SECURITY AGREEMENT

between

SUNSET BRANDS, INC.
U.S. MILLS, INC.

and

IBF FUND LIQUIDATING LLC

Dated as of
November 10, 2005

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SECURITY AGREEMENT

TABLE OF CONTENTS

 

 

 

 

 

 

 

Page

 

I.

DEFINITIONS

1

 

 

 

 

 

1.1

General Terms

1

 

 

 

 

II.

PAYMENTS AND COLLATERAL

2

 

 

2.1

Intentionally Omitted

2

 

2.2

Intentionally Omitted

2

 

2.3

Intentionally Omitted

2

 

2.4

Intentionally Omitted

2

 

2.5

Intentionally Omitted [moved to Section 2.16]

2

 

2.6

Intentionally Omitted

2

 

2.7

Intentionally Omitted

2

 

2.8

Intentionally Omitted

2

 

2.9

Intentionally Omitted

2

 

2.10

Intentionally Omitted

2

 

2.11

Intentionally Omitted [moved to Section 2.17]

2

 

2.12

Intentionally Omitted [moved to Section 2.18]

2

 

2.13

Grant of Security Interest; Collateral

2

 

2.14

Collateral Administration

4

 

2.15

Power of Attorney

5

 

2.16

Lockbox Accounts

5

 

2.17

Other Mandatory Prepayments

6

 

2.18

Payments by Seller

6

 

 

 

 

III.

INTENTIONALLY OMITTED

7

 

 

 

 

IV.

CONDITIONS PRECEDENT

7

 

 

 

 

 

4.1

Conditions to Closing

7

 

V.

REPRESENTATIONS AND WARRANTIES

9

 

 

 

 

 

5.1

Organization and Authority

9

 

5.2

Acquisition Documents

10

 

5.3

Subsidiaries, Capitalization and Ownership Interests

10

 

5.4

Properties

10

 

5.5

Other Agreements

11

 

5.6

Litigation

11

 

5.7

Hazardous Materials

11

 

5.8

Potential Tax Liability; Tax Returns; Governmental Reports

12

 

5.9

Financial Statements and Reports

12

 

5.10

Compliance with Law

12

 

5.11

Intellectual Property

13

 

5.12

Licenses and Permits; Labor

13

 

5.13

No Default

13

 

5.14

Disclosure

13

 

5.15

Existing Indebtedness; Investments, Guarantees and Certain Contracts

13

 

5.16

Other Agreements

14

 

5.17

Insurance

14

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5.18

Names; Location of Offices, Records and Collateral

14

 

5.19

Intentionally Omitted

14

 

5.20

Intentionally Omitted

14

 

5.21

Survival

14

 

 

 

 

VI.

AFFIRMATIVE COVENANTS

15

 

 

 

 

 

6.1

Financial Statements, Financial Reports and Other Information

15

 

6.2

Payment of Obligations

17

 

6.3

Conduct of Business and Maintenance of Existence and Assets

17

 

6.4

Compliance with Legal and Other Obligations

17

 

6.5

Insurance

17

 

6.6

True Books

18

 

6.7

Inspections; Periodic Audits and Reappraisals

18

 

6.8

Further Assurances; Post Closing

18

 

6.9

Payment of Indebtedness

18

 

6.10

Lien Searches

19

 

6.11

Intentionally Omitted

19

 

6.12

Collateral Documents; Security Interest in Collateral

19

 

6.13

Intentionally Omitted

19

 

6.14

Taxes and Other Charges

19

 

6.15

Payroll Taxes

20

 

6.16

Inventory Covenants

20

 

 

 

 

VII.

NEGATIVE COVENANTS

20

 

 

 

 

 

7.1

Financial Covenants

20

 

7.2

Permitted Indebtedness

21

 

7.3

Permitted Liens

21

 

7.4

Investments; New Facilities or Collateral; Subsidiaries

22

 

7.5

Dividends; Redemptions

22

 

7.6

Transactions with Affiliates

22

 

7.7

Charter Documents; Fiscal Year; Name; Jurisdiction of Organization; Dissolution;
Use of Proceeds

23

 

7.8

Truth of Statements

23

 

7.10

Transfer of Assets

24

 

 

 

 

VIII.

EVENTS OF DEFAULT

25

 

 

 

 

IX.

RIGHTS AND REMEDIES AFTER DEFAULT

27

 

 

 

 

 

9.1

Rights and Remedies

27

 

9.2

Application of Proceeds

28

 

9.3

Rights of Seller to Appoint Receiver

28

 

9.4

Rights and Remedies not Exclusive

29

 

 

 

 

X.

WAIVERS AND JUDICIAL PROCEEDINGS

29

 

 

 

 

 

10.1

Waivers

29

 

10.2

Delay; No Waiver of Defaults

29

 

10.3

Jury Waiver

29

 

10.4

Cooperation in Discovery and Litigation

30

 

 

 

 

XI.

EFFECTIVE DATE AND TERMINATION

30

 

 

 

 

 

11.1

Termination and Effective Date Thereof

30

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11.2

Survival

30

 

 

 

 

XII.

MISCELLANEOUS

31

 

 

 

 

 

12.1

Governing Law; Jurisdiction; Service of Process; Venue

31

 

12.2

Successors and Assigns; Participations; New Sellers

31

 

12.3

Application of Payments

32

 

12.4

Indemnity

32

 

12.5

Notice

32

 

12.6

Severability; Captions; Counterparts; Facsimile Signatures

33

 

12.7

Expenses

33

 

12.8

Entire Agreement

34

 

12.9

Seller Approvals

34

 

12.10

Confidentiality and Publicity

34

 

12.11

Release of Seller

34

 

12.12

Agent

35

 

12.13

Agreement Controls

35

 

12.14

Master Subordination Agreement

35

 

ANNEX I

1

 

FINANCIAL COVENANTS

1

 

1)

Minimum EBITDA

1

 

2)

Maximum Senior Leverage Ratio (Senior Debt to EBITDA)

1

 

3)

Fixed Charge Coverage Ratio (EBITDA/Fixed Charges)

1

 

APPENDIX A

1

 

DEFINITIONS

1

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SECURITY AGREEMENT

                    THIS SECURITY AGREEMENT (the “Agreement”) dated as of
November 10, 2005, is entered into between SUNSET BRANDS, INC. a Nevada
corporation (“Sunset”), U.S. MILLS, INC., a Delaware corporation (“US Mills”,
and together with Sunset, jointly and severally, the “Purchaser”), and IBF FUND
LIQUIDATING LLC, a Delaware limited liability company (the “Seller”).

                    WHEREAS, pursuant to that certain Amended and Restated
Acquisition Agreement and Plan of Merger dated as of the date hereof (as
amended, restated, supplemented or otherwise modified from time to time, the
“Acquisition Agreement”), by and among US Mills, Sunset, Seller and USM
Acquisition Sub, Inc. (“Merger Sub”), Sunset will acquire US Mills by merger
(the “Acquisition”).

                    WHEREAS, pursuant to the Acquisition Agreement, US Mills and
Sunset shall issue (i) a Senior Subordinated Note in favor of Seller, dated as
of the date hereof, in the original principal amount of $5,000,000 (as amended,
restated, supplemented or otherwise modified from time to time, “Seller Note 1”)
(ii) a Senior Subordinated Note in favor of Seller, dated as of the date hereof,
in the original principal amount of $1,000,000 (as amended, restated,
supplemented or otherwise modified from time to time, “Seller Note 2”, and
together with Seller Note 1, the “Promissory Notes”), as payment of a portion of
the consideration for the Acquisition.

                    WHEREAS, Sunset and US Mills are party to that certain
Revolving Credit, Term Loan and Security Agreement, dated as of the date hereof
(as amended, restated, supplemented or otherwise modified from time to time, the
“Credit Agreement”), by and among Sunset, US Mills and CapitalSource Finance
LLC, as lender (“CapitalSource”).

                    WHEREAS, Seller is party to that certain Master
Subordination and Intercreditor Agreement, dated as of the date hereof (as
amended, restated, supplemented or otherwise modified from time to time, the
“Master Subordination Agreement”), by and among Seller, US Mills, Sunset,
CapitalSource and the Debenture Holder (as defined therein).

                    WHEREAS, in order to induce Seller to enter into the
Acquisition Agreement, Purchaser has agreed to grant to Seller a continuing
security interest in and to the Collateral in order to secure the Obligations,
by the granting of the security interests contemplated by this Agreement.

                    NOW, THEREFORE, in consideration of the foregoing and for
other good and valuable consideration, the receipt and adequacy of which hereby
are acknowledged, Purchaser and Seller hereby agree as follows:

I. DEFINITIONS

          1.1 General Terms

                    For purposes of this Agreement, in addition to the
definitions above and elsewhere in this Agreement, the terms listed in Appendix
A and Annex I hereto shall have the meanings given such terms in Appendix A and
Annex I, which are incorporated herein and made a part hereof. All capitalized
terms used which are not specifically defined herein shall have meanings
provided in Article 9 of the UCC in effect on the date hereof to the extent the
same are used or defined therein. Unless otherwise specified herein or in
Appendix A, Annex I, any agreement, contract or instrument referred to herein or

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in Appendix A or Annex I shall mean such agreement, contract or instrument as
modified, amended, restated or supplemented from time to time. Unless otherwise
specified, as used in the Acquisition Documents or in any certificate, report,
instrument or other document made or delivered pursuant to any of the
Acquisition Documents, all accounting terms not defined in Appendix A, Annex I
or elsewhere in this Agreement shall have the meanings given to such terms in
and shall be interpreted in accordance with GAAP. References herein to “Eastern
Time” shall mean eastern standard time or eastern daylight savings time as in
effect on any date of determination in the eastern United States of America.

II. PAYMENTS AND COLLATERAL

          2.1 Intentionally Omitted

          2.2 Intentionally Omitted

          2.3 Intentionally Omitted

          2.4 Intentionally Omitted

          2.5 Intentionally Omitted

          2.6 Intentionally Omitted

          2.7 Intentionally Omitted

          2.8 Intentionally Omitted

          2.9 Intentionally Omitted

          2.10 Intentionally Omitted

          2.11 Intentionally Omitted

          2.12 Intentionally Omitted

          2.13 Grant of Security Interest; Collateral

                    (a) To secure the payment and performance of the
Obligations, Purchaser hereby grants to Seller a continuing security interest in
and Lien upon, and pledges to Seller, all of its right, title and interest in
and to the following (collectively and each individually, the “Collateral”),
which security interest is intended to be senior in priority to all other
security interests except with respect to the security interest granted to
CapitalSource pursuant to the terms of the Credit Agreement and other Loan
Documents (as defined in the Credit Agreement):

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                              (i) all of such Purchaser’s tangible personal
property, including without limitation all present and future Inventory, Goods,
and Equipment (including items of equipment which are or become Fixtures), now
owned or hereafter acquired;

                              (ii) all of such Purchaser’s intangible personal
property, including without limitation all present and future Accounts, contract
rights, Permits, General Intangibles, Payment Intangibles, Chattel Paper,
Documents, Documents of Title, Instruments, Securities, Financial Assets,
Deposit Accounts, Investment Property, Letter-of-Credit Rights and Supporting
Obligations, rights to the payment of money or other forms of consideration of
any kind, tax refunds, insurance proceeds, now owned or hereafter acquired, and
all intangible and tangible personal property relating to or arising out of any
of the foregoing;

                              (iii) all of such Purchaser’s present and future
Government Contracts and rights thereunder and the related Government Accounts
and proceeds thereof, now or hereafter owned or acquired by such Purchaser;
provided, however, that Seller shall not have a security interest in any rights
under any Government Contract of such Purchaser or in the related Government
Account where the taking of such security interest is a violation of an express
prohibition contained in the Government Contract (for purposes of this
limitation, the fact that a Government Contract is subject to, or otherwise
refers to, Title 31, § 203 or Title 41, § 15 of the United States Code shall not
be deemed an express prohibition against assignment thereof) or is prohibited by
applicable law, unless in any case consent is otherwise validly obtained; and

                              (iv) any and all additions and accessions to any
of the foregoing, and any and all replacements, products and proceeds (including
insurance proceeds) of any of the foregoing.

                    (b) Notwithstanding the foregoing provisions of this
Section 2.13, such grant of a security interest shall not extend to, and the
term “Collateral” shall not include, any General Intangibles of Purchaser to the
extent that (i) such General Intangibles are not assignable or capable of being
encumbered as a matter of law or under the terms of any license or other
agreement applicable thereto (but solely to the extent that any such restriction
shall be enforceable under applicable law) without the consent of the licensor
thereof or other applicable party thereto, and (ii) such consent has not been
obtained; provided, however, that the foregoing grant of a security interest
shall extend to, and the term “Collateral” shall include, each of the following:
(a) any General Intangible which is in the nature of an Account or a right to
the payment of money or a proceed of, or otherwise related to the enforcement or
collection of, any Account or right to the payment of money, or goods which are
the subject of any Account or right to the payment of money, (b) any and all
proceeds of any General Intangible that is otherwise excluded to the extent that
the assignment, pledge or encumbrance of such proceeds is not so restricted, and
(c) upon obtaining the consent of any such licensor or other applicable party
with respect to any such otherwise excluded General Intangible, such General
Intangible as well as any and all proceeds thereof that might theretofore have
been excluded from such grant of a security interest and from the term
“Collateral.”

                    (c) In addition to the foregoing, to secure the payment and
performance of the Obligations, Sunset has pledged to Seller all of the
securities Sunset owns in direct subsidiaries of Sunset pursuant to the Stock
Pledge Agreement.

                    (d) Upon the execution and delivery of this Agreement, and
upon the proper filing of the necessary financing statements recordation of the
Collateral Patent, Trademark and Copyright Assignment in the United States
Patent and Trademark Office and/or the United States Copyright Office, and
proper delivery of the necessary stock certificates, without any further action,
Seller will have a

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good, valid and perfected Lien and security interest in the Collateral, subject
to no transfer or other restrictions or Liens of any kind in favor of any other
Person except for Permitted Liens. No financing statement relating to any of the
Collateral is on file in any public office except those (i) on behalf of Seller,
and/or (ii) in connection with Permitted Liens.

          2.14 Collateral Administration

                    (a) All Collateral (except Deposit Accounts) will at all
times be kept by Purchaser at the locations set forth on Schedule 5.18B hereto
and shall not, without thirty calendar days prior written notice to Seller, be
moved therefrom, and in any case shall not be moved outside the continental
United States.

                    (b) Purchaser shall keep accurate and complete records of
its Accounts and all payments and collections thereon and shall submit such
records to Seller on such periodic bases as Seller may request.

                    (c) Whether or not an Event of Default has occurred, any of
Seller’s officers, employees, representatives or agents shall have the right, at
any time during normal business hours, in the name of Seller, any designee of
Seller or Purchaser, to verify the validity, amount or any other matter relating
to any Accounts of Purchaser. Purchaser shall cooperate fully with Seller in an
effort to facilitate and promptly conclude such verification process.

                    (d) To expedite collection, subject to the terms of the
Master Subordination Agreement, Purchaser shall endeavor in the first instance
to make collection of its Accounts for Seller. Subject to the terms of the
Master Subordination Agreement, Seller shall have the right at all times after
the occurrence and during the continuance of an Event of Default to notify
Account Debtors owing Accounts to Purchaser that their Accounts have been
assigned to Seller and to collect such Accounts directly in its own name and to
charge collection costs and expenses, including reasonable attorney’s fees, to
Purchaser.

                    (e) As and when determined by Seller in its sole discretion,
Seller will perform the searches described in clauses (i) and (ii) below against
Purchaser (the results of which are to be consistent with Purchaser’s
representations and warranties under this Agreement), all at Purchaser’s
expense: (i) UCC searches with the Secretary of State of the jurisdiction of
organization of Purchaser and the Secretary of State and local filing offices of
each jurisdiction where Purchaser maintain their respective executive offices, a
place of business or assets; (ii) lien searches with the United States Patent
and Trademark Office and the United States Copyright Office;and (iii) judgment,
federal tax lien and corporate and partnership tax lien searches, in each
jurisdiction searched under clause (i) above.

                    (f) Upon notice from Seller that the Master Subordination
Agreement has been terminated, Purchaser (i) shall provide prompt written notice
to its current bank to transfer all items, collections and remittances to the
Concentration Account, (ii) shall provide prompt written notice to each Account
Debtor that Seller has been granted a lien and security interest in, upon and to
all Accounts applicable to such Account Debtor and shall direct each Account
Debtor to make payments to the appropriate Lockbox Account, and Purchaser hereby
authorizes Seller, upon any failure to send such notices and directions within
ten calendar days after the date of this Agreement (or ten calendar days after
the Person becomes an Account Debtor), to send any and all similar notices and
directions to such Account Debtors, and (iii) shall do anything further that may
be lawfully required by Seller to create and perfect Seller’s lien on any
collateral and effectuate the intentions of the Acquisition Documents. Upon
notice from Seller that the Master Subordination Agreement has been terminated,
Purchaser shall

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immediately deliver to Seller all items for which Seller must receive possession
to obtain a perfected security interest and all notes, certificates, and
documents of title, Chattel Paper, warehouse receipts, Instruments, and any
other similar instruments constituting Collateral (collectively, “Control
Collateral”). Until such time as the Master Subordination Agreement has
terminated, all Control Collateral shall be held by CapitalSource for the
benefit of Seller for the purpose of perfecting Seller’s security interest
therein. Concurrently with the termination of the Master Subordination
Agreement, CapitalSource shall deliver all Control Collateral to Seller.

          2.15 Power of Attorney

          Seller is hereby irrevocably made, constituted and appointed the true
and lawful attorney for Purchaser (without requiring Seller to act as such) with
full power of substitution to, subject to the terms of the Master Subordination
Agreement, do the following: (i) endorse the name of any such Person upon any
and all checks, drafts, money orders, and other instruments for the payment of
money that are payable to such Person and constitute collections on its or their
Accounts; (ii) execute in the name of such Person any financing statements,
schedules, assignments, instruments, documents, and statements that it is or
they or are obligated to give Seller under any of the Acquisition Documents; and
(iii) do such other and further acts and deeds in the name of such Person that
Seller may deem necessary or desirable to enforce any Account or other
Collateral or to perfect Seller’s security interest or lien in any Collateral.
If any such Person breaches its obligation hereunder to direct payments of
Accounts or the proceeds of any other Collateral to the appropriate Lockbox
Account, Seller, as the irrevocably made, constituted and appointed true and
lawful attorney for such Person pursuant to this paragraph, may, by the
signature or other act of any of Seller’s officers or authorized signatories
(without requiring any of them to do so), direct, subject to the terms of the
Master Subordination Agreement, any federal, state or private payor or fiscal
intermediary to pay proceeds of Accounts or any other Collateral to the
appropriate Lockbox Account.

          2.16 Lockbox Accounts

          Purchaser shall maintain one or more lockbox accounts (individually
and collectively, the “Lockbox Account”) with one or more banks acceptable to
Seller (each, a “Lockbox Bank”), and shall execute with each Lockbox Bank one or
more agreements acceptable to Seller (individually and collectively, the
“Lockbox Agreement”), and such other agreements related thereto as Seller may
require. Each Purchaser shall ensure that all collections of Purchaser’s
Accounts and all other cash payments received by any Purchaser are paid and
delivered directly from Account Debtors and other Persons into the appropriate
Lockbox Account; provided, however, that all invoices for Purchaser’s Accounts
shall bear Purchaser’s name as the addressee for payments thereunder. The
Lockbox Agreements shall provide that the Lockbox Banks immediately will
transfer all funds paid into the Lockbox Accounts into a depository account or
accounts maintained at a financial institution approved in advance by Seller
(the “Concentration Account”). The Concentration Account shall be subject at all
times to a deposit account control agreement in form and substance satisfactory
to Seller which perfects the Sellers security interest in the Concentration
Account. Notwithstanding and without limiting any other provision of any
Acquisition Document, upon the occurrence and during the continuance of an Event
of Default, Seller shall apply, on a daily basis, all funds transferred into the
Concentration Account pursuant to the Lockbox Agreement and this Section 2.16 in
such order and manner as determined by Seller. To the extent that any Accounts
are collected by Purchaser or any other cash payments received by Purchaser are
not sent directly to the appropriate Lockbox Account but are received by
Purchaser or any of Purchaser’s Affiliates, such collections and proceeds shall
be held in trust for the benefit of Seller and immediately remitted (and in any
event within two Business Days), in the form received, to the appropriate
Lockbox Account for immediate transfer to the Concentration Account. Purchaser

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acknowledges and agrees that compliance with the terms of this Section 2.16 is
an essential term of this Agreement, and that, in addition to and
notwithstanding any other rights Seller may have hereunder, under any other
Acquisition Document, under applicable law or at equity, upon each and every
failure by Purchaser or any of Purchaser’s Affiliates to comply with any such
terms Seller shall be entitled to assess the Lockbox Non-Compliance Fee which
shall operate to increase the interest rate payable with respect to Seller Note
1 by one percent per annum during any period of non-compliance, whether or not a
Default or an Event of Default occurs or is declared, provided that nothing
shall prevent Seller from considering any failure to comply with the terms of
this Section 2.16 to be a Default or an Event of Default. If applicable, at any
time prior to the execution of all or any of the Lockbox Agreements and
operation of all or any of the Lockbox Accounts, Purchaser and Purchaser’s
Affiliates shall direct all collections or proceeds it receives on Accounts or
from other Collateral to the accounts(s) and in the manner specified by Seller
in its sole discretion. The provisions of this Section 2.16 shall not become
operative until the termination of the Master Subordination Agreement, and until
such time, the Lockbox Accounts of Purchaser shall be controlled by
CapitalSource for the purpose of perfecting Seller’s security interest therein.
Upon or promptly after termination of the Master Subordination Agreement,
Purchaser shall obtain in favor of Seller an authenticated Lockbox Agreement
from each bank holding a Lockbox Account that, immediately prior to such
termination, was subject to a Lockbox Agreement in favor of CapitalSource.

          2.17 Other Mandatory Prepayments

                    In addition to and without limiting any provision of any
Acquisition Document:

                    (a) if a Change of Control occurs, on or prior to the first
Business Day following the date of such Change of Control, subject to the terms
of the Master Subordination Agreement, Purchaser shall prepay the Obligations,
in full in cash together with accrued interest thereon to the date of prepayment
and all other amounts owing to Seller under the Acquisition Documents; and

                    (b) if any Purchaser (i) sells any of its assets or
properties other than in the ordinary course of its business, (ii) sells or
issues any subordinated debt other than the transactions set forth on Schedule
2.17 or (iii) receives any property damage insurance award which is not used to
repair or replace the property covered thereby or incurs any Indebtedness except
for Permitted Indebtedness, then, subject to the terms of the Master
Subordination Agreement, it shall apply 100% of the proceeds thereof to the
prepayment of the Obligations owing to Seller under the Acquisition Documents,
such payment to be applied at such time and in such manner and order as Seller
shall decide in its sole discretion.

          2.18 Payments by Seller

                    Should any amount required to be paid under any Acquisition
Document be unpaid, such amount may be paid by Seller, which payment shall be
added to the outstanding principal amount of Seller Note 1 as of the date such
payment is due, and Purchaser irrevocably authorizes disbursement of any such
funds to Seller by way of direct payment of the relevant amount, interest or
Obligations. No payment or prepayment of any amount by Seller or any other
Person shall entitle any Person to be subrogated to the rights of Seller under
any Acquisition Document unless and until the Obligations have been fully
performed and paid irrevocably in cash and this Agreement has been terminated.
Any sums expended by Seller as a result of Purchaser’s failure to pay, perform
or comply with any Acquisition Document or any of the Obligations may be added
to the outstanding principal amount of Seller Note 1 and added to the
Obligations.

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III. INTENTIONALLY OMITTED

IV. CONDITIONS PRECEDENT

          4.1 Conditions to Closing

                    The obligations of Seller to consummate the transactions
contemplated herein and in the Acquisition Agreement, are subject to the
satisfaction, in the sole judgment of Seller, of the following:

                    (a) (i) Purchaser shall have delivered to Seller (A) the
Acquisition Documents to which it is a party, each duly executed by an
authorized officer of Purchaser and the other parties thereto (including the
Stock Pledge Agreement, the Junior Management Fee Subordination Agreement and
the Intellectual Property Security Agreement) (B) intentionally omitted,
(C) audited annual consolidated and consolidating financial statements of
Purchaser for Purchaser’s most recently ended fiscal year, including notes
thereto, consisting of a balance sheet at the end of such completed fiscal year
and the related statements of income, retained earnings, cash flows and owner’s
equity for such completed fiscal year, which financial statements shall be
prepared and certified without qualification by an independent certified public
accounting firm reasonably satisfactory to Seller in accordance with GAAP
consistently applied with prior periods, and (D) unaudited consolidated and
consolidating financial statements of Purchaser consisting of a balance sheet
and statements of income, retained earnings, cash flows and owner’s equity for
the period from the beginning of the current fiscal year through the end of the
most recently ended calendar month, which financial statements shall be prepared
in accordance with GAAP consistently applied with prior periods;

                    (b) all in form and substance satisfactory to Seller in its
sole discretion, Seller shall have received (i) a report of Uniform Commercial
Code financing statement, tax and judgment lien searches performed with respect
to Purchaser in each jurisdiction determined by Seller in its sole discretion,
and such report shall show no Liens on the Collateral (other than Permitted
Liens), (ii) each document (including, without limitation, any Uniform
Commercial Code financing statement) required by any Acquisition Document or
under law or requested by Seller to be filed, registered or recorded to create
in favor of Seller, a perfected security interest upon the Collateral that is
senior in priority to all other security interests except with respect to the
security interest granted to CapitalSource pursuant to the terms of the Credit
Agreement and other Loan Documents (as defined in the Credit Agreement), and
(iii) evidence of each such filing, registration or recordation and of the
payment by Purchaser of any necessary fee, tax or expense relating thereto;

                    (c) Seller shall have received (i) the Charter and Good
Standing Documents, all in form and substance acceptable to Seller, (ii) a
certificate of the corporate secretary or assistant secretary of Purchaser dated
the Closing Date, as to the incumbency and signature of the Persons executing
the Acquisition Documents, in form and substance acceptable to Seller, and (iii)
the written legal opinion of counsel for Purchaser, in form and substance
satisfactory to Seller and its counsel;

                    (d) Seller shall have received a certificate of the chief
financial officer (or, in the absence of a chief financial officer, the chief
executive officer) of Purchaser, in form and substance satisfactory to Seller
(each, a “Solvency Certificate”), certifying (i) the solvency of such Person
after giving effect to the transactions contemplated by the Acquisition
Documents, and (ii) as to such Person’s financial resources and ability to meet
its obligations and liabilities as they become due, to the effect that as of the
Closing Date and after giving effect to such transactions contemplated herein
and in the Acquisition Agreement: (A) the assets of such Person, at a Fair
Valuation, exceed the total liabilities

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(including contingent, subordinated, unmatured and unliquidated liabilities) of
such Person, and (B) no unreasonably small capital base with which to engage in
its anticipated business exists with respect to such Person;

                    (e) Seller shall have completed examinations, the results of
which shall be satisfactory in form and substance to Seller, of the Collateral,
the financial statements and the books, records, business, obligations,
financial condition and operational state of each Purchaser, and each such
Person shall have demonstrated to Seller’s satisfaction that (i) its operations
comply, in all respects deemed material by Seller, in its sole judgment, with
all applicable federal, state, foreign and local laws, statutes and regulations,
(ii) its operations are not the subject of any governmental investigation,
evaluation or any remedial action which could result in any expenditure or
liability deemed material by Seller, in its sole judgment, and (iii) it has no
liability (whether contingent or otherwise) that is deemed material by Seller,
in its sole judgment;

                     (f) Seller shall have received all fees, charges and
expenses payable to Seller on or prior to the Closing Date pursuant to the
Acquisition Documents;

                     (g) all in form and substance satisfactory to Seller in its
sole discretion, Seller shall have received such consents, approvals and
agreements, including, without limitation, any applicable Landlord Waivers and
Consents with respect to any and all leases set forth on Schedule 5.4, from such
third parties as Seller and its counsel shall determine are necessary or
desirable with respect to (i) the Acquisition Documents and/or the transactions
contemplated thereby, and/or (ii) claims against any Purchaser or the
Collateral;

                     (h) Purchaser shall be in compliance with Section 6.5, and
Seller shall have received copies of all insurance policies or binders, original
certificates of all insurance policies of Purchaser confirming that they are in
effect and that the premiums due and owing with respect thereto have been paid
in full and endorsements of such policies issued by the applicable Insurers and
in each case naming Seller as loss payee or additional insured, as appropriate;

                     (i) all corporate and other proceedings, documents,
instruments and other legal matters in connection with the transactions
contemplated by the Acquisition Documents (including, but not limited to, those
relating to corporate and capital structures of Purchaser) shall be satisfactory
to Seller;

                     (j) Seller shall have received, in form and substance
satisfactory to Seller, (i) evidence of the repayment in full and termination of
all current indebtedness and obligations being paid off at Closing and all
related documents, agreements and instruments and of all Liens, security
interests and Uniform Commercial Code financing statements relating thereto, and
(ii) release and termination of any and all Liens, security interest and/or
Uniform Commercial Code financing statements in, on, against or with respect to
any of the Collateral (other than Permitted Liens);

                     (k) Seller shall have received a fully executed copy of the
Credit Agreement (including all schedules, annexes, appendices and other
attachments thereto).

                    (l) Purchaser shall have received a minimum equity infusion
of $1,500,000 in a form, and under terms and conditions, acceptable to Seller in
its sole discretion;

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                    (m) Seller shall have received such other documents,
certificates, information or legal opinions as Seller may reasonably request,
all in form and substance reasonably satisfactory to Seller;

                    (n) Purchaser shall have issued convertible debentures in
favor of the Seller in the amount of $5,000,000 in a form, and under terms and
conditions, acceptable to the Seller in its sole discretion;

                    (o) Purchaser shall have issued the Promissory Notes in
favor of the Seller on terms and conditions acceptable to the Seller in its sole
discretion;

                    (p) Purchaser shall have issued to Seller Series B preferred
stock having an aggregate value equal to $1,500,000, plus the additional Series
B preferred stock issued to Seller with respect to the Working Capital
Adjustment under the Acquisition Agreement, all of which shall be on terms and
conditions acceptable to the Seller in its sole discretion;

                    (q) each of the representations and warranties made by
Purchaser in or pursuant to this Agreement shall be accurate, and no Default or
Event of Default shall have occurred or be continuing or would exist after
giving effect to the transactions contemplated herein and in the Acquisition
Agreement;

                    (r) except as disclosed in the historical financial
statements, there shall be no liabilities or obligations with respect to
Purchaser of any nature whatsoever which, either individually or in the
aggregate, would reasonably be likely to have a Material Adverse Effect;

                    (s) Seller shall have received duly executed signature pages
from all other parties to the Junior Subordination Agreement and the Prepayment
Letter Agreement; and

                    (t) Seller shall have received a copy of an order entered in
the bankruptcy case for InterBank Funding Corp. (Case No. 02-41590-brl in the
Southern District of New York) approving the revised terms of the Acquisition
Agreement and otherwise in form and detail satisfactory to Seller (the “Sale
Order”); and

                    (u) No appeal of the Sale Order or stay of the transactions
covered by the Sale Order shall have occurred prior to the Closing.

V. REPRESENTATIONS AND WARRANTIES

                    Purchaser, jointly and severally, represents and warrants as
of the date hereof, the Closing Date, as follows:

          5.1 Organization and Authority

          Purchaser is a corporation duly organized, validly existing and in
good standing under the laws of its state of formation. Purchaser (i) has all
requisite corporate or entity power and authority to own its properties and
assets and to carry on its business as now being conducted and as contemplated
in the Acquisition Documents, (ii) is duly qualified to do business in every
jurisdiction in which failure so to qualify would reasonably be likely to have a
Material Adverse Effect, and (iii) has all requisite power and authority (A) to
execute, deliver and perform the Acquisition Documents to which it is a party,
(B) to borrow hereunder, (C) to consummate the transactions contemplated under
the Acquisition Documents,

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and (D) to grant the Liens with regard to the Collateral pursuant to the
Security Documents to which it is a party. No Purchaser is an “investment
company” registered or required to be registered under the Investment Company
Act of 1940, as amended, or is controlled by such an “investment company.”

          5.2 Acquisition Documents

                    The execution, delivery and performance by Purchaser of the
Acquisition Documents to which it is a party, and the consummation of the
transactions contemplated thereby, (i) have been duly authorized by all
requisite action of each such Person and have been duly executed and delivered
by or on behalf of each such Person; (ii) do not violate any provisions of
(A) applicable law, statute, rule, regulation, ordinance or tariff, (B) any
order of any Governmental Authority binding on any such Person or any of their
respective properties, or (C) the certificate of incorporation or bylaws (or any
other equivalent governing agreement or document) of any such Person, or any
agreement between any such Person and its respective stockholders, members,
partners or equity owners or among any such stockholders, members, partners or
equity owners; (iii) except as set forth in Schedule 5.2, are not in conflict
with, and do not result in a breach or default of or constitute an event of
default, or an event, fact, condition or circumstance which, with notice or
passage of time, or both, would constitute or result in a conflict, breach,
default or event of default under, any indenture, agreement or other instrument
to which any such Person is a party, or by which the properties or assets of
such Person are bound; (iv) except as set forth therein, will not result in the
creation or imposition of any Lien of any nature upon any of the properties or
assets of any such Person, and (v) except as set forth on Schedule 5.2, do not
require the consent, approval or authorization of, or filing, registration or
qualification with, any Governmental Authority or any other Person. When
executed and delivered, each of the Acquisition Documents to which Purchaser is
a party will constitute the legal, valid and binding obligation of Purchaser,
enforceable against Purchaser in accordance with its terms, subject to the
effect of any applicable bankruptcy, moratorium, insolvency, reorganization or
other similar law affecting the enforceability of creditors’ rights generally
and to the effect of general principles of equity which may limit the
availability of equitable remedies (whether in a proceeding at law or in
equity).

          5.3 Subsidiaries, Capitalization and Ownership Interests

                    Except as listed on Schedule 5.3, Purchaser has no
Subsidiaries. Schedule 5.3 states the authorized and issued capitalization of
Purchaser, the number and class of equity securities and/or ownership, voting or
partnership interests issued and outstanding of Purchaser and the record and
beneficial owners thereof (including options, warrants and other rights to
acquire any of the foregoing). The ownership or partnership interests of
Purchaser that is a limited partnership or a limited liability company are not
certificated, the documents relating to such interests do not expressly state
that the interests are governed by Article 8 of the Uniform Commercial Code, and
the interests are not held in a securities account. The outstanding equity
securities and/or ownership, voting or partnership interests of Purchaser have
been duly authorized and validly issued and are fully paid and nonassessable,
and each Person listed on Schedule 5.3 owns beneficially and of record all the
equity securities and/or ownership, voting or partnership interests it is listed
as owning free and clear of any Liens other than Liens created by the Security
Documents. Schedule 5.3 also lists the directors, members, managers and/or
partners of Purchaser. Except as listed on Schedule 5.3, Purchaser does not own
an interest in, participate in or engage in any joint venture, partnership or
similar arrangements with any Person.

          5.4 Properties

                    Purchaser (i) is the sole owner and has good, valid and
marketable title to, or a valid

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leasehold interest in, all of its properties and assets, including the
Collateral, whether personal or real, subject to no transfer restrictions or
Liens of any kind except for Permitted Liens, and (ii) is in compliance in all
material respects with each lease to which it is a party or otherwise bound.
Schedule 5.4 lists all real properties (and their locations) owned or leased by
or to, and all other assets or property that are leased or licensed by,
Purchaser and all leases (including leases of leased real property) covering or
with respect to such properties and assets all warehouses, fulfillment houses or
other locations at which any of Purchaser’s Inventory is located. Purchaser
enjoys peaceful and undisturbed possession under all such leases and such leases
are all the leases necessary for the operation of such properties and assets,
are valid and subsisting and are in full force and effect.

          5.5 Other Agreements

                    Purchaser is not (i) a party to any judgment, order or
decree or any agreement, document or instrument, or subject to any restriction,
which would affect its ability to execute and deliver, or perform under, any
Acquisition Document or to pay the Obligations, (ii) in default in the
performance, observance or fulfillment of any obligation, covenant or condition
contained in any agreement, document or instrument to which it is a party or to
which any of its properties or assets are subject, which default, if not
remedied within any applicable grace or cure period would reasonably be likely
to have a Material Adverse Effect, nor is there any event, fact, condition or
circumstance which, with notice or passage of time or both, would constitute or
result in a conflict, breach, default or event of default under, any of the
foregoing which, if not remedied within any applicable grace or cure period
would reasonably be likely to have a Material Adverse Effect; or (iii) a party
or subject to any agreement, document or instrument with respect to, or
obligation to pay any, management or service fee with respect to, the ownership,
operation, leasing or performance of any of its business or any facility, nor is
there any manager with respect to any such facility.

          5.6 Litigation

                    There is no action, suit, proceeding or investigation
pending or, to their knowledge, threatened against Purchaser that (i) questions
or could prevent the validity of any of the Acquisition Documents or the right
of Purchaser to enter into any Acquisition Document or to consummate the
transactions contemplated thereby, (ii) would reasonably be likely to be or
have, either individually or in the aggregate, any Material Adverse Change or
Material Adverse Effect, or (iii) would reasonably be likely to result in any
Change of Control or other change in the current ownership, control or
management of Purchaser. Purchaser is not aware that there is any basis for the
foregoing. Purchaser is not a party or subject to any order, writ, injunction,
judgment or decree of any Governmental Authority. There is no action, suit,
proceeding or investigation initiated by Purchaser currently pending. Purchaser
has no existing accrued and/or unpaid Indebtedness to any Governmental Authority
or any other governmental payor.

          5.7 Hazardous Materials

                    Purchaser is in compliance in all material respects with all
applicable Environmental Laws. Purchaser has not been notified of any action,
suit, proceeding or investigation (i) relating in any way to compliance by or
liability of Purchaser under any Environmental Laws, (ii) which otherwise deals
with any Hazardous Substance or any Environmental Law, or (iii) which seeks to
suspend, revoke or terminate any license, permit or approval necessary for the
generation, handling, storage, treatment or disposal of any Hazardous Substance.

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          5.8 Potential Tax Liability; Tax Returns; Governmental Reports

                    (a) Except as disclosed in Schedule 5.8, Purchaser (i) has
not received any oral or written communication from the Internal Revenue Service
with respect to any investigation or assessment relating to the Purchaser
directly, or relating to any consolidated tax return which was filed on behalf
of Purchaser, (ii) is not aware of any year which remains open pending tax
examination or audit by the IRS, and (iii) is not aware of any information that
could give rise to an IRS tax liability or assessment.

                    (b) Except as disclosed in Schedule 5.8, Purchaser (i) has
filed all federal, state, foreign (if applicable) and local tax returns and
other reports which are required by law to be filed by Purchaser, (ii) has paid
all taxes, assessments, fees and other governmental charges, including, without
limitation, payroll and other employment related taxes, in each case that are
due and payable, except only for items that Purchaser is currently contesting in
good faith with adequate reserves under GAAP, which contested items are
described on Schedule 5.8.

          5.9 Financial Statements and Reports

                    All financial statements and financial information relating
to Purchaser that have been or may hereafter be delivered to Seller by Purchaser
are accurate and complete and have been prepared in accordance with GAAP
consistently applied with prior periods. Purchaser has no material obligations
or liabilities of any kind not disclosed in such financial information or
statements, and since the date of the most recent financial statements submitted
to Seller, there has not occurred any Material Adverse Change, Material Adverse
Effect to Purchaser’s knowledge, any other event or condition that would
reasonably be likely to have a Material Adverse Effect.

          5.10 Compliance with Law

                    To the best of Purchaser’s knowledge after making all due
inquiry, Purchaser (i) is in compliance with all laws, statutes, rules,
regulations, ordinances and tariffs of any Governmental Authority applicable to
Purchaser and/or Purchaser’s business, assets or operations, including, without
limitation, ERISA, and (ii) is not in violation of any order of any Governmental
Authority or other board or tribunal, except where noncompliance or violation
could not reasonably be expected to have a Material Adverse Effect. There is no
event, fact, condition or circumstance which, with notice or passage of time, or
both, would constitute or result in any noncompliance with, or any violation of,
any of the foregoing, in each case except where noncompliance or violation could
not reasonably be expected to have a Material Adverse Effect. Purchaser has not
received any notice that Purchaser is not in compliance in any respect with any
of the requirements of any of the foregoing. Purchaser has (a) not engaged in
any Prohibited Transactions as defined in Section 406 of ERISA and Section 4975
of the Internal Revenue Code of 1986, as amended, and the rules and regulations
promulgated thereunder, (b) not failed to meet any applicable minimum funding
requirements under Section 302 of ERISA in respect of its plans and no funding
requirements have been postponed or delayed, (c) no knowledge of any amounts due
but unpaid to the Pension Benefit Guaranty Corporation, or of any event or
occurrence which would cause the Pension Benefit Guaranty Corporation to
institute proceedings under Title IV of ERISA to terminate any of the employee
benefit plans, (d) no fiduciary responsibility under ERISA for investments with
respect to any plan existing for the benefit of Persons other than its employees
or former employees, or (e) not withdrawn, completely or partially, from any
multi-employer pension plans so as to incur liability under the MultiEmployer
Pension Plan Amendments of 1980. With respect to Purchaser, there exists no
event described in Section 4043 of ERISA, excluding Subsections 4043(b)(2)

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and 4043(b)(3) thereof, for which the thirty (30) day notice period contained in
12 C.F.R. § 2615.3 has not been waived.

          5.11 Intellectual Property

                    Except as set forth on Schedule 5.11, Purchaser does not
own, license or utilize, and is not a party to, any patents, patent
applications, trademark registrations, trademark applications, registered
copyrights, copyright applications, trade names, or any material licenses of any
registered patents, trademarks or copyrights (collectively, the “Intellectual
Property”). Purchaser shall update Schedule 5.11 within 15 days after the end of
any month in which Purchaser acquires rights in new Intellectual Property. All
of the Intellectual Property is in full force and effect and not in known
conflict with the rights of others.

          5.12 Licenses and Permits; Labor

                    Purchaser is in compliance, in all material respects and
where non-compliance would not have a Material Adverse Effect on its business,
with and has all Permits necessary or required by applicable law or Governmental
Authority for the operation of its businesses. All of the foregoing are in full
force and effect and not in known conflict with the rights of others. Purchaser
is not (i) in breach of or default under the provisions of any of the foregoing,
nor is there any event, fact, condition or circumstance which, with notice or
passage of time or both, would constitute or result in a conflict, breach,
default or event of default under, any of the foregoing which, if not remedied
within any applicable grace or cure period would reasonably be likely to have a
Material Adverse Effect, (ii) a party to or subject to any agreement, instrument
or restriction that is so unusual or burdensome that it might have a Material
Adverse Effect, and/or (iii) and has not been, involved in any labor dispute,
strike, walkout or union organization which would reasonably be likely to have a
Material Adverse Effect.

          5.13 No Default

                    There does not exist any Default or Event of Default or any
event, fact, condition or circumstance which, with the giving of notice or
passage of time or both, would constitute or result in a Default or Event of
Default.

          5.14 Disclosure

                    No Acquisition Document nor any other agreement, document,
certificate, or statement furnished to Seller by or on behalf of Purchaser in
connection with the transactions contemplated by the Acquisition Documents, nor
any representation or warranty made by Purchaser in any Acquisition Document,
contains any untrue statement of material fact or omits to state any fact
necessary to make the statements therein not materially misleading. There is no
fact known to Purchaser which has not been disclosed to Seller in writing which
would reasonably be likely to have a Material Adverse Effect.

          5.15 Existing Indebtedness; Investments, Guarantees and Certain
Contracts

                    Except as contemplated by the Acquisition Documents or as
otherwise set forth on Schedule 5.15A, Purchaser (i) has no outstanding
Indebtedness, (ii) is not subject or party to any mortgage, note, indenture,
indemnity or guarantee of, with respect to or evidencing any Indebtedness of any
other Person, or (iii) does not own or hold any equity or long-term debt
investments in, and does not

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have any outstanding advances to or any outstanding guarantees for the
obligations of, or any outstanding borrowings from, any Person. Purchaser has
performed all material obligations required to be performed by Purchaser
pursuant to or in connection with any items listed on Schedule 5.15A and there
has occurred no breach, default or event of default under any document
evidencing any such items or any fact, circumstance, condition or event which,
with the giving of notice or passage of time or both, would constitute or result
in a breach, default or event of default thereunder. Schedule 5.15B sets forth
all Indebtedness with a maturity date during the term of this Agreement, and
identifies such maturity date.

          5.16 Other Agreements

                    Except as set forth on Schedule 5.16, (i) there are no
existing or proposed agreements, arrangements, understandings or transactions
between Purchaser and any of Purchaser’s officers, members, managers, directors,
stockholders, partners, other interest holders, employees or Affiliates or any
members of their respective immediate families, and (ii) none of the foregoing
Persons are directly or indirectly, indebted to or have any direct or indirect
ownership, partnership or voting interest in, to Purchaser’s knowledge, any
Affiliate of Purchaser or any Person that competes with Purchaser (except that
any such Persons may own stock in (but not exceeding two (2%) percent of the
outstanding capital stock of) any publicly traded company that may compete with
Purchaser.

          5.17 Insurance

                    Purchaser has in full force and effect such insurance
policies as are customary in its industry and as may be required pursuant to
Section 6.5 hereof. All such insurance policies are listed and described on
Schedule 5.17.

          5.18 Names; Location of Offices, Records and Collateral

                    During the preceding five years, Purchaser has not conducted
business under or used any name (whether corporate, partnership or assumed)
other than as shown on Schedule 5.18A. Purchaser is the sole owner of all of its
names listed on Schedule 5.18A, and any and all business done and invoices
issued in such names are Purchaser’s sales, business and invoices. Each trade
name of Purchaser represents a division or trading style of Purchaser. Purchaser
maintains its places of business and chief executive offices only at the
locations set forth on Schedule 5.18B, and all Accounts of Purchaser arise,
originate and are located, and all of the Collateral, including Inventory and
all books and records in connection therewith or in any way relating thereto or
evidencing the Collateral are located and shall only be located, in and at such
locations. All of the Collateral is located only in the continental United
States.

          5.19 Intentionally Omitted

          5.20 Intentionally Omitted

          5.21 Survival

                    Purchaser makes the representations and warranties contained
herein with the knowledge and intention that Seller is relying and will rely
thereon. All such representations and warranties will

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survive the execution and delivery of this Agreement until all Obligations have
been indefeasibly paid in full and this Agreement has been terminated.

VI. AFFIRMATIVE COVENANTS

                    Purchaser, jointly and severally, covenants and agrees that,
until full performance and satisfaction, and indefeasible payment in full in
cash, of all the Obligations and termination of this Agreement:

          6.1 Financial Statements, Financial Reports and Other Information

                    (a) Financial Reports. Purchaser shall furnish to Seller (i)
upon filing thereof with the Securities and Exchange Commission (provided such
filing is within the time prescribed in the securities laws and regulations) and
in any event within 105 calendar days after the end of each fiscal year of
Purchaser, audited annual consolidated and consolidating financial statements of
Purchaser, including the notes thereto, consisting of a consolidated and
consolidating balance sheet at the end of such completed fiscal year and the
related consolidated and consolidating statements of income, retained earnings,
cash flows and owners’ equity for such completed fiscal year, which financial
statements shall be prepared and certified without qualification as to scope by
an independent certified public accounting firm satisfactory to Seller and
accompanied by related management letters, if available, and (ii) as soon as
available and in any event within twenty-five calendar days after the end of
each calendar month, unaudited consolidated and consolidating financial
statements of Purchaser consisting of a balance sheet and statements of income,
retained earnings, cash flows and owners’ equity as of the end of the
immediately preceding calendar month. All such financial statements shall be
prepared in accordance with GAAP consistently applied with prior periods. With
each such financial statement, Purchaser shall also deliver a certificate of its
chief financial officer in substantially the form of Exhibit B hereto (a
“Compliance Certificate”) stating that (A) such person has reviewed the relevant
terms of the Acquisition Documents and the condition of Purchaser, (B) no
Default or Event of Default has occurred or is continuing, or, if any of the
foregoing has occurred or is continuing, specifying the nature and status and
period of existence thereof and the steps taken or proposed to be taken with
respect thereto, and (C) Purchaser is in compliance with all financial covenants
attached as Annex I hereto. Such certificate shall be accompanied by the
calculations necessary to show compliance with the financial covenants in a form
satisfactory to Seller.

                    (b) Other Materials. Purchaser shall furnish to Seller as
soon as available, and in any event: (i) within ten calendar days after the
filing thereof with the Securities and Exchange Commission, copies of such
financial statements (other than those required to be delivered pursuant to
Section 6.1(a)) prepared by, for or on behalf of Purchaser and any other notes,
reports and other materials related thereto, including, without limitation, any
pro forma financial statements, which Purchaser files with the Securities and
Exchange Commission, (ii) concurrently with the distribution thereof to the
Purchaser’s stockholders, any reports, returns, information, notices and other
materials that Purchaser shall send to its stockholders, members, partners or
other equity owners at any time, and (iii) copies of material licenses and
permits required by any applicable federal, state, foreign or local law, statute
ordinance or regulation or Governmental Authority for the operation of its
business, where the failure to obtain such license or permit would have a
Material Adverse Effect on the Purchaser’s business, (iv) within fifteen
calendar days after the end of each calendar month for such month, (1) a sales
and collection report and accounts receivable and accounts payable aging
schedule, including a report of sales, credits issued and collections received,
all such reports showing a reconciliation to the amounts reported in the monthly
financial statements, and (2) evidence satisfactory to Seller that all amounts

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owing to all warehouses as of the end of such month have been paid in full, (v)
promptly upon receipt thereof, copies of any reports submitted to Purchaser by
its independent accountants in connection with any interim audit of the books of
such Person or any of its Affiliates and copies of each management control
letter provided by such independent accountants, and (vi) within five calendar
days of any request thereof, such additional information, documents, statements,
reports and other materials as Lender may reasonably request from a credit or
security perspective or otherwise from time to time.

                    (c) Notices. Purchaser shall promptly, and in any event
within five Business Days after Purchaser or any authorized officer of Purchaser
obtains knowledge thereof, notify Seller in writing of (i) any pending or
threatened litigation, suit, investigation, arbitration, dispute resolution
proceeding or administrative proceeding brought or initiated by Purchaser or
otherwise affecting or involving or relating to Purchaser or any of its property
or assets to the extent (A) the amount in controversy exceeds $40,000, or (B) to
the extent any of the foregoing seeks injunctive or declarative relief, (ii) any
Default or Event of Default, which notice shall specify the nature and status
thereof, the period of existence thereof and what action is proposed to be taken
with respect thereto, (iii) any other development, event, fact, circumstance or
condition that would reasonably be likely to have a Material Adverse Effect, in
each case describing the nature and status thereof and the action proposed to be
taken with respect thereto, (iv) any notice received by Purchaser from any payor
of a claim, suit or other action such payor has, claims or has filed against
Purchaser, (v) any matter(s) affecting the value, enforceability or
collectability of any of the Collateral, including, without limitation, claims
or disputes in the amount of $40,000 or more, singly or in the aggregate, in
existence at any one time, (vi) any notice given by Purchaser to any other
lender of Purchaser, which notice to Seller shall be accompanied by a copy of
the applicable notice given to the other lender, (vii) receipt of any notice or
request from any Governmental Authority or governmental payor regarding any
liability or claim of liability, (viii) receipt of any notice by Purchaser
regarding termination of any manager of any facility owned, operated or leased
by Purchaser, (ix) any Account becoming evidenced or secured by an Instrument or
Chattel Paper, and/or (x) receipt of any notice from any Account Debtor under a
material contract notifying Purchaser of a material breach under or termination
of such contract.

                    (d) Consents. Purchaser shall obtain and deliver from time
to time all required consents, approvals and agreements from such third parties
as Seller shall determine are necessary or desirable in its sole discretion,
each of which must be satisfactory to Seller in its sole discretion, with
respect to (i) the Acquisition Documents and the transactions contemplated
thereby, (ii) claims against Purchaser or the Collateral, and/or (iii) any
agreements, consents, documents or instruments to which Purchaser is a party or
by which any properties or assets of Purchaser or any of the Collateral is or
are bound or subject, including, without limitation, Landlord Waivers and
Consents with respect to leases.

                    (e) Operating Budget. Purchaser shall furnish to Seller on
or prior to the Closing Date and for each fiscal year of Purchaser thereafter
not less than thirty calendar days prior to the commencement of such fiscal
year, consolidated and consolidating month by month projected operating budgets,
annual projections, profit and loss statements, balance sheets and cash flow
reports of and for Purchaser for such upcoming fiscal year (including an income
statement for each month and a balance sheet as at the end of the last month in
each fiscal quarter), in each case prepared in accordance with GAAP consistently
applied with prior periods.

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          6.2 Payment of Obligations

                    Purchaser shall make full and timely indefeasible payment in
cash of all Obligations.

          6.3 Conduct of Business and Maintenance of Existence and Assets

                    Purchaser shall (i) conduct its business in accordance with
good business practices customary to the industry, (ii) engage principally in
the same or similar lines of business substantially as heretofore conducted,
(iii) collect its Accounts in the ordinary course of business, (iv) maintain all
of its material properties, assets and equipment used or useful in its business
in good repair, working order and condition (normal wear and tear excepted and
except as may be disposed of in the ordinary course of business and in
accordance with the terms of the Acquisition Documents and otherwise as
determined by Purchaser using commercially reasonable business judgment), (v)
from time to time to make all necessary or desirable repairs, renewals and
replacements thereof, as determined by Purchaser using commercially reasonable
business judgment, (vi) maintain and keep in full force and effect its existence
and all material Permits and qualifications to do business and good standing in
each jurisdiction in which the ownership or lease of property or the nature of
its business makes such Permits or qualification necessary and in which failure
to maintain such Permits or qualification could reasonably be likely to have a
Material Adverse Effect; and (vii) remain in good standing and maintain
operations in all jurisdictions in which currently located.

          6.4 Compliance with Legal and Other Obligations

                    Purchaser shall (i) comply with all laws, statutes, rules,
regulations, ordinances and tariffs of all Governmental Authorities applicable
to it or its business, assets or operations; (ii) pay all taxes, assessments,
fees, governmental charges, claims for labor, supplies, rent and all other
obligations or liabilities of any kind, except liabilities being contested in
good faith and against which adequate reserves have been established in
accordance with GAAP, (iii) perform in accordance with its terms each contract,
agreement or other arrangement to which it is a party or by which it or any of
the Collateral is bound, except where the failure to comply, pay or perform
could not reasonably be expected to have a Material Adverse Effect, and (iv)
maintain and comply with all Permits necessary to conduct its business and
comply with any new or additional requirements that may be imposed on it or its
business.

          6.5 Insurance

                    Purchaser shall (i) keep all of its insurable properties and
assets including, without limitation, Inventory that is in transit (whether by
vessel, air or land) adequately insured in all material respects against losses,
damages and hazards as are customarily insured against by businesses engaging in
similar activities or owning similar assets or properties and at least the
minimum amount required by applicable law, including, without limitation,
professional liability insurance, as applicable; and maintain general public
liability insurance at all times against liability on account of damage to
persons and property having such limits, deductibles, exclusions and
co-insurance and other provisions as are customary for a business engaged in
activities similar to those of Purchaser; and (ii) maintain insurance under all
applicable workers’ compensation laws; all of the foregoing insurance policies
to (A) be satisfactory in form and substance to Seller, (B) name Seller as loss
payee and additional insured thereunder, and (C) expressly provide that they
cannot be altered, amended, modified or canceled without thirty Business Days
prior written notice to Seller and that they inure to the benefit of Seller
notwithstanding any action or omission or negligence of or by Purchaser or any
insured thereunder.

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          6.6 True Books

                    Purchaser shall (i) keep true, complete and accurate books
of record and account in accordance with commercially reasonable business
practices in which true and correct entries are made of all of its and their
dealings and transactions in all material respects; and (ii) set up and maintain
on its books such reserves as may be required by GAAP with respect to doubtful
accounts and all taxes, assessments, charges, levies and claims and with respect
to its business, and include such reserves in its quarterly as well as year end
financial statements.

          6.7 Inspections; Periodic Audits and Reappraisals

                    Purchaser shall permit the representatives of Seller, at the
expense of Purchaser, from time to time during normal business hours upon
reasonable notice, to (i) visit and inspect any of its offices or properties or
any other place where Collateral is located to inspect the Collateral and/or to
examine or audit all of its books of account, records, reports and other papers,
(ii) make copies and extracts therefrom, and (iii) discuss its business,
operations, prospects, properties, assets, liabilities, condition and/or
Accounts and Inventory with its officers and independent public accountants (and
by this provision such officers and accountants are authorized to discuss the
foregoing). Seller is also authorized from time to time to conduct or obtain
audits and to obtain updated appraisals of Inventory and intellectual property
by appraisers acceptable to the Seller in its discretion. Other than during the
occurrence and continuance of a Default or an Event of Default, not more than
four such inspections, audits or appraisals related to any 12-month period shall
be at the expense of Purchaser. Seller may increase the frequency of inspections
or audits that are at Purchaser’s expense during the occurrence and continuance
of a Default or an Event of Default.

          6.8 Further Assurances; Post Closing

                    At Purchaser’s cost and expense, Purchaser shall (i) take
such further actions, obtain such consents and approvals and duly execute and
deliver such further agreements, assignments, instructions or documents as
Seller may request with respect to the purposes, terms and conditions of the
Acquisition Documents and the consummation of the transactions contemplated
thereby, and (ii) without limiting and notwithstanding any other provision of
any Acquisition Document, execute and deliver, or cause to be executed and
delivered, such agreements and documents, and take or cause to be taken such
actions, and otherwise perform, observe and comply with such obligations, as are
set forth on Schedule 6.8.

          6.9 Payment of Indebtedness

                    Except as otherwise prescribed in the Acquisition Documents,
Purchaser shall pay, discharge or otherwise satisfy at or before maturity
(subject to applicable grace periods and, in the case of trade payables, to
ordinary course payment practices) all of its material obligations and
liabilities, except when the amount or validity thereof is being contested in
good faith by appropriate proceedings and such reserves as Seller may deem
proper and necessary in its sole discretion shall have been made, but in no
event shall such reserve exceed the amount of the obligations or liabilities so
contested.

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          6.10 Lien Searches

                    If Liens other than Permitted Liens exist, Purchaser
immediately shall take, execute and deliver all actions, documents and
instruments necessary to release and terminate such Liens.

          6.11 Intentionally Omitted

          6.12 Collateral Documents; Security Interest in Collateral

                    Purchaser shall (i) execute, obtain, deliver, file, register
and/or record any and all financing statements, continuation statements, stock
powers, instruments and other documents, or cause the execution, filing,
registration, recording or delivery of any and all of the foregoing, that are
necessary or required under law or otherwise or reasonably requested by Seller
to be executed, filed, registered, obtained, delivered or recorded to create,
maintain, perfect, preserve, validate or otherwise protect the pledge of the
Collateral to Seller and Seller’s perfected Lien on the Collateral that is
senior in priority to all other security interests except with respect to the
security interest granted to CapitalSource pursuant to the terms of the Credit
Agreement and other Loan Documents (as defined in the Credit Agreement)(and
Purchaser irrevocably grants Seller the right, at Seller’s option, to file any
or all of the foregoing), (ii) immediately upon learning thereof, report to
Seller any reclamation, return or repossession of goods in excess of $20,000
(individually or in the aggregate), and (iii) defend the Collateral and Seller’s
perfected Lien thereon against all claims and demands of all Persons at any time
claiming the same or any interest therein adverse to Seller, and pay all
reasonable costs and expenses (including, without limitation, in-house
documentation and diligence fees and legal expenses and reasonable attorneys’
fees and expenses) in connection with such defense, which may at Seller’s
discretion be added to the Obligations.

          6.13 Intentionally Omitted

          6.14 Taxes and Other Charges

                    (a) All payments and reimbursements to Seller made under any
Acquisition Document shall be free and clear of and without deduction for all
taxes, levies, imposts, deductions, assessments, charges or withholdings, and
all liabilities with respect thereto of any nature whatsoever, excluding taxes
to the extent imposed on Seller’s net income. If Purchaser shall be required by
law to deduct any such amounts from or in respect of any sum payable under any
Acquisition Document to Seller, then the sum payable to Seller shall be
increased as may be necessary so that, after making all required deductions,
Seller receives an amount equal to the sum it would have received had no such
deductions been made. Notwithstanding any other provision of any Acquisition
Document, if at any time after the Closing (i) any change in any existing law,
regulation, treaty or directive or in the interpretation or application thereof,
(ii) any new law, regulation, treaty or directive enacted or any interpretation
or application thereof, or (iii) compliance by Seller with any request or
directive (whether or not having the force of law) from any Governmental
Authority: (A) subjects Seller to any tax, levy, impost, deduction, assessment,
charge or withholding of any kind whatsoever with respect to any Acquisition
Document, or changes the basis of taxation of payments to Seller of any amount
payable thereunder (except for net income taxes, or franchise taxes imposed in
lieu of net income taxes, imposed generally by federal, state or local taxing
authorities with respect to interest or commitment fees or other fees payable
hereunder or changes in the rate of tax on the overall net income of Seller), or
(B) imposes on Seller any other condition or increased cost in connection with
the transactions contemplated thereby or participations

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therein, then, in any such case, Purchaser shall promptly pay to Seller any
additional amounts necessary to compensate Seller, on an after-tax basis, for
such additional cost or reduced amount as determined by Seller. If Seller
becomes entitled to claim any additional amounts pursuant to this Section 6.14
it shall promptly notify Purchaser of the event by reason of which Seller has
become so entitled, and each such notice of additional amounts payable pursuant
to this Section 6.14 submitted by Seller to Purchaser shall, absent manifest
error, be final, conclusive and binding for all purposes.

                    (b) Purchaser shall promptly, and in any event within five
Business Days after Purchaser or any authorized officer of Purchaser obtains
knowledge thereof, notify Seller in writing of any oral or written communication
from the Internal Revenue Service or otherwise with respect to any (i) tax
investigations, relating to the Purchaser directly, or relating to any
consolidated tax return which was filed on behalf of Purchaser, (ii) notices of
tax assessment or possible tax assessment, (iii) years that are designated open
pending tax examination or audit, and (iv) information that could give rise to
an IRS tax liability or assessment.

          6.15 Payroll Taxes

                    Without limiting or being limited by any other provision of
any Acquisition Document, Purchaser at all times shall retain and use a Person
acceptable to Seller to process, manage and pay its payroll taxes and shall
cause to be delivered to Seller within ten calendar days after the end of each
calendar month a report of its payroll taxes for the immediately preceding
calendar month and evidence of payment thereof.

          6.16 Inventory Covenants

                    With respect to the Inventory, Purchaser: (a) shall at all
times maintain inventory records reasonably satisfactory to Seller, keeping
correct and accurate records itemizing and describing the kind, type, quality
and quantity of Inventory, Purchaser’s cost therefore and daily withdrawals
therefrom and additions thereto; (b) shall not remove any Inventory from the
locations set forth or permitted herein, without the prior written consent of
Seller, which consent shall not be unreasonably denied or delayed, except for
sales of Inventory in the ordinary course of Purchaser’s business and except to
move Inventory directly from one location set forth or permitted herein to
another such location; (c) shall produce, use store, ship and maintain the
Inventory with all reasonable care and caution and in accordance with applicable
standards of any insurance and in conformity with applicable laws (including the
requirements of the Federal Fair Labor Standards Act of 1938, as amended and all
rules, regulations and orders related thereto); (d) assumes all responsibility
and liability arising from or relating to the production, use, sale or other
disposition of the Inventory; (e) shall not sell Inventory to any customer on
approval, or any other basis which entitles the customer to return or may
obligate Purchaser to repurchase such Inventory; (f) shall keep the Inventory in
good and marketable condition; and (g) shall not, without prior written notice
to Seller, acquire or accept any Inventory on consignment or approval.

VII. NEGATIVE COVENANTS

                    Each Purchaser, jointly and severally, covenants and agrees
that, until full performance and satisfaction, and indefeasible payment in full
in cash, of all of the Obligations and termination of this Agreement:

          7.1 Financial Covenants

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                    Purchaser shall not violate the financial covenants set
forth on Annex I to this Agreement, which is incorporated herein and made a part
hereof.

          7.2 Permitted Indebtedness

                    Purchaser shall not create, incur, assume or suffer to exist
any Indebtedness, except the following (collectively, “Permitted Indebtedness”):
(i) Indebtedness under the Acquisition Documents, (ii) any Indebtedness set
forth on Schedule 7.2, (iii) Capitalized Lease Obligations incurred after the
Closing Date and Indebtedness incurred pursuant to purchase money Liens
permitted by Section 7.3(v), provided that the aggregate amount of such
Capitalized Lease Obligations and purchase money indebtedness outstanding at any
time shall not exceed $75,000, (iv) Indebtedness in connection with advances
made by a stockholder in order to cure any default of the financial covenants
set forth on Annex I; provided, however, that such Indebtedness shall be on an
unsecured basis, subordinated in right of repayment and remedies to all of the
Obligations and to all of Seller’s rights pursuant to a subordination agreement
in form and substance satisfactory to Seller; (v) accounts payable to trade
creditors and current operating expenses (other than for borrowed money) which
are not aged more than 120 calendar days from the billing date or more than 30
days from the due date, in each case incurred in the ordinary course of business
and paid within such time period, unless the same are being contested in good
faith and by appropriate and lawful proceedings and such reserves, if any, with
respect thereto as are required by GAAP and deemed adequate by Purchaser’s
independent accountants shall have been reserved; (vi) borrowings incurred in
the ordinary course of business and not exceeding $40,000 individually or in the
aggregate outstanding at any one time, provided, however, that such Indebtedness
shall be on an unsecured basis, subordinated in right of repayment and remedies
to all of the Obligations and to all of Seller’s rights pursuant to a
subordination agreement in form and substance satisfactory to Seller; and (vii)
Permitted Subordinated Debt and (viii) Indebtedness under the Credit Agreement.
Purchaser shall not make prepayments on any existing or future Indebtedness to
any Person other than (i) to Capital Source in accordance with the terms of the
Credit Agreement, (ii) to Seller subject to the terms of the Master
Subordination Agreement, or (iii) to the Debenture Holder subject to the terms
of the Junior Subordination Agreement or (iv) to the extent specifically
permitted by this Agreement or any subsequent agreement between Purchaser and
Seller.

          7.3 Permitted Liens

                    Purchaser shall not create, incur, assume or suffer to exist
any Lien upon, in or against, or pledge of, any of the Collateral or any of its
properties or assets or any of its shares, securities or other equity or
ownership or partnership interests, whether now owned or hereafter acquired,
except the following (collectively, “Permitted Liens”): (i) Liens under the
Acquisition Documents or otherwise arising in favor of Seller, (ii) Liens
imposed by law for taxes (other than payroll taxes), assessments or charges of
any Governmental Authority for claims not yet due or which are being contested
in good faith by appropriate proceedings and with respect to which adequate
reserves or other appropriate provisions are being maintained by such Person in
accordance with GAAP to the satisfaction of Seller in its sole discretion, (iii)
(A) statutory Liens of landlords (provided that any such landlord has executed a
Landlord Waiver and Consent in form and substance satisfactory to Seller) and of
carriers, warehousemen, mechanics, materialmen, and (B) other Liens imposed by
law or that arise by operation of law in the ordinary course of business from
the date of creation thereof, in each case only for amounts not yet due or which
are being contested in good faith by appropriate proceedings and with respect to
which adequate reserves or other appropriate provisions are being maintained by
such Person in accordance with GAAP to the satisfaction of Seller in its sole
discretion, (iv) Liens (A) incurred or deposits made in the ordinary course of
business (including, without limitation, surety bonds and appeal bonds) in

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connection with workers’ compensation, unemployment insurance and other types of
social security benefits or to secure the performance of tenders, bids, leases,
contracts (other than for the repayment of Indebtedness), statutory obligations
and other similar obligations, or (B) arising as a result of progress payments
under government contracts, (v) purchase money Liens (A) securing Indebtedness
permitted under Section 7.2(iii), or (B) in connection with the purchase by such
Person of equipment in the normal course of business, provided that such
payables shall not exceed any limits on Indebtedness provided for herein and
shall otherwise be Permitted Indebtedness hereunder, (vi) Liens securing
Permitted Subordinated Debt, provided that such Liens are subordinated to the
Liens in favor of Seller pursuant to a written agreement acceptable to Seller;
(vii) Liens disclosed on Schedule 7.3; and (viii) Liens in favor of Capital
Source granted pursuant to the “Security Documents” (as defined in the Credit
Agreement).

          7.4 Investments; New Facilities or Collateral; Subsidiaries

                    Purchaser, directly or indirectly, shall not (i) purchase,
own, hold, invest in or otherwise acquire obligations or stock or securities of,
or any other interest in, or all or substantially all of the assets of, any
Person or any joint venture, or (ii) make or permit to exist any loans, advances
or guarantees to or for the benefit of any Person or assume, guarantee, endorse,
contingently agree to purchase or otherwise become liable for or upon or incur
any obligation of any Person (other than those created by the Acquisition
Documents and Permitted Indebtedness and other than (A) trade credit extended in
the ordinary course of business, (B) advances for business travel and similar
temporary advances made in the ordinary course of business to officers,
directors and employees, and (C) the endorsement of negotiable instruments for
deposit or collection or similar transactions in the ordinary course of
business). Purchaser, directly or indirectly, shall not purchase, own, operate,
hold, invest in or otherwise acquire any facility, property or assets or any
Collateral that is not located at the locations set forth on Schedule 5.18B
unless Purchaser shall first obtain the written consent of the Seller, which
consent shall not be unreasonably withheld. Purchaser shall have no Subsidiaries
other than those Subsidiaries, if any, existing at Closing and set forth in
Schedule 5.3.

          7.5 Dividends; Redemptions

                    Purchaser shall not (i) declare, pay or make any dividend or
Distribution on any shares of capital stock or other securities or interests
other than dividends or Distributions payable in its stock, of split-ups or
reclassifications of its stock , (ii) apply any of its funds, property or assets
to the acquisition, redemption or other retirement of any capital stock or other
securities or interests or of any options to purchase or acquire any of the
foregoing (provided, however, that Purchaser may (1) redeem its capital stock
from terminated employees pursuant to, but only to the extent required under the
terms of the related employment agreements, and (2) prepay certain Permitted
Indebtedness if allowed to do so under the terms and conditions of the
Subordination Agreements, as long as no Default or Event of Default has occurred
and is continuing or would be cause by or result therefrom), (iii) otherwise
make any payments or Distributions to any stockholder, member, partner or other
equity owner in such Person’s capacity as such, or (iv) make any payment of any
management or service fee except as permitted in writing by Seller in advance,
and provided further, that Purchaser shall not make or suffer to exist any such
payment described in (i) through (iv) above if a Default or Event of Default has
occurred and is continuing or would result therefrom.

          7.6 Transactions with Affiliates

                    Except as set forth in Schedule 7.6, Purchaser shall not
enter into or consummate any transaction of any kind with any of its Affiliates
or any of their respective Affiliates other than: (i) salary, bonus, employee
stock option and other compensation and employment arrangements with directors
or

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officers in the ordinary course of business, provided, that no payment of any
type of any compensation listed above shall be permitted if a Default or Event
of Default has occurred and remains in effect or would be caused by or result
from such payment, (ii) Distributions and dividends permitted pursuant to
Section 7.5, (iii) transactions with Seller or any Affiliate of Seller, and (iv)
payments permitted under and pursuant to written agreements entered into by and
between Purchaser and one or more of its Affiliates that both (A) reflect and
constitute transactions on overall terms at least as favorable to Purchaser as
would be the case in an arm’s-length transaction between unrelated parties of
equal bargaining power, and (B) are subject to such terms and conditions as
determined by Seller in its sole discretion; provided, that notwithstanding the
foregoing Purchaser shall not (W) enter into or consummate any transaction or
agreement pursuant to which it becomes a party to any mortgage, note, indenture
or guarantee evidencing any Indebtedness of any of its Affiliates or otherwise
to become responsible or liable, as a guarantor, surety or otherwise, pursuant
to agreement for any Indebtedness of any such Affiliate, (X) make any payment to
any of its Affiliates in excess of $40,000 without the prior written consent of
Seller, (Y) make any payment that is restricted or prohibited by the Junior
Management Fee Subordination Agreement or (Z) make any payment for any present
or future obligation of any Subsidiary or other Affiliate of Purchaser
(including, without limitation any amounts owing by Low Carb Creations, Inc. to
(i) Wells Fargo Bank, N.A. (or any of its Affiliates) or (ii) the Langdon Family
Revocable Trust).

          7.7 Charter Documents; Fiscal Year; Name; Jurisdiction of
Organization; Dissolution; Use of Proceeds

                    Purchaser shall not (i) amend, modify, restate or change its
certificate of incorporation or formation or bylaws or similar charter documents
in a manner that would be adverse to Seller, (ii) change its fiscal year unless
Purchaser demonstrates to Seller’s satisfaction compliance with the covenants
contained herein for both the fiscal year in effect prior to any change and the
new fiscal year period by delivery to Seller of appropriate interim and annual
pro forma, historical and current compliance certificates for such periods and
such other information as Seller may reasonably request, (iii) without at least
twenty (20) days prior written notice to Seller, change its name or change its
jurisdiction of organization; (iv) amend, alter or suspend or terminate or make
provisional in any material way, any Permit without the prior written consent of
Seller, which consent shall not be unreasonably withheld, or (v) wind up,
liquidate or dissolve (voluntarily or involuntarily) or commence or suffer any
proceedings seeking or that would result in any of the foregoing.

          7.8 Truth of Statements

                    Purchaser shall not furnish to Seller any certificate or
other document that contains any untrue statement of a material fact or that
omits to state a material fact necessary to make it not misleading in light of
the circumstances under which it was furnished.

          7.9 IRS Form 8821

                    Purchaser shall not alter, amend, restate, or otherwise
modify, or withdraw, terminate or re-file the IRS Form 8821 required to be filed
pursuant to the Conditions Precedent in Section 4.1 hereof.

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          7.10 Transfer of Assets

                    Notwithstanding any other provision of this Agreement or any
other Security Document, Purchaser shall not sell, lease, transfer, assign or
otherwise dispose of any interest in any properties or assets (other than
obsolete equipment or excess equipment no longer needed in the conduct of the
business in the ordinary course of business and sales of Inventory in the
ordinary course of business), or agree to do any of the foregoing at any future
time, except that:

 

 

 

(a) Purchaser may lease (as lessee) real or personal property or surrender all
or a portion of a lease of the same, in each case in the ordinary course of
business (so long as such lease does not create or result in and is not
otherwise a Capitalized Lease Obligation prohibited under this Agreement),
provided that a Landlord Waiver and Consent and such other consents as are
required by Seller are signed and delivered to Seller with respect to any lease
of real or other property, as applicable;

 

 

 

(b) Purchaser may arrange for warehousing, fulfillment or storage of Inventory
at locations not owned or leased by Purchaser in each case in the ordinary
course of business, provided that a Warehouse Waiver and Consent and such other
consents as are required by Seller are signed and delivered to Seller with
respect to any such location;

 

 

 

(c) Purchaser may license or sublicense Intellectual Property or customer lists
from third parties in the ordinary course of business, provided, that such
licenses or sublicenses shall not interfere with the business or other
operations of Purchaser and that Purchaser’s rights, title and/or interest in or
to such Intellectual Property and customer lists and interests therein are
pledged to Seller as further security for the Obligations and included as part
of the Collateral;

 

 

 

(d) Purchaser agrees not sell, transfer, amend or dispose of any of its rights
relating to (a) any registered Intellectual Property (or any applications
therefor), or (b) any other material Intellectual Property, without first
providing to Seller written notice of its intent and providing Seller with the
opportunity to object in writing within ten (10) days of the receipt of such
notice; and

 

 

 

(e) Purchaser may consummate such other sales or dispositions of property or
assets (including any sale or transfer or disposition of all or any part of its
assets and thereupon and within one year thereafter rent or lease the assets so
sold or transferred) only to the extent prior written notice has been given to
Seller and to the extent Seller has given its prior written consent thereto,
subject in each case to such conditions as may be set forth in such consent.

          7.11 Payment on Permitted Subordinated Debt

                    Purchaser shall not, unless expressly permitted under the
Subordination Agreements, (i) make any prepayment of any part or all of any
Permitted Subordinated Debt, (ii) repurchase, redeem or retire any instrument
evidencing any such Permitted Subordinated Debt prior to maturity, or (iii)
enter into any agreement (oral or written) which could in any way be construed
to amend, modify, alter or terminate any one or more instruments or agreements
evidencing or relating to any Permitted Subordinated Debt in a manner adverse to
Seller, as determined by Seller in its sole discretion.

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VIII. EVENTS OF DEFAULT

          The occurrence of any one or more of the following shall constitute an
“Event of Default:”

                    (a) Purchaser shall fail to pay any amount on the
Obligations or provided for in any Acquisition Document when due (whether on any
payment date, at maturity, by reason of acceleration, by notice of intention to
prepay, by required prepayment or otherwise);

                    (b) any representation, statement or warranty made or deemed
made by Purchaser in any Acquisition Document or in any other certificate,
document, report or opinion delivered in conjunction with any Acquisition
Document to which it is a party, shall not be true and correct in all material
respects or shall have been false or misleading in any material respect on the
date when made or deemed to have been made (except to the extent already
qualified by materiality, in which case it shall be true and correct in all
respects and shall not be false or misleading in any respect);

                    (c) Purchaser or other party thereto other than Seller shall
be in violation, breach or default of, or shall fail to perform, observe or
comply with any covenant, obligation or agreement set forth in, any Acquisition
Document and such violation, breach, default or failure shall not be cured
within the applicable period set forth in the applicable Acquisition Document;
provided that, with respect to the affirmative covenants set forth in Article VI
(other than Sections 6.1(c), 6.2, 6.3, 6.5, 6.8 and 6.9 for which there shall be
no cure period), there shall be a twenty calendar day cure period commencing
from the earlier of (i) Receipt by such Person of written notice of such breach,
default, violation or failure, and (ii) the time at which such Person or any
authorized officer thereof knew or became aware, or should have known or been
aware, of such failure, violation, breach or default;

                    (d) (i) any of the Acquisition Documents ceases to be in
full force and effect, or (ii) except as set forth herein or under any
applicable Acquisition Document, any Lien created thereunder ceases to
constitute a valid perfected Lien on the Collateral in accordance with the terms
thereof, or Seller ceases to have a valid perfected security interest in any of
the Collateral or any securities pledged to Seller pursuant to the Security
Documents that is senior in priority to all other security interests except with
respect to the security interest granted to CapitalSource pursuant to the terms
of the Credit Agreement and other Loan Documents (as defined in the Credit
Agreement);

                    (e) one or more tax assessments, judgments or decrees is
rendered against any Purchaser in an amount in excess of $40,000 individually or
$75,000 in the aggregate, which is/are not satisfied, stayed, vacated or
discharged of record within thirty-five calendar days of being rendered or
is/are not subject to a good faith dispute for which adequate reserves have been
put aside;

                    (f) (i) any default occurs, which is not cured or waived,
(x) in the payment of any amount with respect to any Indebtedness (other than
the Obligations) of Purchaser in excess of $40,000, (y) in the performance,
observance or fulfillment of any material provision contained in any agreement,
contract, document or instrument to which Purchaser is a party or to which any
of their properties or assets are subject or bound under or pursuant to which
any Indebtedness was issued, created, assumed, guaranteed or secured and such
default continues for more than any applicable grace period or permits the
holder of any Indebtedness to accelerate the maturity thereof, or (z) in the
performance, observance or fulfillment of any provision contained in any
agreement, contract, document or instrument between Purchaser and Seller or any
Affiliate of Seller (other than the Acquisition Documents) and such default
continues for more than any applicable grace period (if any), or (ii) any
Indebtedness of Purchaser is declared to be due and payable or is required to be
prepaid (other than by a regularly scheduled payment) prior to the stated
maturity thereof, or any obligation of such Person for the payment of
Indebtedness

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(other than the Obligations) is not paid when due or within any applicable grace
period, or any such obligation becomes or is declared to be due and payable
before the expressed maturity thereof, or there occurs an event which, with the
giving of notice or lapse of time, or both, would cause any such obligation to
become, or allow any such obligation to be declared to be, due and payable;

                    (g) Purchaser shall (i) be unable to pay its debts generally
as they become due, (ii) have total liabilities (including contingent,
subordinated, unmatured and unliquidated liabilities) that exceed its assets, at
a Fair Valuation, (iii) have an unreasonably small capital base with which to
engage in its anticipated business, (iv) file a petition under any insolvency
statute, (v) make a general assignment for the benefit of its creditors, (vi)
commence a proceeding for the appointment of a receiver, trustee, liquidator or
conservator of itself or of the whole or any substantial part of its property,
or (vii) file a petition seeking reorganization or liquidation or similar relief
under any Debtor Relief Law or any other applicable law or statute;

                    (h) (i) a court of competent jurisdiction shall (A) enter an
order, judgment or decree appointing a custodian, receiver, trustee, liquidator
or conservator of Purchaser or the whole or any substantial part of any such
Person’s properties, which shall continue unstayed and in effect for a period of
thirty-five calendar days, (B) shall approve a petition filed against Purchaser
seeking reorganization, liquidation or similar relief under the any Debtor
Relief Law or any other applicable law or statute, which is not dismissed within
thirty-five calendar days or, (C) under the provisions of any Debtor Relief Law
or other applicable law or statute, assume custody or control of any Purchaser
or of the whole or any substantial part of any such Person’s properties, which
is not irrevocably relinquished within thirty-five calendar days, or (ii) there
is commenced against Purchaser any proceeding or petition seeking
reorganization, liquidation or similar relief under any Debtor Relief Law or any
other applicable law or statute and either (A) any such proceeding or petition
is not unconditionally dismissed within thirty-five calendar days after the date
of commencement, or (B) Purchaser takes any action to indicate its approval of
or consent to any such proceeding or petition;

                    (i) (i) any Change of Control occurs or any agreement or
commitment to cause or that may result in any such Change of Control is entered
into, (ii) any Material Adverse Effect, or Material Adverse Change occurs or is
reasonably expected to occur, or (iii) any Purchaser ceases a material portion
of its business operations as currently conducted;

                    (j) Seller receives any indication or evidence that
Purchaser may have directly or indirectly been engaged in any type of activity
which, in Seller’s judgment, might result in forfeiture of any property to any
Governmental Authority which shall have continued unremedied for a period of
fifteen calendar days after written notice from Seller;

                    (k) an Event of Default occurs under any other Acquisition
Document after notice (if required) and the expiration of any applicable grace
period;

                    (l) uninsured damage to, or loss, theft or destruction of,
any portion of the Collateral occurs that exceeds $40,000 in the aggregate;

                    (m) Purchaser or any of their respective directors or senior
officers is criminally indicted or convicted under any law that could lead to a
forfeiture of any Collateral;

                    (n) The common stock of Sunset shall cease to be quoted for
trading or listed for trading on either the NASD OTC Bulletin Board, Nasdaq
SmallCap Market, New York Stock Exchange,

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American Stock Exchange or the Nasdaq National Market and shall not again be
quoted or listed for trading thereon within seven Business Days of such
delisting;

                    (o) the issuance of any process for levy, attachment or
garnishment or execution upon or prior to any judgment against any Purchaser or
any of their property or assets; or

                    (p) Purchaser does, or enters into or becomes a party to any
agreement or commitment to do, or cause to be done, any of the things described
in this Article VIII or otherwise prohibited by any Acquisition Document
(subject to any cure periods set forth therein); then, and in any such event,
notwithstanding any other provision of any Acquisition Document, Seller may,
without notice or demand, elect all or any of the Obligations to be due and
payable immediately (except in the case of an Event of Default under Section
8(d), (g), (h) or (i)(iii), in which event all of the foregoing shall
automatically and without further act by Seller be due and payable, provided
that, with respect to non-material breaches or violations that constitute Events
of Default under clause (ii) of Section 8(d), there shall be a three (3)
Business Day cure period commencing from the earlier of (A) Receipt by the
applicable Person of written notice of such breach or violation or of any event,
fact or circumstance constituting or resulting in any of the foregoing, and (B)
the time at which such Person or any authorized officer thereof knew or became
aware, or should have known or been aware, of such breach or violation and
resulting Event of Default or of any event, fact or circumstance constituting or
resulting in any of the foregoing), in each case without presentment, demand,
protest or further notice of any kind, all of which are hereby expressly waived
by Purchaser.

IX. RIGHTS AND REMEDIES AFTER DEFAULT

          9.1 Rights and Remedies

                    (a) In addition to the acceleration provisions set forth in
Article VIII above, upon the occurrence and continuation of an Event of Default,
subject to the terms of the Master Subordination Agreement, Seller shall have
the right to exercise any and all rights, options and remedies provided for in
the Acquisition Documents, under the UCC or at law or in equity, including,
without limitation, the right to (i) apply any property of Purchaser held by
Seller to reduce the Obligations, (ii) foreclose the Liens created under the
Security Documents, (iii) realize upon, take possession of and/or sell any
Collateral or securities pledged with or without judicial process, (iv) exercise
all rights and powers with respect to the Collateral as any Purchaser, as
applicable, might exercise, (v) collect and send notices regarding the
Collateral, with or without judicial process, (vi) by its own means or with
judicial assistance, enter any premises at which Collateral and/or pledged
securities are located, or render any of the foregoing unusable or dispose of
the Collateral and/or pledged securities on such premises without any liability
for rent, storage, utilities, or other sums, and no Purchaser shall resist or
interfere with such action, (vii) at Purchaser’s expense, require that all or
any part of the Collateral be assembled and made available to Seller at any
place designated by Seller, (viii) intentionally omitted, (ix) assess the
Non-Compliance Fee, and/or (x) relinquish or abandon any Collateral or
securities pledged or any Lien thereon. Notwithstanding any provision of any
Acquisition Document, Seller, in its sole discretion, shall have the right, at
any time that Purchaser fails to do so, and from time to time, without prior
notice, to: (i) obtain insurance covering any of the Collateral to the extent
required hereunder; (ii) pay for the performance of any of Obligations; (iii)
discharge taxes or Liens on any of the Collateral that are in violation of any
Acquisition Document unless Purchaser is in good faith with due diligence by
appropriate proceedings contesting those items; and (iv) pay for the maintenance
and preservation of the Collateral. Such expenses and advances shall be added to
the Obligations until reimbursed to Seller and shall be secured

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by the Collateral, and such payments by Seller shall not be construed as a
waiver by Seller of any Event of Default or any other rights or remedies of
Seller.

                    (b) Purchaser agrees that notice received by it at least ten
calendar days before the time of any intended public sale, or the time after
which any private sale or other disposition of Collateral is to be made, shall
be deemed to be reasonable notice of such sale or other disposition. If
permitted by applicable law, any perishable Collateral which threatens to
speedily decline in value or which is sold on a recognized market may be sold
immediately by Seller without prior notice to Purchaser. At any sale or
disposition of Collateral or securities pledged, Seller may (to the extent
permitted by applicable law) purchase all or any part thereof free from any
right of redemption by Purchaser which right is hereby waived and released.
Purchaser covenants and agrees not to, and not to permit or cause any of its
Subsidiaries to, interfere with or impose any obstacle to Seller’s exercise of
its rights and remedies with respect to the Collateral. Seller, in dealing with
or disposing of the Collateral or any part thereof, shall not be required to
give priority or preference to any item of Collateral or otherwise to marshal
assets or to take possession or sell any Collateral with judicial process.

          9.2 Application of Proceeds

                    In addition to any other rights, options and remedies Seller
has under the Acquisition Documents, the UCC, at law or in equity, subject to
the terms of the Master Subordination Agreement, all dividends, interest, rents,
issues, profits, fees, revenues, income and other proceeds collected or received
from collecting, holding, managing, renting, selling, or otherwise disposing of
all or any part of the Collateral or any proceeds thereof upon exercise of its
remedies hereunder shall be applied in the following order of priority: (i)
first, to the payment of all costs and expenses of such collection, storage,
lease, holding, operation, management, sale, disposition or delivery and of
conducting Purchaser’s business and of maintenance, repairs, replacements,
alterations, additions and improvements of or to the Collateral, and to the
payment of all sums which Seller may be required or may elect to pay, if any,
for taxes, assessments, insurance and other charges upon the Collateral or any
part thereof, and all other payments that Seller may be required or authorized
to make under any provision of this Agreement (including, without limitation, in
each such case, in-house documentation and diligence fees and legal expenses,
search, audit, recording, professional and filing fees and expenses and
reasonable attorneys’ fees and all expenses, liabilities and advances made or
incurred in connection therewith); (ii) second, to the payment of all
Obligations as provided herein; (iii) third, to the satisfaction of Indebtedness
secured by any subordinate security interest of record in the Collateral if
written notification of demand therefore is received before distribution of the
proceeds is completed, provided, that, if requested by Seller, the holder of a
subordinate security interest shall furnish reasonable proof of its interest,
and unless it does so, Seller need not address its claims; and (iv) fourth, to
the payment of any surplus then remaining to Purchaser, unless otherwise
provided by law or directed by a court of competent jurisdiction, provided that
Purchaser shall be liable for any deficiency if such proceeds are insufficient
to satisfy the Obligations or any of the other items referred to in this
section.

          9.3 Rights of Seller to Appoint Receiver

                    Without limiting and in addition to any other rights,
options and remedies Seller has under the Acquisition Documents, the UCC, at law
or in equity, upon the occurrence and continuation of an Event of Default,
subject to the terms of the Master Subordination Agreement, Seller shall have
the right to apply for and have a receiver appointed by a court of competent
jurisdiction in any action taken by Seller to enforce its rights and remedies in
order to manage, protect, preserve, sell or dispose the Collateral and continue
the operation of the business of Purchaser and to collect all revenues and
profits thereof and apply the same to the payment of all expenses and other
charges of such receivership

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including the compensation of the receiver and to the payments as aforesaid
until a sale or other disposition of such Collateral shall be finally made and
consummated.

          9.4 Rights and Remedies not Exclusive

                    Subject to the terms of the Master Subordination Agreement,
Seller shall have the right in its sole discretion to determine which rights,
Liens and/or remedies Seller may at any time pursue, relinquish, subordinate or
modify, and such determination will not in any way modify or affect any of
Seller’s rights, Liens or remedies under any Acquisition Document, applicable
law or equity. The enumeration of any rights and remedies in any Acquisition
Document is not intended to be exhaustive, and all rights and remedies of Seller
described in any Acquisition Document are cumulative and are not alternative to
or exclusive of any other rights or remedies which Seller otherwise may have.
The partial or complete exercise of any right or remedy shall not preclude any
other further exercise of such or any other right or remedy.

X. WAIVERS AND JUDICIAL PROCEEDINGS

          10.1 Waivers

                    Except as expressly provided for herein, Purchaser hereby
waives setoff, counterclaim, demand, presentment, protest, all defenses with
respect to any and all instruments and all notices and demands of any
description, and the pleading of any statute of limitations as a defense to any
demand under any Acquisition Document. Purchaser hereby waives any and all
defenses and counterclaims it may have or could interpose in any action or
procedure brought by Seller to obtain an order of court recognizing the
assignment of, or Lien of Seller in and to, any Collateral. With respect to any
action hereunder, Seller conclusively may rely upon, and shall incur no
liability to Purchaser in acting upon, any request or other communication that
Seller reasonably believes to have been given or made by a person authorized on
Purchaser’s behalf, whether or not such person is listed on the incumbency
certificate delivered pursuant to Section 4.1 hereof. In each such case,
Purchaser hereby waives the right to dispute Seller’s action based upon such
request or other communication, absent manifest error.

          10.2 Delay; No Waiver of Defaults

                    No course of action or dealing, renewal, release or
extension of any provision of any Acquisition Document, or single or partial
exercise of any such provision, or delay, failure or omission on Seller’s part
in enforcing any such provision shall affect the liability of Purchaser or
operate as a waiver of such provision or affect the liability of any Purchaser
or preclude any other or further exercise of such provision. No waiver by any
party to any Acquisition Document of any one or more defaults by any other party
in the performance of any of the provisions of any Acquisition Document shall
operate or be construed as a waiver of any future default, whether of a like or
different nature, and each such waiver shall be limited solely to the express
terms and provisions of such waiver. Notwithstanding any other provision of any
Acquisition Document, by completing the Closing under this Agreement, Seller
does not waive any breach of any representation or warranty under any
Acquisition Document, and all of Seller’s claims and rights resulting from any
such breach or misrepresentation are specifically reserved.

          10.3 Jury Waiver

                    EACH PARTY TO THIS AGREEMENT HEREBY EXPRESSLY WAIVES ANY
RIGHT TO TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION ARISING UNDER THE

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ACQUISITION DOCUMENTS OR IN ANY WAY CONNECTED WITH OR INCIDENTAL TO THE DEALINGS
OF THE PARTIES WITH RESPECT TO THE ACQUISITION DOCUMENTS OR THE TRANSACTIONS
CONTEMPLATED THEREBY, WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER
SOUNDING IN CONTRACT, TORT OR OTHERWISE. EACH PARTY HEREBY AGREES AND CONSENTS
THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A
JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A
COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENTS OF THE
PARTIES TO THE WAIVER OF THEIR RESPECTIVE RIGHTS TO TRIAL BY JURY.

          10.4 Cooperation in Discovery and Litigation

                    In any litigation, arbitration or other dispute resolution
proceeding relating to any Acquisition Document, Purchaser waives any and all
defenses, objections and counterclaims it may have or could interpose with
respect to (i) any of its directors, officers, employees or agents being deemed
to be employees or managing agents of Purchaser for purposes of all applicable
law or court rules regarding the production of witnesses by notice for testimony
(whether in a deposition, at trial or otherwise), (ii) Seller’s counsel
examining any such individuals as if under cross-examination and using any
discovery deposition of any of them as if it were an evidence deposition, and/or
(iii) using all commercially reasonable efforts to produce in any such dispute
resolution proceeding, at the time and in the manner requested by Seller, all
Persons, documents (whether in tangible, electronic or other form) and/or other
things under its control and relating to the dispute.

XI. EFFECTIVE DATE AND TERMINATION

          11.1 Termination and Effective Date Thereof

                    (a) This Agreement shall continue in full force and effect
until the full performance and indefeasible payment in cash of all Obligations,
unless terminated sooner as provided in this Section 11.1. Purchaser may
terminate this Agreement at any time upon not less than ninety calendar days’
prior written notice to Seller and upon full performance and indefeasible
payment in full in cash of all Obligations on or prior to such ninetieth
calendar day after Receipt by Seller of such written notice.All of the
Obligations shall be immediately due and payable upon any such termination on
the termination date stated in any notice of termination (the “Termination
Date”); provided that, notwithstanding any other provision of any Acquisition
Document, the Termination Date shall be effective no earlier than the first
Business Day of the month following the expiration of the ninety calendar days’
prior written notice period. Notwithstanding any other provision of any
Acquisition Document, no termination of this Agreement shall affect Seller’s
rights or any of the Obligations existing as of the effective date of such
termination, and the provisions of the Acquisition Documents shall continue to
be fully operative until the Obligations have been fully performed and
indefeasibly paid in cash in full. The Liens granted to Seller under the
Security Documents and the financing statements filed pursuant thereto and the
rights and powers of Seller shall continue in full force and effect until all of
the Obligations have been fully performed and indefeasibly paid in full in cash
and this Agreement has been terminated.

          11.2 Survival

                    All obligations, covenants, agreements, representations,
warranties, waivers and indemnities made by Purchaser in any Acquisition
Document shall survive the execution and delivery of

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the Acquisition Documents, the Closing, and any termination of this Agreement
until all Obligations are fully performed and indefeasibly paid in full in cash.
The obligations and provisions of Sections 3.4, 3.5, 6.13, 10.1, 10.3, 11.1,
11.2, 12.4, 12.7 and 12.10 shall survive termination of the Acquisition
Documents and any payment, in full or in part, of the Obligations.

XII. MISCELLANEOUS

          12.1 Governing Law; Jurisdiction; Service of Process; Venue

                    The Acquisition Documents shall be governed by and construed
in accordance with the internal laws of the State of New York without giving
effect to its choice of law provisions. Any judicial proceeding against
Purchaser with respect to the Obligations, any Acquisition Document or any
related agreement may be brought in any federal or state court of competent
jurisdiction located in the State of New York. By execution and delivery of each
Acquisition Document to which it is a party, Purchaser (i) accepts the
non-exclusive jurisdiction of the aforesaid courts and irrevocably agrees to be
bound by any judgment rendered thereby, (ii) waives personal service of process,
(iii) agrees that service of process upon it may be made by certified or
registered mail, return receipt requested, pursuant to Section 12.5 hereof, (iv)
waives any objection to jurisdiction and venue of any action instituted
hereunder and agrees not to assert any defense based on lack of jurisdiction,
venue or convenience, and (v) agrees that Seller has accepted in New York the
Acquisition Documents executed by Purchaser. Nothing shall affect the right of
Seller to serve process in any manner permitted by law or shall limit the right
of Seller to bring proceedings against Purchaser in the courts of any other
jurisdiction having jurisdiction. Any judicial proceedings against Seller
involving, directly or indirectly, the Obligations, any Acquisition Document or
any related agreement shall be brought only in a federal or state court located
in the State of New York. All parties acknowledge that they participated in the
negotiation and drafting of this Agreement and that, accordingly, no party shall
move or petition a court construing this Agreement to construe it more
stringently against one party than against any other.

          12.2 Successors and Assigns; Participations; New Sellers

                    The Acquisition Documents shall inure to the benefit of
Seller, Transferees and all future holders of the Promissory Notes, the
Obligations and/or any of the Collateral, and each of their respective
successors and assigns. Each Acquisition Document shall be binding upon the
Persons’ other than Seller that are parties thereto and their respective
successors and assigns, and no such Person may assign, delegate or transfer any
Acquisition Document or any of its rights or obligations thereunder without the
prior written consent of Seller. No rights are intended to be created under any
Acquisition Document for the benefit of any third party done, creditor or
incidental beneficiary of Purchaser. Nothing contained in any Acquisition
Document shall be construed as a delegation to Seller of any other Person’s duty
of performance. PURCHASER ACKNOWLEDGES AND AGREES THAT SELLER AT ANY TIME AND
FROM TIME TO TIME MAY (I) DIVIDE AND RESTATE ANY NOTE, AND/OR (II) SELL, ASSIGN
OR GRANT PARTICIPATING INTERESTS IN OR TRANSFER ALL OR ANY PART OF ITS RIGHTS OR
OBLIGATIONS UNDER ANY ACQUISITION DOCUMENT, THE PROMISSORY NOTES, THE
OBLIGATIONS AND/OR THE COLLATERAL TO OTHER PERSONS (EACH SUCH TRANSFEREE,
ASSIGNEE OR PURCHASER, A “TRANSFEREE”). Each Transferee shall have all of the
rights and benefits with respect to the Obligations, the Promissory Notes,
Collateral and/or Acquisition Documents held by it as fully as if the original
holder thereof, and either Seller or any Transferee may be designated as the
sole agent to manage the transactions and obligations contemplated therein;
provided that, notwithstanding anything to the contrary in any Acquisition
Document, Purchaser shall not be obligated to pay under this Agreement to any
Transferee any sum in excess of the sum which

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Purchaser would have been obligated to pay to Seller had such participation not
been effected. Notwithstanding any other provision of any Acquisition Document,
Seller may disclose to any Transferee all information, reports, financial
statements, certificates and documents obtained under any provision of any
Acquisition Document.

          12.3 Application of Payments

                    To the extent that any payment made or received with respect
to the Obligations is subsequently invalidated, determined to be fraudulent or
preferential, set aside or required to be repaid to a trustee, debtor in
possession, receiver, custodian or any other Person under any Debtor Relief Law,
common law or equitable cause or any other law, then the Obligations intended to
be satisfied by such payment shall be revived and shall continue as if such
payment had not been received by Seller. Any payments with respect to the
Obligations received shall be credited and applied in such manner and order as
Seller shall decide in its sole discretion.

          12.4 Indemnity

                    Purchaser jointly and severally shall indemnify Seller, its
Affiliates and its and their respective managers, members, officers, employees,
Affiliates, agents, representatives, successors, assigns, accountants and
attorneys (collectively, the “Indemnified Persons”) from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses and disbursements of any kind or nature whatsoever (including,
without limitation, reasonable fees and disbursements of counsel and in-house
documentation and diligence fees and legal expenses) which may be imposed on,
incurred by or asserted against any Indemnified Person with respect to or
arising out of, or in any litigation, proceeding or investigation instituted or
conducted by any Person with respect to any aspect of, or any transaction
contemplated by or referred to in, or any matter related to, any Acquisition
Document or any agreement, document or transaction contemplated thereby, whether
or not such Indemnified Person is a party thereto, except to the extent that any
of the foregoing arises out of the gross negligence or willful misconduct of
such Indemnified Person. If any Indemnified Person uses in-house counsel for any
purpose for which Purchaser is responsible to pay or indemnify, each Purchaser
expressly agrees that its indemnification obligations include reasonable charges
for such work commensurate with the fees that would otherwise be charged by
outside legal counsel selected by such Indemnified Person in its sole discretion
for the work performed. Seller agrees to give Purchaser reasonable notice of any
event of which Seller becomes aware for which indemnification may be required
under this Section 12.4, and Seller may elect (but is not obligated) to direct
the defense thereof, provided that the selection of counsel shall be subject to
Purchaser’s consent, which consent shall not be unreasonably withheld or
delayed. Any Indemnified Person may, in its reasonable discretion, take such
actions as it deems necessary and appropriate to investigate, defend or settle
any event or take other remedial or corrective actions with respect thereto as
may be necessary for the protection of such Indemnified Person or the
Collateral. Notwithstanding the foregoing, if any Insurer agrees to undertake
the defense of an event (an “Insured Event”), Seller agrees not to exercise its
right to select counsel to defend the event if that would cause Purchaser’s
Insurer to deny coverage; provided, however, that Seller reserves the right to
retain counsel to represent any Indemnified Person with respect to an Insured
Event at its sole cost and expense. To the extent that Seller obtains recovery
from a third party other than an Indemnified Person of any of the amounts that
any Purchaser has paid to Seller pursuant to the indemnity set forth in this
Section 12.4, then Seller shall promptly pay to Purchaser the amount of such
recovery.

          12.5 Notice

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                    Any notice or request under any Acquisition Document shall
be given to any party to this Agreement at such party’s address set forth
beneath its signature on the signature page to this Agreement, or at such other
address as such party may hereafter specify in a notice given in the manner
required under this Section 12.5. Any notice or request hereunder shall be given
only by, and shall be deemed to have been received upon (each, a “Receipt”): (i)
registered or certified mail, return receipt requested, on the date on which
received as indicated in such return receipt, (ii) delivery by a nationally
recognized overnight courier, one (1) Business Day after deposit with such
courier, or (iii) facsimile transmission, in each case upon telephone or further
electronic communication from the recipient acknowledging receipt (whether
automatic or manual from recipient), as applicable.

          12.6 Severability; Captions; Counterparts; Facsimile Signatures

                    If any provision of any Acquisition Document is adjudicated
to be invalid under applicable laws or regulations, such provision shall be
inapplicable to the extent of such invalidity without affecting the validity or
enforceability of the remainder of the Acquisition Documents which shall be
given effect so far as possible. The captions in the Acquisition Documents are
intended for convenience and reference only and shall not affect the meaning or
interpretation of the Acquisition Documents. The Acquisition Documents may be
executed in one or more counterparts (which taken together, as applicable, shall
constitute one and the same instrument) and by facsimile transmission, which
facsimile signatures shall be considered original executed counterparts. Each
party to this Agreement agrees that it will be bound by its own facsimile
signature and that it accepts the facsimile signature of each other party.

          12.7 Expenses

                    Purchaser shall pay, whether or not the Closing occurs, all
costs and expenses incurred by Seller and/or its Affiliates, including, without
limitation, documentation and diligence fees and expenses, all search, audit,
appraisal, recording, professional and filing fees and expenses and all other
out-of-pocket charges and expenses (including, without limitation, UCC and
judgment and tax lien searches and UCC filings and fees for post-Closing UCC and
judgment and tax lien searches and wire transfer fees and audit expenses), and
reasonable attorneys’ fees and expenses, (i) in any effort to enforce, protect
or collect payment of any Obligation or to enforce any Acquisition Document or
any related agreement, document or instrument, (ii) in connection with entering
into, negotiating, preparing, reviewing and executing the Acquisition Documents
and/or any related agreements, documents or instruments, (iii) arising in any
way out of administration of the Obligations, (iv) in connection with
instituting, maintaining, preserving, enforcing and/or foreclosing on Seller’s
Liens in any of the Collateral or securities pledged under the Acquisition
Documents, whether through judicial proceedings or otherwise, (v) in defending
or prosecuting any actions, claims or proceedings arising out of or relating to
Seller’s transactions with Purchaser, (vi) in seeking, obtaining or receiving
any advice with respect to its rights and obligations under any Acquisition
Document and any related agreement, document or instrument, and/or (vii) in
connection with any modification, restatement, supplement, amendment, waiver or
extension of any Acquisition Document and/or any related agreement, document or
instrument. All of the foregoing shall be charged to Purchaser’s and shall be
part of the Obligations. If Seller or any of its Affiliates uses in-house
counsel for any purpose under any Acquisition Document for which Purchaser is
responsible to pay or indemnify, Purchaser expressly agrees that its Obligations
include reasonable charges for such work commensurate with the fees that would
otherwise be charged by outside legal counsel selected by Seller or such
Affiliate in its sole discretion for the work performed. Without limiting the
foregoing, Purchaser shall pay all taxes (other than taxes based upon or
measured by

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Seller’s income or revenues or any personal property tax), if any, in connection
with the issuance of the Promissory Notes and the filing and/or recording of any
documents and/or financing statements.

          12.8 Entire Agreement

                    This Agreement and the other Acquisition Documents to which
Purchaser is a party constitute the entire agreement between Purchaser and
Seller with respect to the subject matter hereof and thereof, and supersede all
prior agreements and understandings, if any, relating to the subject matter
hereof or thereof. Any promises, representations, warranties or guarantees not
herein contained and hereinafter made shall have no force and effect unless in
writing signed by Purchaser and Seller. No provision of this Agreement may be
changed, modified, amended, restated, waived, supplemented, discharged, canceled
or terminated orally or by any course of dealing or in any other manner other
than by an agreement in writing signed by Seller and Purchaser. Each party
hereto acknowledges that it has been advised by counsel in connection with the
negotiation and execution of this Agreement and is not relying upon oral
representations or statements inconsistent with the terms and provisions hereof.

          12.9 Seller Approvals

                    Unless expressly provided herein to the contrary, any
approval, consent, waiver or satisfaction of Seller with respect to any matter
that is subject of any Acquisition Document may be granted or withheld by Seller
in its sole and absolute discretion.

          12.10 Confidentiality and Publicity

                    (a) Purchaser agrees, and agrees to cause each of its
Affiliates, (i) not to transmit or disclose provisions of any Acquisition
Document to any Person (other than to Purchaser’s advisors and officers on a
need-to-know basis or as otherwise may be required by law) without Seller’s
prior written consent, except as required by applicable law or any regulations
thereunder, (ii) to inform all Persons of the confidential nature of the
Acquisition Documents and to direct them not to disclose the same to any other
Person and to require each of them to be bound by these provisions. Purchaser
agrees to submit to Seller and Seller reserves the right to review and approve
all materials that Purchaser or any of its Affiliates prepares that contain
Seller’s name or describe or refer to any Acquisition Document, any of the terms
thereof or any of the transactions contemplated thereby. Purchaser shall not,
and shall not permit any of its Affiliates to, use Seller’s name (or the name of
any of Seller’s Affiliates) in connection with any of its business operations,
including without limitation, advertising, marketing or press releases or such
other similar purposes, without Seller’s prior written consent. Nothing
contained in any Acquisition Document is intended to permit or authorize
Purchaser or any of its Affiliates to contract on behalf of Seller.

                    (b) Purchaser hereby agrees that Seller or any Affiliate of
Seller may (i) disclose a general description of transactions arising under the
Acquisition Documents for advertising, marketing or other similar purposes and
(ii) use Purchaser’s name, logo or other indicia germane to such party in
connection with such advertising, marketing or other similar purposes.

          12.11 Release of Seller

                    Notwithstanding any other provision of any Acquisition
Document, Purchaser voluntarily, knowingly, unconditionally and irrevocably,
with specific and express intent, for and on behalf of itself, its managers,
members, directors, officers, employees, stockholders, Affiliates, agents,

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representatives, accountants, attorneys, successors and assigns and their
respective Affiliates (collectively, the “Releasing Parties”), hereby fully and
completely releases and forever discharges the Indemnified Persons and any other
Person or Insurer which may be responsible or liable for the acts or omissions
of any of the Indemnified Persons, or who may be liable for the injury or damage
resulting therefrom (collectively, with the Indemnified Persons, the “Released
Parties”), of and from any and all actions, causes of action, damages, claims,
obligations, liabilities, costs, expenses and demands of any kind whatsoever, at
law or in equity, matured or unmatured, vested or contingent, that any of the
Releasing Parties has against any of the Released Parties as of the date of the
Closing. Purchaser acknowledges that the foregoing release is a material
inducement to Seller’s decision to enter into the Acquisition Agreement and has
been relied upon by Seller in agreeing to enter into the Acquisition Agreement.

          12.12 Agent

                    Seller and its successors and assigns hereby (i) designate
and appoint IBF Fund Liquidating LLC, a Delaware limited liability company, and
its successors and assigns (“IBF”), to act as agent for Seller and its
successors and assigns under this Agreement and all other Acquisition Documents,
(ii) irrevocably authorize IBF to take all actions on its behalf under the
provision of this Agreement and all other Acquisition Documents, and (iii) to
exercise all such powers and rights, and to perform all such duties and
obligations hereunder and thereunder. IBF, on behalf of Seller, shall hold all
Collateral, payments of principal and interest, fees, charges and collections
received pursuant to this Agreement and all other Acquisition Documents.
Purchaser acknowledges that Seller and its successors and assigns transfer and
assign to IBF the right to act as Seller’s agent to enforce all rights and
perform all obligations of Seller contained herein and in all of the other
Acquisition Documents. Purchaser shall within ten Business Days after Seller’s
reasonable request, take such further actions, obtain such consents and
approvals and duly execute and deliver such further agreements, amendments,
assignments, instructions or documents as Seller may request to evidence the
appointment and designation of IBF as agent for Seller and other financial
institutions from time to time party hereto and to the other Acquisition
Documents.

          12.13 Agreement Controls

                    In the event of any inconsistency between this Agreement and
any other Acquisition Documents, the terms of this Agreement shall control.

          12.14 Master Subordination Agreement

                    Notwithstanding anything contained herein to the contrary,
this Agreement and the exercise of any right or remedy hereunder by Seller are
subject to the terms of the Master Subordination Agreement. The Liens in the
Collateral granted herein are subordinated to the Liens in the Collateral
granted to CapitalSource in the manner and to the extent set forth in the Master
Subordination Agreement.

[SIGNATURES APPEAR ON THE FOLLOWING PAGE]

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          IN WITNESS WHEREOF, each of the parties has duly executed this
Security Agreement as of the date first written above.

 

 

 

 

SUNSET BRANDS, INC.

 

 

 

By:

/s/ Todd Sanders

 

 

--------------------------------------------------------------------------------

 

Name: Todd Sanders

 

Its: President & CEO

 

 

 

Address for Notices:

 

Sunset Brand, Inc.

 

10990 Wilshire Blvd., Suite 1220

 

Los Angeles, CA 90024

 

Attention: President

 

Telephone: (310) 478-4600

 

FAX: (310) 478-4601

 

 

 

U.S. MILLS, INC.

 

 

 

By:

/s/ Todd Sanders

 

 

--------------------------------------------------------------------------------

 

Name: Todd Sanders

 

Its: CEO

 

 

 

By:

/s/ Charles Verde

 

 

--------------------------------------------------------------------------------

 

Name: Charles Verde

 

Its: President

 

 

 

Address for Notices:

 

U.S. Mills, Inc.

 

200 Reservoir Street

 

Needham, MA 02494

 

Attention: President

 

Telephone: (781) 444-0440

 

FAX: (781) 444-3411

 

 

 

IBF FUND LIQUIDATING LLC

 

 

 

By:

/s/ Arthur J. Steinberg

 

 

--------------------------------------------------------------------------------

 

Name: Arthur J. Steinberg

 

Its:   

Manager

 

 

 

 

Address for Notices:

 

c/o Kaye Scholer LLP

 

425 Park Avenue

 

New York, NY 10022

 

Attention: Arthur J. Steinberg, Esq., Manager

 

Telephone: (212) 836-8564

 

FAX: (212) 836-6157

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SCHEDULES

 

 

 

Schedule 2.17

--

Other Mandatory Payments

 

 

 

Schedule 5.2

--

Required Consents

 

 

 

Schedule 5.3

--

Capitalization, Organization Chart (including all subsidiaries,
authorized/issued capitalization, owners, directors, officers and managers) and
Joint Ventures

 

 

 

Schedule 5.4

--

Liens; Real and Personal Property Owned or Leased; Leases

 

 

 

Schedule 5.8

--

Taxes

 

 

 

Schedule 5.11

--

Intellectual Property

 

 

 

Schedule 5.15A

--

Existing Indebtedness

 

 

 

Schedule 5.15B

--

Indebtedness Maturing During Term

 

 

 

Schedule 5.16

--

Other Agreements

 

 

 

Schedule 5.17

--

Insurance

 

 

 

Schedule 5.18A

--

Corporate Names

 

 

 

Schedule 5.18B

--

Places of Business

 

 

 

Schedule 6.8

--

Further Assurances/Post Closing

 

 

 

Schedule 7.2

--

Permitted Indebtedness

 

 

 

Schedule 7.3

--

Permitted Liens

 

 

 

Schedule 7.5

--

Dividends

 

 

 

Schedule 7.6

--

Transactions with Affiliates

37

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ANNEX I

FINANCIAL COVENANTS

                    1) Minimum EBITDAM

                    For the Test Period ending on November 30, 2005 and for the
Test Periods ending on the last day of each calendar month thereafter, Purchaser
shall not permit its EBITDAM to be less than the following amounts on the Test
Periods set forth below:

 

 

 

Test Period Ended

 

Min. EBITDAM Covenant Level

--------------------------------------------------------------------------------

 

--------------------------------------------------------------------------------

 

 

 

November 30, 2005

 

$  170,000

December 31, 2005

 

$  317,900

January 31, 2006

 

$  451,350

February 28, 2006

 

$  586,500

March 31, 2006

 

$  711,450

April 30, 2006

 

$  779,450

May 31, 2006

 

$  641,750

June 30, 2006 and the last day of each month thereafter

 

$  595,000

                    2) Maximum Senior Leverage Ratio (Senior Debt to EBITDAM)

For the Test Period ending on November 30, 2005 and for each Test Period ending
on the last day of each calendar month thereafter, Purchaser shall not permit
its Maximum Senior Leverage Ratio to be more than 4.0 to 1.0.

                    3) Minimum Fixed Charge Coverage Ratio (EBITDAM/Fixed
Charges)

                    For the Test Period ending on November 30, 2005 and for the
Test Periods ending on the last day of each calendar month thereafter, Purchaser
shall not permit its Minimum Fixed Charge Coverage Ratio to be less than the
following amounts on the Test Periods set forth below:

 

 

 

Test Period Ended

 

Minimum Fixed Charge Coverage Ratio

--------------------------------------------------------------------------------

 

--------------------------------------------------------------------------------

 

November 30, 2005 through
and including October 31, 2006

 

0.94 to 1.0

November 30, 2006 through
and including October 31, 2007

 

1.02 to 1.0

November 30, 2007 and the last day
of each month thereafter

 

1.11 to 1.0

                    4) Minimum Liquidity

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                    At Closing and at all other times Purchaser shall have not
less than $250,000 of Available Cash on hand.

          For purposes of the covenants set forth in this Annex I, the terms
listed below shall have the following meanings:

                    “Available Cash” shall mean, for and on any date, the sum
without duplication of the following for Purchaser: (a) unrestricted cash on
hand on such date, (b) Cash Equivalents held on such date, and (c) the
unborrowed Availability (as such term is defined in the Credit Agreement) on and
as of such date.

                    “Cash Equivalents” shall mean (a) securities issued, or
directly and fully guaranteed or insured, by the United States or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States is pledged in support thereof) having maturities of not more than six
months from the date of acquisition, (b) U.S. dollar denominated time deposits,
certificates of deposit and bankers’ acceptances of (i) any domestic commercial
bank of recognized standing having capital and surplus in excess of
$500,000,000, or (ii) any bank (or the parent company of such bank) whose
short-term commercial paper rating from Standard & Poor’s Ratings Services
(“S&P”) is at least A-2 or the equivalent thereof or from Moody’s Investors
Service, Inc. (“Moody’s”) is at least P-2 or the equivalent thereof in each case
with maturities of not more than six months from the date of acquisition (any
bank meeting the qualifications specified in clauses (b)(i) or (ii), an
“Approved Bank”), (c) repurchase obligations with a term of not more than seven
days for underlying securities of the types described in clause (a), above,
entered into with any Approved Bank, (d) commercial paper issued by any Approved
Bank or by the parent company of any Approved Bank and commercial paper issued
by, or guaranteed by, any industrial or financial company with a short-term
commercial paper rating of at least A-2 or the equivalent thereof by S&P or at
least P-2 or the equivalent thereof by Moody’s, or guaranteed by any industrial
company with a long term unsecured debt rating of at least A or A2, or the
equivalent of each thereof, from S&P or Moody’s, as the case may be, and in each
case maturing within six months after the date of acquisition and (e)
investments in money market funds substantially all of whose assets are
comprised of securities of the type described in clauses (a) through (d) above.

                    “EBITDAM” shall mean, for any Test Period, the sum, without
duplication, of the following for Purchaser, on a consolidated basis: Net Income
determined in accordance with GAAP, plus, (a) Interest Expense, (b) taxes on
income, whether paid, payable or accrued, (c) depreciation expense, (d)
amortization expense, (e) all other non-cash, non-recurring charges and
expenses, excluding accruals for cash expenses made in the ordinary course of
business, (f) loss from any sale of assets, other than sales in the ordinary
course of business, all of the foregoing determined in accordance with GAAP, and
(g) plus any management fees paid or accrued by Purchaser during such period,
minus (a) gains from any sale of assets, other than sales in the ordinary course
of business and (b) other extraordinary or non-recurring gains.

                    “Fixed Charge Coverage Ratio” shall mean, for Purchaser
collectively on a consolidated basis, the ratio of (a) EBITDAM for the Test
Period, to (b) Fixed Charges for the Test Period.

                    “Fixed Charges” shall mean, the sum of the following:
(a) Total Debt Service, (b) Capital Expenditures, (c) income taxes paid in cash
or accrued, (d) dividends paid or accrued or declared, and (e) management fees
paid or accrued.

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                    “Interest Expense” shall mean, for any Test Period, total
interest expense (including attributable to Capital Leases in accordance with
GAAP) fees with respect to all outstanding Indebtedness including capitalized
interest but excluding commissions, discounts and other fees owed with respect
to letters of credit and bankers’ acceptance financing and net costs under
Interest Rate Agreements.

                    “Interest Rate Agreement” shall mean any interest rate swap,
cap or collar agreement or other similar agreement or arrangement designed to
hedge the position with respect to interest rates.

                    “Total Senior Leverage Ratio” shall mean, at any date of
determination, for Purchaser individually and collectively on a consolidated and
consolidating basis, the ratio of (i) Total Senior Debt on such date, to
(ii) EBITDAM for the Test Period most recently ended on such date (taken as one
accounting period) multiplied by the factor necessary to convert such Test
Period EBITDAM into an annualized basis.

                    “Test Period” shall mean the six most recent calendar months
then ended (taken as one accounting period), or such other period as specified
in the Agreement or any Annex thereto; except that for the period prior to the
six month anniversary of the Closing Date, the Test Period shall be equal to the
trailing number of months then elapsed since November 1, 2005.

                    “Total Senior Debt” shall mean, at any date of
determination, for Purchaser individually and collectively on a consolidated and
consolidating basis, the total Indebtedness owed to CapitalSource under the
Credit Agreement and secured by liens on the Purchaser’s assets on such date
less cash and Cash Equivalents held on such date.

                    “Total Debt Service” shall mean the sum of (i) all payments
of principal on Indebtedness, and (ii) cash Interest Expense, in each case for
such period.

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APPENDIX A

DEFINITIONS

                    “Accounts” shall mean all “accounts” (as defined in the UCC)
of Purchaser (or, if referring to another Person, of such other Person),
including without limitation, accounts, accounts receivables, monies due or to
become due and obligations in any form (whether arising in connection with
contracts, contract rights, Instruments, General Intangibles or Chattel Paper),
in each case whether arising out of goods sold or services rendered or from any
other transaction and whether or not earned by performance, now or hereafter in
existence, and all documents of title or other documents representing any of the
foregoing, and all collateral security and guaranties of any kind, now or
hereafter in existence, given by any Person with respect to any of the
foregoing.

                    “Account Debtor” shall mean any Person who is obligated
under an Account.

                    “Acquisition Documents” shall mean, collectively and each
individually, the Acquisition Agreement, this Agreement, the Promissory Notes,
the Intellectual Property Security Agreement, the Stock Pledge Agreements, the
Lockbox Agreements, the Junior Management Fee Subordination Agreement, the
Uniform Commercial Code Financing Statements, the Subordination Agreements, the
Landlord Waiver and Consents, and all other agreements, documents, instruments
and certificates heretofore or hereafter executed or delivered to Seller in
connection with this Agreement or the Acquisition Agreement, as the same may be
amended, modified or supplemented from time to time. Acquisition Documents shall
not include the Series B Preferred (as such term is defined in the Acquisition
Agreement).

                    “Affiliate” shall mean, as to any Person, any other Person
(a) that, directly or indirectly through one or more intermediaries, controls,
is controlled by, or is under common control with, such Person, (b) who is a
director or officer (i) of such Person, (ii) of any Subsidiary of such Person,
or (iii) of any Person described in clause (a) above with respect to such
Person, or (c) which, directly or indirectly through one or more intermediaries,
is the beneficial or record owner (as defined in Rule 13d-3 of the Securities
Exchange Act of 1934, as amended, as the same is in effect on the date hereof)
of five percent (5%) or more of any class of the outstanding voting stock,
securities or other equity or ownership interests of such Person. For purposes
of this definition, the term “control” (and the correlative terms, “controlled
by” and “under common control with”) shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies, whether through ownership of securities or other interests, by
contract or otherwise. “Affiliate” shall include any Subsidiary.

                    “Business Day” shall mean any day other than a Saturday,
Sunday or other day on which the Federal Reserve is closed.

                    “Capital Expenditures” shall mean, for any Test Period, the
sum (without duplication) of all expenditures (whether paid in cash or accrued
as liabilities) during the Test Period that are or should be treated as capital
expenditures under GAAP.

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                    “Capital Lease” shall mean, as to any Person, a lease of any
interest in any kind of property or asset by that Person as lessee that is,
should be or should have been recorded as a “capital lease” in accordance with
GAAP.

                     “Capitalized Lease Obligations” shall mean all obligations
of any Person under Capital Leases, in each case, taken at the amount thereof
accounted for as a liability in accordance with GAAP.

                     “Change of Control” shall mean, with respect to Purchaser,
the occurrence of any of the following: (i) a merger, consolidation,
reorganization, recapitalization or share or interest exchange, sale or transfer
or any other transaction or series of transactions in which its stockholders,
managers, partners or interest holders immediately prior to such transaction or
series of transactions receive, in exchange for the stock or interests owned by
them, cash, property or securities of the resulting or surviving entity or any
Affiliate thereof, and, as a result thereof, Persons who, individually or in the
aggregate, were holders of 50% or more of its voting stock, securities or
equity, partnership or ownership interests immediately prior to such transaction
or series of transactions hold less than 50% of the voting stock, securities or
other equity, partnership or ownership interests of the resulting or surviving
entity or such Affiliate thereof, calculated on a fully diluted basis, (ii) a
direct or indirect sale, transfer or other conveyance or disposition, in any
single transaction or series of transactions, of all or substantially all of its
assets, (iii) the initial public offering of its securities, or (iv) any “change
in/of control” or “sale” or “disposition” or similar event as defined in any
document governing indebtedness of such Person which gives the holder of such
indebtedness the right to accelerate or otherwise require payment of such
indebtedness prior to the maturity date thereof.

                    “Charter and Good Standing Documents” shall mean, for
Purchaser (i) a copy of the certificate of incorporation or formation (or other
charter document) certified as of a date satisfactory to Seller before the
Closing Date by the applicable Governmental Authority of the jurisdiction of
incorporation or organization of Purchaser, (ii) a copy of the bylaws or similar
organizational documents certified as of a date satisfactory to Seller before
the Closing Date by the corporate secretary or assistant secretary of Purchaser,
(iii) an original certificate of good standing as of a date acceptable to Seller
issued by the applicable Governmental Authority of the jurisdiction of
incorporation or organization of such Purchaser and of every other jurisdiction
in which Purchaser has an office or conducts business or is otherwise required
to be in good standing, and (iv) copies of the resolutions of the Board of
Directors or managers (or other applicable governing body) and, if required,
stockholders, members or other equity owners authorizing the execution, delivery
and performance of the Acquisition Documents to which Purchaser is a party,
certified by an authorized officer of such Person as of the Closing Date.

                    “Closing” shall mean the satisfaction, or written waiver by
Seller, of all of the conditions precedent set forth in the Agreement required
to be satisfied prior to the consummation of the transactions contemplated
hereby.

                    “Closing Date” shall mean the date of this Agreement.

                    “Collateral” shall have the meaning given such term in
Section 2.13.

                    “Collateral Patent, Trademark and Copyright Assignment”
shall mean (i) the Intellectual Property Security Agreement dated as of the date
hereof made by Purchaser in favor of Seller or (ii) any patent, trademark, or
copyright assignment or acknowledgement executed by and between Purchaser and
Seller, as such may be modified, amended or supplemented from time to time.

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                    “Concentration Account” shall have the meaning given such
term in Section 2.16.

                    “Control Collateral” shall have the meaning given such term
in Section 2.14.

                    “Debenture Holder” shall mean collectively, the holders at
such time of any portion of the outstanding principal amount of the Secured
Convertible Debentures issued by Sunset to Seller on the Closing Date in the
aggregate original principal amount of $5,000,000 which are convertible into
shares of the common stock of Sunset, as such Secured Convertible Debentures may
be replaced, substituted or reissued from time to time in accordance with its
terms.

                    “Debtor Relief Law” shall mean, collectively, the Bankruptcy
Code of the United States of America and all other applicable liquidation,
conservatorship, bankruptcy, moratorium, rearrangement, receivership,
insolvency, reorganization or similar debtor relief laws from time to time in
effect affecting the rights of creditors generally, as amended from time to
time.

                    “Default” shall mean any event, fact, circumstance or
condition that, with the giving of applicable notice or passage of time or both,
would constitute or be or result in an Event of Default.

                    “Distribution” shall mean any fee, payment, bonus or other
remuneration of any kind, and any repayment of or debt service on loans or other
indebtedness.

                    “Environmental Laws” shall mean, collectively and each
individually, the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, the Superfund Amendment and Reauthorization Act of 1986,
the Resource Conservation and Recovery Act, the Toxic Substances Control Act,
the Clean Air Act, the Clean Water Act, any other “Superfund” or “Superlien” law
and all other federal, state and local and foreign environmental, land use,
zoning, health, chemical use, safety and sanitation laws, statutes, ordinances
and codes relating to the protection of the environment and/or governing the
use, storage, treatment, generation, transportation, processing, handling,
production or disposal of Hazardous Substances, in each case, as amended, and
the rules, regulations, policies, guidelines, interpretations, decisions, orders
and directives of Governmental Authorities with respect thereto.

                    “ERISA” shall mean the Employee Retirement Income Security
Act of 1974, as amended, and the regulations thereunder.

                    “Event of Default” shall mean the occurrence of any event
set forth in Article VIII.

                    “Fair Valuation” shall mean the determination of the value
of the consolidated assets of a Person on the basis of the amount which may be
realized by a willing seller within a reasonable time through collection or sale
of such assets at market value on a going concern basis to an interested buyer
who is willing to purchase under ordinary selling conditions in an arm’s length
transaction.

                    “GAAP” shall mean generally accepted accounting principles
in the United States of America in effect from time to time as applied by
nationally recognized accounting firms.

                    “Government Account” shall be defined to mean all Accounts
arising out of or with respect to any Government Contract.

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                    “Government Contract” shall be defined to mean all contracts
with the United States Government or with any agency thereof, and all amendments
thereto.

                     “Governmental Authority” shall mean any federal, state,
municipal, national, local or other governmental department, court, commission,
board, bureau, agency or instrumentality or political subdivision thereof, or
any entity or officer exercising executive, legislative or judicial, regulatory
or administrative functions of or pertaining to any government or any court, in
each case, whether of the United States or a state, territory or possession
thereof, a foreign sovereign entity or country or jurisdiction or the District
of Columbia.

                     “Hazardous Substances” shall mean, without limitation, any
flammable explosives, radon, radioactive materials, asbestos, urea formaldehyde
foam insulation, polychlorinated biphenyls, petroleum and petroleum products,
methane, hazardous materials, hazardous wastes, hazardous or toxic substances or
related materials as defined in or subject to any applicable Environmental Law.

                    “Indebtedness” of any Person shall mean, without
duplication, (a) all items which, in accordance with GAAP, would be included in
determining total liabilities as shown on the liability side of the balance
sheet of such Person as of the date as of which Indebtedness is to be
determined, including any lease which, in accordance with GAAP would constitute
Indebtedness, (b) all indebtedness secured by any mortgage, pledge, security,
Lien or conditional sale or other title retention agreement to which any
property or asset owned or held by such Person is subject, whether or not the
indebtedness secured thereby shall have been assumed, (c) all indebtedness of
others which such Person has directly or indirectly guaranteed, endorsed
(otherwise than for collection or deposit in the ordinary course of business),
discounted or sold with recourse or agreed (contingently or otherwise) to
purchase or repurchase or otherwise acquire, or in respect of which such Person
has agreed to supply or advance funds (whether by way of loan, stock, equity or
other ownership interest purchase, capital contribution or otherwise) or
otherwise to become directly or indirectly liable.

                    “Indemnified Person” shall have the meaning given such term
in Section 12.4.

                    “Insured Event” shall have the meaning given such term in
Section 12.4.

                    “Insurer” shall mean a Person that insures another Person
against any costs incurred in the receipt by such other Person of Services, or
that has an agreement with Purchaser to compensate it for providing services to
such Person.

                    “Intellectual Property Security Agreement” shall mean that
certain Intellectual Property Security Agreement dated as of the date hereof
entered into among Sunset, US Mills and Seller, as such agreement may be
modified, amended, restated or supplemented from time to time.

                    “Inventory” shall mean all “inventory” (as defined in the
UCC) of Purchaser (or, if referring to another Person, of such other Person),
now owned or hereafter acquired, and all documents of title or other documents
representing any of the foregoing, and all collateral security and guaranties of
any kind, now or hereafter in existence, given by any Person with respect to any
of the foregoing.

                    “Junior Subordination Agreement” shall mean that certain
Junior Subordination and Intercreditor Agreement dated as of the date hereof
entered into among Sunset, US Mills, Seller and the Debenture Holder, as such
agreement may be modified, amended, restated or supplemented from time to time.

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                    “Landlord Waiver and Consent” shall mean a waiver/consent in
form and substance satisfactory to Seller from the owner/lessor of any premises
not owned by Purchaser at which any of the Collateral is now or hereafter
located for the purpose of providing Seller access to such Collateral, in each
case as such may be modified, amended or supplemented from time to time.

                    “Lien” shall mean any mortgage, pledge, security interest,
encumbrance, restriction, lien or charge of any kind (including any agreement to
give any of the foregoing, any conditional sale or other title retention
agreement or any lease in the nature thereof), or any other arrangement pursuant
to which title to the property is retained by or vested in some other Person for
security purposes.

                    “Lockbox Accounts” shall have the meaning given such term in
Section 2.16.

                    “Lockbox Agreement” shall have the meaning given such term
in Section 2.16.

                    “Lockbox Bank” shall have the meaning given such term in
Section 2.16.

                    “Junior Management Fee Subordination Agreement” shall mean
that certain Junior Management Fee Subordination Agreement dated as of the date
hereof entered into by and among Sunset International Holdings, Inc., Sunset and
the Seller, as such agreement may be modified, amended or restated or
supplemented from time to time.

                    “Master Subordination Agreement” shall have the meaning
given such term in the recitals of this Agreement.

                    “Material Adverse Effect” or “Material Adverse Change” shall
mean any event, condition or circumstance or set of events, conditions or
circumstances or any change(s) which (i) has, had or would reasonably be likely
to have any material adverse effect upon or change in the validity or
enforceability of any Acquisition Document, (ii) has been or would reasonably be
likely to be material and adverse to the value of any of the Collateral, to the
priority of the Seller’s security interest in the Collateral, or to the
business, operations, prospects, properties, assets, liabilities or condition of
Purchaser, either individually or taken as a whole, or (iii) has materially
impaired or would reasonably be likely to materially impair the ability of any
Purchaser to pay any portion of the Obligations or to otherwise perform the
Obligations or to consummate the transactions under the Acquisition Documents
executed by such Person.

                    “Non-Compliance Fee” shall mean a daily fee payable by
Purchaser equal to the greater of (i) $500, or (ii) five one-hundredths of one
percent (0.05%) of the outstanding principal balance of the Obligations as of
any date of determination.

                    “Obligations” shall mean all present and future obligations,
Indebtedness and liabilities of Purchaser to Seller at any time and from time to
time of every kind, nature and description, direct or indirect, secured or
unsecured, joint and several, absolute or contingent, due or to become due,
matured or unmatured, now existing or hereafter arising, contractual or
tortious, liquidated or unliquidated, under any of the Acquisition Documents or
otherwise relating to the Promissory Notes, including, without limitation, all
applicable fees, charges and expenses and/or all amounts paid or advanced by
Seller on behalf of or for the benefit of any Purchaser for any reason at any
time, including in each case obligations of performance as well as obligations
of payment and interest that accrue after the commencement of any proceeding
under any Debtor Relief Law by or against any such Person.

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                     “Permit” shall mean collectively all licenses, leases,
powers, permits, franchises, certificates, authorizations, approvals,
certificates of need, provider numbers and other rights.

                    “Permitted Indebtedness” shall have the meaning given such
term in Section 7.2.

                    “Permitted Liens” shall have the meaning given such term in
Section 7.3.

                    “Permitted Subordinated Debt” shall mean indebtedness
incurred by Purchaser which is subordinated to the indebtedness of Purchaser
owed to Seller pursuant to the Junior Subordination Agreement or another written
agreement approved by Seller in writing.

                    “Person” shall mean an individual, a partnership, a
corporation, a limited liability company, a business trust, a joint stock
company, a trust, an unincorporated association, a joint venture, a Governmental
Authority or any other entity of whatever nature.

                    “Promissory Notes” shall have the meaning given such terms
in the recitals of this Agreement.

                    “Receipt” shall have the meaning given such term in Section
12.5.

                    “Released Parties” shall have the meaning given such term in
Section 12.11.

                    “Releasing Parties” shall have the meaning given such term
in Section 12.11.

                    “Security Documents” shall mean the Promissory Notes, this
Agreement, the Stock Pledge Agreement, Collateral Patent, Trademark, and
Copyright Assignment, the Intellectual Property Security Agreement, Lockbox
Agreements, Uniform Commercial Code Financing Statements and all other documents
or instruments necessary to create or perfect the Liens in the Collateral, as
such may be modified, amended or supplemented from time to time.

                    “Seller” shall mean IBF Fund Liquidating LLC.

                    “Solvency Certificate” shall have the meaning given such
term in Section 4.1(d).

                    “Stock Pledge Agreement” shall mean that certain Stock
Pledge Agreement by and between Purchaser and Seller executed in connection
herewith as such may be modified, amended or supplemented from time to time.

                    “Subordination Agreements” shall mean, collectively and each
individually, (i) the Master Subordination Agreement, (ii) the Junior
Subordination and Intercreditor Agreement, and (iii) and any other subordination
agreements (the terms of which shall be satisfactory to Seller) to which Seller
and other creditors of any Purchaser are a party, as such agreements may be
modified, amended, restated or supplemented from time to time.

                    “Subsidiary” shall mean, (i) as to Purchaser, any Person in
which more than 50% of all equity, membership, partnership or other ownership
interests is owned directly or indirectly by Purchaser or one or more of its
Subsidiaries, and (ii) as to any other Person, any Person in which more than 50%
of all equity, membership, partnership or other ownership interests is owned
directly or indirectly by such Person or by one or more of such Person’s
Subsidiaries.

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                    “Term” shall mean the period commencing on the date set
forth on the first page hereof and ending on the third anniversary hereof.

                    “Termination Date” shall have the meaning given such term in
Section 11.1.

                    “Transferee” shall have the meaning given such term in
Section 12.2.

                    “UCC” shall mean the Uniform Commercial Code as in effect in
the State of New York from time to time.

                    “Warehouse Waiver and Consent” shall mean a waiver/consent
in form and substance satisfactory to Seller from any warehouseman, fulfillment
house or other person owning a facility not owned by Purchaser at which any
Inventory is now or hereafter located for the purpose of providing Seller access
to such Inventory, in each case as may be modified, amended or supplemented from
time to time.

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