exhibit10_16.htm


    
      

    

    Exhibit
10.16

    


    SECURITY
AGREEMENT

    


    THIS
SECURITY AGREEMENT (“Agreement”), dated as of November 6, 2009, is made by
and between PHYSICIANS FORMULA COSMETICS, INC., a Delaware corporation (the
“Debtor”), and WELLS FARGO BANK, NATIONAL ASSOCIATION (“Wells
Fargo”).

    


    Pursuant
to a Credit and Security Agreement as of even date herewith (as the same may be
amended, supplemented or restated from time to time, the “Credit Agreement”),
Wells Fargo may extend credit accommodations to PHYSICIANS FORMULA, INC., a New
York corporation (the “Company”).

    


    As a
condition to extending credit to the Company, Wells Fargo has required the
execution and delivery of the Debtor’s Continuing Guaranty dated as of even date
herewith, guaranteeing the payment and performance of all obligations of the
Company arising under or pursuant to the Credit Agreement (the
“Guaranty”).

    


    As a
further condition to extending credit to the Company under the Credit Agreement,
Wells Fargo has required the execution and delivery of this Agreement by the
Debtor.

    


    ACCORDINGLY,
in consideration of the mutual covenants contained in the Credit Agreement, the
Guaranty and herein, the parties hereby agree as follows:

    


    1.           
 Definitions.  All
terms defined in the recitals hereto and the Credit Agreement that are not
otherwise defined herein shall have the meanings given them in the recitals and
the Credit Agreement. All terms defined in the UCC and not otherwise defined
herein have the meanings assigned to them in the UCC.  In addition,
the following terms have the meanings set forth below or in the referenced
Section of this Agreement:

    


    “Accounts”
shall have the meaning given it under the UCC.

    


    “Collateral”
means, whether now owned or existing or hereafter acquired or arising or in
which the Debtor now has or hereafter acquires any rights, all of the Debtor’s
Accounts, chattel paper, deposit accounts, documents, Equipment, General
Intangibles, goods, instruments, Inventory, Investment Property,
letter-of-credit rights, letters of credit, all sums on deposit in any
Collection Account, and any items in any Lockbox; together with (i) all
substitutions and replacements for and products of any of the foregoing;
(ii) in the case of all goods, all accessions; (iii) all accessories,
attachments, parts, equipment and repairs now or hereafter attached or affixed
to or used in connection with any goods; (iv) all warehouse receipts, bills
of lading and other documents of title now or hereafter covering such goods;
(v) all collateral subject to the Lien of the Security Documents; (vi) any
money, or other assets of the Debtor that now or hereafter come into the
possession, custody, or control of Wells Fargo; and (vii) proceeds of any
and all of the foregoing.

    


    “Equipment”
shall have the meaning given it under the UCC.

    


    Security
Agreement for Physicians Formula Cosmetics, Inc.

    WFBC/Physicians
Formula


    
      
         


      

      
         


        
          

        

      

      
         


      

    


    “Event of
Default” has the meaning given it in Section 6.

    


    “Excluded
Property” means, collectively, (i) any permit, lease or license or any
contractual obligation entered into by Debtor (A) that prohibits or requires the
consent of any Person other than Debtor and its Subsidiaries which has not been
obtained as a condition to the creation by Debtor of a Lien on any right, title
or interest in such permit, lease, license or contractual obligation or any
Capital Stock or equivalent thereof related thereto or that contains terms
stating that the granting of a lien therein would otherwise result in a material
loss by Debtor of any material rights therein, (B) to the extent that any law
applicable thereto prohibits the creation of a Lien thereon or (C) to the
extent that a Lien thereon would give any other party a legally enforceable
right to terminate such permit, lease, license or any contractual obligation,
but only, with respect to the prohibition in (A), (B) and (C) to the extent, and
for as long as, such prohibition is not terminated or rendered unenforceable or
otherwise deemed ineffective by the UCC or any other applicable law, (ii)
property or assets owned by Debtor that is subject to a purchase money Lien or a
Capital Lease Obligation if the contractual obligation pursuant to which such
Lien is granted (or in the document providing for such Capital Lease Obligation)
prohibits or requires the consent of any Person other than Debtor and its
Subsidiaries which has not been obtained as a condition to the creation of any
other Lien on such property or such assets, (iii) any “intent to use” trademark
applications for which a statement of use has not been filed (but only until
such statement is filed with, and accepted by, the United States Patent and
Trademark Office) (each such trademark, an “Intent To Use
Trademark”) and (iv) shares of capital stock having voting power in
excess of 65% of the voting power of all classes of capital stock of a first
tier controlled foreign corporation (as that term is described in the IRC);
provided, however, “Excluded Property”
shall not include any proceeds, products, substitutions or replacements of
Excluded Property (unless such proceeds, products, substitutions or replacements
would otherwise constitute Excluded Property).

    


    “General
Intangibles” shall have the meaning given it under the UCC.

    


    “Indebtedness”
is used herein in its most comprehensive sense and means any and all advances,
debts, obligations and liabilities of the Debtor to Wells Fargo, heretofore, now
or hereafter made, incurred or created, whether voluntary or involuntary and
however arising, whether due or not due, absolute or contingent, liquidated or
unliquidated, determined or undetermined, including under any swap, derivative,
foreign exchange, hedge, deposit, treasury management or other similar
transaction or arrangement at any time entered into by the Debtor with Wells
Fargo, and whether the Debtor may be liable individually or jointly with others,
or whether recovery upon such Indebtedness may be or hereafter becomes
unenforceable.  Without limiting the generality of the foregoing,
“Indebtedness” shall include (without limitation) all now existing or hereafter
arising obligations of Debtor under the Guaranty.

    


    “Inventory”
shall have the meaning given it under the UCC.

    


    Security
Agreement for Physicians Formula Cosmetics, Inc.

    WFBC/Physicians
Formula


    
      
         


      

      
        2

        
          

        

      

      
         


      

    


    “Investment
Property” shall have the meaning given it under the UCC.

    


    “Permitted
Liens” means (i) the Security Interest, (ii) covenants, restrictions,
rights, easements and minor irregularities in title which do not materially
interfere with the Debtor’s business or operations as presently conducted,
(iii) licenses (ranged on a non-exclusive basis), sublicenses, leases or
subleases granted to third parties in the ordinary course of business and not
interfereing with the business of the Debtor, and (iv) Liens in existence on the
date hereof and described on Exhibit C
hereto.

    


    “Security
Interest” has the meaning given in Section 2.

    


    “UCC”
means the Uniform Commercial Code as in effect from time to time in the State of
California.

    


    2.         
   Security
Interest.  The Debtor hereby pledges, collaterally assigns and
grants to Wells Fargo a Lien and security interest (collectively referred to as
the “Security Interest”) in the Collateral as security for the payment and
performance of all Indebtedness; provided, however,
notwithstanding the foregoing, no Lien is hereby granted on any Excluded
Property, and such Excluded Property shall not be deemed to be “Collateral”;
provided further, that if and
when any property shall cease to be Excluded Property, a Lien on and security
interest in such property shall be deemed granted therein and such property
shall be deemed to be “Collateral.”

    


    3.      
      Representations, Warranties
and Agreements.  The Debtor hereby represents, warrants and
agrees as follows:

    


    (a)           Title.  The Debtor
(i) has good and marketable title to each item of Collateral in existence
on the date hereof, free and clear of all Liens except the Permitted Liens,
(ii) will have, at the time the Debtor acquires any rights in Collateral
hereafter arising, good and marketable title to each such item of Collateral
free and clear of all Liens except Permitted Liens, (iii) will keep all
Collateral free and clear of all Liens except Permitted Liens, and
(iv) will defend the Collateral against all claims or demands of all
Persons other than Wells Fargo and the holders of Permitted
Liens.  The Debtor will not sell or otherwise dispose of the
Collateral or any interest therein outside the ordinary course of business,
without the prior written consent of Wells Fargo, except for: (i) the use
of cash and Cash Equivalents in the ordinary course of business; (ii) the sale
of obsolete, surplus, uneconomical, or worn-out assets; (iii) leases or
subleases granted to third parties in the ordinary course of business in each
case not interfering with the business of Debtor; (iv) licenses of
Intellectual Property Rights granted to third parties in the ordinary course of
business in each case not interfering with the business of Debtor; and
(v)subject to Section 5.23 of the Credit Agreement, write-offs or grants of
discounts or forgiveness of Accounts, without recourse, which are at least 90
days past due in connection with the compromise or collection thereof in the
ordinary course of business which do not interfere in any material respect of
Debtor.

    


    (b)           Chief Executive Office;
Identification Number.  The Debtor’s chief executive office and
principal place of business is located at the address set forth under its
signature below.  The Debtor’s federal employer identification number
and organization identification number is correctly set forth under its
signature below.

    


    Security
Agreement for Physicians Formula Cosmetics, Inc.

    WFBC/Physicians
Formula


    
      
         


      

      
        3

        
          

        

      

      
         


      

    


    (c)           Location of
Collateral.  As of the date hereof, the tangible Collateral is
located at the locations identified on Exhibit A attached
hereto, other than tangible Collateral in transit between such locations in the
ordinary course of business.  The Debtor will not permit any tangible
Collateral to be located in any state (and, if a county filing is required, in
any county) in which a financing statement covering such Collateral is required
to be, but has not in fact been, filed in order to perfect the Security
Interest.

    


    (d)           Changes in Name, Constituent
Documents, Location.  The Debtor will not change its name,
Constituent Documents, or jurisdiction of organization, without the prior
written consent of Wells Fargo.  The Debtor will not change its
business address, without 30 days prior written notice to Wells
Fargo.

    


    (e)           Fixtures.  The
Debtor will not permit any tangible Collateral (other than in-store displays) to
become part of or to be affixed to any real property without first assuring to
the reasonable satisfaction of Wells Fargo that the Security Interest will be
prior and senior to any Lien then held or thereafter acquired by any mortgagee
of such real property or the owner or purchaser of any interest
therein.  If any part or all of the tangible Collateral (other than
in-store displays) is now or will become so related to particular real estate as
to be a fixture, the real estate concerned is accurately set forth in Exhibit B
hereto.

    


    (f)           Rights to
Payment.  Each right to payment and each instrument, document,
chattel paper and other agreement constituting or evidencing Collateral is (or
will be when arising, issued or assigned to Wells Fargo) the valid, genuine and
legally enforceable obligation, subject to no defense, setoff or counterclaim
(other than those arising in the ordinary course of business), of the account
debtor or other obligor named therein or in the Debtor’s records pertaining
thereto as being obligated to pay such obligation.  The Debtor will
neither agree to any material modification or amendment nor agree to any
forbearance, release or cancellation of any such obligation, and will not
subordinate any such right to payment to claims of other creditors of such
account debtor or other obligor.

    


    (g)           Commercial Tort
Claims.  Promptly after a Responsible Officer obtains actual
knowledge thereof (and in any event, within five Business Days), the Debtor will
deliver to Wells Fargo notice of any commercial tort claims brought against any
Person, including the name and address of each defendant, a summary of the
facts, an estimate of the Debtor’s damages, copies of any complaint or demand
letter submitted by the Debtor, and such other information as Wells Fargo may
reasonably request.  Upon written request by Wells Fargo, the Debtor
will grant Wells Fargo a security interest in all commercial tort claims it may
have against any such Person.

    


    (h)           Miscellaneous
Covenants.  The Debtor will:

    


    (i)      
      keep all tangible Collateral in good repair,
working order and condition, ordinary wear and tear excepted, and will, from
time to time, replace any worn, broken or defective parts thereof, although
Debtor may discontinue the operation  and maintenance of any
properties if Debtor believes that such discontinuance is desirable to the
conduct of its business and not disadvantageous in any material respect to Wells
Fargo;

    


    Security
Agreement for Physicians Formula Cosmetics, Inc.

    WFBC/Physicians
Formula


    
      
         


      

      
        4

        
          

        

      

      
         


      

    


    (ii)           pay
or discharge when due all taxes and other governmental charges levied or
assessed upon or against any Collateral or upon or against the creation,
perfection or continuance of the Security Interest, although Debtor shall not be
required to pay any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings and for which proper reserves have been made;

    


    (iii)           at
any time during ordinary business hours, permit Wells Fargo or its
representatives to examine or inspect any Collateral, wherever located, and to
examine, inspect and copy the Debtor’s books and records pertaining to the
Collateral and its business and financial condition and to send and discuss with
account debtors and other obligors requests for verifications of amounts owed to
the Debtor;

    


    (iv)           keep
accurate and complete records pertaining to the Collateral and pertaining to the
Debtor’s business and financial condition in accordance with GAAP consistently
applied and cause the Company to submit such periodic reports regarding the
Collateral and its business and financial condition as in accordance with the
Credit Agreement;

    


    (v)           promptly,
after a Responsible Officer obtains actual knowledge thereof (and in any event
within five Business Days), notify Wells Fargo of any loss of or material damage
to any Collateral or of any substantial adverse change in any Collateral or the
prospect of its payment;

    


    (vi)           if
Wells Fargo at any time so requests in writing (after the occurrence and during
the continuance of an Event of Default), promptly deliver to Wells Fargo any
instrument, document or chattel paper constituting Collateral in an amount in
excess of $50,000, duly endorsed or assigned by the Debtor;

    


    (vii)         at
all times keep all tangible Collateral insured with insurers acceptable to Wells
Fargo, in such amounts and on such terms (including deductibles) as Wells Fargo
in its sole discretion may require and including, as applicable and without
limitation, business interruption insurance (including force majeure coverage),
hazard coverage on an “all risks” basis for all tangible Collateral, and theft
and physical damage coverage for Collateral consisting of motor vehicles, with
all insurance policies containing an appropriate lender’s interest endorsement
or clause, and name Wells Fargo as an additional insured;

    


    (viii)        from
time to time authorize or execute such financing statements as Wells Fargo may
reasonably require in order to perfect the Security Interest and, if any
Collateral consists of a motor vehicle, execute such documents as may be
required to have the Security Interest properly noted on a certificate of
title;

    


    Security
Agreement for Physicians Formula Cosmetics, Inc.

    WFBC/Physicians
Formula


    
      
         


      

      
        5

        
          

        

      

      
         


      

    


    (ix)           pay
when due or reimburse Wells Fargo on demand for all costs of collection of any
of the Indebtedness and all expenses (including in each case all reasonable
attorneys’ fees) incurred by Wells Fargo in connection with the creation,
perfection, satisfaction, protection, defense or enforcement of the Security
Interest or the creation, continuance, protection, defense or enforcement of
this Agreement or any or all of the Indebtedness, including expenses incurred in
any litigation or bankruptcy or insolvency proceedings: provided that such
incurrence is not a product of Wells Fargo’s gross negligence, bad faith or will
misconduct;

    


    (x)     
      authorize, execute, deliver or endorse any
and all instruments, documents, assignments, security agreements and other
agreements and writings which Wells Fargo may at any time reasonably request in
order to secure, protect, perfect or enforce the Security Interest and Wells
Fargo’s rights under this Agreement; and

    


    (xi)           not
use or keep any Collateral, or permit it to be used or kept by any Subsidiary,
for any unlawful purpose or in violation of any federal, state or local law,
statute or ordinance.

    


    (i)     
      Wells Fargo’s Right to Take
Action.  The Debtor authorizes Wells Fargo to file from time to
time where permitted by law, such financing statements against collateral
described as “all personal property” or “all assets” as Wells Fargo deems
reasonably necessary or useful to perfect the Security Interest.  The
Debtor will not amend any financing statements in favor of Wells Fargo except as
permitted by law. Further, if the Debtor at any time fails to perform or observe
any agreement contained in Section 3(h), and if such failure continues for a
period of ten (10) days after Wells Fargo gives the Debtor written notice
thereof (or, in the case of the agreements contained in clauses (vii) and (viii)
of Section 3(h), immediately upon the occurrence of such failure, without notice
or lapse of time), Wells Fargo may (but need not) perform or observe such
agreement on behalf and in the name, place and stead of the Debtor (or, at Wells
Fargo’s option, in Wells Fargo’s own name) and may (but need not) take any and
all other actions which Wells Fargo may reasonably deem necessary to cure or
correct such failure (including, without limitation, the payment of taxes, the
satisfaction of security interests, liens, or encumbrances, the performance of
obligations under contracts or agreements with account debtors or other
obligors, the procurement and maintenance of insurance, the execution of
financing statements, the endorsement of instruments, the qualification and
licensing of the Debtor to do business in any jurisdiction, and the procurement
of repairs or transportation); and, except to the extent that the effect of such
payment would be to render any loan or forbearance of money usurious or
otherwise illegal under any applicable law, the Debtor shall thereupon pay Wells
Fargo on demand the amount of all moneys expended and all costs and expenses
(including reasonable attorneys’ fees) incurred by Wells Fargo in connection
with or as a result of Wells Fargo’s performing or observing such agreements or
taking such actions, together with interest thereon from the date expended or
incurred by Wells Fargo at the highest rate then applicable to any of the
Indebtedness.  To facilitate the performance or observance by Wells
Fargo of such agreements of the Debtor, the Debtor hereby irrevocably appoints
(which appointment is coupled with an interest) Wells Fargo, or its delegate, as
the attorney-in-fact of the Debtor with the right (but not the duty) from time
to time to create, prepare, complete, execute, deliver, endorse or file, in the
name and on behalf of the Debtor, any and all instruments, documents, financing
statements, applications for insurance and other agreements and writings
required to be obtained, executed, delivered or endorsed by the Debtor under
this Section 3 and Section 4 below.

    


    Security
Agreement for Physicians Formula Cosmetics, Inc.

    WFBC/Physicians
Formula


    
      
         


      

      
        6

        
          

        

      

      
         


      

    


    4.        
    Rights of Wells
Fargo.  At any time and from time to time, whether before or
after an Event of Default, Wells Fargo may take any or all of the following
actions:

    


    (a)           Account
Verification.  Wells Fargo may at any time and from time to
time send or require the Debtor to send requests for verification of accounts or
notices of assignment to account debtors and other obligors.  Wells
Fargo may also at any time and from time to time telephone account debtors and
other obligors to verify accounts.

    


    (b)           Collection
Account.  Wells Fargo may establish a collateral account for
the deposit of checks, drafts and cash payments made by the Debtor’s account
debtors. If a collateral account is so established, the Debtor shall promptly
deliver to Wells Fargo, for deposit into said collateral account, all payments
on Accounts and chattel paper received by it (except for the Separate Collateral
Bank Account).  All such payments shall be delivered to Wells Fargo in
the form received (except for the Debtor’s endorsement where
necessary).  Until so deposited, all payments on Accounts and chattel
paper received by the Debtor shall be held in trust by the Debtor for and as the
property of Wells Fargo and shall not be commingled with any funds or property
of the Debtor.  All deposits in said collateral account shall
constitute proceeds of Collateral and shall not constitute payment of any
Obligation.  Unless otherwise agreed in writing, the Debtor shall have
no right to withdraw amounts on deposit in any collateral account.

    


    (c)           Lockbox.  Wells
Fargo may, by notice to the Debtor, require the Debtor to direct each of its
account debtors to make payment directly to a special lockbox to be under the
control of Wells Fargo. The Debtor hereby authorizes and directs Wells Fargo to
deposit all checks, drafts and cash payments received in said lockbox into the
collateral account established as set forth above.

    


    (d)           Direct
Collection.  Wells Fargo may notify any account debtor, or any
other Person obligated to pay any amount due, that such chattel paper, Account,
or other right to payment has been assigned or transferred to Wells Fargo for
security and shall be paid directly to Wells Fargo.  At any time after
Wells Fargo or the Debtor gives such notice to an account debtor or other
obligor, Wells Fargo may (but need not), in its own name or in the Debtor’s
name, demand, sue for, collect or receive any money or property at any time
payable or receivable on account of, or securing, any such chattel paper,
Account, or other right to payment, or grant any reasonable to, make any
compromise or settlement with or otherwise agree to waive, modify, amend or
change the obligations (including collateral obligations) of any such account
debtor or other obligor.

    


    5.           
 Assignment of
Insurance.  The Debtor hereby collaterally assigns to Wells
Fargo, as additional security for the payment of the Indebtedness, any and all
moneys (including but not limited to proceeds of insurance and refunds of
unearned premiums) due or to become due under, and all other rights of the
Debtor under or with respect to, any and all policies of insurance covering the
Collateral, the Debtor hereby directs the issuer of any such policy to pay any
such moneys directly to Wells Fargo.  After the occurrence and during
the continuance of an Event of Default, Wells Fargo may (but need not), in its
own name or in the Debtor’s name, execute and deliver proofs of claim, receive
all such moneys, endorse checks and other instruments representing payment of
such moneys, and adjust, litigate, compromise or release any claim against the
issuer of any such policy.

    


    Security
Agreement for Physicians Formula Cosmetics, Inc.

    WFBC/Physicians
Formula


    
      
         


      

      
        7

        
          

        

      

      
         


      

    


    6.           
 Events of
Default.  Each of the following occurrences shall constitute an
event of default under this Agreement (herein called “Event of
Default”):  (i) an Event of Default shall occur under the Credit
Agreement; or (ii) the Debtor shall fail to pay any or all of the Indebtedness
when due or (if payable on demand) on demand; or (iii) the Debtor shall
fail to observe or perform any covenant or agreement herein binding on
it.

    


    7.       
     Remedies upon Event of
Default.  Upon the occurrence  and during the
continuance of an Event of Default Wells Fargo may exercise any one or more of
the following rights and remedies: (i) declare all unmatured Indebtedness
to be immediately due and payable, and the same shall thereupon be immediately
due and payable, without presentment or other notice or demand;
(ii) exercise and enforce any or all rights and remedies available upon
default to a secured party under the UCC, including but not limited to the right
to take possession of any Collateral, proceeding without judicial process or by
judicial process (without a prior hearing or notice thereof, which the Debtor
hereby expressly waives), and the right to sell, lease or otherwise dispose of
any or all of the Collateral, and in connection therewith, Wells Fargo may
require the Debtor to make the Collateral available to Wells Fargo at a place to
be designated by Wells Fargo which is reasonably convenient to both parties, and
if notice to the Debtor of any intended disposition of Collateral or any other
intended action is required by law in a particular instance, such notice shall
be deemed commercially reasonable if given (in the manner specified in
Section 9) at least ten (10) days prior to the date of intended disposition
or other action; (iii) exercise or enforce any or all other rights or
remedies available to Wells Fargo by law or agreement against the Collateral,
against the Debtor or against any other Person or property.  Upon the
occurrence and during the continuance of an Event of Default, Wells Fargo is
hereby granted a nonexclusive, worldwide and royalty-free license to use or
otherwise exploit all Intellectual Property Rights owned by or licensed to the
Debtor that Wells Fargo deems reasonably necessary or appropriate to the
disposition of any Collateral.

    


    8.         
   Other Personal
Property.  Unless at the time Wells Fargo takes possession of
any tangible Collateral, or within seven days thereafter, the Debtor gives
written notice to Wells Fargo of the existence of any goods, papers or other
property of the Debtor, not affixed to or constituting a part of such
Collateral, but which are located or found upon or within such Collateral,
describing such property, Wells Fargo shall not be responsible or liable to the
Debtor for any action taken or omitted by or on behalf of Wells Fargo with
respect to such property.

    


    Security
Agreement for Physicians Formula Cosmetics, Inc.

    WFBC/Physicians
Formula


    
      
         


      

      
        8

        
          

        

      

      
         


      

    


    9.    
        Notices; Requests for
Accounting.  All notices and other communications hereunder
shall be in writing and shall be (a) personally delivered, (b) sent by
first class United States mail, (c) sent by overnight courier of national
reputation,  (d) transmitted by telecopy, in each case addressed
or telecopied to the party to whom notice is being given at its address or
telecopier number as set forth below its signature or, as to each party, at such
other address or telecopier number as may hereafter be designated by such party
in a written notice to the other party complying as to delivery with the terms
of this Section 9, or (e) by an encrypted electronic mail.  All
such notices, requests, demands and other communications shall be deemed to have
been given on (i) the date of delivery if personally delivered,
(ii) when deposited in the mail if delivered by mail, (iii) the date
delivered to the courier if sent by overnight courier, or (iv) the date of
transmission if delivered by telecopy or electronic mail.  All
requests under Section 9-210 of the UCC (1) shall be made in a writing
signed by an authorized Person, (2) shall be personally delivered, sent by
registered or certified mail, return receipt requested, or by overnight courier
of national reputation (3) shall be deemed to be sent when received by
Wells Fargo and (4) shall otherwise comply with the requirements of Section
9-210.  The Debtor requests that Wells Fargo respond to all such
requests which on their face appear to come from an authorized individual and
releases Wells Fargo from any liability for so responding.  The Debtor
shall pay Wells Fargo the maximum amount allowed by law for responding to such
requests.

    


    10.           Miscellaneous.  This
Agreement has been duly and validly authorized by all necessary corporate
action. This Agreement does not contemplate a sale of accounts, or chattel
paper. This Agreement can be waived, modified, amended, terminated or
discharged, and the Security Interest can be released, only explicitly in a
writing signed by Wells Fargo, and, in the case of amendment or modification, in
a writing signed by the Debtor.  A waiver signed by Wells Fargo shall
be effective only in the specific instance and for the specific purpose
given.  Mere delay or failure to act shall not preclude the exercise
or enforcement of any of Wells Fargo’s rights or remedies.  All rights
and remedies of Wells Fargo shall be cumulative and may be exercised singularly
or concurrently, at Wells Fargo’s option, and the exercise or enforcement of any
one such right or remedy shall neither be a condition to nor bar the exercise or
enforcement of any other.  Wells Fargo’s duty of care with respect to
Collateral in its possession (as imposed by law) shall be deemed fulfilled if
Wells Fargo exercises reasonable care in physically safekeeping such Collateral
or, in the case of Collateral in the custody or possession of a bailee or other
third person, exercises reasonable care in the selection of the bailee or other
third person, and Wells Fargo need not otherwise preserve, protect, insure or
care for any Collateral.  Wells Fargo shall not be obligated to
preserve any rights the Debtor may have against prior parties, to realize on the
Collateral at all or in any particular manner or order, or apply any cash
proceeds of Collateral in any particular order unless otherwise provided in the
Credit Agreement.  This Agreement shall be binding upon and inure to
the benefit of the Debtor and Wells Fargo and their respective successors and
assigns and shall take effect when signed by the Debtor and Wells Fargo and
delivered to Wells Fargo, and the Debtor waives notice of Wells Fargo’s
acceptance hereof.  A carbon, photographic or other reproduction of
this Agreement or of any financing statement signed by the Debtor shall have the
same force and effect as the original for all purposes of a financing
statement.  This Agreement shall be governed by and construed in
accordance with the substantive laws (other than conflict laws) of the State of
California.  If any provision or application of this Agreement is held
unlawful or unenforceable in any respect, such illegality or unenforceability
shall not affect other provisions or applications which can be given effect and
this Agreement shall be construed as if the unlawful or unenforceable provision
or application had never been contained herein or prescribed hereby. All
representations and warranties contained in this Agreement shall survive the
execution, delivery and performance of this Agreement and the creation and
payment of the Indebtedness.  The parties hereto hereby
(i) consent to the personal jurisdiction of the state and federal courts
located in the State of California in connection with any controversy related to
this Agreement; (ii) waive any argument that venue in any such forum is not
convenient, (iii) agree that any litigation initiated by Wells Fargo or the
Debtor in connection with this Agreement or the other Loan Documents may be
venued in either the state or federal courts located in Los Angeles, California;
and (iv) agree that a final judgment in any such suit, action or proceeding
shall be conclusive and may be enforced in other jurisdictions by suit on the
judgment or in any other manner provided by law.

    


    Security
Agreement for Physicians Formula Cosmetics, Inc.

    WFBC/Physicians
Formula


    
      
         


      

      
        9

        
          

        

      

      
         


      

    


    11.           Arbitration.  Wells
Fargo and Debtor agree, upon demand by either party, to submit to binding
arbitration all claims, disputes and controversies between or among them (and
their respective employees, officers, directors, attorneys, and other agents),
whether in tort, contract or otherwise, in any way arising out of or relating to
this Agreement and its negotiation, execution, collateralization,
administration, repayment, modification, extension, substitution, formation,
inducement, enforcement, default or termination.

    


    (a)           Governing
Rules.  Any arbitration proceeding will (i) proceed in a
location in Los Angeles, California selected by the American Arbitration
Association (“AAA”); (ii) be governed by the Federal Arbitration Act (Title 9 of
the United States Code), notwithstanding any conflicting choice of law provision
in any of the documents between the parties; and (iii) be conducted by the AAA,
or such other administrator as the parties shall mutually agree upon, in
accordance with the AAA’s commercial dispute resolution procedures, unless the
claim or counterclaim is at least $1,000,000.00 exclusive of claimed interest,
arbitration fees and costs in which case the arbitration shall be conducted in
accordance with the AAA’s optional procedures for large, complex commercial
disputes (the commercial dispute resolution procedures or the optional
procedures for large, complex commercial disputes to be referred to herein, as
applicable, as the “Rules”).  If there is any inconsistency between
the terms hereof and the Rules, the terms and procedures set forth herein shall
control.  Any party who fails or refuses to submit to arbitration
following a demand by any other party shall bear all costs and expenses incurred
by such other party in compelling arbitration of any dispute.  Nothing
contained herein shall be deemed to be a waiver by any party that is a bank of
the protections afforded to it under 12 U.S.C. §91 or any similar
applicable state law.

    


    (b)           No Waiver of Provisional Remedies,
Self-Help and Foreclosure.  The arbitration requirement does
not limit the right of any party to (i) foreclose against real or personal
property collateral; (ii) exercise self-help remedies relating to collateral or
proceeds of collateral such as setoff or repossession; or (iii) obtain
provisional or ancillary remedies such as replevin, injunctive relief,
attachment or the appointment of a receiver, before, during or after the
pendency of any arbitration proceeding.  This exclusion does not
constitute a waiver of the right or obligation of any party to submit any
dispute to arbitration or reference hereunder, including those arising from the
exercise of the actions detailed in sections (i), (ii) and (iii) of this
paragraph.

    


    Security
Agreement for Physicians Formula Cosmetics, Inc.

    WFBC/Physicians
Formula


    
      
         


      

      
        10

        
          

        

      

      
         


      

    


    (c)           Arbitrator Qualifications and
Powers.  Any arbitration proceeding in which the amount in
controversy is $5,000,000.00 or less will be decided by a single arbitrator
selected according to the Rules, and who shall not render an award of greater
than $5,000,000.00.  Any dispute in which the amount in controversy
exceeds $5,000,000.00 shall be decided by majority vote of a panel of three
arbitrators; provided however, that all three arbitrators must actively
participate in all hearings and deliberations.  The arbitrator will be
a neutral attorney licensed in the State of California or a neutral retired
judge of the state or federal judiciary of California, in either case with a
minimum of ten years experience in the substantive law applicable to the subject
matter of the dispute to be arbitrated.  The arbitrator will determine
whether or not an issue is arbitratable and will give effect to the statutes of
limitation in determining any claim.  In any arbitration proceeding
the arbitrator will decide (by documents only or with a hearing at the
arbitrator's discretion) any pre-hearing motions which are similar to motions to
dismiss for failure to state a claim or motions for summary
adjudication.  The arbitrator shall resolve all disputes in accordance
with the substantive law of California and may grant any remedy or relief that a
court of such state could order or grant within the scope hereof and such
ancillary relief as is necessary to make effective any award.  The
arbitrator shall also have the power to award recovery of all costs and fees, to
impose sanctions and to take such other action as the arbitrator deems necessary
to the same extent a judge could pursuant to the Federal Rules of Civil
Procedure, the California Code of Civil Procedure or other applicable
law.  Judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction.  The institution and
maintenance of an action for judicial relief or pursuit of a provisional or
ancillary remedy shall not constitute a waiver of the right of any party,
including the plaintiff, to submit the controversy or claim to arbitration if
any other party contests such action for judicial relief.

    


    (d)           Discovery.  In any
arbitration proceeding, discovery will be permitted in accordance with the
Rules.  All discovery shall be expressly limited to matters directly
relevant to the dispute being arbitrated and must be completed no later than 20
days before the hearing date.  Any requests for an extension of the
discovery periods, or any discovery disputes, will be subject to final
determination by the arbitrator upon a showing that the request for discovery is
essential for the party's presentation and that no alternative means for
obtaining information is available.

    


    (e)           Class Proceedings and
Consolidations.  No party hereto shall be entitled to join or
consolidate disputes by or against others in any arbitration, except parties who
have executed this Agreement or any other contract, instrument or document
relating to any Indebtedness, or to include in any arbitration any dispute as a
representative or member of a class, or to act in any arbitration in the
interest of the general public or in a private attorney general
capacity.

    


    (f)        
    Payment
Of Arbitration Costs And Fees.  The arbitrator shall award all
costs and expenses of the arbitration proceeding.

    


    Security
Agreement for Physicians Formula Cosmetics, Inc.

    WFBC/Physicians
Formula


    
      
         


      

      
        11

        
          

        

      

      
         


      

    


    (g)           Miscellaneous.  To
the maximum extent practicable, the AAA, the arbitrators and the parties shall
take all action required to conclude any arbitration proceeding within 180 days
of the filing of the dispute with the AAA.  No arbitrator or other
party to an arbitration proceeding may disclose the existence, content or
results thereof, except for disclosures of information by a party required in
the ordinary course of its business or by applicable law or
regulation.  If more than one agreement for arbitration by or between
the parties potentially applies to a dispute, the arbitration provision most
directly related to the documents between the parties or the subject matter of
the dispute shall control.  This arbitration provision shall survive
termination, amendment or expiration of any of the documents or any relationship
between the parties.

    


    [Signatures
on next page]

    


    Security
Agreement for Physicians Formula Cosmetics, Inc.

    WFBC/Physicians
Formula


    
      
         


      

      
        12

        
          

        

      

      
         


      

    


    IN
WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date
and year first above written.

     

    
      
        	
                WELLS
      FARGO BANK, NATIONAL ASSOCIATION

              	 
      	
                PHYSICIANS
      FORMULA COSMETICS, INC.

              	 
      
	 
      	 
      	 
      	 
      	 
      
	
                By:

              	
                /s/ Phillip Goessler

              	 
      	
                By:

              	
                /s/ Ingrid Jackel

              	 
      
	
                Print
      Name:

              	
                Phillip Goessler

              	 
      	
                Print
      Name:

              	
                Ingrid Jackel

              	 
      
	
                Title:

              	
                Vice President

              	 
      	
                Title:

              	
                Chief Executive Officer

              	 
      
	 
      	 
      	 
      	 
      	 
      	 
      
	
                Address:

              	 
      	
                Address:

              	 
      
	 	 	 	 
	

                245
      S. Los Robles Avenue, Suite 700

              	 
      	
                1055
      West 8th Street

              	 
      
	
                Pasadena,
      CA  91101

              	 
      	
                Azusa,
      CA 91702

              	 
      
	
                Attn:  Relationship
      Manager-Physicians Formula

              	 
      	
                Attn:
      Jeff Berry

              	 
      
	
                Fax:
      626.844.9063

              	 
      	
                Fax:
      626.812.6010

              	 
      
	
                Email:
      gary.whitaker@wachovia.com

              	 
      	
                Email:
      jeff.berry@physiciansformula.com

              	 
      


      

       

    

    Security
Agreement for Physicians Formula Cosmetics, Inc.

    WFBC/Physicians
Formula


    
      
         


      

      
        S-1

        
          

        

      

      
         


      

    


    EXHIBIT
A

    


    LOCATION OF
COLLATERAL

    


    
      	
              Location

            
	
              1055
      W. 8th
      Street

              Azusa,
      CA 91702

            
	 
	
              1425
      Max Brose Drive #8

              London,
      Ontario   N6N 0A2

              Canada

            
	 
	
              435
      Park Court

              Lino
      Lakes, MN 55014

            
	 
	
              230
      South Ninth Avenue

              City
      of Industry, CA 91746

            
	 
	
              250
      South Ninth Avenue

              City
      of Industry, CA 91746

            
	 
	
              753-755
      Arrow Grand Circle Way

              Covina,
      CA 91722

            
	 
	
              2169
      Wright Ave.

              La
      Verne, CA 91750

            


    

    


    Security
Agreement for Physicians Formula Cosmetics, Inc.

    WFBC/Physicians
Formula


    
      
         


      

      
         


        
          

        

      

      
         


      

    

     

    EXHIBIT
B

     

    FIXTURES

     

    NONE

     

    Security
Agreement for Physicians Formula Cosmetics, Inc.

    WFBC/Physicians
Formula


    
      
         


      

      
         


        
          

        

      

      
         


      

    

     

    EXHIBIT
C

     

    PERMITTED
LIENS

     

    
      	
              Creditor

            	
              Collateral

            	
              Jurisdiction

            	
              Filing Date

            	
              Filing No.

            
	
              U.S.
      District Court, California Central District*

            	 
      	
              CA

            	
              02/04/2009

            	
              2:09-CV-0866-ABC-FMO

            
	
              Liens
      in favor of the Subordinated Creditor

            	 
      	 
      	 
      	 
      


    

     

    * This
judgment lien has been discharged.

     

    Security
Agreement for Physicians Formula Cosmetics, Inc.

    WFBC/Physicians
Formula