SECURITY AGREEMENT
This SECURITY AGREEMENT (this "AGREEMENT") is dated as of August 24,
2005, by and between PacificHealth Laboratories, Inc., a Delaware corporation
("DEBTOR"), and Hormel Health Labs, LLC (the "LENDER").
RECITALS:
A. Debtor entered into a Securities Purchase Agreement (the "PURCHASE
AGREEMENT") of even date herewith pursuant to which Debtor borrowed $500,000
from Lender under the terms of a Secured Promissory Note (the "NOTE").
B. As a condition to the execution and delivery of the Purchase
Agreement, the Lender required Debtor to secure Debtor's obligations to the
Lender under the Note by granting the Lender a lien on and security interest in
all of Debtor's property.
NOW, THEREFORE, in consideration of the foregoing Recitals and for
other good and valuable consideration, receipt of which is hereby acknowledged,
and intending to be bound hereby, Debtor agrees with the Lender, for the benefit
of the Lender, as follows:
1. GRANT OF SECURITY INTEREST. For valuable consideration, Debtor
hereby grants and transfers to the Lender, for the benefit of the Lender, a
security interest in all of the now held and hereafter acquired property of
Debtor described as follows (collectively, the "COLLATERAL"):
(a) all accounts receivable, accounts, chattel paper, contract rights
(including, without limitation, royalty agreements, license agreements and
distribution agreements), documents, instruments, money, deposit accounts and
general intangibles, including, without limitation, payment intangibles,
returns, repossessions, books and records relating thereto, and equipment
containing said books and records, all financial assets, all investment
property, including securities and securities entitlements;
(b) all software, computer source codes and other computer programs and
supporting information (collectively, the "SOFTWARE PRODUCTS"), and all common
law and statutory copyrights and copyright registrations, applications for
registration, now existing or hereafter arising, United States of America and
foreign, obtained or to be obtained on or in connection with the Software
Products, or any parts thereof or any underlying or component elements of the
Software Products together with the right to copyright and all rights to renew
or extend such copyrights and the right (but not the obligation) of any lender
to xxx in its own name and/or the name of the Company for past, present and
future infringements of copyright;
(c) all goods, including, without limitation, equipment and inventory
(including, without limitation, all export inventory) and all computer programs
embedded in goods and any supporting information;
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(d) all guarantees and other security therefor;
(e) all trademarks, service marks, trade names and service names and
the goodwill associated therewith;
(f) (a) all patents and patent applications, including but not limited
to those patents and patent applications set forth on Schedule A hereto, filed
in the United States Patent and Trademark Office or any similar office of any
foreign jurisdiction, and interests under patent license agreements, including,
without limitation, the inventions and improvements described and claimed
therein, (b) licenses pertaining to any patent whether the Company is licensor
or licensee, (c) all income, royalties, damages, payments, accounts and accounts
receivable now or hereafter due and/or payable under and with respect thereto,
including, without limitation, damages and payments for past, present or future
infringements thereof, (d) the right (but not the obligation) to xxx for past,
present and future infringements thereof, (e) all rights corresponding thereto
throughout the world in all jurisdictions in which such patents have been issued
or applied for, and (f) the reissues, divisions, continuations, renewals,
extensions and continuations-in-part with any of the foregoing (all of the
foregoing patents and applications and interests under patent license
agreements, together with the items described in clauses (a) through (f) in this
paragraph are sometimes herein individually and collectively referred to as the
"PATENTS");
(g) all letter-of-credit rights and letters of credit; together with
(h) whatever is receivable or received when any of the foregoing or the
proceeds thereof are sold, leased, collected, exchanged or otherwise disposed
of, whether such disposition is voluntary or involuntary, including without
limitation, all rights to payment, including returned premiums, with respect to
any insurance relating to any of the foregoing, and all rights to payment with
respect to any claim or cause of action affecting or relating to any of the
foregoing (collectively, "PROCEEDS").
2. OBLIGATIONS SECURED. The obligations secured hereby (the "SECURED
OBLIGATIONS") consist of the following: all of Debtor's obligations of payment
and performance now or in the future arising under or in connection with (i) the
Purchase Agreement or (ii) the Note.
3. TERMINATION. This Agreement will terminate, the Lender's security
interests in the Collateral described in this Security Agreement will terminate,
and UCC termination statements will be filed when the Secured Obligations have
been fully satisfied and Lender shall have provided a written release of its
security interests evidenced hereunder.
4. REPRESENTATIONS AND WARRANTIES. Debtor represents and warrants to
the Lender that: (a) Debtor's legal name is exactly as set forth on the first
page of this Agreement, and all of Debtor's organizational documents or
agreements delivered to the Lender are complete and accurate in every respect;
(b) Debtor is the owner and has possession or control of the Collateral and
Proceeds; (c) Debtor has the exclusive right to grant a security interest in the
Collateral and Proceeds; (d) except for the liens and security interests created
hereby or pursuant to the obligations of the Company to Fidelity Funding
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Business Credit, Ltd., dba USA Funding, Ltd. pursuant to the Purchase & Sale
Agreement dated May 28, 2003 between the Company and Fidelity Funding Business
Credit, Ltd., dba USA Funding, Ltd. as amended by the First Amendment to the
Purchase & Sale Agreement dated June 1, 2004 (the "USA OBLIGATION") or as
permitted by the Note, or otherwise agreed to in writing by the Lender,
Collateral and Proceeds are: (i) genuine and free from valid liens or
encumbrances and (ii) with respect to accounts, to the best of Debtor's
knowledge, such accounts are free of valid adverse claims, set-offs, default,
prepayment, defenses or other conditions precedent except those that occur in
the ordinary course of Debtor's business as Debtor's business is currently
conducted; (e) all statements contained herein and, where applicable, in the
Note or the Purchase Agreement as to the Collateral are true and complete in all
material respects; (f) except with respect to the USA Obligation, there is no
valid financing statement covering any of the Collateral or Proceeds, and naming
any secured party other than Lender, on file in any public office; (g) where
Collateral consists of rights to payment, to the best of Debtor's knowledge, all
persons appearing to be obligated on the Collateral and Proceeds have authority
and capacity to contract and are bound as they appear to be, all property
subject to chattel paper (if any) has been properly registered and filed in
compliance with law and to perfect the interest of Debtor in such property, and
all such Collateral and Proceeds comply with all applicable laws concerning
form, content and manner of preparation and execution, including where
applicable Federal Reserve Regulation Z and any applicable consumer credit laws;
and (h) where the Collateral consists of Equipment, Debtor is not in the
business of selling goods of the kind included within such Collateral, and
Debtor acknowledges that no sale or other disposition of any such Collateral,
including without limitation, any Equipment that Debtor may deem to be surplus,
has been consented to or acquiesced in by the Lender.
5. COVENANTS OF DEBTOR.
(a) Debtor agrees: (i) to pay the Secured Obligations secured hereby when
due; (ii) to indemnify and hold harmless the Lender against all losses,
claims, demands, liabilities and expenses of every kind caused by property
subject hereto; (iii) to pay all costs and expenses, including reasonable
attorneys' fees (whether incurred before trial, at trial, or in any
bankruptcy or arbitration) incurred by Lender in enforcing Lender's
interest therein and/or the realization, enforcement and exercise of the
Lender's rights, powers and remedies hereunder; (iv) to permit Lender to
exercise its powers hereunder; (v) to execute and deliver such documents as
Lender deems necessary to create, perfect and continue the security
interests contemplated hereby; (vi) not to change its name, and as
applicable, its chief executive office, its principal residence or the
jurisdiction in which it is organized and/or registered without giving the
Lender prior written notice thereof; (vii) not to change the places where
Debtor keeps any Collateral or Debtor's records concerning the Collateral
and Proceeds without giving the Lender prior written notice of the address
to which Debtor is moving same; and (viii) to cooperate with the Lender in
perfecting all security interests granted herein and in obtaining such
agreements from third parties as the Lender deems necessary, proper or
convenient in connection with the preservation, perfection or enforcement
of any of its rights hereunder.
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(b) Debtor agrees with regard to the Collateral and Proceeds (but not
with respect to any property other than Collateral and Proceeds): (i) that
Lender is authorized to file financing statements in the name of Debtor to
perfect Lender's security interest in Collateral and Proceeds; (ii) where
applicable, to insure the Collateral with Lender named as loss payee, in form,
substance and amounts, under agreements, against risks and liabilities, and with
insurance companies, in a manner satisfactory to Lender; (iii) where applicable,
to operate the Collateral in accordance with all applicable statutes, rules and
regulations relating to the use and control thereof, and not to use any
Collateral for any unlawful purpose or in any way that would void any insurance
required to be carried in connection therewith; (iv) not to remove the
Collateral from Debtor's premises, except (A) for deliveries to buyers in the
ordinary course of Debtor's business and (B) Collateral which consists of mobile
goods as defined in the Delaware Uniform Commercial Code, in which case Debtor
agrees not to remove or permit the removal of such Collateral from its state of
domicile for a period in excess of thirty (30) calendar days; (v) to pay when
due all license fees, registration fees and other charges in connection with any
Collateral; (vi) except to the extent specifically permitted by the Purchase
Agreement and the Note, not to permit any lien on the Collateral or Proceeds,
including without limitation, liens arising from repairs to or storage of the
Collateral, except in favor of the Lender and the sale of Accounts pursuant to
the USA Obligation; (vii) not to sell, hypothecate or dispose of, nor permit the
transfer by operation of law of, any of the Collateral or Proceeds or any
interest therein, except sales of inventory to buyers in the ordinary course of
Debtor's business; (viii) to permit the Lender to inspect the Collateral at any
time; (ix) to keep, in accordance with generally accepted accounting principles,
complete and accurate records regarding all Collateral and Proceeds, and to
permit the Lender or its representatives to inspect the same and make copies
thereof at any reasonable time; (x) if requested by the Lender, to receive and
use reasonable diligence to collect Collateral consisting of accounts and other
rights to payment and Proceeds, after an Event of Default, in trust and as the
property of Lender, and to immediately endorse as appropriate and deliver such
Collateral and Proceeds to Lender daily in the exact form in which they are
received together with a collection report in form satisfactory to the Lender;
(xi) not to commingle Collateral or Proceeds, or collections thereunder, with
other property except for Proceeds deposited in Debtor's account(s) maintained
at the Lender. As used herein the prohibition on commingling of Collateral
refers to combining or intermixing Equipment or inventory in which the Lender is
granted a security interest pursuant to this Agreement with other property in
which the Lender has no security interest if the effect of such combining or
intermixing is that the property in which the Lender is not granted a security
interest hereunder cannot be differentiated and separated from the Collateral in
which the Lender is granted a security interest pursuant to this Agreement;
(xii) to give only allowances and credits on accounts in the ordinary course of
Debtor's business and to advise the Lender of the same immediately in writing if
they affect any rights to payment or Proceeds in any material respect; (xiii)
from time to time, when requested by the Lender, to prepare and deliver a
schedule of all Collateral and Proceeds subject to this Agreement, and to assign
in writing and deliver to the Lender all accounts, contracts, leases and other
chattel paper, instruments, documents and other evidences thereof; (xiv) in the
event the Lender elects to receive payments or rights to payment or Proceeds
hereunder to pay all reasonable expenses incurred by the Lender in connection
therewith, including reasonable expenses of accounting, correspondence,
collection efforts, reporting to account or contract debtors, filing, recording,
record keeping and expenses incidental thereto; and (xv) to provide any service
and do any other acts which may be necessary to maintain, preserve and protect
all Collateral and, as appropriate and applicable, to keep all Collateral in
good and saleable condition, to deal with the Collateral in accordance with the
standards and practices adhered to generally by users and manufacturers of like
property, and to keep all Collateral and Proceeds free and clear of all
defenses, rights of offset and counterclaims.
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Lender agrees that the following liens shall not violate this Agreement: (a)
liens created pursuant to the USA Obligations, and (b) equipment leases
permitted by the Note. In addition, Lender agrees that its security interest in
any Accounts which are sold pursuant to the terms of the USA Obligations shall
lapse upon such sale.
6. POWERS OF LENDER. Debtor appoints the Lender its true attorney in
fact to perform any of the following powers, which are coupled with an interest,
are irrevocable until termination of this Agreement and may be exercised from
time to time by the Lender's officers and employees, or any of them: (a) to
perform any obligation of Debtor hereunder in Debtor's name or otherwise; (b) to
give notice to account debtors or others of the Lender's rights in the
Collateral and Proceeds, to enforce or forebear from enforcing the same and make
extension and modification agreements with respect thereto; (c) to release
persons liable on Collateral or Proceeds and to give receipts and acquittances
and compromise disputes in connection therewith; (d) to release or substitute
security; (e) to resort to security in any order; (f) to prepare, execute, file,
record or deliver notes, assignments, schedules, designation statements,
financing statements, continuation statements, termination statements,
statements of assignment, applications for registration or like papers to
perfect, preserve or release the Lender's interest in the Collateral and
Proceeds; (g) to receive, open and read mail addressed to Debtor; (h) to take
cash, instruments for the payment of money and other property to which the
Lender is entitled; (i) to verify facts concerning the Collateral and Proceeds
by inquiry of obligors thereon, or otherwise, in its own name or a fictitious
name; (j) to endorse, collect, deliver and receive payment under instruments for
the payment of money constituting or relating to Proceeds; (k) to prepare,
adjust, execute, deliver and receive payment under insurance claims, and to
collect and receive payment of and endorse any instrument in payment of loss or
returned premiums or any other insurance refund or return, and to apply such
amounts received by the Lender toward repayment of the Secured Obligations or,
where appropriate and if approved by the Secured Creditors, replacement of the
Collateral; (l) to exercise all rights, powers and remedies which Debtor would
have, but for this Agreement, with respect to all Collateral and Proceeds
subject hereto; (m) to enter onto Debtor's premises in inspecting the
Collateral; (n) to make withdrawals from and to close deposit accounts or other
accounts with any financial institution, wherever located, into which Proceeds
may have been deposited, and to apply funds so withdrawn to payment of the
Secured Obligations; (o) to preserve or release the interest evidenced by
chattel paper to which the Lender is entitled hereunder and to endorse and
deliver any evidence of title incidental thereto; and (p) to do all acts and
things and execute all documents in the name of Debtor or otherwise, deemed by
the Lender as necessary, proper and convenient in connection with the
preservation, perfection or enforcement of its rights hereunder; provided
however, that the Lender shall not take any of the above actions to the extent
inconsistent with the rights of Fidelity Funding Business Credit, Ltd. pursuant
to the USA Obligations. The Lender shall exercise its rights as attorney in fact
under this Agreement only upon the occurrence and continuation of an Event of
Default (as that term is defined in the Note).
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7. PAYMENT OF PREMIUMS, TAXES, CHARGES, LIENS AND ASSESSMENTS. Debtor
agrees to pay, when due, all insurance premiums, taxes, charges, liens and
assessments (collectively, the "ASSESSMENTS") against the Collateral and
Proceeds, and upon the failure of Debtor to do so, the Lender at its option may
pay any of them and shall be the sole judge of the legality or validity thereof
and the amount necessary to discharge the same. Any such payments made by the
Lender shall be obligations of Debtor to the Lender, due and payable immediately
upon demand, together with interest at a rate determined in accordance with the
provisions of Section 14 of this Agreement, and shall be secured by the
Collateral and Proceeds, subject to all terms and conditions of this Agreement.
Notwithstanding the foregoing, any Assessments that are payable in installments
may be paid in installments as long as each installment is paid by its due date.
Further, Debtor may diligently contest, in good faith and by appropriate
proceedings, the amount or validity of any Assessments as long as Debtor
provides the Lender with prior written notice of the contest and if the Lender
so requests, provides a bond or other security acceptable to the Lender.
8. EVENTS OF DEFAULT. Any Event of Default (as defined in the Note) is
an Event of Default under this Agreement.
9. REMEDIES. Upon an Event of Default, the Lender shall have all other
rights, powers, privileges and remedies granted to a secured party upon default
under the Delaware Uniform Commercial Code or otherwise provided by law,
including without limitation, the right (a) subject to the USA Obligations, to
contact all persons obligated to Debtor on any Collateral or Proceeds and to
instruct such persons to deliver all Collateral and/or Proceeds directly to the
Lender, and (b) to sell, lease, license or otherwise dispose of any or all
Collateral. All rights, powers, privileges and remedies of the Lender shall be
cumulative. No delay, failure or discontinuance of the Lender in exercising any
right, power, privilege or remedy hereunder or under the Note or Purchase
Agreement shall affect or operate as a waiver of such right, power, privilege or
remedy; nor shall any single or partial exercise of any such right, power,
privilege or remedy preclude, waive or otherwise affect any other or further
exercise thereof or the exercise of any other right, power, privilege or remedy.
Any waiver, permit, consent or approval of any kind by the Lender of any default
hereunder or under the Note or Purchase Agreement, or any such waiver of any
provisions or conditions hereof, must be in writing and shall be effective only
to the extent set forth in writing. While an Event of Default exists: (a) Debtor
will deliver to the Lender from time to time, as requested by the Lender,
current lists of all Collateral and Proceeds; (b) Debtor will not dispose of any
Collateral or Proceeds except pursuant to the provisions of the USA Obligations
or on terms approved by the Lender; (c) at the Lender's request, Debtor will
assemble and deliver all Collateral and Proceeds, and books and records
pertaining thereto, to the Lender at a reasonably convenient place designated by
the Lender; and (d) the Lender may, without notice to Debtor, enter onto
Debtor's premises and take possession of the Collateral. With respect to any
sale or other disposition by the Lender of any Collateral subject to this
Agreement, Debtor hereby expressly grants to the Lender the right to sell such
Collateral using any or all of Debtor's trademarks, trade names, trade name
rights and/or proprietary labels or marks. Debtor further agrees that the Lender
shall have no obligation to process or prepare any Collateral for sale or other
disposition.
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10. DISPOSITION OF COLLATERAL AND PROCEEDS; TRANSFER OF INDEBTEDNESS.
In disposing of Collateral hereunder, the Lender may disclaim all warranties of
title, possession, quiet enjoyment and the like. Any proceeds of any disposition
of any Collateral or Proceeds, or any part thereof, may be applied by the Lender
to the payment of expenses and fees incurred by or owed to the Lender,
reasonable attorneys' fees, and the balance of such proceeds may be distributed
by the Lender toward the payment of the Secured Obligations in such order of
application as may be required by the Note and Purchase Agreement.
11. STATUTE OF LIMITATIONS. Until all Secured Obligations shall have
been paid in full and all commitments by the Lender to extend credit to Debtor
pursuant to the Note and Purchase Agreement have been terminated, the power of
sale or other disposition and all other rights, powers, privileges and remedies
granted to the Lender hereunder shall continue to exist and may be exercised by
the Lender at any time and from time to time irrespective of the fact that the
Secured Obligations or any part thereof may have become barred by any statute of
limitations, or that the personal liability of Debtor may have ceased, unless
such liability shall have ceased due to the payment in full of all Secured
Obligations secured hereunder.
12. MISCELLANEOUS WAIVERS. Debtor hereby waives any right to require
the Lender to (i) proceed against Debtor or any other person, (ii) proceed
against or exhaust any security from Debtor or any other person, (iii) perform
any obligation of Debtor with respect to any Collateral or Proceeds, and (d)
except as specifically required under other provisions of this Agreement, make
any presentment or demand, or give any notice of nonpayment or nonperformance,
protest, notice of protest or notice of dishonor hereunder or in connection with
any Collateral or Proceeds. Debtor further waives any right to direct the
application of payments or security for any Secured Obligations of Debtor or
indebtedness of customers of Debtor.
13. NOTICES. All notices, requests and demands required under this
Agreement must be in writing, addressed to the Lender at the address specified
in the Purchase Agreement, to Debtor at the address designated in the Purchase
Agreement, or to such other address as any party may designate by written notice
to each other party, and shall be deemed to have been given or made as follows:
(a) if personally delivered, upon delivery; (b) if sent by mail, upon the
earlier of the date of receipt or three (3) days after deposit in the U.S. mail,
first class and postage prepaid; and (c) if sent by telecopy, upon receipt.
14. COSTS, EXPENSES AND ATTORNEYS' FEES. Debtor shall pay to the Lender
immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of Lender's in-house counsel), expended or
incurred by the Lender in exercising any right, power, privilege or remedy
conferred by this Agreement or in the enforcement thereof, whether incurred at
the trial or appellate level, in an arbitration proceeding or otherwise, and
including any of the foregoing incurred in connection with any bankruptcy
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proceeding (including without limitation, any adversary proceeding, contested
matter or motion brought by the Lender or any other person) relating to Debtor
or in any way affecting any of the Collateral, the Proceeds or the Lender's
ability to exercise any of its rights or remedies with respect thereto. All of
the foregoing shall be paid by Debtor with interest from the date of demand
until paid in full at a rate per annum equal to the Default Rate specified in
the Note. Notwithstanding anything apparently to the contrary in this Section
14, if the Lender demands payment of any of the costs, expenses and attorney
fees described in this Section 14 in the absence of an Event of Default, then
Debtor shall have 30 days from the date of such demand to make such payment and
if no Event of Default has occurred during that 30 day period, Debtor may make
such payment within that 30 day period without having to pay interest on such
payment.
15. SUCCESSORS; ASSIGNS; AMENDMENT. This Agreement shall be binding
upon and inure to the benefit of the heirs, executors, administrators, legal
representatives, successors and assigns of the parties, and may be amended or
modified only in writing signed by the Lender and Debtor.
16. SEVERABILITY OF PROVISIONS. If any provision of this Agreement
shall be held to be prohibited by or invalid under applicable law, such
provision shall be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or any
remaining provisions of this Agreement.
17. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the General Corporation Law of the state of Delaware as to
matters within the scope thereof, and as to all other matters shall be governed
by and construed in accordance with the internal laws of the New Jersey, without
regard to its principles of conflicts of laws. Any disputes hereunder shall be
resolved pursuant to Section 7.13 of the Purchase Agreement.
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, this Agreement has been duly executed as of the
first date written above.
PacificHealth Laboratories, Inc.
By: /s/ Xxxxxxx X. Xxxxxx
---------------------------------------
Name: Xxxxxxx X. Xxxxxx
Title: CFO/COO
Accepted and agreed as of the first date written above.
Hormel Health Labs, LLC
By: /s/ Xxxxx X. Xxxxxxx
-------------------------------------
Name: Xxxxx X. Xxxxxxx
Title: Vice President
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Schedule A
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PATENTS AND PATENTS PENDING
1. US 6,716,815 B2 - Nutritional Intervention Composition for Enhancing and
Extending Satiety, Issued April 6, 2004
2. US 6,558,690 B2 - Nutritional Composition for Improving the Efficacy of a
Lipase Inhibitor, Issued May 6, 2003
3. US 6,468,962 B1 - Nutritional Intervention Composition for Enhancing and
Extending Satiety, Issued October 22, 2002
4. US 6,436,899 B2 - Nutritional Intervention Composition for Enhancing and
Extending Satiety, Issued August 20, 2002
5. US 6,429,190 B1 - Method for Extending the Satiety of Food by Adding a
Nutritional Composition Designed to Stimulate Cholecystokinin (CCK), Issued
August 6, 2002
6. US 6,207,638 B1 - Nutritional Intervention Composition for Enhancing and
Extending Satiety, Issued March 27, 2001
7. U.S. 6,838,431 - Nutritional Intervention Composition Containing Proteinase
Inhibitor for Extending Post Meal Satiety, Issued January 4, 2005
8. Patent Pending 10/274,071 - Composition for Reducing Caloric Intake
(Submitted on October 18, 2002)
9. US 5,585,101 - Method to Improve Performance During Exercise Using the
Ciwujia Plant, Issued December 17, 1996
10. US 6,051, 236 - Composition for Optimizing Muscle Performance During
Exercise, Issued April 18, 2000
11. Patent Pending 09/824,357 - Sports Drink Composition For Enhancing Glucose
Uptake And Extending Endurance During Physical Exercise, Filed April 2, 2001
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