SECURITY AGREEMENT
THIS SECURITY AGREEMENT made this ____ day of December, 1999, by and
among Derma Sciences, Inc., a Pennsylvania corporation with offices located at
▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇, ▇▇▇▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇▇ ("▇▇▇▇▇ Sciences"),
Genetic Laboratories Wound Care, Inc., a Minnesota corporation with offices at
▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇, ▇▇. ▇▇▇▇, ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇ and Sunshine Products, Inc., a
Missouri corporation with offices at ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇, ▇▇. ▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
(collectively, the "Debtors") and ▇▇▇▇▇ Partners III, L.P., a New York limited
partnership with offices at ▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇
Partners International III, L.P., a New York limited partnership with offices at
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇ Employee Fund III, L.P., a New
York limited partnership with offices at ▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇
▇▇▇▇▇, and Med-Tec Investors, LLC, a New Jersey limited liability company with
offices at ▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇ (collectively, the
"Secured Parties").
WHEREAS, Derma Sciences has issued bonds of even date herewith (the
"Bonds") to the Secured Parties; and WHEREAS, as a condition to the
Bonds and as collateral for payment of Derma Sciences' obligations
thereunder (the "Obligations"), the Debtors have agreed to grant the Secured
Parties a security interest in the Collateral (as hereinafter defined);
NOW THEREFORE, in consideration of the mutual promises contained herein
and other good and valuable consideration, and intending to be legally bound
hereby, the parties agree as follows:
1. COLLATERAL. For purposes of this Agreement, "Collateral" means all
property now owned or hereafter acquired by Debtors and any and all inventory,
supplies, accounts receivable,
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machinery, equipment, tools, fixtures, furnishings, furniture, books, records,
charts, analyses, compilations, contract rights, reports, any and all other
personal property and goods, any and all general intangibles, trade secrets,
intellectual property, trademarks (and all goodwill pertaining thereto),
copyrights, patents, and all replacements, substitutions and cash and non-cash
proceeds thereof. Collateral also includes all leases, subleases and rentals now
or hereafter entered into pertaining to any of the foregoing, together with all
cash and non-cash proceeds thereof, and the proceeds of any insurance policy
payable by reason of loss or damage to any of the foregoing.
2. SECURITY INTEREST. As security for the prompt payment of the
Obligations, when due, at maturity or by acceleration upon default, the Debtors
hereby grant to the Secured Parties a lien upon and a continuing security
interest in all Collateral in which the Debtors now or may hereafter acquire an
interest. Provided, however, the security interest granted hereby is, and shall
be, subject to the prior security interest in the Collateral ("Prior Security
Interest") granted to the holders of the Company's $875,000 aggregate principal
amount convertible bonds due August 15, 2000.
3. REPRESENTATIONS AND WARRANTIES. The Debtors represent and warrant to
the Secured Parties as follows:
a. Binding Agreement. This Agreement constitutes the valid and
legally binding obligation of the Debtors enforceable in accordance with its
terms.
b. Warranty of Title. Each item of Collateral is and will remain
at all times prior to payment in full of the Obligations, the sole property of
the respective Debtors free and clear of any lien, encumbrance, security
interest or claim of adverse interest other than (i) interests granted to the
Secured Parties herein, (ii) the Prior Security Interest, (iii) interests of
record as of the date hereof, and (iv) purchase money security interests in
after acquired Collateral.
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4. COVENANTS. The Debtors covenant and agree that so long as any of the
Obligations remain outstanding:
a. Further assurances. The Debtors will execute such financing
statements, continuation statements, security agreements and other documents, in
form satisfactory to the Secured Parties, as may be necessary to perfect, or
continue perfection of, the security interests of the Secured Parties in the
Collateral. The Debtors agree that the Secured Parties may file a carbon,
photographic copy or other reproduction of any financing statement in lieu of an
executed original thereof.
b. Maintenance of Records. The Debtors will keep and maintain, at
their own cost and expense, satisfactory, complete and current records of the
Collateral. The Debtors will protect their records against fire, theft, loss or
any other manner of destruction.
c. Maintenance of Collateral. The Debtors will keep the
Collateral in good condition and free from all liens and other security
interests and the Debtors will not use the Collateral illegally, sell or offer
to sell (except in the ordinary course of business) or otherwise transfer or
encumber the Collateral or permit it to be affixed to real or personal property
without the prior written consent of the Secured Parties.
d. Taxes. The Debtors will pay promptly when due all taxes,
charges and assessments, including penalties and interest, that are or may
become a lien on the Collateral or any part thereof except to the extent that
they may be contested in good faith and by appropriate proceedings.
e. Inspection and Delivery of Collateral, Books and Records. The
Secured Parties, or their agents, may at anytime and from time to time inspect
the Collateral and the books and records of the Debtors pertaining thereto.
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f. Expenses. The Debtors shall be liable for, and agree to pay
the Secured Parties, any and all expenses incurred or paid by the Secured
Parties in enforcing their rights under this Agreement, including reasonable
counsel fees and legal expenses. At their option, the Secured Parties may
discharge taxes, liens, security interests or other encumbrances on the
Collateral and may pay for the repair of damage to the Collateral, the
maintenance and preservation thereof and insurance thereon. The Debtors agree to
reimburse the Secured Parties on demand for any payments so made, and, until
such reimbursement, the amount of any such payments, with interest at the
maximum contract rate permitted by law from date of payment until the date of
reimbursement, shall be added to the Obligation and shall be secured by this
Security Agreement.
g. Insurance. The Debtors will continuously insure the Collateral
with a responsible company or companies against fire (with extended coverage) in
the full insurable value of the Collateral and against other casualties in
reasonable amounts. If the Debtors fail to pay the premium, the Secured Parties
at their option may do so for the Debtors' account and add the amount thereof to
the Obligation.
5. EVENTS OF DEFAULT.
a. Events of Default. The occurrence of any one or more of the
following events shall constitute an Event of Default hereunder:
(1) Derma Sciences fails to make any payment of interest or
principal under the Bonds when due; or
(2) Derma Sciences fails to have a sufficient number of shares
of Series D Preferred Stock authorized no later than seven (7) days after the
Conversion Notification Date (as defined in the Bonds) to permit conversion of
the Bonds; or
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(3) Derma Sciences fails duly to perform or observe any other
term, covenant or agreement contained in the Bonds for a period of 30 days after
the date on which written notice of such failure, requiring the Company to
remedy the same, shall first have been given to the Company by the holders of at
least 25% in aggregate principal amount of the Bonds as from time to time
outstanding; or
(4) A court having jurisdiction in the premises enters a
decree or order for relief in respect of any of the Debtors in an involuntary
case or proceeding under any applicable bankruptcy, insolvency, reorganization
or other similar law now or hereafter in effect, or appointing a receiver,
liquidator, assignee, custodian, trustee, sequestrator (or similar official) of
any of the Debtors or for any substantial part of the property thereof or
ordering the winding-up or liquidation of the affairs of any of the Debtors it
and such decree or order remains unstayed and in effect for a period of 30
consecutive days; or
(5) Any of the Debtors commences a voluntary case or
proceeding under any applicable bankruptcy, insolvency, reorganization or other
similar law now or hereafter in effect, or consents to the entry of an order for
relief in an involuntary case under any such law, or consents to the appointment
of or taking possession by a receiver, liquidator, assignee, trustee, custodian,
sequestrator (or similar official) of any of the Debtors or for any substantial
part of the property thereof, or makes any general assignment for the benefit of
creditors, or admits in writing its inability to pay its debts as they become
due or takes any corporate action in furtherance of any of the foregoing; or
(6) An event of default, as defined in any indenture or
instrument evidencing or under which any of the Debtors has outstanding at least
$200,000 (or its equivalent in another currency), in aggregate principal amount
of indebtedness for borrowed money, has occurred and
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is continuing and such default involves the failure to pay the
principal or interest of such indebtedness (or any part thereof), when due and
payable after the expiration of any applicable grace period with respect
thereto, or such indebtedness has been accelerated so that the same becomes due
and payable prior to the date on which the same would otherwise have become due
and payable, and failure to pay is not cured within 30 days after such failure
or such acceleration is not rescinded or annulled within 60 days after notice
thereof has first been given to Derma Sciences; provided that if such event of
default under such indenture or instrument is remedied or cured by Derma
Sciences or waived by the holders of such indebtedness, then the Event of
Default hereunder by reason thereof shall be deemed likewise to have been
thereupon remedied, cured or waived without further action upon the part of any
of the Bondholders.
b. Remedies on Default . Upon any such Event of Default and at
any time thereafter, the Secured Parties holding 50% or more of the aggregate
principal amount of the Bonds then outstanding may declare all obligations
secured hereby to be immediately due and payable without notice, protest,
presentment or demand, all of which are hereby expressly waived by the Debtors,
and may proceed to enforce payment of the same and exercise any and all of the
rights and remedies set forth herein or provided by the law. The Secured Parties
will give the Debtors reasonable notice of the time and place of any public sale
of the Collateral or any part hereof or of the time after which any private sale
or any other intended disposition thereof is to be made. The requirements of
reasonable notice shall be deemed met if such notice is mailed, postage prepaid,
to the address of the Debtors shown at the head of this Agreement at least ten
(10) days before the time of the sale or disposition, but nothing contained
herein shall be construed to mean that any other notice or a shorter period of
time does not constitute reasonable notice for the sale of the Collateral or any
part thereof. Expenses of retaking, holding, preparing
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for sale, selling or the like shall include the Secured Parties' reasonable
counsel fees and legal expenses. Should an Event of Default occur, the Debtors
shall upon request by the Secured Parties assemble the Collateral or any
designated part thereof and make it available to the Secured Parties at such
place as is designated by the Secured Parties. The Debtors shall pay the Secured
Parties, on demand, any and all expenses, including all reasonable counsel fees
and legal expenses incurred or paid by the Secured Parties in protecting or
enforcing their rights, powers and remedies hereunder or under any other
agreement between the parties or under any obligation secured hereby or thereby.
6. MISCELLANEOUS.
a. Amendment and Waiver. The provisions of this Agreement may be
amended or compliance with this Agreement waived only by the written agreement
of the Secured Parties and the Debtors.
b. Titles. The titles and section headings herein are included
for convenience only and shall not be deemed to be a part of this Agreement.
c. Cumulative Rights. Each and every right granted to the Secured
Parties hereunder or under any other document delivered hereunder or in
connection herewith or allowed by law or equity shall be cumulative and may be
exercised from time to time. No failure on the part of the Secured Parties to
exercise, and no delay in exercising, any right shall operate as a waiver
thereof, nor shall any single or partial exercise by the Secured Parties of any
right preclude any other or future exercise thereof or the exercise of any other
right.
d. Pro Rata Recourse to Collateral. The Secured Parties, upon
occurrence of an Event of Default which is not timely cured in accordance with
the terms hereof and in the further event the Collateral or proceeds thereof are
insufficient to satisfy the Obligations, shall have
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recourse against the collateral pro rata in proportion to the principal amounts
of their respective Bonds irrespective of the dates or order of filing of this
Security Agreement or the dates or order of filing associated Forms UCC-1 or any
other indicia of priority.
e. Choice of Law; Saving Clause. This Agreement shall be governed
and construed in accordance with the laws of the Commonwealth of Pennsylvania.
Wherever possible each provision of this Agreement shall be interpreted in such
manner as to be effective and valid under applicable law, but if any provision
of this Agreement shall be prohibited by or invalid under such law, such
provision shall be ineffective to the extent of such prohibition or invalidity
without invalidating the remainder of such provision or the remaining provisions
of this Agreement.
7. TERM AND TERMINATION. This Security Agreement shall remain in full
force and effect until the earlier to occur of: (i) the agreement by all parties
hereto to terminate this Security Agreement; or (ii) the satisfaction by Derma
Sciences of all of the Obligations.
8. COUNTERPARTS. This Security Agreement may be executed in two or more
counterparts, each of which shall constitute an original, but all of which, when
taken together, shall constitute but one instrument, and shall become effective
when one or more counterparts have been signed by each party hereto and
delivered to the other parties. Facsimile signatures are considered to be
originals and shall have the same effect.
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IN WITNESS WHEREOF, the parties to this Agreement have caused it to be
executed by their duly authorized officers the day and year first above written.
DEBTORS: SECURED PARTIES:
DERMA SCIENCES, INC. ▇▇▇▇▇ PARTNERS III, L.P.
By: Claudius, L.L.C.
Its General Partner
By: ______________________
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇, CPA, MST
Vice President and By: ______________________
Chief Financial Officer ▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Senior Managing Member
GENETIC LABORATORIES ▇▇▇▇▇ PARTNERS INTERNATIONAL III, L.P.
WOUND CARE, INC.
By: Claudius, L.L.C.
Its General Partner
By: ______________________
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇, CPA, MST
Vice President and By: ______________________
Chief Financial Officer ▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Senior Managing Member
SUNSHINE PRODUCTS, INC ▇▇▇▇▇ EMPLOYEE FUND III, L.P.
By: Wesson Enterprises, Inc.
Its General Partner
By: ______________________
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇, CPA, MST
Vice President and By: ______________________
Chief Financial Officer ▇▇▇▇▇ ▇. ▇▇▇▇▇▇
President
MED-TEC INVESTORS, LLC
By: ______________________
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇, CPA, MST
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