Document:

Unassociated Document

    
      
Exhibit 10.17

     

    
      SECURITY
AGREEMENT

      

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

      

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

      

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

      

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

      

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

      

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

      

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

      

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

      

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

      
        
           

        

        
           

          
            

          

        

        
           

        

      

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

      

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

      

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

      

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

      

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

      
        
           

        

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

      

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

      

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

      

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

      

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

      

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

      

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

      

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

      
        
           

        

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

      

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

      

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

      

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

      

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

      

      (h)           
Miscellaneous
Covenants.  The Debtor will:

      

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

      
        
           

        

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

      

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

      

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

      

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

      

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

      

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

      

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

      
        
           

        

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

      

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

      

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

      

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

      
        
           

        

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

      

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

      

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

      

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

      

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

      

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

      
        
           

        

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

      

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

      

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

      

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

      
        
           

        

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

      
        
           

        

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

      

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

      

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

      
        
           

        

        
          10

          
            

          

        

        
           

        

      

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

      

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

      

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

      

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

      
        
           

        

        
          11

          
            

          

        

        
           

        

      

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

      

      [Signatures
on next page]

      
        
           

        

        
          12

          
            

          

        

        
           

        

      

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

      

      

      
        	
                WELLS
      FARGO BANK,

              	 
      	
                PHYSICIANS
      FORMULA DRTV, LLC

              	 
      
	
                  NATIONAL
      ASSOCIATION

              	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      	 
      
	
                By:

              	
                /s/ Phillip Goessler

              	 
      	
                By:

              	
                /s/ Ingrid Jackel

              	 
      
	
                Print Name: 
      

              	
                Phillip Goessler

              	 
      	
                Print Name: 
      

              	
                Ingrid Jackel

              	 
      
	
                Title:

              	
                Vice President

              	 
      	
                Title:

              	
                Chief Executive Officer

              	 
      
	 
      	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      	 
      
	
                Address:

              	 
      	
                Address:

              	 
      
	 
      	 
      	 
      	 
      	 
      	 
      
	
                245
      S. Los Robles Avenue, Suite 700

              	 
      	
                1055
      West 8th Street

              	 
      
	
                Pasadena,
      CA  91101

              	 
      	
                Azusa,
      CA 91702

              	 
      
	
                Attn:  Relationship
      Manager-Physicians

              	 
      	
                Attn:
      Jeff Berry

              	 
      
	
                Formula

              	 
      	
                Fax:
      626.812.6010

              	 
      
	
                Fax:
      626.844.9063

              	 
      	
                Email:
      jeff.berry@physiciansformula.com

              	 
      
	
                Email:
      gary.whitaker@wachovia.com

              	 
      	 
      	 
      	 
      

      

      
        
           

        

        
          S-1

          
            

          

        

        
           

        

      

      EXHIBIT
A

      

      

      LOCATION OF
COLLATERAL

      

      

      
        	
                Location

              	 
	
                1055
      W. 8th
      Street

                Azusa,
      CA 91702

              	 
	
                1425
      Max Brose Drive #8

                London,
      Ontario   N6N 0A2

                Canada

              	 
	
                435
      Park Court

                Lino
      Lakes, MN 55014

              	 
	
                230
      South Ninth Avenue

                City
      of Industry, CA 91746

              	 
	
                250
      South Ninth Avenue

                City
      of Industry, CA 91746

              	 
	
                753-755
      Arrow Grand Circle Way

                Covina,
      CA 91722

              	 
	
                2169
      Wright Ave.

                La
      Verne, CA 91750

              	 

      

      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

      EXHIBIT
B

      

      

      FIXTURES

      

      

      NONE

      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

      EXHIBIT
C

      

      

      PERMITTED
LIENS

      

      

      
        	
                Creditor

              	
                Collateral

              	
                Jurisdiction

              	
                Filing Date

              	
                Filing No.

              
	
                U.S.
      District Court, California Central District*

              	 
      	
                CA

              	
                02/04/2009

              	
                2:09-CV-0866-ABC-FMO

              
	
                Liens
      in favor of the Subordinated Creditor

              	 
      	 
      	 
      	 
      

      

      * This
judgment lien has been discharged.Unassociated Document

    
      

    

    Exhibit
10.18

     

    GENERAL
SECURITY AGREEMENT

     

    THIS AGREEMENT is dated with
effect as of this 6th day of November, 2009 by PHYSICIANS FORMULA, INC., a
New York corporation, (the “Borrower”) to and in favour of
WELLS FARGO BANK, NATIONAL
ASSOCIATION, acting through its Wells Fargo Business Credit operating
division (the “Lender”).

     

    RECITALS:

     

    
      	
              A.

            	
              The
      Borrower is or is about to become indebted to the Lender pursuant to a
      credit and security agreement between the Borrower and the Lender dated
      with effect as of the date hereof (as amended, supplemented, replaced or
      restated from time to time, the “Credit
      Agreement”).

            

    

     

    
      	
              B.

            	
              As
      a condition precedent to the Lender extending such credit to the Borrower,
      the Borrower is required to execute and deliver this Agreement, and to
      grant to the Lender and to create a security interest in all personal
      property of the Borrower, as hereinafter provided as security for the
      payment and performance of the obligations and liabilities of the Borrower
      to the Lender.

            

    

     

    NOW THEREFORE in consideration
of the extension of credit by the Lender to the Borrower, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by the Borrower, the Borrower covenants and agrees to and in favour
of the Lender as follows:

     

    ARTICLE
1 - DEFINITIONS; INTERPRETATION

     

    
      	
              1.1

            	
              Defined
      Terms

            

    

     

    Except as
otherwise expressly provided herein, capitalized terms used in this Agreement
but not defined herein shall have the meanings assigned to such terms in the
Credit Agreement.

     

    
      	
              1.2

            	
              Terms
      Defined in Ontario Personal Property Security
  Act

            

    

     

    Where
applicable and except as defined herein, terms used herein shall have the
meanings assigned to them in the Personal Property Security
Act as the same may, from time to time, be in effect in the Province of
Ontario (the “PPSA”).  Such terms
include: “accounts”,
“chattel paper”, “documents of title”, “equipment”, “intangibles”, “instruments”, “inventory”, “investment property”, “money”, “proceeds” and “security”.

     

    ARTICLE
2 - GRANT OF SECURITY INTEREST; COLLATERAL

     

    
      	
              2.1

            	
              Grant
      of Security Interest

            

    

     

    As
security for the payment and performance of the Secured Obligations (as defined
in Section 3), the Borrower hereby grants to the Lender a security interest
in, to and under all of its personal property, wherever located in and whether
now existing or hereafter acquired or arising, including, without limitation,
the following property (collectively and severally, the “Collateral”):

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    
      	
               
      

            	
              (a)

            	
              all
      present and future investment property held by the Borrower, including
      securities, security entitlements, securities accounts, future contracts,
      future accounts, shares, options, rights, warrants, joint venture
      interests, interests in limited partnerships, trust units, bonds,
      debentures and all other documents which constitute evidence of a share,
      participation or interest of the Borrower in property or in an enterprise
      or which constitute evidence of an obligation of the issuer; and all
      substitutions therefore, and subject to Section 6.3, dividends and income
      derived therefrom, all of which are herein called the “Pledged
      Collateral”;

            

    

     

    
      	
               
      

            	
              (b)

            	
              all
      accounts and book debts of the Borrower, chattel paper, documents of
      title, instruments, and intangibles of the Borrower, including all debts,
      dues, claims choses in action and demands of every nature and kind,
      howsoever arising or secured, including letters of credit, guarantees and
      advices of credit that are now due, owing or accruing or growing due to or
      owned by or which may hereafter become due, owing or accruing or growing
      due to or owned by the Borrower, whether or not arising out of or in
      connection with the sale or lease of goods or the rendering of services,
      and all supporting obligations of any or all of the forgoing (“Accounts”);

            

    

     

    
      	
               
      

            	
              (c)

            	
              all
      inventory of the Borrower, including all merchandise, goods and other
      personal property that are held for sale or lease or that have been leased
      by the Borrower or that are to be furnished under a contract of service,
      all raw materials, work in process, materials used or consumed in the
      Borrower’s business and finished goods, all goods in which the Borrower
      has an interest in mass or a joint or other interest or gifts of any kind
      (including goods in which the Borrower has an interest or right as
      consignee), and all goods which are returned to or repossessed by the
      Borrower, together with all additions and accessions thereto and
      replacements therefor and products thereof and documents therefor (“Inventory”);

            

    

     

    
      	
               
      

            	
              (d)

            	
              all
      equipment of the Borrower and all parts thereof and all accessions,
      additions, attachments, improvements, substitutions and replacements
      thereto and therefor, including, all machinery, tools, dies, blueprints,
      catalogues, computer hardware and software, furniture, furnishings,
      vehicles and fixtures (“Equipment”);

            

    

     

    
      	
               
      

            	
              (e)

            	
              all
      intangible property and Intellectual Property
  Rights;

            

    

     

    
      	
               
      

            	
              (f)

            	
              all
      money maintained in a deposit or other account in the Borrower’s name with
      any financial institution, and all certificates, instruments and other
      writings, if any, from time to time representing, evidencing or deposited
      into such accounts, and all interest, 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
      foregoing;

            

    

    
      
         

      

      
        - 2
-

        
          

        

      

      
         

      

    

    
      	
               
      

            	
              (g)

            	
              all
      now existing and hereafter arising contracts and agreements to which the
      Borrower is party (each, an “Assigned Agreement”),
      including, without limitation, all rights of the Borrower to receive
      moneys due and to become due under or pursuant to the Assigned Agreements,
      all rights of the Borrower to receive proceeds of any insurance,
      indemnity, warranty or guaranty with respect to the Assigned Agreements,
      all claims of the Borrower for damages arising out of or for breach of or
      default under the Assigned Agreements, and all rights of the Borrower to
      terminate, amend, supplement or modify the Assigned Agreements, to perform
      thereunder and to compel performance and otherwise exercise all remedies
      thereunder;

            

    

     

    
      	
               
      

            	
              (h)

            	
              all
      books, records, writings, databases, information and other property
      relating to, used or useful in connection with, embodying, incorporating
      or referring to, any of the foregoing
  Collateral;

            

    

     

    
      	
               
      

            	
              (i)

            	
              all
      cash and cash equivalents held by the Borrower not otherwise included in
      the foregoing Collateral; and

            

    

     

    
      	
               
      

            	
              (j)

            	
              all
      products and proceeds of the foregoing Collateral (with the term “proceeds” having the
      meaning provided in the PPSA and also including any voluntary or
      involuntary disposition, and all rights to payment, including return
      premiums, with respect to any
insurance).

            

    

     

    
      	
              2.2

            	
              Excluded
      Collateral

            

    

     

    Notwithstanding
Section 2.1, the Collateral shall not include (collectively, “Excluded
Collateral”): (a) any property held in trust by the Borrower and lawfully
belonging to others, (b) the last day of the term of any lease of real property,
provided that the Borrower shall stand possessed of such last day and shall
assign and transfer such interest as instructed by the Lender; (c) with respect
to Section 2.1(c), any consumer goods used as such by the Borrower, (d) any
permit, lease or license or any contractual obligation entered into by Borrower
(i) that prohibits or requires the consent of any Person other than Borrower and
its Subsidiaries which has not been obtained as a condition to the creation by
Borrower of a Lien on any right, title or interest in such permit, lease,
license or contractual obligation or any Capital Stock or equivalent thereof
related thereto or that contains terms stating that the granting of a lien
therein would otherwise result in a material loss by Borrower of any material
rights therein, (ii) to the extent that any law applicable thereto prohibits the
creation of a Lien thereon or (iii) to the extent that a Lien thereon would
give any other party a legally enforceable right to terminate such permit,
lease, license or any contractual obligation, but only, with respect to the
prohibition in (i), (ii) and (iii) to the extent, and for as long as, such
prohibition is not terminated or rendered unenforceable or otherwise deemed
ineffective by the PPSA or any other applicable law, (e) property or assets
owned by Borrower that is subject to a purchase money Lien or a Capital Lease
Obligation if the contractual obligation pursuant to which such Lien is granted
(or in the document providing for such Capital Lease Obligation) prohibits or
requires the consent of any Person other than Borrower and its Subsidiaries
which has not been obtained as a condition to the creation of any other Lien on
such property or such assets, (f) any Intent To Use
Trademark or any similar Trademark existing under Canadian law and (g)
shares of capital stock having voting power in excess of 65% of the voting power
of all classes of capital stock of a first tier controlled foreign corporation
(as that term is described in the IRC); provided, however, “Excluded Collateral”
shall not include any proceeds, products, substitutions or replacements of
Excluded Collateral (unless such proceeds, products, substitutions or
replacements would otherwise constitute Excluded Collateral).

    
      
         

      

      
        - 3
-

        
          

        

      

      
         

      

    

    
      	
              2.3

            	
              Borrower
      Remains Liable

            

    

     

    Anything
herein to the contrary notwithstanding, (a) the Borrower shall remain
liable under all Assigned Agreements, to the extent set forth therein, to
perform all of its duties and obligations thereunder to the same extent as if
this Agreement had not been executed, (b) the exercise by the Lender of any
of the rights hereunder shall not release the Borrower from any of its duties or
obligations under such Assigned Agreements, and (c) the Lender shall not
have any obligation or liability under any Assigned Agreements by reason of this
Agreement, nor shall the Lender be obligated to perform any of the obligations
or duties of the Borrower thereunder or to take any action to collect or enforce
any such contract, agreement or other document included in the Collateral
hereunder.

     

    
      	
              2.4

            	
              Continuing
      Security Interest

            

    

     

    The
Borrower agrees that this Agreement shall create a general collateral continuing
security interest in the Collateral which shall remain in effect until
terminated in accordance with Section 10.14.

     

    
      	
              2.5

            	
              Attachment

            

    

     

    The
Borrower and the Lender intend that the security interest created hereby
attaches to existing Collateral upon the execution of this Agreement and that
the security interest will attach to Collateral acquired after the date of
execution of this Agreement at the time that the Borrower acquires rights in
that Collateral.  The Borrower and the Lender agree that value has
been given.  The Borrower represents and warrants that it has rights
in the existing Collateral.

     

    ARTICLE
3 - SECURED OBLIGATIONS

     

    
      	
              3.1

            	
              Secured
      Obligations

            

    

     

    The
obligations secured by this Agreement shall consist of all Indebtedness
(collectively, the “Secured
Obligations”).

     

    ARTICLE
4 - REPRESENTATIONS AND WARRANTIES

     

    [Reserved]

     

    ARTICLE
5 - COVENANTS AND AGREEMENTS

     

    [Reserved]

    
      
         

      

      
        - 4
-

        
          

        

      

      
         

      

    

    ARTICLE
6 - AUTHORIZED ACTION BY THE LENDER; RIGHTS TO PAYMENT

     

    [Reserved]

     

    ARTICLE
7 - ADDITIONAL PROVISIONS REGARDING

    INTELLECTUAL
PROPERTY

     

    [Reserved]

     

    ARTICLE
8 - REMEDIES; NOTICE OF SALE; RECEIVERS

     

    
      	
              8.1

            	
              Remedies

            

    

     

    During a
Default Period, the Lender may at its option, without notice to or demand on the
Borrower subject to applicable law and in addition to all rights and remedies
available to the Lender with respect to the Secured Obligations, at law, in
equity or otherwise, do any one or more of the following:

     

    
      	
               
      

            	
              (a)

            	
              foreclose
      or otherwise enforce the Lender’s security interest in any manner
      permitted by law or provided for in this
  Agreement;

            

    

     

    
      	
               
      

            	
              (b)

            	
              sell,
      lease or otherwise dispose of any Collateral at one or more public or
      private sales at the Lender’s place of business or any other place or
      places, including any broker’s board or securities exchange, whether or
      not such Collateral is present at the place of sale, for cash or credit or
      future delivery, on such terms and in such manner as the Lender may
      determine;

            

    

     

    
      	
               
      

            	
              (c)

            	
              use
      or transfer the Borrower’s rights and interests in any Intellectual
      Property Collateral by license, by sublicense (to the extent permitted by
      an applicable license), assignment or otherwise, on such conditions and in
      such manner as the Lender may
determine;

            

    

     

    
      	
               
      

            	
              (d)

            	
              recover
      from the Borrower all costs and expenses, including reasonable legal fees
      and disbursements, incurred or paid by the Lender in exercising any right,
      power or remedy provided by this
Agreement;

            

    

     

    
      	
               
      

            	
              (e)

            	
              require
      the Borrower to assemble the Collateral and make it available to the
      Lender at a place to be designated by the
  Lender;

            

    

     

    
      	
               
      

            	
              (f)

            	
              enter
      onto property where any Collateral is located and take possession thereof
      with or without judicial process;
and

            

    

     

    
      	
               
      

            	
              (g)

            	
              prior
      to the disposition of the Collateral, store, process, repair or
      recondition it or otherwise prepare it for disposition in any manner and
      to the extent the Lender deems appropriate and in connection with such
      preparation and disposition, without charge, use any trade-mark,
      tradename, copyright, patent or technical process used by the
      Borrower.

            

    

    
      
         

      

      
        - 5
-

        
          

        

      

      
         

      

    

    
      	
              8.2

            	
              Notice
      of Sale

            

    

     

    The
Borrower shall be given ten (10) days prior notice of the time and place of any
public sale or of the time after which any private sale or other intended
disposition of Collateral is to be made, which notice the Borrower hereby agrees
shall be deemed reasonable notice thereof.  Upon any sale or other
disposition pursuant to this Agreement, the Lender shall have the right to
deliver, assign and transfer to the purchaser thereof, the Collateral or portion
thereof so sold or disposed of.  The Lender shall have the right,
subject to applicable law, upon any public sale, and, to the extent permitted by
law, upon any private sale, to purchase the whole or any part of the Collateral
so sold.  Each purchaser at any such sale or other disposition
(including the Lender) shall hold the Collateral free from any claim or right of
whatever kind, including any equity or right of redemption of the Borrower and
the Borrower specifically waives (to the extent permitted by applicable law) all
rights of redemption, stay or appraisal which it has or may have under any rule
of law or statute now existing or hereafter adopted.

     

    
      	
              8.3

            	
              License

            

    

     

    For the
purpose of enabling the Lender to exercise its rights and remedies under
Section 8.1 or otherwise in connection with this Agreement, during a
Default Period, the Borrower hereby grants to the Lender an irrevocable,
non-exclusive and assignable license (exercisable without payment or royalty or
other compensation to the Borrower) or (to the extent permitted by the
applicable license) sublicense to use, license or sublicense any Intellectual
Property Collateral, subject with respect to trade-marks to reasonable and
appropriate quality control provisions.

     

    
      	
              8.4

            	
              Appointment
      of Receiver

            

    

     

    The
Lender may, during a Default Period, in addition to any other rights it may
have, appoint by instrument in writing a receiver, monitor, consultant,
liquidator or receiver and manager (all of which are herein called a “Receiver”) of all or any part
of the Collateral or may institute proceedings in any court of competent
jurisdiction for the appointment of such a Receiver.  Any such
Receiver is hereby given and shall have the same powers and rights and
exclusions and limitations of liability as the Lender has under this Agreement,
at law or in equity.  In exercising any such powers, any such Receiver
shall, to the extent permitted by applicable law, act as and for all purposes be
deemed to be the agent of the Borrower, and the Lender shall not be responsible
for any act or default of any such Receiver, except for any act or default that
results from the gross negligence or wilful misconduct of such
Receiver.  During a Default Period, Lender may appoint one or more
Receivers hereunder and may remove any such Receiver or Receivers and appoint
another or others in his or their stead from time to time.  Any
Receiver so appointed may be an officer or employee of the Lender, except as
prohibited under applicable law.  A court need not appoint, ratify the
appointment by the Lender of or otherwise supervise in any manner the actions of
any Receiver, except as required under applicable law.  Upon the
Borrower receiving notice from the Lender of the taking of possession of the
Collateral or the appointment of a Receiver, all powers, functions, rights and
privileges of the Borrower and, to the extent permitted by applicable law, its
directors and officers with respect to the Collateral shall cease, unless
specifically continued by the written consent of the Lender.

    
      
         

      

      
        - 6
-

        
          

        

      

      
         

      

    

    
      	
              8.5

            	
              Carrying
      on Business

            

    

     

    During a
Default Period, the Lender may carry on, or concur in the carrying on of, all or
any part of the business or undertaking of the Borrower, and may, subject to the
rights and liens of third parties but to the exclusion of the Borrower, enter
upon, occupy and use all or any of the premises, buildings, plant and
undertakings of or occupied or used by the Borrower and may use all or any of
the tools, machinery, equipment and intangibles of the Borrower for such time as
the Lender sees fit, free of charge, to carry on the business of the Borrower
and, if applicable, to manufacture or complete the manufacture of any Inventory
and to pack and ship the finished product.

     

    
      	
              8.6

            	
              Dealing
      with Collateral

            

    

     

    During a
Default Period, the Lender may seize, collect, realize, dispose of, enforce,
release to third parties or otherwise deal with the Collateral or any part
thereof in such manner, upon such terms and conditions and at such time or times
as may seem to it advisable, all without notice to the Borrower except as
otherwise required by any applicable law.  During a Default Period,
the Lender may demand, sue for and receive any Accounts with or without notice
to the Borrower, give such receipts, discharges and extensions of time and make
such compromises in respect of any Accounts which may, in the Lender’s absolute
discretion, seem bad or doubtful.  The Lender may charge on its own
behalf and pay to others, sums for costs and expenses incurred including,
without limitation, legal fees and expenses on a solicitor and his own client
scale and Receivers’ and accounting fees, in or in connection with seizing,
collecting, realizing, disposing, enforcing or otherwise dealing with the
Collateral and in connection with the protection and enforcement of the rights
of the Lender hereunder including, without limitation, in connection with advice
with respect to any of the foregoing.  The amount of such sums shall
be deemed advanced to the Borrower by the Lender, shall become part of the
Secured Obligations, shall bear interest at the highest rate per annum charged
by the Lender on the Secured Obligations or any part thereof and shall be
secured by this Agreement.

     

    
      	
              8.7

            	
              Right
      to Use

            

    

     

    During a
Default Period, the Borrower hereby grants to the Lender a license or other
right to use, without charge, all of the Borrower’s present and future property,
whether real or personal, including, without limitation, labels, patents,
copyrights, rights of use of any name, trade secrets, trade names, trade-marks,
services marks, and advertising matter, or any other property of any nature or
of a similar nature, as it pertains to the Collateral, in completing production
of, advertising for sale, and selling of any Collateral and the Borrower’s
rights under all licenses and all franchise agreements shall inure to the
Lender.

     

    
      	
              8.8

            	
              Retention
      of Collateral

            

    

     

    Upon
notice to the Borrower and subject to any obligation to dispose of any of the
Collateral, as provided in the PPSA and subject to any applicable law, during a
Default Period, the Lender may elect to retain all or any part of the Collateral
in satisfaction of the Secured Obligations or any of them.

    
      
         

      

      
        - 7
-

        
          

        

      

      
         

      

    

    
      	
              8.9

            	
              Pay
      Liens

            

    

     

    During a
Default Period, the Lender may pay any Liens that may exist or be threatened
against the Collateral.

     

    
      	
              8.10

            	
              Application
      of Payments

            

    

     

    Any and
all payments made in respect of the Secured Obligations from time to time and
moneys realized on the Collateral shall be applied in accordance with the Credit
Agreement.  Any insurance moneys received by the Lender pursuant to
this Agreement shall be applied in accordance with the Credit
Agreement.

     

    
      	
              8.11

            	
              Set-off

            

    

     

    The
Secured Obligations will be paid by the Borrower without regard to any equities
between the Borrower and the Lender or any right of set-off or
cross-claim.  During a Default Period, any indebtedness owing by the
Lender to the Borrower may be set-off and applied by the Lender against the
Secured Obligations either before or after maturity, without demand upon or
notice to anyone and regardless of the currency in which the indebtedness is
denominated; provided, that in no event shall Lender offset against Borrower’s
payroll account number 4121973010 maintained with Lender so long as the funds
held in such payroll account are limited to the amount required to satisfy the
Borrower’s payroll obligations during the following seven day period (as of any
date of determination).

     

    
      	
              8.12

            	
              Deficiency

            

    

     

    If the
proceeds of the realization of the Collateral are insufficient to repay to the
Lender all amounts owing to it, the Borrower shall forthwith pay such deficiency
or cause such deficiency to be paid to the Lender.

     

    
      	
              8.13

            	
              Lender
      Not Liable

            

    

     

    The
Lender shall not be liable or accountable for any failure to seize, collect,
realize, dispose of, enforce or otherwise deal with the Collateral, shall not be
bound to institute proceedings for any such purposes or for the purpose of
preserving any rights of the Lender, the Borrower or any other person, firm or
corporation in respect of the Collateral and shall not be liable or responsible
for any loss, cost or damage whatsoever which may arise in respect of any such
failure including, without limitation, resulting from the negligence of the
Lender or any of its officers, servants, agents, solicitors, attorneys,
Receivers or otherwise unless arising from gross negligence or wilful
misconduct.  Neither the Lender nor its officers, servants, agents, or
Receivers shall be liable by reason of any entry into possession of the
Collateral or any part thereof, to account as a mortgagee in possession, for
anything except actual receipts, for any loss on realization, for any act or
omission for which a mortgagee in possession might be liable, for any negligence
in the carrying on or occupation of the business or undertaking of the Borrower
or for any loss, cost, damage or expense whatsoever which may arise in respect
of any such actions, omissions or negligence unless arising from gross
negligence or wilful misconduct.

    
      
         

      

      
        - 8
-

        
          

        

      

      
         

      

    

    
      	
              8.14

            	
              Extensions
      of Time

            

    

     

    The
Lender may grant renewals, extensions of time and other indulgences, take and
give up securities, accept compositions, grant releases and discharges, perfect
or fail to perfect any securities, release its security interest in any part of
the Collateral and otherwise deal or fail to deal with the Borrower,
subsidiaries of the Borrower, guarantors, sureties and others and with the
Collateral and other securities as the Lender may see fit, all without prejudice
to the liability of the Borrower to the Lender or the Lender’s rights and powers
under this Security Agreement.

     

    
      	
              8.15

            	
              Rights
      in Addition

            

    

     

    The
rights and powers conferred by this Section are in supplement of and in addition
to and not in substitution for any other rights or powers the Lender may have
from time to time under this Agreement or under applicable law.  The
Lender may proceed by way of any action, suit, remedy or other proceeding at law
or in equity and no such remedy for the enforcement of the rights of the Lender
shall be exclusive of or dependent on any other such remedy.  Any one
or more of such remedies may from time to time be exercised separately or in
combination.

     

    ARTICLE
9 - PERFECTION AND PRIORITY

     

    
      	
              9.1

            	
              Financing
      Statements, Etc.

            

    

     

    The
Borrower hereby authorizes the Lender to file at any time and from time to time
any financing statements describing the Collateral, and the Borrower shall
execute and deliver to the Lender, and the Borrower hereby authorizes the Lender
to file (with or without the Borrower’s signature), at any time and from time to
time, all amendments to financing statements, continuation financing statements,
termination statements, security agreements relating to the Intellectual
Property Collateral, assignments, fixture filings, affidavits, reports, notices
and all other documents and instruments, in form reasonably satisfactory to the
Lender, as the Lender may reasonably request, to perfect and continue perfected,
maintain the priority of or provide notice of the Lender’s security interest in
the Collateral and to accomplish the purposes of this
Agreement.  Without limiting the generality of the foregoing, the
Borrower ratifies and authorizes the filing by the Lender of any financing
statements filed prior to the date hereof.

     

    
      	
              9.2

            	
              Bailees

            

    

     

    Any
Person (other than the Lender) at any time and from time to time holding all or
any portion of the Collateral shall be deemed to, and shall, hold the Collateral
as the agent of, and as pledge holder for, the Lender.  At any time
and from time to time, the Lender may give notice to any such Person holding all
or any portion of the Collateral that such Person is holding the Collateral as
the agent and bailee of, and as pledge holder for, the Lender, and obtain such
Person’s written acknowledgment thereof.  Without limiting the
generality of the foregoing, upon the written request of Lender, the Borrower
will join with the Lender in notifying any Person who has possession of any
Collateral of the Lender’s security interest therein and obtaining an
acknowledgment from such Person that it is holding the Collateral for the
benefit of the Lender.

    
      
         

      

      
        - 9
-

        
          

        

      

      
         

      

    

    
      	
              9.3

            	
              Control

            

    

     

    If any of
the Collateral consists of Investment Property, (a) the Borrower authorizes the
Lender, during any Default Period, to transfer such Collateral or any part
thereof into its own name or that of its nominee so that the Lender or its
nominee may appear of record as the sole owner thereof; provided, that until the
security hereby constituted becomes enforceable, the Lender shall deliver
promptly to the Borrower all notices, statements or other communications
received by it or its nominee as such registered owner, and upon demand and
receipt of payment of necessary expenses thereof, shall give to the Borrower or
its designee a proxy or proxies to vote and take all action with respect to such
property; provided further that after the security hereby constituted becomes
enforceable, the Borrower waives all rights to be advised of or to receive any
notices, statements or communications received by the Lender or its nominee as
such record owner, and agrees that no proxy or proxies given by the Lender to
the Borrower or its designee as aforesaid shall thereafter be effective; and (b)
the Borrower further agrees to execute such other documents and to perform such
other acts, and to cause any issuer or securities intermediary to execute such
other documents and to perform such other acts as may be necessary or
appropriate in order to give the Lender “control” of such Investment Property,
as defined in the Securities
Transfer Act, 2006 (Ontario), which “control” shall be in such manner as
the Lender shall designate in its reasonable judgement and discretion,
including, without limitation, an agreement by an issuer or securities
intermediary that it will comply with instructions in the case of an issuer or
entitlement orders in the case of a securities intermediary, originated by the
Lender, whether before or after security hereby constituted becomes enforceable,
without further consent by the Borrower.

     

    ARTICLE
10 - MISCELLANEOUS

     

    
      	
              10.1

            	
              Amendments
      and Waivers

            

    

     

    Except to
the extent otherwise provided herein or in any other Document, (a) no
amendment to any provision of this Agreement shall in any event be effective
unless the same shall be in writing and signed by the Borrower and the Lender
and (b) no waiver of any provision of this Agreement, or consent to any
departure by the Borrower or other party therefrom, shall in any event be
effective unless the same shall be in writing and signed by the
Lender.  Any such amendment, waiver or consent shall be effective only
in the specific instance and for the specific purpose for which
given.

     

    
      	
              10.2

            	
              Notices

            

    

     

    All
notices required or permitted under this Agreement shall be given in the manner
and to the addresses specified in the Credit Agreement.

     

    
      	
              10.3

            	
              No
      Waiver; Cumulative Remedies

            

    

     

    No
failure on the part of the Lender to exercise, and no delay in exercising, any
right, remedy, power or privilege under this Agreement shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right, remedy,
power or privilege preclude any other or further exercise thereof or the
exercise of any other right, remedy, power or privilege.  The rights
and remedies under this Agreement are cumulative and not exclusive of any
rights, remedies, powers and privileges that may otherwise be available to the
Lender.

    
      
         

      

      
        - 10
-

        
          

        

      

      
         

      

    

    
      	
              10.4

            	
              Binding
      Effect

            

    

     

    This
Agreement shall be binding upon the Borrower and its successors and assigns,
including any successor by reason of amalgamation, and inure to the benefit of
and be enforceable by the Lender and its successors, endorsees, transferees and
assigns.

     

    
      	
              10.5

            	
              Assignment

            

    

     

    The
Borrower may not assign or otherwise transfer any of its rights or obligations
hereunder without the prior written consent of the Lender, and any attempted
assignment in violation of this provision shall be null and void.  The
Lender may assign this Agreement in whole or in part to any Person acquiring an
interest in the Secured Obligations in accordance with the provisions of the
Credit Agreement.

     

    
      	
              10.6

            	
              Costs
      and Expenses

            

    

     

    The
Borrower agrees to pay on demand all reasonable costs and expenses of the
Lender, any Receiver, or the agents of the Lender or any Receiver, and
reasonable legal fees and disbursements in connection with the perfection,
enforcement, or preservation of any rights under, this Agreement and the other
Documents.

     

    
      	
              10.7

            	
              Severability

            

    

     

    Whenever
possible, each provision of this Agreement shall be interpreted in such manner
as to be effective and valid under all applicable laws and
regulations.  If, however, any provision of this Agreement shall be
prohibited by or invalid under any such law or regulation, it shall be deemed
modified to conform to the minimum requirements of such law or regulation, or,
if for any reason it is not deemed so modified, it shall be ineffective and
invalid only to the extent of such prohibition or invalidity without affecting
the remaining provisions of this Agreement.

     

    
      	
              10.8

            	
              Governing
      Law

            

    

     

    This
Agreement is to be exclusively construed in accordance with and governed by the
internal laws of the Province of Ontario and the federal laws of Canada
applicable therein without giving effect to any choice of law rule or principle
that would cause the application of the laws of any jurisdiction other than the
internal laws of the Province of Ontario and the federal laws of Canada
applicable therein to the rights and duties of the Borrower and the
Lender.

     

    
      	
              10.9

            	
              Submission
      to Jurisdiction

            

    

     

    The
Borrower hereby (a) submits to the non-exclusive jurisdiction of the courts
of the Province of Ontario sitting in Toronto for the purpose of any action or
proceeding arising out of or relating to this Agreement and the other Loan
Documents, (b) agrees that all claims in respect of any such action or
proceeding may be heard and determined in such courts, (c) irrevocably
waives (to the extent permitted by applicable law) any objection which it now or
hereafter may have to the laying of venue of any such action or proceeding
brought in any of the foregoing courts, and any objection on the ground that any
such action or proceeding in any such court has been brought in an inconvenient
forum and (d) agrees that a final judgment in any such action or proceeding
shall be conclusive and may be enforced in other jurisdictions by suit on the
judgment or in any other manner permitted by law.

    
      
         

      

      
        - 11
-

        
          

        

      

      
         

      

    

    
      	
              10.10

            	
              Judgment
      Currency

            

    

     

    If, for
the purposes of obtaining judgment in any court, it is necessary to convert a
sum due hereunder or any Loan Document in one currency into another currency,
the rate of exchange used shall be that at which in accordance with practices of
the Lender could purchase the first currency with such other currency on the
Business Day preceding that on which final judgment is given.  The
obligation of the Borrower in respect of any such sum due from it to the Lender
hereunder or under the other Loan Documents shall, notwithstanding any judgment
in a currency (the “Judgment
Currency”) other than that in which such sum is denominated in accordance
with the applicable provisions of the Loan Documents or other relevant document
(the “Agreement
Currency”), be discharged only to the extent that on the Business Day
following receipt by the Lender of any sum adjudged to be so due in the Judgment
Currency, the Lender may in accordance with normal practices purchase the
Agreement Currency with the Judgment Currency.  If the amount of the
Agreement Currency so purchased is less than the sum originally due to the
Lender from the Borrower in the Agreement Currency, the Borrower agrees, as a
separate obligation and notwithstanding any such judgment, to indemnify the
Lender against such loss.  If the amount of the Agreement Currency so
purchased is greater than the sum originally due to the Lender in such currency,
the Lender agrees to return the amount of any excess to the Borrower (or to any
other Person who may be entitled thereto under applicable law).  The
agreements in this Section 10.10 shall survive the repayment of all Secured
Obligations.

     

    
      	
              10.11

            	
              Entire
      Agreement

            

    

     

    This
Agreement and the other Loan Documents constitutes the entire agreement of the
parties hereto with respect to the matters set forth herein and supersede any
prior agreements, commitments, drafts, communications, discussions and
understandings, oral or written, with respect thereto.

     

    
      	
              10.12

            	
              Counterparts

            

    

     

    This
Agreement may be executed in several counterparts by facsimile transmission or
PDF, each of which shall be deemed an original and all of which when taken
together shall constitute one and the same agreement.

    
      
         

      

      
        - 12
-

        
          

        

      

      
         

      

    

    
      	
              10.13

            	
              Termination

            

    

     

    Upon
payment and performance in full of all Secured Obligations, the security
interests created by this Agreement shall terminate and the Lender shall execute
and deliver to the Borrower, at the Borrower’s sole cost and expense, such
documents and instruments reasonably requested by the Borrower as shall be
necessary to evidence termination of all security interests given by the
Borrower to the Lender hereunder.

     

    
      	
              10.14

            	
              Indemnity

            

    

     

    The
Borrower hereby agrees to indemnify the Lender, and its successors, assigns,
agents and employees, from and against any and all liabilities, damages,
penalties, suits, costs, and expenses of any kind and nature (including, without
limitation, all reasonable expenses of litigation or preparation therefor
whether or not the Lender is a party thereto) imposed on, incurred by or
asserted against the Lender, or its successors, assigns, agents and employees,
in any way relating to or arising out of this Agreement, or the manufacture,
purchase, acceptance, rejection, ownership, delivery, lease, possession, use,
operation, condition, sale, return or other disposition of any Collateral
(including, without limitation, latent and other defects, whether or not
discoverable by the Lender or the Borrower, and any claim for patent, trade-mark
or copyright infringement), except for the gross negligence or wilful misconduct
of the Lender.

     

    
      	
              10.15

            	
              Acknowledgement
      of Receipt

            

    

     

    The
Borrower acknowledges receipt of a copy of this Agreement.

     

    [SIGNATURE
PAGE FOLLOWS]

    
      
         

      

      
        - 13
-

        
          

        

      

      
         

      

    

    IN WITNESS WHEREOF the
undersigned has executed and delivered this Agreement under seal with effect as
of the date first written above.

     

    
      	 
      	
              PHYSICIANS
      FORMULA, INC.

               

            
	 
      	
              By:

            	
              /s/
      Ingrid Jackel

            
	 
      	 
      	
              Name: Ingrid
      Jackel

            
	 
      	 
      	
              Authorized
      Signing Officer

            

    

     

     

    - 14 -

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