JUNIOR SUBORDINATION AND INTERCREDITOR
AGREEMENT
This
JUNIOR SUBORDINATION AND INTERCREDITOR AGREEMENT (this
“Agreement” ), dated as of November 10, 2005, is
among IBF FUND LIQUIDATING LLC , a Delaware limited
liability company, as holder of the Seller Notes (as defined below)
(“ Senior Creditor ”) and IBF FUND
LIQUIDATING LLC , a Delaware limited liability company, as
holder of the Convertible Debentures (as defined below) (the
“Subordinated Creditor” ) and acknowledged by
SUNSET BRANDS, INC., a Nevada corporation
(“Sunset”) and U.S. MILLS, INC., a
Delaware corporation ( “US Mills” ), (Sunset and
US Mills sometimes hereinafter are referred to individually as an
“Obligor” and collectively as the
“Obligors”) .
RECITALS
A.
The Obligors, Senior Creditor,
Subordinated Creditor and Capital Source Finance LLC have entered
into a Master Subordination and Intercreditor Agreement of even
date herewith, as the same hereafter may be amended, modified,
supplemented or restated from time to time, hereinafter is referred
to as the “Senior Subordination Agreement”
).
B.
Pursuant to the Amended and Restated
Acquisition Agreement and Plan of Merger, dated as of November 10,
2005 (the “ Merger Agreement ”), among Senior
Creditor, the Obligors and USM Acquisition Sub, Inc. (“
Merger Sub ”), Merger Sub will be merged with and into
US Mills and US Mills will continue as the surviving corporation as
a wholly-owned subsidiary of Sunset (the “ Acquisition
”).
C
. Pursuant to the
Merger Agreement, Sunset and US Mills will be indebted to Senior
Creditor, and such indebtedness is to be evidenced by, among other
things, a Senior Subordinated Note of even date herewith in the
original principal amount of $5,000,000 (“ Seller Note
1 ”) and a Senior Subordinated Note of even date herewith
in the original principal amount of $1,000,000 (“ Seller
Note 2 ”, and collectively with Seller Note 1, the
“Seller Notes” ) made by Sunset and US Mills in
favor of Senior Creditor. Sunset and US Mills are issuing the
Seller Notes in partial payment of the purchase price payable to
Senior Creditor pursuant to the Merger Agreement. To secure the
obligations of Sunset and US Mills to Senior Creditor under the
Seller Notes, Sunset and US Mills have granted to Senior Creditor a
security interest in their assets.
D.
Pursuant to the Merger Agreement
Sunset has issued to Subordinated Creditor Secured Convertible
Debentures dated the date hereof in the aggregate original
principal amount of $5,000,000 (together with any reissue,
substitution or replacement thereof, collectively, the “
Convertible Debentures ”) which are convertible in
shares of the common stock of Sunset, as payment of a portion of
the consideration for the Acquisition. To secure Sunset’s
obligations to Subordinated Creditor under the Subordinated Debt
Documents (as defined below) Sunset has granted to Subordinated
Creditor a security interest in its assets and US Mills has
guaranteed the obligations of Sunset.
E.
O ne of the conditions
precedent to Senior Creditor’s obligations under the Merger
Agreement is that this Agreement shall have been executed and
delivered by all of the parties hereto.
NOW
THEREFORE, the parties
hereto hereby agree as follows:
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1. Recitals and
Definitions .
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1.1
Recitals . The
Recitals set forth above are acknowledged by the Obligors and by
Subordinated Creditor to be true and correct and are incorporated
herein by this reference.
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1.2
Definitions . As
used herein, the following terms shall have the following
meanings:
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“
Acquisition Documents ” shall mean the
“Acquisition Documents,” as such term is defined in the
Security Agreement.
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“
Bankruptcy Code ” shall mean Chapter 11 of Title 11 of
the United States Code, as amended from time to time, any successor
statute, and all rules and regulations promulgated
thereunder.
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“
Blockage Period ” shall mean the period (i) commencing
on the date Senior Creditor notifies Subordinated Creditor that a
Senior Default has occurred and (ii) ending on the date which is
the earlier to occur of (A) the date Senior Creditor elects to
terminate such period by notice to Subordinated Creditor, (B) the
date Senior Creditor waives such Senior Default or such Senior
Default is cured, (C) the date all of the Senior Indebtedness is
paid indefeasibly in full, in cash,and the Security Agreement has
been terminated, and (D) if, and only if, the Senior Default is a
Senior Covenant Default, the date which is 270 days after the
commencement of the Blockage Period. If the Senior Default that
commences a Blockage Period is a Senior Payment Default, then the
Blockage Period shall end on the earliest to occur of the
circumstances set forth in clauses (A) through (C).
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“
Closing Date : shall mean the date of this
Agreement.
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“
Lien ” shall mean any mortgage, deed of trust, pledge,
assignment, lien, charge, encumbrance or security interest of any
kind, including without limitation, those created or arising from
the Subordinated Debt Documents, or the interest of a vendor or
lessor under any conditional sale agreement, capitalized lease or
other title retention agreement.
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“
Person ” shall mean any individual, firm, corporation,
limited liability company, business enterprise, trust, association,
joint venture, partnership, government, governmental agency or
other entity, whether acting in an individual, fiduciary or other
capacity.
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“
Proceeding ” shall mean any insolvency, bankruptcy,
receivership, custodianship, liquidation, reorganization,
assignment for the benefit of creditors or other proceeding for the
liquidation, dissolution or other winding up of the Obligors (or
either of them) or their properties (including, without limitation,
any such proceeding under the Bankruptcy Code).
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“
Security Agreement ” shall mean the Security
Agreement, dated as of the date hereof, by and among the Obligors
and Senior Creditor, as such may be amended, restated, supplemented
or otherwise modified from time to time.
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“
Senior Collection Action ” shall mean any judicial
proceeding or other action initiated by Senior Creditor against the
Obligors (or either of them) to collect the Senior Indebtedness, to
foreclose the Senior Liens or otherwise to enforce the rights of
Senior
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Creditor under the Security
Agreement and the other Acquisition Documents or applicable law
with respect to the Senior Indebtedness.
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“
Senior Covenant Default ” shall mean any Default or
Event of Default under the Senior Debt Documents or any other
occurrence permitting Senior Creditor to accelerate the payment of
all or any portion of the Senior Indebtedness (other than a Senior
Payment Default).
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“
Senior Debt Documents ” shall mean the Security
Agreement, the Seller Notes and the other Acquisition Documents,
all as the same may be amended, restated, supplemented or otherwise
modified from time to time.
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“
Senior Default ” shall mean any Senior Covenant
Default or any Senior Payment Default.
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“
Senior Indebtedness ” shall mean all obligations,
liabilities and indebtedness of every nature of each Obligor and
each other Person from time to time owed to Senior Creditor under
the Seller Notes and the other Senior Debt Documents, including
interest, principal and all fees, costs and expenses now and from
time to time hereafter owing, due or payable, whether before or
after the commencement of a Proceeding and whether or not
authorized under the Bankruptcy Code to collect such interest from
either Obligor (including any interest accruing at a default or
post-judgment rate), together with any amendments, modifications,
renewals or extensions thereof to the extent not prohibited by the
terms of this Agreement and any interest accruing thereon after the
commencement of a Proceeding, whether or not allowed in such
Proceeding.
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“
Senior Liens ” shall mean all Liens now or hereafter
granted to Senior Creditor to secure the Senior
Indebtedness.
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“
Senior Payment Default ” shall mean any failure by any
Obligor to make any required payment of interest or principal, or
any material fee or other monetary payment, under the Senior Debt
Documents, including, without limitation, any default in payment of
Senior Indebtedness after acceleration thereof and/or the filing of
a Proceeding, or any failure to pay the amounts described in this
definition regardless of any requirement of notice or lapse of time
or both before such failure to pay becomes an Event of Default
under the Senior Debt Documents.
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“
Subordinated Collection Action ” shall mean (i) any
acceleration of the Subordinated Indebtedness, (ii) to file or
initiate, or to join with other Persons in filing or initiating, a
Proceeding against any Obligor, (iii) any judicial proceeding or
other action initiated or taken by Subordinated Creditor, or by
Subordinated Creditor in concert with other Persons, against any
Obligor to collect the Subordinated Indebtedness or otherwise to
enforce the rights of Subordinated Creditor under the Subordinated
Debt Documents or applicable law with respect to the Subordinated
Indebtedness or (iv) any action (judicial or non-judicial) to
exercise rights and remedies against any assets, properties, or
other interests of any Obligor including, without limitation,
actions to foreclose, sell or dispose collateral, or enforce Liens,
pursuant to the Uniform Commercial Code.
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“
Subordinated Debt Documents ” shall mean collectively,
the Convertible Debentures and all related documents, including all
other documents, instruments and agreements executed and delivered
by any Obligor, Subordinated Creditor or any other
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Person evidencing, governing the
terms of repayment of or otherwise pertaining to Subordinated
Indebtedness, all as the same may be amended, restated,
supplemented or otherwise modified from time to time;
provided , however , notwithstanding the foregoing,
the term “Subordinated Debt Documents” shall in no
event include any documents, instruments or agreements now or
hereafter entered into by Subordinated Creditor through which
Subordinated Creditor (a) sells or otherwise transfers all (or any
portion) of the Convertible Debentures or (b) secures the
obligations of the proposed purchaser with respect to any such sale
or transfer.
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“
Subordinated Indebtedness ” shall mean all
obligations, liabilities and indebtedness of every nature of each
Obligor and each other Person from time to time owed to
Subordinated Creditor in respect of the Subordinated Debt
Documents, together with all accrued and unpaid interest thereon
and all fees, costs and expenses now and from time to time
hereafter owing, due or payable in connection with any of the
foregoing, whether before or after the commencement of a Proceeding
or a Subordinated Collection Action.
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“
Subordinated Securities ” shall mean any securities of
any Obligor issued in connection with a Proceeding, the payment of
which is junior or otherwise subordinated, at least to the extent
provided in this Agreement, to the payment of all Senior
Indebtedness and to the payment of all securities issued in
exchange therefor to the holders of the Senior
Indebtedness.
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2. Subordination of the
Subordinated Indebtedness to the Senior Indebtedness
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2.1
Payment Subordination. Upon the terms and conditions contained in this
Agreement the payment of any and all of the Subordinated
Indebtedness hereby expressly is subordinated to the prior
indefeasible payment in full in cash of the Senior Indebtedness and
the termination of the Security Agreement.
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2.2
Lien Subordination .
Subordinated Creditor hereby unconditionally agrees that: (i) all
Liens of Subordinated Creditor in any property of either Obligor
shall be and hereby are subordinated to the Senior Liens, and (ii)
other than as set forth in Section 2.7(b), Subordinated Creditor
shall have no right to possession of any property of any Obligor or
to take any Subordinated Collection Action, unless and until all
the Senior Indebtedness shall have been fully paid and satisfied
and the Security Agreement has been terminated. Notwithstanding any
rights or remedies available to Subordinated Creditor under
applicable law (including, without limitation, under the Bankruptcy
Code) or under any Subordinated Debt Document, Subordinated
Creditor shall not, without the prior written consent of Senior
Creditor, be permitted to take any action to foreclose, repossess,
marshal, control or exercise any remedies with respect to any
property of either Obligor or take any other action which
would interfere with or impair the Senior Liens or the rights of
Senior Creditor against either Obligor’s property, until the
payment in full of the Senior Indebtedness and the termination of
the Security Agreement. Notwithstanding the date, manner or order
of grant, attachment or perfection of any Liens or any Senior
Liens, and notwithstanding any provision of the UCC or any other
applicable law or the provisions of any Subordinated Debt Document
or any other Senior Debt Document or any other circumstance
whatsoever, Subordinated Creditor, hereby agrees that (a) any
Senior Liens now or hereafter held by or for the benefit of Senior
Creditor shall be senior in right, priority,
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operation, effect and all other
respects to any and all Subordinated Creditor Liens and (b) any
Subordinated Creditor Lien now or hereafter held by or for the
benefit of any Subordinated Creditor shall be junior and
subordinate in right, priority, operation, effect and all other
respects to any and all Senior Liens. The Senior Liens shall be and
remain senior in right, priority, operation, effect and all other
respects to any Subordinated Creditor Liens for all purposes,
whether or not any Senior Liens are subordinated in any respect to
any other Lien securing any other obligation of either Obligor, any
other grantor or any other Person and regardless of whether the
Lien purported to be granted is found to be improperly granted,
improperly perfected, a fraudulent conveyance or legally or
otherwise deficient in any manner. Each of Senior Creditor and
Subordinated Creditor, agrees that it will not, and hereby waives
any right to, directly or indirectly, contest or support any other
Person in contesting, in any proceeding (including any Proceeding),
the priority, validity or enforceability of any Senior Lien, or the
validity or enforceability of the priorities, rights or obligations
established by this Agreement; provided that nothing in this
Agreement shall be construed to prevent or impair the rights of
Senior Creditor to enforce this Agreement. Each Obligor, by its
execution of this Agreement, hereby acknowledges and agrees to the
provisions of this paragraph, notwithstanding anything to the
contrary in any document to which such Obligor is a
party.
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2.3
Payment Restrictions . Notwithstanding any provision of the
Subordinated Debt Documents to the contrary and in addition to any
other limitations set forth herein or therein, no payment of any
principal, interest, fees, costs, expenses or any other amount due
with respect to the Subordinated Indebtedness shall be made, and no
Subordinated Creditor shall exercise any right of set-off or
recoupment with respect to any Subordinated Indebtedness, until all
of the Senior Indebtedness is indefeasibly paid in full in cash and
the Security Agreement has been terminated, except that at any
time, Obligors may make and Subordinated Creditor may receive
prepayments of the principal of the Convertible Debentures, but
only if (1) no Default or Event of Default has occurred and is
continuing under the Senior Debt Documents; (2) such payment will
not result in, cause, or create a Default or Event of Default under
the Senior Debt Documents; (3) the source of such payment is
entirely from a new capital infusion into the Obligors on terms and
conditions satisfactory to Senior Creditor which shall include,
without limitation, a provision that the provider of new capital
infusion will agree to subordinate its debt and any Liens in any
property of either Obligor to Senior Creditor on terms no less
favorable that those contained herein; and (4) Obligors have
provided 30 calendar days prior written notice to Senior Creditor
of all of the foregoing prior to making any such
prepayment.
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2.4
Proceedings . In
the event of any Proceeding, (a) all Senior Indebtedness first
shall be indefeasibly paid in full in cash and the Security
Agreement shall have been terminated before any payment of or with
respect to the Subordinated Indebtedness shall be made, other than
any payment consisting of Subordinated Securities; (b) any payment
which, but for the terms hereof, otherwise would be payable or
deliverable in respect of the Subordinated Indebtedness (other than
Subordinated Securities) shall be paid or delivered directly to
Senior Creditor (to be held and/or applied by Senior Creditor in
accordance with the terms of the Security Agreement) until all
Senior Indebtedness is indefeasibly paid in full in cash and the
Security Agreement has been terminated, and Subordinated Creditor
irrevocably authorizes, empowers and directs all receivers,
trustees, liquidators, custodians, conservators and others having
authority in the premises to effect all such payments and
deliveries and further irrevocably authorizes and empowers Senior
Creditor to demand, sue for, collect and receive every such payment
or distribution; (c) Subordinated Creditor agrees to execute and
deliver to Senior Creditor or its representative all such further
instruments requested by Senior Creditor confirming the
authorization referred to in the foregoing clause (b); (d)
Subordinated Creditor agrees (i) not to waive, discharge, release
or compromise any claim of Subordinated Creditor in respect of the
Subordinated Indebtedness without the prior written consent of
Senior Creditor, which consent will not be unreasonably withheld,
and (ii) to take all actions as Senior Creditor reasonably may
request in order to enable Senior Creditor to enforce all claims
upon or in respect of the Subordinated Indebtedness;
(e) Subordinated Creditor expressly consents to the granting
by the
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Obligors to Senior Creditor of
senior priority Liens on the Obligors’ property and assets in
connection with any financing provided to the Obligors after the
commencement of such Proceeding; (f) Subordinated Creditor shall
not propose or support any plan, financing, or order which would
have the effect of canceling, modifying or amending, to the
detriment of Senior Creditor, the relative Lien priorities set
forth in this Agreement; and (g) Subordinated Creditor agrees to
execute, verify, deliver and file any proofs of claim in respect of
the Subordinated Indebtedness requested by Senior Creditor in
connection with any such Proceeding and hereby irrevocably
authorizes, empowers and appoints Senior Creditor its agent and
attorney-in-fact to execute, verify, deliver and file such proofs
of claim upon the failure of Subordinated Creditor to do so at
least ten Business Days prior to the bar date for filing such
proofs of claim. The provisions of this Agreement shall continue in
full force and effect notwithstanding the occurrence of a
Proceeding against any Obligor or any of its property. To the
extent of Subordinated Creditor
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