Document:

securityagreement.htm

Exhibit 10.3

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:

 

  

  

  

 

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

 

  

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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.

 

  

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(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]

 

  

- 24 -

  

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:pledgeagreement.htm

Exhibit 10.4

 
 

THE RIGHTS OF THE BENEFICIARY OF THIS INSTRUMENT ARE SUBJECT AND SUBORDINATE TO THE LIENS SECURING ALL OBLIGATIONS OF THE PLEDGOR 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.

PLEDGE AGREEMENT

This Pledge Agreement (this “Agreement”), dated as of September 4, 2009, is made by PHYSICIANS FORMULA HOLDINGS, INC., a Delaware corporation (the “Pledgor”), in favor of MILL ROAD CAPITAL,
L.P., a Delaware limited partnership having its principal place of business at Two Sound View Drive, Greenwich, CT 06830 (the “Lender”).

Recitals

A.           Concurrently herewith, the Lender is entering into a Term Loan Agreement dated as of even date herewith (as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, the “Loan
Agreement”) with Physicians Formula, Inc., a New York corporation (the “Borrower”).  Terms defined in the Loan Agreement and not otherwise defined herein are used herein as defined in the Loan Agreement, and the rules of interpretation set forth in Section 1.2 of the Loan Agreement are incorporated herein by reference.

B.           The Pledgor is concurrently herewith entering into that certain Pledgor Guarantee dated as of even date herewith in favor of the Lender (as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, the “Pledgor
Guarantee”).

C.           Under the terms of the Loan Agreement, the Borrower is required to cause the Pledgor to execute and deliver this Pledge Agreement.  The Pledgor owns 100% of the equity interests in the Borrower.  The Pledgor therefore desires to execute this Pledge Agreement
because it has a financial interest in the success of the Borrower.

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, the Pledgor hereby represents, warrants, covenants, agrees, assigns and grants as follows:

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 term “Secured Party” shall mean the Lender and the term “Subordination Agreement”
shall mean 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.           Grant of Security.  The Pledgor hereby assigns and pledges to the Lender, and hereby grants to the Lender, a security
interest in, all of the Pledgor’s right, title and interest in and to the following, whether now owned or hereafter acquired, whether now or hereafter existing and wherever located (all of the following herein called the “Collateral”):

 

(a)           all shares of capital stock, equity interests or other interests in the Borrower owned by the Pledgor or in which the Pledgor has an interest (the “Pledged Interests”); all rights to vote or participate
in the management of the Borrower and to receive information concerning the business and affairs of the Borrower; all preferences and privileges with respect thereto, and all distributions (including any redemption payments or liquidation payments), dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Interests; notwithstanding the foregoing, the security interest granted herein shall not include,
and the term Collateral shall not include, equity interests in any direct Foreign Subsidiary of the Pledgor 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 the Pledgor to incur material adverse tax consequences under Section 956 of the Code); and

(b)           any and all proceeds and products of the foregoing, including, without limitation, 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 and, to the extent not otherwise included, all books and records with respect to the foregoing Collateral.

3.           Delivery of Pledged Collateral.  With respect to any provision in this Agreement which requires the Pledgor 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.

4.           Security for Obligations.  This Agreement and the pledges made and security interests granted herein secure the prompt
payment and full performance of all obligations of the Pledgor now or hereafter existing under the Pledgor Guarantee, whether for principal, interest, fees, expenses or otherwise, including, without limitation, all obligations of the Pledgor now or hereafter existing under this Agreement, all interest that accrues (whether or not allowed) at the then applicable rate (including interest at the rate for overdue payments described in Section 4.5 of the Loan Agreement) specified in the Loan Agreement on all
or any part of any of such

  

2

  

obligations after the filing of any petition or pleading against the Pledgor for a proceeding under any bankruptcy or related law (collectively, the “Secured Obligations”).

5.           Delivery of Certificates and Instruments/Control of Collateral.  All certificates or instruments representing or
evidencing the Collateral shall be delivered to and held by or on behalf of the Lender pursuant hereto and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance reasonably satisfactory to the Lender.  Subject to the revocable rights specified in Section 9(a), the Lender shall have the right, at any time after the occurrence and during the continuation of any Event of Default, in its discretion
and without notice to the Pledgor, to transfer to or register in the name of the Lender or any of its nominees any or all of Collateral.  In addition, the Lender shall have the right to exchange certificates or instruments representing or evidencing Collateral for certificates or instruments of smaller or larger denominations.  On or prior to the Closing Date, the Pledgor will cause the Lender to receive, and at all times to have, control over the Collateral, including, without limitation,
in the case of any security entitlement, by causing the Lender to become the entitlement holder with respect thereto.

6.           Representations and Warranties.  The Pledgor represents and warrants as set forth below.

(a)           Location of Pledgor and Collateral, Etc.  The place of business of the Pledgor or, if the Pledgor has more than one place of business, the chief executive office of the Pledgor and the place where
the Pledgor keeps its records concerning the Collateral, are located at the address referred to for the Pledgor in Section 20, or at such other location as to which the Pledgor has provided 30 days’ prior written notice to the Lender.  The Pledgor’s exact legal name and state of incorporation are as set forth in the Pledgor’s signature block to this Agreement.  The Pledgor has taken all action (if any) required by Section 7.

(b)           Ownership of Collateral.  As of the Closing Date, the Pledgor is the legal and beneficial owner of the Pledged Interests specified in Schedule 1.

(c)           Pledged Interests.  The Pledged Interests have been duly authorized and validly issued and are fully paid and nonassessable.  All of the Pledged Interests are in certificated form (as contemplated
by Article 8 of the Uniform Commercial Code).  The Pledged Interests constitute the percentage of the issued and outstanding shares of the Borrower as specified in Schedule 1.

(d)           Pledge Agreement Authorized and Binding.  The execution, delivery and performance of this Agreement have been duly authorized by the Pledgor and do not require the consent or approval of any Governmental
Authority (except (i) any consent or approval which has been made or obtained and is in full force and effect and (ii) material consents or approvals required by the Pledgor in the ordinary course of business none of which it believes will not be duly given, made or taken as needed in such ordinary course); and are not in contravention of, or in conflict with, any applicable law.  This Agreement is a valid and legally binding obligation of the Pledgor enforceable in accordance with its terms, except
as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the

  

3

  

enforcement of creditors’ rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law).

 

(e)           Valid and Perfected Security Interest.  This Agreement and the delivery to UB, as agent for the Lender, of the certificates or instruments representing or evidencing the Collateral, accompanied by
stock powers or endorsements, as applicable, executed in blank, create a valid and perfected security interest in the Collateral, securing the payment of the Secured Obligations.

(f)           Third-Party Authorizations, Etc.  No consent or authorization of, filing with or other act by or in respect of, any Governmental Authority is required either (i) for the grant by the Pledgor
of the security interest granted hereby or for the execution, delivery or performance of this Agreement by the Pledgor or (ii) for the perfection of or exercise by the Lender of its rights provided for in this Agreement or the remedies in respect of the Collateral provided pursuant to this Agreement (except (A) as may be required in connection with the disposition of the Collateral by laws affecting the offering and sale of securities generally, (B) any consent, authorization, filing or other act which has been
made or obtained and is in full force and effect and (C) material consents, authorizations, filings or other acts required by the Pledgor in the ordinary course of business none of which it believes will not be duly given, made or taken as needed in such ordinary course).

7.           Further Assurances.

(a)           The Pledgor agrees that from time to time, at its own expense, it will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary, or that the Lender may reasonably request, in order to perfect and protect the security
interest granted or purported to be granted hereby by the Pledgor or to enable the Lender to exercise and enforce its rights and remedies hereunder with respect to any of the Collateral.  Without limiting the generality of the foregoing, the Pledgor (i) will not take any action that would cause any of the representations and warranties of the Pledgor in Section 6 to become untrue and (ii) will execute and file such financing and continuation statements, and amendments thereto, and such other instruments
and notices, as may be necessary or reasonably desirable, or as the Lender may reasonably request, in order to perfect and preserve the security interest granted or purported to be granted hereby.

(b)           The Pledgor hereby authorizes the Lender to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of the Pledgor where permitted by law.  A photocopy 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.

(c)           The Pledgor will furnish to the Lender from time to time statements and schedules further identifying and describing the Collateral, and such other reports in connection with the Collateral, as the Lender may reasonably request, all in reasonable detail.

8.           Place of Business; Name.  The Pledgor will keep its place of business or, if the Pledgor has more than one place
of business, its chief executive office, and the place where the

  

4

  

Pledgor keeps its records concerning the Collateral, at the location therefor specified pursuant to Section 6(a) or, upon 30 days’ prior written notice to the Lender, at such other locations in jurisdictions where all actions required by Section 7 have been taken with respect to the Collateral.  The Pledgor will hold and preserve
such records and will permit representatives of the Lender at any time during normal business hours, upon reasonable prior notice, to inspect, copy and make abstracts from such records.  The Pledgor will not adopt, use or conduct business under any trade name or other corporate or fictitious name (other than its legal name, as set forth on the signature pages hereto) or change its legal name, state of incorporation or state organizational identification number, if any, as specified pursuant to Section
6(a), except upon not less than 30 days’ prior notice to the Lender and the Pledgor’s prior compliance with all applicable requirements of Section 7 hereof necessary to perfect the Lender’s security interest hereunder.

9.           Rights with Respect to Collateral.

(a)           So long as no Event of Default has occurred and is continuing, the provisions set forth below shall apply.

(i)           The Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Collateral or any part thereof for any purpose not inconsistent with the terms of this Agreement or any other Loan Document.

(ii)           The Pledgor shall be entitled to receive and retain any and all distributions paid in compliance with the Loan Agreement in respect of the Collateral; provided, however,
that any and all

(A)           distributions paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of or exchange for, the Collateral,

(B)           distributions paid or payable in cash in respect of the Collateral 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

(C)           cash paid, payable or otherwise distributed in respect of principal of, or in redemption of or exchange for, any Pledged Interest shall be, and shall, subject to the Subordination Agreement, be forthwith delivered to the Lender to hold as, Collateral and shall, if received
by the Pledgor, be received in trust for the benefit of the Lender, be segregated from the other property or funds of the Pledgor and be forthwith delivered to the Lender as Collateral in the same form as so received (with any necessary endorsement).

(b)           Upon the occurrence and during the continuation of any Event of Default, the provisions set forth below shall apply.

(i)           All rights of the Pledgor to exercise the voting and other consensual rights that it would otherwise be entitled to exercise pursuant to Section 9(a)(i) and to receive the dividends and other distributions that it would otherwise be authorized to receive and retain pursuant
to Section 9(a)(ii) shall cease, and all such rights, subject to the Subordination

  

5

  

Agreement, shall thereupon become vested in the Lender, which shall thereupon have the sole right to exercise such voting and other consensual rights and to receive and hold as Collateral such distributions.

 

(ii)           All distributions that are received by the Pledgor contrary to the provisions of Section 9(b)(i) shall, subject to the Subordination Agreement, be received in trust for the benefit of the Lender, shall be segregated from other funds of the Pledgor and shall be forthwith
paid over to the Lender as Collateral in the same form as so received (with any necessary endorsement).

(iii)           Determination by the Lender to exercise its right to sell any or all of the Pledged Interests without registering them under the Securities Act of 1933 shall not be deemed to be commercially unreasonable.

After any and all Events of Default have been cured or waived, the Pledgor shall have the right to exercise the voting and other consensual rights it would otherwise be entitled to exercise pursuant to Section 9(a)(i) hereof and the Loan Agreement and receive the distributions which it would be authorized to receive and retain pursuant to
Section 9(a)(ii) hereof and the Loan Agreement.

(c)           The Pledgor hereby revokes all previous proxies with regard to the Pledged Interests (except proxies granted to UB) and, subject to the Subordination Agreement, appoints the Lender as its proxyholder and attorney-in-fact to attend and vote at any and all meetings of the
shareholders of the Borrower (whether or not any Pledged 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 Borrower executed on or after the date of the giving of this proxy and prior to the termination of this proxy with the same effect as if the Pledgor had personally attended the meetings or had personally voted on its Pledged Interests or had
personally signed the consents, waivers or ratifications; provided, however, that the Lender as proxyholder shall have such rights only upon the occurrence and during the continuance of an Event of Default.  The Pledgor hereby authorizes the Lender to substitute another Person (which Person shall be a successor to the rights of the Lender hereunder, a nominee appointed by
the Lender to serve as proxyholder, or otherwise as approved by the Pledgor in writing, such approval not to be unreasonably withheld) as the proxyholder and, upon the occurrence or during the continuance of any Event of Default, subject to the Subordination Agreement, hereby authorizes and directs the proxyholder to file this proxy and the substitution instrument with the secretary of the Borrower.  This proxy is coupled with an interest and is irrevocable until such time as no part of any Term Loan
Commitment remains outstanding and all Obligations have been paid in full.

10.           Transfers and Other Liens; Additional Capital Stock.

(a)           The Pledgor will not (i) sell, assign (by operation of law or otherwise) 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, except for the security
interest created by this Agreement and except for security interests in favor of UB.

  

6

  

(b)           The Pledgor agrees that it will (i) cause the Borrower not to issue any capital stock or other equity interests (or options, warrants or other rights with respect thereto) in addition to or in substitution for the Collateral, except to the Pledgor.

11.           Lender Appointed Attorney-in-Fact.  The Pledgor hereby irrevocably appoints the Lender as the Pledgor’s attorney-in-fact,
with full authority in the place and stead of the Pledgor and in the name of the Pledgor or otherwise, from time to time in the Lender’s reasonable discretion at any time upon the occurrence and during the continuation of any Event of Default, to, subject to the Subordination Agreement, take any action and to execute any instrument that the Lender may deem reasonably necessary or advisable to accomplish the purposes of this Agreement, including:

(a)           to ask for, demand, collect, sue for, recover, compromise, receive and give acquittance and receipts for moneys due or to become due under or in respect of any of the Collateral;

(b)           to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection with clause (a) above; and

(c)           to file any claims, take any action and institute any proceedings that the Lender may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce compliance with the rights of the Lender with respect to any of the Collateral.

12.           Lender May Perform.  If the Pledgor fails to perform any agreement contained herein, subject to the Subordination
Agreement, the Lender may itself perform or cause performance of such agreement, and the reasonable expenses of the Lender incurred in connection therewith shall be payable by the Pledgor under Section 14(b).

13.           Lender’ Duties.  The powers conferred on the Lender hereunder are solely to protect its interest in the Collateral
and shall not impose any duty upon it to exercise any such powers.  Except for the safe custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Lender shall have no duty as to any Collateral, as to ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Collateral, whether or not the Lender has or is deemed to have knowledge of such matters, or as to the taking of any necessary
steps to preserve rights against any parties or any other rights pertaining to any Collateral.  The Lender shall be deemed to have exercised reasonable care in the custody and preservation of any Collateral in its possession if such Collateral is accorded treatment substantially equal to that the Lender accords its own similar property.

14.           Remedies.  If any Event of Default occurs and is continuing, the provisions set forth below shall apply, subject,
in each case, to the Subordination Agreement,.

(a)           The Lender may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all of the rights and remedies of a secured party on default under the Uniform Commercial Code (whether or not the Uniform Commercial
Code applies to the affected Collateral) and may also (i) require the Pledgor to, and the Pledgor hereby agrees that it will at its expense and upon request by the Lender forthwith,

  

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assemble all or part of the Collateral as directed by the Lender and make it available to the Lender at a place to be designated by the Lender that is reasonably convenient to both parties and (ii) without notice except as provided below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any
of the Lender’s offices or elsewhere, for cash, on credit or for future delivery and upon such other terms as the Lender may deem commercially reasonable.  The Pledgor agrees that, to the extent notice of sale is required by law, at least 10 days’ notice to the Pledgor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification.  The Lender shall not be obligated to make any sale of Collateral regardless
of notice of sale having been given.  The Lender may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned.  Until the Lender is able to effect a sale, lease, or other disposition of the Collateral, the Lender shall have the right to hold or use the Collateral, or any part thereof, to the extent that it deems appropriate for the purpose
of preserving the Collateral or its value or for any other purpose deemed appropriate by the Lender.  The Lender shall have no obligation to the Pledgor to maintain or preserve the rights of the Pledgor as against third parties with respect to the Collateral while the Collateral is in the possession of the Lender.  The Lender may, if it so elects, seek the appointment of a receiver or keeper to take possession of the Collateral and to enforce any of the Lender’s remedies, with respect
to such appointment without prior notice or hearing as to such appointment.

 

(b)           The proceeds resulting from the collection, liquidation, sale or other disposition of the Collateral shall be applied, first, to the reasonable costs and expenses (including, without limitation, reasonable
attorneys’ fees) of retaking, holding, storing, processing and preparing for sale, selling, collecting and liquidating the Collateral, and the like; second, to the satisfaction of all Secured Obligations (other than contingent obligations); and third, any surplus remaining after the satisfaction of all Secured Obligations (other than contingent obligations), provided no Obligations
(other than contingent obligations) exist and no Term Loan Commitment remains outstanding, to be paid over to the Pledgor or to whomsoever may be lawfully entitled to receive such surplus.

(c)           The Lender may exercise any and all rights and remedies of the Pledgor under or in connection with the Collateral, including any and all rights of the Pledgor to demand or otherwise require payment of any amount under, or performance of any provision of, the Collateral.

(d)           To the extent permitted by applicable law, the Pledgor waives all claims, damages and demands against the Lender 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 its agents or attorneys-in-fact.

15.           Private Sales.  Subject to the Subordination Agreement, the Lender may, in its sole and absolute discretion, sell
all or any part of the 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

  

8

  

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 Collateral is sold at private sale, the Pledgor agrees to the extent
permitted by applicable law that if the Collateral is sold for a price which is commercially reasonable, then (A) the Pledgor shall not be entitled to a credit against the Secured Obligations in an amount in excess of the purchase price, and (B) the Lender shall not incur any liability or responsibility to the Pledgor in connection therewith, notwithstanding the possibility that a substantially higher price might have been realized at a public sale.  The Pledgor recognizes that a ready market may not
exist for such Collateral, 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.

16.           Amendments, Etc.  No amendment or waiver of any provision of this Agreement or consent to any departure by the Pledgor
therefrom shall in any event be effective unless the same shall be in writing and otherwise 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.

17.           No Waiver; Remedies.  No failure on the part of the Lender to exercise, and no delay in exercising, any right hereunder
shall operate as a waiver thereof, and no single or partial exercise of any right hereunder shall preclude any other or further exercise thereof or the exercise of any other right.  The remedies provided herein are cumulative and not exclusive of any remedies provided by law.

18.           Continuing Security Interest; Assignment.  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 Secured Obligations (other than contingent obligations) and the termination or expiration of the Term Loan Commitment, (ii) be binding upon the Pledgor, 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, for the benefit of the Secured Party, 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, 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 the 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.  The Pledgor’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 the Pledgor hereunder may be assigned or otherwise transferred.

19.           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).
 

  

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20.           Addresses for Notices.  All notices, demands and other communications provided for hereunder shall be in writing
and given in accordance with Section 3.1 of the Pledgor Guarantee.

21.           Release of Pledgor.

(a)           This Agreement and all obligations of the Pledgor 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 the Term Loan Commitments has expired.  Upon
such release and termination, all rights in and to the Collateral shall automatically revert to the Pledgor, and the Lender shall promptly return any Collateral in their possession to the Pledgor, 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 Pledgor, or to the Person or Persons legally entitled thereto, and to evidence or document
the release of the interests of the Secured Party arising under this Agreement, all as reasonably requested by, and at the sole expense of, the Pledgor.

(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 Pledgor free and clear of the Lien under this Agreement.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

  

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

	  	
PLEDGOR
	 
	  	  	  	 
	  	
PHYSICIANS FORMULA HOLDINGS, INC.,
	 
	  	
a Delaware corporation
	 
	  	  	  	 
	  	  	  	 
	  	
By:
	
/s/ Jeffrey Rogers
	 
	  	
Name:  
	
Jeffrey Rogers
	 
	  	
Title:
	
President
	 

  

S-1

  

SCHEDULE 1

PLEDGED INTERESTS

	
Pledged Interest
	
Certificate No.
	
No. of Shares
	
Percentage Interest in Issuer
	
Other Classes of Shares

	  	  	  	  	  
	  	  	  	  	  
	
Physicians Formula, Inc.
	
5
	
100
	
100%
	
None

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