender, any such
corporation, any such Pledged Entity or any such partnership and/or any
Grantor.  Except as provided in the immediately preceding sentence, the Lender,
by accepting this Agreement, does not intend to become a stockholder of any
corporation, member of any Pledged Entity or partner in any partnership with
respect to which any Grantor has pledged its interests in any Pledged
Securities, Pledged Limited Liability Company Interests or Pledged Partnership
Interests, or otherwise be deemed to be a co-venturer with respect to any
Grantor or any such corporation, Pledged Entity or partnership, either before or
after an Event of Default shall have occurred.
 
14.      Collections on the Collateral.  Except as provided to the contrary in
the Loan Agreement, each Grantor shall have the right to use and to continue to
make collections on and receive dividends and other proceeds of all of the
Collateral in the ordinary course of business so long as no Event of Default
shall have occurred and be continuing.  Upon the occurrence and during the
continuance of an Event of Default, at the option of the Lender, each Grantor’s
right to make collections on and receive dividends and other proceeds of the
Collateral and to use or dispose of such collections and proceeds shall
terminate, and any and all dividends, proceeds and collections, including all
partial or total prepayments, then held or thereafter received on or on account
of the Collateral will be held or received by such Grantor in trust for the
Lender and immediately delivered in kind to the Lender (duly endorsed to the
Lender, if required), to be applied to the Obligations or held as Collateral, as
the Lender shall elect.  Upon the occurrence and during the continuance of an
Event of Default, the Lender shall have the right at all times to receive,
receipt for, endorse, assign, deposit and deliver, in the name of the Lender or
in the name of any Grantor, any and all checks, notes, drafts and other
instruments for the payment of money constituting proceeds of or otherwise
relating to the Collateral; and each Grantor hereby authorizes the Lender to
affix, by facsimile signature or otherwise, the general or special endorsement
of such Grantor, in such manner as the Lender shall deem advisable, to any such
instrument in the event the same has been delivered to or obtained by the Lender
without appropriate endorsement, and the Lender and any collecting bank are
hereby authorized to consider such endorsement to be a sufficient, valid and
effective endorsement by such Grantor, to the same extent as though it were
manually executed by the duly authorized representatives of such Grantor,
regardless of by whom or under what circumstances or by what authority such
endorsement actually is affixed, without duty of inquiry or responsibility as to
such matters, and
 
 
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each Grantor hereby expressly waives demand, presentment, protest and notice of
protest or dishonor and all other notices of every kind and nature with respect
to any such instrument.
 
15.  Possession of Collateral by Lender.  All the Collateral now, heretofore or
hereafter delivered to the Lender shall be held by the Lender in its possession,
custody and control.  Any or all of the Collateral delivered to the Lender
constituting cash or cash equivalents shall, except as otherwise set forth in
any Loan Document or unless an Event of Default has occurred and is continuing,
upon written request of any Grantor, be held in an interest-bearing account with
the Lender, and shall be invested in investments permitted by the Loan
Agreement.  Nothing herein shall obligate the Lender to obtain any particular
return thereon.  Upon the occurrence and during the continuance of an Event of
Default, whenever any of the Collateral is in the Lender’s possession, custody
or control, the Lender may use, operate and consume the Collateral, whether for
the purpose of preserving and/or protecting the Collateral, or for the purpose
of performing any Grantor’s obligations with respect thereto, or otherwise, and,
subject to the terms of Section 13.1 of the Loan Agreement, any or all of the
Collateral delivered to the Lender constituting cash or cash equivalents shall
be applied by the Lender to payment of the Obligations or held as Collateral, as
the Lender shall elect.  The Lender may at any time deliver or redeliver the
Collateral or any part thereof to any Grantor, and the receipt of any of the
same by such Grantor shall be complete and full acquittance for the Collateral
so delivered, and the Lender thereafter shall be discharged from any liability
or responsibility arising after such delivery to any Grantor.  So long as the
Lender exercises reasonable care with respect to any Collateral in its
possession, custody or control, the Lender shall not have any liability for any
loss of or damage to any Collateral, and in no event shall the Lender have
liability for any diminution in value of the Collateral occasioned by economic
or market conditions or events.  The Lender shall be deemed to have exercised
reasonable care within the meaning of the preceding sentence if the Collateral
in the possession, custody or control of the Lender is accorded treatment
substantially equal to that which the Lender accords similar property for its
own account, it being understood that neither the Lender nor the Lenders shall
have any responsibility for (i) ascertaining or taking action with respect to
calls, conversions, exchanges, maturities, tenders or other matters relating to
any Collateral, whether or not the Lender or any Lender has or is deemed to have
knowledge of such matters, or (ii) taking any necessary steps to preserve rights
against any Person with respect to any Collateral.
 
16.  Remedies.
 
(a)           Rights Upon Event of Default.  Subject to the terms of the
Subordination Agreement and upon the occurrence and during the continuance of an
Event of Default, the Grantors shall be in default hereunder and the Lender
shall have, in any jurisdiction where enforcement is sought, in addition to all
other rights and remedies that the Lender may have under this Agreement and
under and to the maximum extent permitted by applicable laws or in equity, all
rights and remedies of a secured party under the Uniform Commercial Code as
enacted in any such jurisdiction in effect at that time, and in addition the
following rights and remedies, all of which may be exercised with or without
notice to any Grantor except such notice as may be specifically required by
applicable law and to the maximum extent permitted by applicable law:  (i) to
foreclose the Liens created hereunder or under any other Loan Document by any
available judicial procedure or without judicial process; (ii) to enter any
premises where any Collateral may be located for the purpose of securing,
protecting, inventorying, appraising,
 
 
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inspecting, repairing, preserving, storing, preparing, processing, taking
possession of or removing the same; (iii) to sell, assign, lease or otherwise
dispose of any Collateral or any part thereof, either at public or private sale
or at any broker’s board, in lot or in bulk, for cash, on credit or otherwise,
with or without representations or warranties and upon such terms as shall be
commercially reasonable; (iv) to notify obligors on the Collateral that the
Collateral has been assigned to the Lender and that all payments thereon, or
performance with respect thereto, are to be made directly and exclusively to the
Lender; (v) to collect by legal proceedings or otherwise all dividends,
distributions, interest, principal or other sums now or hereafter payable upon
or on account of the Collateral; (vi) to enter into any extension,
reorganization, disposition, merger or consolidation agreement, or any other
agreement relating to or affecting the Collateral, and in connection therewith
the Lender may deposit or surrender control of the Collateral and/or accept
other property in exchange for the Collateral as the Lender deems appropriate;
(vii) to settle, compromise or release, on terms acceptable to the Lender, in
whole or in part, any amounts owing on the Collateral and/or any disputes with
respect thereto; (viii) to extend the time of payment, make allowances and
adjustments and issue credits in connection with the Collateral in the name of
the Lender or in the name of any Grantor; (ix) to enforce payment and prosecute
any action or proceeding with respect to any or all of the Collateral and take
or bring, in the name of the Lender or in the name of any Grantor, any and all
steps, actions, suits or proceedings deemed necessary or desirable by the Lender
to effect collection of or to realize upon the Collateral, including, any
judicial or nonjudicial foreclosure thereof or thereon, and each Grantor
specifically consents to any nonjudicial foreclosure of any or all of the
Collateral or any other action taken by the Lender which may release any obligor
from personal liability on any of the Collateral, and any money or other
property received by the Lender in exchange for or on account of the Collateral,
whether representing collections or proceeds of Collateral, and whether
resulting from voluntary payments or foreclosure proceedings or other legal
action taken by Lender or the Grantor may be applied by the Lender, without
notice to such Grantor, to the Obligations in such order and manner as the
Lender in its sole discretion shall determine; (x) to insure, protect and
preserve the Collateral; (xi) to exercise all rights, remedies, powers or
privileges provided under any of the other Loan Documents; and (xii) to remove,
from any premises where the same may be located, the Collateral and any and all
documents, instruments, files and records, and any receptacles and cabinets
containing the same, relating to the Collateral, and the Lender may, at the cost
and expense of each Grantor, use such of its supplies, equipment, facilities and
space at its places of business as may be necessary or appropriate to properly
administer, process, store, control, prepare for sale or disposition and/or sell
or dispose of the Collateral or to properly administer and control the handling
of collections and realizations thereon, and the Lender shall be deemed to have
a rent-free tenancy of any premises of such Grantor for such purposes and for
such periods of time as reasonably required by the Lender.  Each Grantor will,
at the Lender’s request, assemble the Collateral and make it available to the
Lender at places which the Lender may designate, whether at the premises of such
Grantor or elsewhere, and will make available to the Lender, free of cost, all
premises, equipment and facilities of such Grantor for the purpose of the
Lender’s taking possession of the Collateral or storing the same or removing or
putting the Collateral in salable form or selling or disposing of the same.  The
Lender has no obligation to clean-up or otherwise prepare the Collateral for
sale.
 
(b)           Possession by Lender.  Subject to the terms of the Subordination
Agreement and upon the occurrence and during the continuance of an Event of
Default, the Lender also shall have the right, without notice or demand, either
in person, by agent or by a receiver to be
 
 
- 19 -

--------------------------------------------------------------------------------

 

appointed by a court in accordance with the provisions of applicable law (and
each Grantor hereby expressly consents, to the fullest extent permitted by
applicable law, upon the occurrence and during the continuance of an Event of
Default to the appointment of such a receiver), and, to the extent permitted by
applicable law, without regard to the adequacy of any security for the
Obligations, to operate the business of any Grantor, by, inter alia, taking
possession of the Collateral or any part thereof and to collect and receive the
rents, issues, profits, income and proceeds thereof, pending the exercise of any
and all other rights and remedies available to the Lender under this Agreement
and/or at law or in equity.  The operation of any Grantor’s business and the
taking possession of the Collateral by the Lender shall not cure or waive any
Event of Default or notice thereof or invalidate any act done pursuant to such
notice.  The rights, remedies and powers of any receiver appointed by a court
shall be as ordered by said court.
 
(c)           Sale of Collateral.  Any public or private sale or other
disposition of the Collateral may be held at any office of Lender, or at any
Grantor’s place of business, or at any other place permitted by applicable law,
and without the necessity of the Collateral’s being within the view of
prospective purchasers.  The Lender may direct the order and manner of sale of
the Collateral, or portions thereof, as it in its sole and absolute discretion
may determine provided such sale is commercially reasonable, and each Grantor
expressly waives, to the extent permitted by applicable law, any right to direct
the order and manner of sale of any Collateral.  The Lender or any Person acting
on the Lender’s behalf may bid and purchase at any such sale or other
disposition.  In addition to the other rights of the Lender hereunder, subject
to the Subordination Agreement, each Grantor hereby grants to the Lender a
license or other right to use, without charge, but only after the occurrence and
during the continuance of an Event of Default, such Grantor’s labels,
copyrights, patents, rights of use of any name, trade names, trademarks and
advertising matter, or any property of a similar nature, including, the
Copyrights, the Patents and the Marks, in advertising for sale and selling any
Collateral.  The Lender may comply with any applicable state or federal law
requirements in connection with a disposition of the Collateral and compliance
will not be considered adversely to affect the commercial reasonableness of any
sale of the Collateral.
 
(d)           Notice of Sale.  Unless the Collateral is perishable or threatens
to decline speedily in value or is of a type customarily sold on a recognized
market, the Lender will give each Grantor reasonable notice of the time and
place of any public sale thereof or of the time on or after which any private
sale thereof is to be made.  The requirement of reasonable notice conclusively
shall be met if such notice is mailed, certified mail, postage prepaid, to such
Grantor at its address set forth in the Loan Agreement, or delivered or
otherwise sent to such Grantor, at least ten days before the date of the
sale.  Each Grantor expressly waives, to the fullest extent permitted by
applicable law, any right to receive notice of any public or private sale of any
Collateral or other security for the Obligations except as expressly provided
for in this paragraph.  The Lender shall not be obligated to make any sale of
the Collateral if it shall determine not to do so regardless of the fact that
notice of sale of the Collateral may have been given.  The Lender may, without
notice or publication, except as required by applicable law, adjourn the sale
from time to time by announcement at the time and place fixed for sale, and such
sale may, without further notice (except as required by applicable law), be made
at the time and place to which the same was so adjourned.
 
 
- 20 -

--------------------------------------------------------------------------------

 
 
(e)           Private Sales.  With respect to any Collateral consisting of
securities, partnership interests, membership interests, joint venture interests
or the like, and whether or not any of such Collateral has been effectively
registered under the Securities Act of 1933, as amended, or other applicable
laws, subject to the Subordination Agreement, the Lender may, in its sole and
absolute discretion, sell all or any part of such Collateral at private sale in
such manner and under such circumstances as the Lender may deem necessary or
advisable in order that the sale may be lawfully conducted in a commercially
reasonable manner.  Without limiting the foregoing, the Lender may (i) approach
and negotiate with a limited number of potential purchasers, and (ii) restrict
the prospective bidders or purchasers to persons who will represent and agree
that they are purchasing such Collateral for their own account for investment
and not with a view to the distribution or resale thereof.  In the event that
any such Collateral is sold at private sale, each Grantor agrees to the extent
permitted by applicable law that if such Collateral is sold for a price which is
commercially reasonable, then (A) such Grantor shall not be entitled to a credit
against the Obligations in an amount in excess of the purchase price, and
(B) neither the Lender nor the Lenders shall incur any liability or
responsibility to such Grantor in connection therewith, notwithstanding the
possibility that a substantially higher price might have been realized at a
public sale.  Each Grantor recognizes that a ready market may not exist for such
Collateral if it is not regularly traded on a recognized securities exchange,
and that a sale by the Lender of any such Collateral for an amount less than a
pro rata share of the fair market value of the issuer’s assets minus liabilities
may be commercially reasonable in view of the difficulties that may be
encountered in attempting to sell a large amount of such Collateral or
Collateral that is privately traded.
 
(f)           Title of Purchasers.  Upon consummation of any sale of Collateral
hereunder, the Lender shall have the right to assign, transfer and deliver to
the purchaser or purchasers thereof the Collateral so sold.  Each such purchaser
at any such sale shall hold the Collateral so sold absolutely free from any
claim or right upon the part of any Grantor or any other Person claiming through
any Grantor, and each Grantor hereby waives (to the extent permitted by
applicable law) all rights of redemption, stay and appraisal which it now has or
may at any time in the future have under any rule of law or statute now existing
or hereafter enacted.  If the sale of all or any part of the Collateral is made
on credit or for future delivery, the Lender shall not be required to apply any
portion of the sale price to the Obligations until such amount actually is
received by the Lender, and any Collateral so sold may be retained by the Lender
until the sale price is paid in full by the purchaser or purchasers
thereof.  The Lender shall not incur any liability in case any such purchaser or
purchasers shall fail to pay for the Collateral so sold, and, in case of any
such failure, the Collateral may be sold again.
 
(g)           Disposition of Proceeds of Sale.  The proceeds resulting from the
collection, liquidation, sale or other disposition of the Collateral shall be
applied in accordance with Section 11 of the Loan Agreement, subject to the
Subordination Agreement.
 
(h)           Certain Waivers.  To the extent permitted by applicable law, the
Grantor waives all claims, damages and demands against the Lender and the
Lenders arising out of the repossession, retention or sale of the Collateral, or
any part or parts thereof, except to the extent any such claims, damages and
awards arise out of the gross negligence or willful misconduct of the Lender or
the Lenders or their agents or attorneys-in-fact.
 
 
- 21 -

--------------------------------------------------------------------------------

 
 
(i)             Remedies Cumulative.  The rights and remedies provided under
this Agreement are cumulative and may be exercised singly or concurrently, and
are not exclusive of any other rights and remedies provided by law or equity.
 
(j)             Deficiency.  If the proceeds of sale, collection or other
realization of or upon the Collateral pursuant to this Section 16 are
insufficient to cover the costs and expenses of such realization and the payment
in full of the Obligations, each Grantor shall remain liable for any deficiency.
 
17.   Lender Appointed Attorney-in-Fact.  Each Grantor hereby irrevocably
appoints the Lender as such Grantor’s attorney-in-fact, effective upon the
occurrence and during continuance of an Event of Default, with full authority in
the place and stead of such Grantor, and in the name of such Grantor, or
otherwise, from time to time, in the Lender’s sole and absolute discretion to do
any of the following acts or things:  (a) to do all acts and things and to
execute all documents necessary or advisable to perfect and continue perfected
the security interests created by this Agreement and to preserve, maintain and
protect the Collateral; (b) to do any and every act which such Grantor is
obligated to do under this Agreement; (c) to prepare, sign, file and record, in
such Grantor’s name, any financing statement covering the Collateral; (d) to
endorse and transfer the Collateral upon foreclosure by the Lender; (e) to grant
or issue an exclusive or nonexclusive license under the Copyrights, the Patents
or the Marks to anyone upon foreclosure by the Lender; (f) to assign, pledge,
convey or otherwise transfer title in or dispose of the Copyrights, the Patents
or the Marks to anyone upon foreclosure by the Lender; and (g) to file any
claims or take any action or institute any proceedings which the Lender may
reasonably deem necessary or desirable for the protection or enforcement of any
of the rights of the Lender with respect to any of the Copyrights, the Patents
and the Marks; provided, however, that the Lender shall be under no obligation
whatsoever to take any of the foregoing actions, and neither the Lender nor the
Lenders shall have any liability or responsibility for any act or omission
(other than the Lender’s, the Lenders’ or their agents’ or attorneys-in-fact’s
own gross negligence or willful misconduct) taken with respect thereto.
 
18.    Costs and Expenses.  Each Grantor agrees to pay to the Lender all
reasonable costs and out-of-pocket expenses (including, reasonable attorneys’
fees and disbursements) incurred by the Lender in the enforcement or attempted
enforcement of this Agreement, and in connection with any waiver or amendment of
any term or provision hereof.  All reasonable costs and expenses, including,
reasonable attorneys’ fees and disbursements, incurred or paid by the Lender in
exercising any right, privilege, power or remedy conferred by this Agreement
(including, the right to perform any obligation of any Grantor), or in the
enforcement or attempted enforcement thereof, shall be secured hereby and shall
become a part of the Obligations and shall be due and payable to the Lender by
each Grantor on demand therefor.
 
19.    Transfers and Other Liens.  Each Grantor agrees that, except as
specifically permitted under the Loan Agreement and under Section 9 and Section
10 hereof, it will not (i) sell, assign, exchange, lease, license, transfer or
otherwise dispose of, or contract to sell, assign, exchange, transfer or
otherwise dispose of, or grant any option with respect to, any of the
Collateral, or (ii) create or permit to exist any Lien upon or with respect to
any of the Collateral, and each Grantor acknowledges that the Lender does not
authorize any of the foregoing.  To the extent any Collateral permitted to be
sold or otherwise disposed of is sold or disposed of, such sale or disposition
shall be for fair market value.
 

 
- 22 -

--------------------------------------------------------------------------------

 
 
20.   Future Grantors.  The Borrower is required to cause each of its Domestic
Subsidiaries formed or acquired after the Closing Date to execute and deliver to
the Lender, concurrently with the formation or acquisition thereof, a joinder to
this Agreement and the Subsidiary Guarantee substantially in the form of Exhibit
A attached to the Subsidiary Guarantee.
 
21.   Understandings With Respect to Waivers and Consents.  Each Grantor
represents, warrants and agrees that each of the waivers and consents set forth
herein are made with full knowledge of their significance and consequences, with
the understanding that events giving rise to any defense or right waived may
diminish, destroy or otherwise adversely affect rights which such Grantor
otherwise may have against the Lender or others, or against any Collateral.  If
any of the waivers or consents herein are determined to be unenforceable under
applicable law, such waivers and consents shall be effective to the maximum
extent permitted by law.
 
22.   Indemnity.  Each Grantor hereby indemnifies the Lender and the Lenders
from and against any and all claims, losses and liabilities growing out of or
resulting from this Agreement (including, enforcement of this Agreement), except
to the extent such claims, losses or liabilities result from the Lender’s, or
their agents’ or attorneys-in-fact’s gross negligence or willful misconduct.
 
23.    Amendments, Etc.  No amendment or waiver of any provision of this
Agreement nor consent to any departure by any Grantor herefrom (other than
supplements to the Schedules hereto in accordance with the terms of this
Agreement) shall in any event be effective unless the same shall be in writing
and made in accordance with Section 13.12 of the Loan Agreement, and then such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given.
 
24.   Notices.  All notices and other communications provided for hereunder
shall be given in the manner, and to the respective addresses, set forth in
Section 13.6 of the Loan Agreement.
 
25.    Continuing Security Interest; Successors and Assigns.  This Agreement
shall create a continuing security interest in the Collateral and shall
(i) remain in full force and effect until payment in full in cash of the
Obligations (other than contingent obligations) and the termination or
expiration of the Term Loan Commitment, (ii) be binding upon each Grantor, its
successors and assigns and (iii) inure, together with the rights and remedies of
the Lender hereunder, to the benefit of the Lender, and any successor Lender
subject to the terms of the Loan Agreement.  Subject to the terms of the Loan
Agreement, any Lender may assign or otherwise transfer any Loans, or the Term
Loan Commitment or participations therein, or any rights in Collateral held by
it to any other Person, and such other Person shall thereupon become vested with
all the benefits in respect thereof granted to such Lender or Lender herein or
otherwise.  Nothing set forth herein or in any other Loan Document is intended
or shall be construed to give to any other party any right, remedy or claim
under, to or in respect of this Agreement or any other Loan Document or any
Collateral.  Each Grantor’s successors and assigns shall include, without
limitation, a receiver, trustee or debtor-in-possession thereof or therefor,
provided that, none of the rights or obligations of such Grantor hereunder may
be assigned or otherwise transferred.
 

 
- 23 -

--------------------------------------------------------------------------------

 
 
26.    Release of Grantor.
 
(a)           This Agreement and all obligations of each Grantor hereunder and
all security interests granted hereby shall be released and terminated when all
Obligations (other than contingent obligations) have been paid in full in cash
and when all Commitments and all Letters of Credit have expired.  Upon such
release and termination, all rights in and to the Collateral shall automatically
revert to the Grantors, and the Lender and the Lenders shall promptly return any
Pledged Collateral in their possession to the Grantors, or to the Person or
Persons legally entitled thereto, and shall endorse, execute, deliver, record
and file all instruments and documents, and do all other acts and things,
reasonably required for the return of the Collateral to the Grantors, or to the
Person or Persons legally entitled thereto, and to evidence or document the
release of the interests of the Lender arising under this Agreement, all as
reasonably requested by, and at the sole expense of, the Grantors.
 
(b)           The Lender agrees that if an Asset Disposition permitted under the
UB Credit Agreement occurs with respect to any Collateral, the Lender shall
release such Collateral that is the subject of such Asset Disposition to the
applicable Grantor free and clear of the Lien under this Agreement.
 
27.   GOVERNING LAW.  THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK (WITHOUT REFERENCE TO ITS
CHOICE OF LAW RULES).
 
28.    Counterparts.  This Agreement may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which shall be deemed to be an original, but all of which taken together shall
constitute one and the same agreement.  Delivery of an executed counterpart of a
signature page to this Agreement by telecopier (or other electronic
transmission) shall be effective as delivery of a manually executed counterpart
of this Agreement.
 
 
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
 
 
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--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Grantor has executed this Agreement by its duly
authorized representative(s), solely in such capacity and not as an individual,
as of the date first written above.
 

 
GRANTORS
         
PHYSICIANS FORMULA, INC.
   
a New York corporation
                       
By:
/s/ Jeffrey Rogers
     
Name:
Jeffrey Rogers
     
Title:
President
                       
PHYSICIANS FORMULA COSMETICS, INC.,
   
a Delaware Corporation
                       
By:
/s/ Jeffrey Rogers
     
Name:
Jeffrey Rogers
     
Title:
President
                       
PHYSICIANS FORMULA DRTV, LLC,
   
a Delaware Limited Liability Company
                       
By:
/s/ Jeffrey Rogers
     
Name:
Jeffrey Rogers
     
Title:
President
 

 
S-1

--------------------------------------------------------------------------------

 
 
ACKNOWLEDGED AND AGREED, as of the date first written above.

 
MILL ROAD CAPITAL, L.P.
           
By:
/s/ Charles Goldman
 
Name:
Charles Goldman
 
Title:
Managing Director
 

 
S-2

--------------------------------------------------------------------------------

 
 
SCHEDULE A
 
PLEDGED COLLATERAL
 
 
1.
Pledged Shares

 
Issuer
Certificate No.
No of Shares
Percentage Interest in  Issuer
Other Classes of Shares
Physicians Formula Cosmetics, Inc.
2
1,000
100%
None

 
 
2.
Pledged Partnership Interests - None

 
 
3.
Pledged Limited Liability Company Interests -

 
Physicians Formula DRTV, LLC
C-1
1,000
100%
None

 
 

--------------------------------------------------------------------------------

 
 
SCHEDULE B
 
COPYRIGHTS, PATENTS AND MARKS
 
Physicians Formula, Inc. - Intellectual Property

COPYRIGHTS - None.

PATENTS

Owned US Patents
Patent No.
Carton with Extended Printable Surface
D567,077

 
Owned Foreign Patents
Country
Patent No.
Carton with Extended Printable Surface
Australia
317340
Loose Powder Jar
Australia
322510

 
MARKS

U.S. Trademarks Registered
Registration No.
Actiplump
3,496,856
Artist's Eraser
3,262,838
Baked Berries
3,169,240
Baked Berry
3,127,457
Baked Butter
3,189,776
Baked Cocoa
3,146,080
Baked Ginger
3,146,079
Baked Gingersnap
3,112,495
Baked Oatmeal
3,189,775
Baked Pyramid
3,382,889
Baked Sands
3,189,777
Baked Smokes
3,169,239
Baked Spices
3,189,774
Baked Sugar
3,197,148
Baked Sweets
3,107,413
Baked to Perfection
2,235,191
Blemish Rx
3,402,746

 
 
 

--------------------------------------------------------------------------------

 
 
Bronze Gems
3,332,539
Brow-Tweez
3,446,275
Circle RX & Design
3,419,413
Cliniclear Technology
3,586,902
Conceal RX & Mortar & Pestle Design
3,325,455
Cover 2 Go
3,235,257
Covertoxten50
3,277,212
Derm@Home
3,170,157
Durascreen
1,695,175
Eco-Olive
3,446,345
Ecoblend
3,423,809
Eurobuffer
3,295,301
Exerc’Eyes
3,064,200
Face Aid
3,202,539
FINELINE
2,277,124
F.L.A.T.
3,346,200
How Green is Your Makeup?
3,544,638
Illuminating Veil
3,402,750
Line Erase RX & Design
3,641,110
Magic Mosaic
3,098,670
Mineral Bronzebrightener
3,644,714
Mineral Wear
3,104,495
Mineral Wear
3,164,117
Mineral Wear
3,373,540
Mineral Wear
3,595,401
Mineral Wear
3,554,909
My Secret Formula
3,577,246
Organic Wear
3,454,574
Organisoy
3,423,808
Painter's Palette
3,331,759
Painter's Tube
3,320,750
PF
3,277,282
PF & Palette Design
3,294,477
Physicians Formula & Design (Line)
3,494,604
Plentiful Lip Palette
3,326,684
Plump Potion
3,341,830
Plump Potion
3,455,125
Pro-Cover
3,276,953
Revined
3,074,104
Silipcone
3,419,412
The Once-A-Day, All Day Sunscreen
2,021,117
Wanderful Brow Wand
3,407,243

 
California Trademarks Registered
Registration No.

 
 
 

--------------------------------------------------------------------------------

 
 
Physicians Formula
112615
Physicians Formula & Line Design
112616

 
 

--------------------------------------------------------------------------------

 

Trademarks Pending
Application No.
Bamboo Wear
77/677,128
Bambuki
77/773,439
Bronze Booster & Sun Design
77/569,242
Brow Designer
77/136,836
Brow Corrector
78/860,415
Mineral Cheekbrightener
77/677,070
Mineral Facebrightener
77/479,575
Correct & Cover
78/860,372
DHA+ Infusion
77/555,910
Eco-Aroma Therapy
77/617,381
Eye-Tech
77/639,786
Healthy Wear
77/691,778
How Green is Your Makeup Remover?
77/663,154
How Green is Your Skincare?
77/663,162
Line Erase Rx & Design
77/569,244
Organiblend
77/276,037
Mineral Cheekbrightener
77/677,070
Mineral Shimmer Gem
77/726,090
Organic Glow
77/087,977
Time Proof
77/136,799
Total Perfection
78/924,753
True Organic
77/087,988
Your Beauty. Our Passion. We promise.
77/594,530

Physicians Formula Cosmetics, Inc. - Intellectual Property
 
COPYRIGHTS - None.
 
PATENTS OWNED
 
Item
Patent Number
Jungle Fever – Leopard powder design
D466,249
Jungle Fever – Tiger powder design
D465,609
Jungle Fever – Tiger Bronzing Cream
D472,014
Jungle Fever – Leopard Bronzing Cream
D471,666
LB FancyPansy – Pansy Pan
D471,317
Camouflage – Sergeant Shadow
D470,973
Skinsitive
D470,974
Camouflage – Corporal Cream Bronzer
D478,686
LB SunnyBuddy – Sunflower Pan
D480,507
LB OopsiDaisy – Daisy Pan
D480,508
Virtual Face Powder – Pan
D495,446
Retro Glow – Round Compact
D482,496

 
 
 

--------------------------------------------------------------------------------

 
 
Retro Glow – Oval Compact
D482,495
Loose-to-Go Pan Design
D508,145
Solar Powder Triangular
D516,742
Sunny Bunch
D516,743
Magic Mosaic
D516,744
Revined
D516,745
Baked Blush
D517,728
Solar Powder 3-D
D518,230
Starlight
D519,241
Cream Blush
D519,240
Face Aid
D521,187
Solar Powder Variation
D522,174
Cosmetic Container
D532,558
Cosmetic Container
D549,393
Carton with Extendable Printable Surface
D567,077
Cosmetic Container
D582,099
Cosmetic Container
D582,100
Lip Butter Paper Compact (with recessed mirror)
D583,505
Paper Compact Container (with mirror)
D583,100
Cosmetic Block
D470,974
Carton with Extended Printable Surface
D567,077

 
TRADEMARKS REGISTERED
 
 
Trademarks
Registration No.
Aqua Cover
2,599,366
Aquacheeks
2,613,511
Baked Blush
3,263,481
Baked Bronzer
2,801,528
Baked Collection
2,953,835
Bare Radiance
2,230,760
Battle Bronzer
2,650,663
Beauty Spiral
2,352,779
Beauty Spiral
2,547,162
Berry-go-Round
2,580,400
Blush Palette
2,598,217
Bright Collection
2,841,745
Brow Collector
2,384,341
Char-Kohl
2,803,685
Cinnamon Roll
2,599,557
Clear Water
2,619,015
Concealer 101
2,852,080
Concealer Twins
2,398,555
Correct & Cover
2,384,357
Crème de Velours
2,356,270

 
 
 

--------------------------------------------------------------------------------

 
 
Crystal Ball
3,083,611
Drops of Bronze
2,413,065
Drops of Crystal
2,942,286
Dust of Bronze
2,422,061
Dust of Crystal
2,659,956
Dust of Gold
2,464,337
Eye-Tech
2,735,561
Eyebrightener
2,288,310
Eyebrightener
2,441,239
Eyeliner Palette
2,670,728
Face Lace
2,852,079
Fineline
2,277,124
Gentle Cover
2,230,761
Geometric Colors
2,520,864
Globe-Trotter
2,596,066
Heart of Gold
2,649,396
Heart of Gold
2,586,654
Heartbreaker
2,670,304
Hide Out
3,115,027
Instant Makeover Tool
3,033,073
Jungle Fever
2,709,526
Lash-In-A-Tube
2,770,397
Le Velvet
1,949,213
LeVelvet Film
1,122,628
Lieutenant Lash
2,644,431
Lip Color Corrector
2,407,434
Lip Spectrum
2,356,269
Loose-To-Go
2,818,418
Magic Cube
2,846,865
Mini Dose
2,459,896
Month 2 Month
2,408,984
Mood Swirls
2,602,854
Moonglow
2,633,330
Only from Physicians Formula!
2,691,072
P & Design 1 (Block)
2,874,954
P & Design 2 (Retro)
2,973,126
P Physicians Formula Intensive Therapy Moisture Cream & Design
1,735,589
P Physicians Formula Intensive Therapy Moisture Lotion & Design
1,759,042
Peach-To-Glow
2,228,941
Pearls of Perfection
2,460,119
Pearls of Perfection
2,650,551
Physicians Formula
1,187,307
Physicians Formula Cosmetics & Retro Design
3,204,345

 
 
 

--------------------------------------------------------------------------------

 
 
Planet Blush
2,596,062
Planet Eyes
2,489,120
Plentifull
2,003,717
Plump Palette
3,074,502
Powder Palette
2,400,377
Professional Formula
78/110,542
Retro Glow
2,664,520
Seducer
2,622,305
Self Defense
2,475,987
Sensitive Skin? Be Sensible!
2,583,857
Sergeant Shadow
2,644,432
Silver Moon
2,626,623
Skinsitive
2,673,075
Sport Team
2,288,234
Star Perfection
2,852,078
Summer Eclipse
2,721,774
Summer Shimmer
2,493,092
Sun Shield
1,257,282
Sun-In-A-Brush
2,650,683
To Any Lengths
2,070,859
Total Perfection
2,371,937
Virtual Eyes
2,526,119
Virtual Face Powder
2,805,872
Virtual Foundation
2,640,888
Virtual Glove
2,598,226
Virtual Lips
2,741,925
Vital Lash
2,719,467
Wanderful Wand
2,833,112
Winter Eclipse
2,550,786

 
PATENTS PENDING
 
Patents
Application No.
Mineral Wear Veil (Cosmetic Brush)
29/264,813

 
TRADEMARKS PENDING
 
Trademarks
Application No.
Blush Palette
77/413,657
Bronzing Bronzer
77/476,016
Eyeliner Palette
77/496,554
Mineral Bronzebrightener
77/479,558
Mineral Cheekbrightener
77/479,568
Mineral Facebrightener
77/479,575

 
 
 

--------------------------------------------------------------------------------

 
 
Skinsitive
77/465,982
Virtual Foundation
77/465,964

 
FOREIGN TRADEMARKS REGISTERED
 
Country
Trademark
Registration No.
Africa (African Intellectual Property Organization)
P PHYSICIANS FORMULA & Design 1
37907
Andorra
PHYSICIANS FORMULA
11299
Argentina
PHYSICIANS FORMULA
1771530
Australia
P PHYSICIANS FORMULA & Design 2
B461391
 
P PHYSICIANS FORMULA & Design 2
B500912
 
HOW GREEN IS YOUR MAKEUP?
1199306
 
MY SECRET FORMULA
1199305
 
P PHYSICIANS FORMULA & Design 2
B500912
Austria
P PHYSICIANS FORMULA & Design 1
116867
Benelux
P & Design 1 (Block)
428208
 
PHYSICIANS FORMULA
416285
Bophuthatswana
P PHYSICIANS FORMULA & Design 2
86/0646
Brazil
P & Design 1 (Block)
813179939
 
PHYSICIANS FORMULA
812952413
Cambodia
P PHYSICIANS FORMULA & Design 1
7594
Canada
P & Design 1 (Block)
385353
 
P PHYSICIANS FORMULA & Design 1
477948
 
PHYSICIANS FORMULA
442028
China
PHYSICIANS FORMULA (Chinese Characters)
876087
Denmark
P & Design 1 (Block)
198907206
 
PHYSICIANS FORMULA
470/1988
Egypt
P & Design 1 (Block)
68514
 
PHYSICIANS FORMULA
67193
 
PHYSICIANS FORMULA
73879
European Community
MINERAL WEAR
006415541
 
ORGANIC WEAR
006415582
Finland
P PHYSICIANS FORMULA & Design 2
118585
France
P & Design 1 (Block)
1396090
 
PHYSICIANS FORMULA
1427439
Germany
P PHYSICIANS FORMULA & Design 1
2908932
Greece
P PHYSICIANS FORMULA & Design 1
86096
Hong Kong
P PHYSICIANS FORMULA & Design 1
B11441
 
PHYSICIANS FORMULA (Chinese Characters)
741/96
India
P & Design 1 (Block)
469868B
 
P PHYSICIANS FORMULA & Design 2
469867B

 
 
 

--------------------------------------------------------------------------------

 
 
Indonesia
P PHYSICIANS FORMULA & Design 1
329032
Ireland, Republic of
P PHYSICIANS FORMULA & Design 2
B125079
 
P PHYSICIANS FORMULA & Design 2
B125080
 
PHYSICIANS FORMULA
238829
Israel
P & Design 1 (Block)
65538
 
PHYSICIANS FORMULA
63739
Italy
P & Design 1 (Block)
486269
 
PHYSICIANS FORMULA
TO96000025
 
PHYSICIANS FORMULA
482291
Japan
P & Design 1 (Block)
2146936
 
PHYSICIANS FORMULA
2709460
Korea, South
P PHYSICIANS FORMULA & Design 1
422210
 
P PHYSICIANS FORMULA & Design 1
414698
Laos
P PHYSICIANS FORMULA & Design 1
5133
Malaysia
P PHYSICIANS FORMULA & Design 1
93009145
 
PHYSICIANS FORMULA (Chinese Characters)
94007530
Mexico
P & Design 1 (Block)
402173
 
PHYSICIANS FORMULA
402221
Morocco
P & Design 1 (Block)
38669
 
PHYSICIANS FORMULA
37615
Namibia
P PHYSICIANS FORMULA & Design 2
86/0668
New Zealand
P PHYSICIANS FORMULA & Design 1
B170325
 
P PHYSICIANS FORMULA & Design 1
B170326
Norway
P PHYSICIANS FORMULA & Design 2
148730
Philippines
PHYSICIANS FORMULA
4-1997-12636
Portugal
P PHYSICIANS FORMULA & Design 1
239846
 
P PHYSICIANS FORMULA & Design 1
239847
Puerto Rico
PHYSICIANS FORMULA
27785
Russian Federation
PHYSICIANS FORMULA
87586
Saudi Arabia
P & Design 1 (Block)
178/66
 
PHYSICIANS FORMULA
166/52
Singapore
P PHYSICIANS FORMULA & Design 1
B3648/93
 
PHYSICIANS FORMULA (Chinese Characters)
7209/94
South Africa
P PHYSICIANS FORMULA & Design 1
86/4294
 
P PHYSICIANS FORMULA & Design 1
88/2372
Spain
P & Design 1 (Block)
1175699
 
P & Design 1 (Block)
1175700
 
PHYSICIANS FORMULA
1155597
 
PHYSICIANS FORMULA
1175196BIS
Sweden
P PHYSICIANS FORMULA & Design 1
222774
Switzerland
P PHYSICIANS FORMULA & Design 1
357102
Taiwan
P PHYSICIANS FORMULA & Design
649964
Turkey
P PHYSICIANS FORMULA & Design 1
106028
United Kingdom
P PHYSICIANS FORMULA & Design 1
B1301801
 
P PHYSICIANS FORMULA & Design 1
B1301802

 
 
 

--------------------------------------------------------------------------------

 
 
Vietnam
P PHYSICIANS FORMULA & Design 1
16618

 
FOREIGN TRADEMARKS PENDING
 
Country
 
Trademark
Application No.

Australia
ORGANIC WEAR
1198137
Canada
HOW GREEN IS YOUR MAKEUP?
1363748
 
MY SECRET FORMULA
1362755
 
ORGANIC WEAR
1362685
Philippines
PHYSICIANS FORMULA
42008004618

 
FOREIGN PATENTS OWNED
 
Country
Patent
Patent No.
Australia
Cosmetic Block – Starlight
306669
 
Cosmetic Block – Cream Blush
306595
 
Cosmetic Block – Face Aid
306770
 
Cosmetic Container
318469
 
Cosmetic Container
311002
 
Cosmetic Block
304171
 
Flat Mascara Container
309292
 
Carton with Extended Printable Surface
317340
 
Loose Powder Jar
322510
 
Cosmetic Block - Magic Mosaic
AU3041715
Canada
Cosmetic Block
111406
 
Cosmetic Block
111407
 
Cosmetic Block
111408
 
Summer Eclipse Bronzing Powder
113194
 
Cosmetic Block
113196
 
Cosmetic Block
113209
 
Cosmetics Container
123138
 
Cosmetics Container
117137
 
Solar Powder SPF 20 Face Powder
111373
 
F.L.A.T. Mascara
116088
 
Cosmetic Block – Solar Powder
111372
 
Cosmetic Block – Baked Blush
111405
 
Cosmetic Block – Solar Powder Design with Triangular Rays
111374
 
Cosmetic Block – Solar Powder Design with Embossed SPF
111373

 
FOREIGN PATENTS PENDING
 
Country
Patent
Application No.

 
 
 

--------------------------------------------------------------------------------

 
 
Canada
Lip Butter Paper Compact
126670
 
Eye Shadow Paper Compact
126669
 
Loose Powder Jar
124009
 
Carton with Extendable Printable Surface
122305

 
Physicians Formula DRTV, LLC - Intellectual Property
 
COPYRIGHTS
 
None.
   
PATENTS
 
None.
   
MARKS
 
None.

 
 
 

--------------------------------------------------------------------------------

 

SCHEDULE C
 
LOCATIONS OF EQUIPMENT AND INVENTORY
 

Location
Name of Third Party/Bailee
Qualified to do business in such location
1055 W. 8th Street
Azusa, CA 91702
N/A
Yes
1425 Max Brose Drive #8
London, Ontario   N6N 0A2
Canada
Agility
N/A
435 Park Court
Lino Lakes, MN 55014
Distribution Alternatives, Inc. (d/b/a Scholls, Inc.)
No
230 South Ninth Avenue
City of Industry, CA 91746
N/A
Yes
250 South Ninth Avenue
City of Industry, CA 91746
N/A
Yes
753-755 Arrow Grand Circle Way
Covina, CA 91722
N/A
Yes
2169 Wright Ave.
La Verne, CA 91750
Jet
Yes

 
 

--------------------------------------------------------------------------------

 

SCHEDULE D
 
LOCATIONS OF BOOKS AND RECORDS
 
1.
Chief Executive Office

 
1055 W. 8th Street
Azusa, CA 91702
 
2.
Locations of Account Records and Chattel Paper

 
1055 W. 8th Street
Azusa, CA 91702
 
3.
Foreign Qualifications

 
Grantor
Location
Qualified to do business in such location?
Physicians Formula DRTV, LLC
California
Yes
Physicians Formula Cosmetics, Inc.
California
Yes
Physicians Formula, Inc.
California
Yes

 
 

--------------------------------------------------------------------------------

 

SCHEDULE E
 
DEPOSIT ACCOUNTS, CERTAIN INVESTMENT PROPERTY AND LETTERS OF CREDIT
 
1.
Deposit Accounts

 
Grantor
Bank
Type
Account No.
Physicians Formula, Inc.
Union Bank
General / Concentration
 
4960003069
Physicians Formula, Inc.
Union Bank
Disbursements
 
9080013377
Physicians Formula, Inc.
 
Union Bank
Payroll
 
4960003077
Physicians Formula, Inc.
Union Bank
Flex Account --
Employee Benefits deducted from Employee Paychecks
4960003085
Physicians Formula, Inc.
Union Bank
Canadian Time Deposit Account
300464-CAD
Physicians Formula, Inc.
Union Bank
Foreign Currency Direct Deposit Account
300451-CAD
Physicians Formula, Inc.
Royal Bank of Canada
Business Account
102-971-9
Physicians Formula, Inc.
Union Bank
Foreign Currency  Account
300650-CAD
Physicians Formula DRTV, LLC
Union Bank
General Concentration
4960003107
Physicians Formula DRTV, LLC
Union Bank
Disbursements
9080013466
Physicians Formula Holdings, Inc.
Union Bank
Custodian Account
4960003123

 
2.
Securities Accounts and Other Investment Property - None

 
3.
Letters of Credit Issued for the Benefit of the Grantor - None

 
 

--------------------------------------------------------------------------------

 
 
SCHEDULE F
 
UCC FILING OFFICES AND STATE ORGANIZATIONAL IDENTIFICATION NUMBER
 
 
Grantor
Filing Office(s)
State Organizational Identification Number
Physicians Formula, Inc.
New York Department of State
N/A
Physicians Formula Holdings, Inc.
Delaware Secretary of State
3718902
Physicians Formula Cosmetics, Inc.
Delaware Secretary of State
3019117
Physicians Formula DRTV, LLC
Delaware Secretary of State
4319769

 
 

--------------------------------------------------------------------------------

 
 
SCHEDULE G
 
FORM OF LIMITED LIABILITY COMPANY NOTICE

 
TO:           [Name of Pledged Entity]
 
Notice is hereby given that, pursuant to the Security Agreement dated as of
September 4, 2009 (said Agreement, as it may be amended, restated, supplemented
or otherwise modified from time to time, the “Security Agreement”), made by
Physicians Formula, Inc. (the “Grantor”), in favor of Mill Road Capital, L.P.,
as Lender (the “Lender”), the Grantor has pledged and assigned to the Lender,
and granted to the Lender a continuing security interest in, all right, title
and interest of the Grantor, whether now existing or hereafter arising or
acquired, as a member in [NAME OF PLEDGED ENTITY] (the “Limited Liability
Company”), and in, to and under the [TITLE OF APPLICABLE LIMITED LIABILITY
COMPANY AGREEMENT] (said Agreement, as it may be amended, restated, supplemented
or otherwise modified from time to time, the “Limited Liability Company
Agreement”), as such security interest is more particularly described in the
Security Agreement.
 
Pursuant to the Security Agreement, the Limited Liability Company is hereby
authorized and directed to register each Grantor’s pledge to the Lender of the
interest of such Grantor on the Limited Liability Company’s books.
 
Such Grantor hereby requests the Limited Liability Company to indicate the
Limited Liability Company’s acceptance of this Notice and consent to and
confirmation of its terms and provisions by signing a copy hereof where
indicated on the attached page and returning the same to the Lender.
 

 
PHYSICIANS FORMULA, INC.
             
By:
   
Name:
   
Title:
 

 
 

--------------------------------------------------------------------------------

 

FORM OF ACKNOWLEDGMENT
 
[NAME OF PLEDGED ENTITY] (the “Limited Liability Company”) hereby acknowledges
receipt of a copy of the assignment by Physicians Formula, Inc. (the “Grantor”)
of its interest under the [TITLE OF APPLICABLE LIMITED LIABILITY COMPANY
AGREEMENT] (as it may be amended, restated, supplemented or otherwise modified
from time to time) pursuant to the terms of the Security Agreement dated as of
September 4, 2009 (as it may be amended, restated, supplemented or otherwise
modified from time to time in accordance with the terms thereof, the “Security
Agreement”), made by the Grantor in favor of Mill Road Capital, L.P., as Lender
(the “Lender”).  The undersigned hereby further confirms the registration of the
Grantor’s pledge of its interest to the Lender on the Limited Liability
Company’s book.  The undersigned acknowledges the control by the Lender of the
Grantor’s interest in the Limited Liability Company and confirms that the
undersigned shall act upon the direction of the Lender alone with respect to
such interest.
 
Dated:  _____________________, ______
 

 
[NAME OF PLEDGED ENTITY]
             
By:
   
Name:
   
Title:
 

--------------------------------------------------------------------------------