THIS NOTE HASNOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THESECURITIES LAWS OF ANY STATE, AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED INTHE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT ANDUNDER ANY SUCH APPLICABLE STATE LAW. 

THEOBLIGATIONS EVIDENCED HEREBY ARE SUBORDINATE IN THE MANNER AND TO THE EXTENTSET FORTH IN THAT CERTAIN MASTER SUBORDINATION AND INTERCREDITOR AGREEMENT (ASAMENDED, RESTATED, SUPPLEMENTED OR OTHERWISE MODIFIED FROM TIME TO TIME, THE “SUBORDINATIONAGREEMENT”), DATED AS OF NOVEMBER 10, 2005, AMONG SUNSET BRANDS, INC., U.SMILLS, INC., IBF FUND LIQUIDATING LLC, AS SELLER, THE DEBENTURE HOLDER (ASDEFINED THEREIN) AND CAPITALSOURCE FINANCE LLC.  EACH HOLDER HEREOF, BY ITS ACCEPTANCE HEREOF, SHALL BE BOUND BYTHE PROVISIONS OF THE SUBORDINATION AGREEMENT.

SUNSET BRANDS, INC.

U.S. MILLS, INC.

Senior Subordinated Note

          FORVALUE RECEIVED, the undersigned, Sunset Brands, Inc., a Nevada corporation (“Sunset”)and U.S. Mills, Inc., a Delaware corporation (“US Mills” and together withSunset, the “Debtors”), hereby jointly and severally promise to pay tothe order of IBF Fund Liquidating LLC, a Delaware limited liability company(the “holder”), or its registered assigns, on November 9, 2008, theprincipal amount of One Million United States Dollars (U.S.$1,000,000) or suchpart thereof as then remains unpaid, with interest (computed on the basis of a360-day year and the actual number of days elapsed) on the unpaid principalamount hereof at a per annum rate equal to the Prime Rate (as defined below)plus 4.00% commencing on December 31, 2005, payable in accordance with theprovisions of Section 2.1 hereof, until such principal amount shall bepaid in full; provided, that notwithstanding any provision of anyAcquisition Document to the contrary, for the purpose of calculating interesthereunder, the Prime Rate shall not be less than 6.75%; provided,furtherthat so long as the Term Loan is outstanding under the Credit Agreement, theinterest rate payable with respect to this Note shall not be less than theinterest rate payable with respect to the Term Loan.

          1.The Note.  All payments ofprincipal, interest and other amounts payable on or in respect of this SeniorSubordinated Note (this “Note”) or the indebtedness evidenced herebyshall be made at the address of the holder specified in the register maintainedby Debtors pursuant to the provisions of Section 5.2 hereof.  All payments received in respect of theindebtedness evidenced by this Note shall, subject to the provisions of theSubordination Agreement, be applied first to interest hereon accrued to thedate of payment, then to the

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payment ofother amounts (except principal) at the time due and unpaid hereunder, andfinally to the unpaid principal hereof.

          Ifany payment on this Note becomes due and payable on a day other than a BusinessDay, the maturity thereof shall be extended to the next succeeding Business Dayand, with respect to any payment of principal, interest thereon shall bepayable during such extension.

          Debtorsshall pay principal, interest and other amounts under, and in accordance withthe terms of, this Note, free and clear of and without deduction for any andall present and future taxes, levies, imposts, deductions, charges,withholdings and all liabilities with respect thereto, excluding taxes measuredby income and franchise taxes.

          2.Payment Provisions.  Debtorscovenant that so long as this Note is outstanding: 

                    2.1Interest Payments.  Interest onthe unpaid principal amount hereof shall be payable in arrears monthly on thelast Business Day of each calendar month following the date hereof (each suchdate hereinafter referred to as a “Payment Date”), beginning on January31, 2006.  

                    2.2Payment at Maturity.  On November9, 2008, unless otherwise required or permitted to be sooner paid pursuant tothe terms hereof and of the Security Agreement, Debtors will pay to the holderhereof the entire principal amount of this Note then outstanding, withoutpremium, but together with accrued and unpaid interest thereon.

                    2.3Voluntary Prepayments.  Debtorsmay at any time or from time to time prepay all or any part of the outstandingprincipal amount of this Note, without premium or penalty, but together withaccrued and unpaid interest thereon.

          3.Security.  This Note is one ofthe “Promissory Notes” referred to in, and holder is entitled to the rights andbenefits of, that certain Security Agreement, dated as of the date hereof, among Debtors and IBFFund Liquidating LLC (as amended, restated, supplemented or otherwise modifiedfrom time to time, the “Security Agreement”).  This Note is secured by the Collateral referred to in theSecurity Agreement.  

          4.Representations, Warranties, Covenants and Agreements.  The representations, warranties, covenantsand agreements of Debtors set forth in the Security Agreement are incorporatedby reference herein as though originally included herein.  

          5.Payment, Registration, Transfer, Exchange and Replacement of this Note.

                    5.1Payments.  Debtors will duly andpunctually pay the principal of and interest and premium, if any, on this Notein accordance with the terms hereof.Payments on account of principal and interest with respect to this Noteshall be made by wire transfer of immediately available funds to the account ofthe holder appearing in the register maintained pursuant to Section 5.2and without the necessity of any presentment or notation of payment, exceptupon payment in full (whether at maturity, on prepayment, upon acceleration orotherwise).  The holder of this Note, beforeany transfer hereof, shall make a notation thereon of the date to whichinterest has been paid and of all principal payments theretofore made thereon 

and shall inwriting notify Debtors of the name, address and wire transfer instructions ofthe transferee.

                    5.2Registration, Transfer or Exchange of this Note.  Debtors shall cause to be kept at theiroffices specified pursuant to the provisions hereof a register in which shallbe entered the names, addresses, wire transfer instructions and facsimilenumbers of all holders from time to time of this Note and the particulars ofthis Note when held by them and of all transfers of this Note.  The Person in whose name this Note shall beso registered shall be deemed and treated as the owner hereof for all purposeshereof, and Debtors shall not be affected by any notice to the contrary.  Payment of or on account of the principal ofand premium, if any, and interest on this Note shall be made only to or uponthe order in writing of the holder hereof.For the purpose of any request, direction or consent hereunder, Debtorsmay deem and treat the holder of this Note as the owner hereof withoutproduction of this Note.  Any holderfrom time to time of this Note may at any time and from time to time prior tomaturity or prepayment hereof surrender this Note for transfer or exchange atsaid office or agency of Debtors.Within a reasonable time thereafter and without expense (other thantransfer taxes, if any) to such holder, Debtors shall issue in exchangetherefor another Note, dated the date to which interest has been paid on thesurrendered Note, for the same aggregate principal amount as the unpaidprincipal amount of the Note so surrendered, having the same maturity and rateof interest, containing the same provisions and subject to the same terms andconditions as the Note so surrendered.Such new Note shall be registered in the name of such Person as theholder of such surrendered Note may designate in writing, and such exchangeshall be made in a manner such that no additional or lesser amount of principalor interest shall result.  Eachtransferring holder will pay shipping and insurance charges involved in theexchange or transfer of this Note.

                    5.3Replacement.  Upon receipt ofevidence satisfactory to Debtors of the loss, theft, destruction or mutilationof this Note and, if requested in the case of any such loss, theft ordestruction, upon delivery of an indemnity agreement or security reasonablysatisfactory to Debtors in form and amount, or, in the case of any suchmutilation, upon surrender and cancellation of such Note, Debtors will issue anew Note, of like tenor and amount and dated the date to which the interest hasbeen paid, in lieu of such lost, stolen, destroyed or mutilated Note.

          6.Definitions.  For purposes ofthis Note: 

          “BusinessDay” shall mean any day other than a Saturday or a Sunday or a day on whichcommercial banking institutions in New York, New York are authorized orrequired by law to be closed.

          “Collateral”shall have the meaning set forth in the Security Agreement.

          “CreditAgreement” shall mean that certain Revolving Credit, Term Loan and SecurityAgreement dated as of the date hereof by and among the Debtors andCapitalSource Finance LLC, as such may be amended, restated, supplemented orotherwise modified from time to time in accordance with its terms.

          “PaymentDate” shall have the meaning set forth in Section 2.1 hereof. 

          “Person”shall mean any natural individual or any corporation, firm, limited liabilitycompany, unincorporated organization, association, partnership, a trust (intervivos or testamentary), an estate of a deceased, insane or incompetentindividual, business trust, joint stock company, joint venture or otherorganization, entity or business, or any governmental authority. 

          “PrimeRate” shall mean a fluctuating interest rate per annum equal at all timesto the rate of interest announced publicly from time to time by Citibank, N.A.as its base rate; provided, that such rate is not necessarily the bestrate offered to its customers, and, should the holder of this note be unable todetermine such rate, such other indication of the prevailing prime rate ofinterest as may reasonably be chosen by the holder of this note; provided,that each change in the fluctuating interest rate shall take effectsimultaneously with the corresponding change in the Prime Rate.

          “SecurityAgreement” shall have the meaning set forth in Section 3.

          “TermLoan” shall have the meaning given to such term in the Credit Agreement.

          7.Waivers; Amendments.  Amendmentsto and modifications of this Note may be made, required consents and approvalsmay be granted, compliance with any term, covenant, agreement, condition orother provision set forth herein may be omitted or waived, either generally orin a particular instance and either retroactively or prospectively with, butonly with, the written consent of Debtors and the holder.

          8.Notices.  All notices and othercommunications which by any provision of this Note are required or permitted tobe given shall be given in writing and shall be (a) mailed by first-class orexpress mail, or by recognized courier service, postage prepaid, (b) sent byfacsimile or other form of rapid transmission, confirmed by mailing (by firstclass or express mail, or by recognized courier service, postage prepaid)written confirmation at substantially the same time as such rapid transmission,or (c) personally delivered to the receiving party (which if other than anindividual shall be an officer or other responsible party of the receivingparty).  All such notices andcommunications shall be mailed, sent or delivered as follows:  if to the holder hereof, at the addressand/or facsimile number of such holder appearing in the register maintainedpursuant to Section 5.2 hereof, if to Debtors, to 10990 WilshireBoulevard, Suite 1220, Los Angeles, California 90024, facsimile number (310)478-4601; or to such other person(s), facsimile number(s) or address(es) as theparty to receive any such communication or notice may have designated bywritten notice to the other party. 

          9.Section Headings.  The headingscontained in this Note are for reference purposes only and shall not in any wayaffect the meaning or interpretation of this Note.

          10.Governing Law.  The validity,interpretation, construction and performance of this Note shall be governed by,and construed in accordance with, the internal laws of the State of New York,without giving effect to any choice or conflict of laws provision or rule thatwould cause the application of domestic substantive laws of any otherjurisdiction.

**  *  *  *

          INWITNESS WHEREOF, Debtors has caused this Note to be executed as a sealedinstrument as of the date first above written.

 

 

 

 

 

SUNSET BRANDS, INC. 

 

 

 

 

 

 

By:

/s/ Todd Sanders

 

 

 

 

Name:

TODD SANDERS

 

 

Title:

PRESIDENT & CEO

 

 

 

 

 

 

U.S. MILLS, INC. 

 

 

 

 

 

By:

/s/ Todd Sanders

 

 

 

 

 

Name:

TODD SANDERS

 

 

Title:

CEO