UNIT PURCHASE AGREEMENT
 
BY AND AMONG
 
ST SAN DIEGO, LLC,
 
SLEEP COUNTRY USA, INC.,
 
SC HOLDINGS, INC.
 
AND
 
SIMMONS BEDDING COMPANY
 
                            
 
Dated as of July 24, 2006
 

 

 

 

 

 

 

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ARTICLE I
DEFINITIONS
1
1.1
Certain Definitions
1
1.2
Terms Defined Elsewhere in this Agreement
6
1.3
Other Definitional and Interpretive Matters
8
ARTICLE II
SALE AND PURCHASE OF UNITS
9
2.1
Sale and Purchase of Units
9
2.2
Allocation of Purchase Price
9
ARTICLE III
PURCHASE PRICE
10
3.1
Purchase Price
10
3.2
Calculation and Payment of Purchase Price
10
3.3
Post-Closing Purchase Price Adjustment
10
ARTICLE IV
CLOSING AND TERMINATION
12
4.1
Closing Date
12
4.2
Termination of Agreement
12
4.3
Procedure Upon Termination
13
4.4
Effect of Termination
13
ARTICLE V
REPRESENTATIONS AND WARRANTIES REGARDING THE COMPANY
13
5.1
Organization and Good Standing
13
5.2
Authorization of Agreement
13
5.3
Conflicts; Consents of Third Parties
14
5.4
Capitalization
14
5.5
Subsidiaries
15
5.6
Financial Statements
15
5.7
No Undisclosed Liabilities
15
5.8
Absence of Certain Developments
16
5.9
Taxes
16
5.10
Real Property
17
5.11
Tangible Personal Property; Condition of Assets
18
5.12
Intellectual Property
19
5.13
Material Contracts
19
5.14
Employee Benefits Plans
21
5.15
Labor and Employment
23
5.16
Litigation
24
5.17
Compliance with Laws; Permits
24
5.18
Environmental Matters
24
5.19
Suppliers
25
5.20
Financial Advisors
25
5.21
Insurance
25
5.22
Related Party Transactions
25
5.23
No Other Representations or Warranties; Schedules
26
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF HOLDINGS AND SIMMONS
26
6.1
Organization and Good Standing
26
6.2
Authorization of Agreement
26
6.3
Conflicts; Consents of Third Parties
27
6.4
Ownership and Transfer of Units
27
6.5
Litigation
27
6.6
Financial Advisors
27
ARTICLE VII
REPRESENTATIONS AND WARRANTIES OF PURCHASER
28
7.1
Organization and Good Standing
28
7.2
Authorization of Agreement
28
7.3
Conflicts; Consents of Third Parties
28
7.4
Litigation
29
7.5
Investment Intention
29
7.6
Financial Advisors
29
7.7
Financing
29
7.8
Condition of the Business
29
ARTICLE VIII
COVENANTS
30
8.1
Access to Information
30
8.2
Conduct of the Business Pending the Closing
30
8.3
Consents
32
8.4
Regulatory Approvals
32
8.5
Further Assurances
33
8.6
Confidentiality
33
8.7
Preservation of Records
33
8.8
Publicity
34
8.9
Employee Benefits
34
8.10
Supplementation and Amendment of Schedules
34
8.11
Non-Competition by Holdings, Simmons and their Subsidiaries
35
8.12
Insurance
36
8.13
Tax Matters
37
8.14
Financing
40
ARTICLE IX
CONDITIONS TO CLOSING
40
9.1
Conditions Precedent to Obligations of Purchaser
40
9.2
Conditions Precedent to Obligations of Holdings and Simmons
42
9.3
Notices; Frustration of Closing Conditions
43
ARTICLE X
INDEMNIFICATION
43
10.1
Survival of Representations and Warranties
43
10.2
Indemnification by Simmons
43
10.3
Indemnification by Purchaser
44
10.4
Indemnification Procedures
45
10.5
Certain Limitations on Indemnification
46
10.6
Calculation of Losses; Materiality
47
10.7
Tax Treatment of Indemnity Payments
47
10.8
Exclusive Remedy
47
ARTICLE XI
MISCELLANEOUS
48
11.1
Payment of Sales, Use or Similar Taxes
48
11.2
Expenses
48
11.3
Submission to Jurisdiction; Consent to Service of Process
48
11.4
Entire Agreement; Amendments and Waivers
49
11.5
Governing Law
49
11.6
Notices
49
11.7
Severability
50
11.8
Binding Effect; Assignment
51
11.9
Non-Recourse
51
11.10
Counterparts
51

 

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TABLE OF CONTENTS
(continued)
 
 

Schedules
 
Schedule 5.3(a)
No Conflicts
Schedule 5.3(b)
Consents
Schedule 5.4(b)
Capitalization
Schedule 5.6
Financial Statements
Schedule 5.8
Absence of Certain Changes
Schedule 5.9
Taxes
Schedule 5.10(a)
Real Property
Schedule 5.11
Tangible Personal Property
Schedule 5.12(a)
Intellectual Property
Schedule 5.12(c)
Infringement of Intellectual Property
Schedule 5.13
Material Contracts
Schedule 5.14(a)
Employee Benefit Plans
Schedule 5.15(a)
Labor and Collective Bargaining Agreements
Schedule 5.15(b)
Labor
Schedule 5.16
Litigation
Schedule 5.18
Environmental Matters
Schedule 5.20
Financial Advisors
Schedule 5.21
Insurance
Schedule 5.22
Related Party Transactions
Schedule 7.3(a)
No Conflicts
Schedule 8.2
Conduct of the Business Pending the Closing

Schedules and Exhibits
 
Schedule 1 - Definition of Adjusted EBITDA
Schedule 2 - Allocation of Purchase Price
Schedule 3 - Preliminary Statement
Exhibit A - Working Capital Statement
Exhibit B - Estoppel Certificate
Exhibit C - Simmons Dealer Incentive Agreement
Exhibit D - Opinion of Counsel
Exhibit E - Form of Authorized Dealer Agreement
Exhibit F - Form of Co-op Advertising Agreement

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UNIT PURCHASE AGREEMENT
 
This UNIT PURCHASE AGREEMENT (the “Agreement”), dated as of July 24, 2006, by
and among ST San Diego, LLC, a California limited liability company
(“Purchaser”), Sleep Country USA, Inc., a Delaware corporation, which
immediately preceding the Closing (as defined below) shall be converted to a
Delaware limited liability company (the “Company”), SC Holdings, Inc., a
Delaware corporation (“Holdings”), and Simmons Bedding Company, a Delaware
corporation (“Simmons”).
 
W I T N E S S E T H:
 
WHEREAS, Holdings owns an aggregate of 3,000 shares of the Company’s common
stock, $0.01 par value per share (the “Shares”), which constitute all of the
issued and outstanding shares of capital stock of the Company;
 
WHEREAS, prior to the Closing, Holdings will convert the Company into a Delaware
limited liability company named Sleep Country USA, LLC (the “Conversion”), and,
after the effective time of the Conversion, the Company shall be deemed, for all
purposes of and in accordance with the laws of the State of Delaware, to be the
same entity as the Company prior to the Conversion;
 
WHEREAS, after the Conversion, Holdings will own 100 units of the Company’s
common units (the “Units”), which Units will constitute, immediately prior to
Closing, all of the issued and outstanding equity interests of the Company;
 
WHEREAS, Holdings desires to sell to Purchaser, and Purchaser desires to
purchase from Holdings, the Units for the purchase price and upon the terms and
conditions hereinafter set forth; and
 
WHEREAS, Simmons owns 100% of the issued and outstanding shares of capital stock
of Holdings and will receive substantial benefits from the transactions
contemplated hereby.
 
NOW, THEREFORE, in consideration of the premises and the mutual covenants and
agreements hereinafter contained, the parties hereby agree as follows:
 
ARTICLE I  
 

 
DEFINITIONS
 
1.1  Certain Definitions.
 
(a)  For purposes of this Agreement, the following terms shall have the meanings
specified in this Section 1.1:
 
“Actual Knowledge” means the actual knowledge of Steve Fendrich, Joe
Paviglianti, Terry Horsley, Richard Thomas, Charles Dieteker, Jacqueline Steven,
Bill Creekmuir or Kristen McGuffey, or any knowledge which would have been
obtained by any such person after inquiry of such other named persons, but
without any other inquiry.
 
“Adjusted EBITDA” has the meaning specified on Schedule 1 attached hereto.
 
“Affiliate” means, with respect to any Person, any other Person that, directly
or indirectly through one or more intermediaries, controls, or is controlled by,
or is under common control with, such Person, and the term “control” (including
the terms “controlled by” and “under common control with”) means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of such Person, whether through ownership of voting
securities, by contract or otherwise.
 
“Business Day” means any day of the year on which national banking institutions
in California and Georgia are open to the public for conducting business and are
not required or authorized to close.
 
“Closing Date Debt” means, without duplication, (A) the amount of (i) the
aggregate debt for borrowed money (excluding current liabilities) of the Company
outstanding on the Closing Date, and (ii) any amount, whether or not a current
liability, owed by the Company to Simmons, Dreamwell, Ltd., a Nevada limited
liability company, or any of their respective Affiliates (excluding trade
payables incurred in the Ordinary Course of Business), all of which will be
required to be repaid by the Company at or immediately prior to the Closing
Date, and all prepayment penalties and costs incurred or to be incurred by the
Company (or Purchaser) in connection therewith, and (B) the aggregate payoff
amount reflected in payoff letters provided on or before the Closing Date in
respect of any capitalized equipment lease obligations of the Company (or, if
payoff letters are not so provided in respect of any capitalized equipment lease
obligations, the aggregate amount of the present value under any such
obligations as of the Closing Date determined in accordance with the historical
accounting practices of the Company).
 
“Code” means the Internal Revenue Code of 1986, as amended.
 
“Contract” means any written or oral contract, agreement, indenture, note, bond,
mortgage, loan, instrument, lease, license, restriction, understanding or
undertaking of any kind or character.
 
“Environmental Law” means any applicable Law currently in effect relating to the
protection of the environment or natural resources, including the Comprehensive
Environmental Response, Compensation and Liability Act (42 U.S.C. § 9601
et seq.), the Hazardous Materials Transportation Act (49 U.S.C. App. § 1801
et seq.), the Resource Conservation and Recovery Act (42 U.S.C. § 6901 et seq.),
the Clean Water Act (33 U.S.C. § 1251 et seq.), the Clean Air Act (42 U.S.C.
§ 7401 et seq.) the Toxic Substances Control Act (15 U.S.C. § 2601 et seq.), and
the Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. § 136
et seq.), as each has been amended and the regulations promulgated pursuant
thereto.
 
“Excess Cash” means the amount of any and all cash and cash equivalents of the
Company (excluding Petty Cash) as of the Closing Date equal to the excess of
current assets of the Company (excluding Petty Cash) over current liabilities of
the Company as of the Closing Date, as determined in accordance with GAAP.
 
“Force Majeure Event” means acts of god or the public enemy, fire, flood,
earthquake, war, military action or hostilities, terrorism, sabotage or similar
events.
 
“GAAP” means generally accepted accounting principles in the United States,
consistently applied in accordance with the Company’s historical practice.
 
“Governmental Body” means any government or governmental or regulatory body
thereof, or political subdivision thereof, whether federal, state, local or
foreign, or any agency, instrumentality or authority thereof, or any court or
arbitrator (public or private).
 
“Hazardous Material” means any substance, material or waste which is regulated
by any Governmental Body including petroleum and its by-products, asbestos, and
any material or substance which is defined as a “hazardous waste,” “hazardous
substance,” “hazardous material,” “restricted hazardous waste,” “industrial
waste,” “solid waste,” “contaminant,” “pollutant,” “toxic waste” or “toxic
substance” under any provision of Environmental Law.
 
“HSR Act” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended and the rules and regulations promulgated thereunder.
 
“Intellectual Property” means all intellectual property rights owned or used by
the Company arising from or in respect of the following: (i) patents and patent
applications, including continuations, divisionals, continuations-in-part,
reissues or reexaminations and patents issuing thereon (collectively,
“Patents”), (ii) trademarks, service marks, trade dress, logos, corporate names,
trade names and Internet domain names, together with the goodwill associated
with any of the foregoing, and all applications and registrations therefor
(collectively, “Marks”), (iii) copyrights and registrations and applications
therefor, works of authorship and moral rights (collectively, “Copyrights”),
(iv)  confidential and proprietary information, including trade secrets,
discoveries, concepts, ideas, research and development, algorithms, know-how,
formulae, inventions (whether or not patentable), processes, techniques,
technical data, designs, drawings, specifications, databases, and customer
lists, in each case excluding any rights in respect of any of the foregoing that
comprise or are protected by Patents (collectively, “Trade Secrets”) and (v)
Software.
 
“IRS” means the United States Internal Revenue Service and, to the extent
relevant, the United States Department of Treasury.
 
“Knowledge of the Company” means the actual knowledge of Steve Fendrich, Joe
Paviglianti, Terry Horsley, Richard Thomas, Charles Dieteker, Jacqueline Steven,
Bill Creekmuir or Kristen McGuffey, or any knowledge which would have been
obtained by any such person after inquiry that a reasonably prudent person would
undertake in the particular circumstance.
 
“Knowledge of the Purchaser” means the actual knowledge of Dale Carlsen, Michael
Dunn, Kevin Moretton, Robert Killgore, Michael Combest, John Haitz, Paul Grimm
or Bruce Kerr, or any knowledge which would have been obtained by any such
person after inquiry that a reasonably prudent person would undertake in the
particular circumstance.
 
“Law” means any foreign, federal, state, local law, statute, code, ordinance,
rule or regulation, or any decree, injunction, judgment, order or ruling.
 
“Legal Proceeding” means any judicial, administrative or arbitral actions, suits
or proceedings (public or private) by or before a Governmental Body.
 
“Liability” means any debt, liability or obligation (whether known or unknown,
direct or indirect, absolute or contingent, accrued or unaccrued, liquidated or
unliquidated, or due or to become due and whether or not required to be
reflected or reserved against on a balance sheet under GAAP) and including all
costs and expenses relating thereto.
 
“Lien” means any lien, encumbrance, pledge, mortgage, deed of trust, security
interest, lease, charge, option, right of first refusal, easement, servitude,
transfer restriction, or adverse claim or right of any kind or character.
 
“Material Adverse Effect” means any circumstance, occurrence of any event,
change in, or effect on the Company that, individually or when taken with all
other related circumstances, events, changes in or effects on the Company, has
(or is reasonably likely to have) a materially adverse effect (financial or
otherwise) on (i) the business, assets, properties, results of operations or
financial condition of the Company or (ii) the ability of the Company to
consummate the transactions contemplated by this Agreement, other than an effect
resulting from an Excluded Matter. “Excluded Matter” means any one of the
following: (i) the effect of any change in the United States economy or
securities or financial markets in general, which change does not
disproportionately affect the Company and which is not the result of a Force
Majeure Event; (ii) the effect of any change that generally affects any industry
in which the Company operates, which such change does not disproportionately
affect the Company and which is not the result of a Force Majeure Event;
(iii) the effect of any action taken by Purchaser or its Affiliates with respect
to the transactions contemplated hereby or with respect to the Company; or
(iv) any effect resulting from the public announcement of this Agreement,
compliance with terms of this Agreement or the consummation of the transactions
contemplated by this Agreement.
 
“Order” means any order, injunction, judgment, decree, ruling, writ, assessment
or arbitration award of a Governmental Body.
 
“Ordinary Course of Business” means solely any act or omission that (i) is in
the ordinary and usual course of normal day-to-day operations of the Company,
consistent with historical practices, (ii) does not relate to any breach of
Contract, tort, infringement, willful misconduct or violation of Law, and
(iii) does not require, under Law, Contract or consistent with the historical
practices of the Company, authorization by the Company’s Board of Directors.
 
“Permits” means any approvals, authorizations, consents, licenses, permits or
certificates of a Governmental Body.
 
“Permitted Exceptions” means (i) all defects, exceptions, restrictions,
easements, rights of way and encumbrances disclosed in policies of title
insurance and on Schedule 5.10(a); (ii) statutory liens for current Taxes,
assessments or other governmental charges not yet due or the amount or validity
of which is being contested in good faith by appropriate proceedings;
(iii) zoning, entitlement and other land use and environmental regulations by
any Governmental Body; (iv) title of a lessor under a capital or operating lease
or any Real Property Lease, together with any defects, easements, restrictions,
exceptions, rights of way and encumbrances to which any such lessor is subject;
and (v) such other imperfections in title, charges, easements, restrictions and
encumbrances not arising out of or relating to the failure of the Company to pay
any amount when due which would not result in Losses or Liabilities to the
Company in excess of $10,000.
 
“Person” means any individual, corporation, partnership, limited liability
company, firm, joint venture, association, joint-stock company, trust,
unincorporated organization, Governmental Body or other entity.
 
“Petty Cash” means the amount of petty cash kept on hand at each of the
Company’s stores, distribution centers, corporate offices and other facilities
and excluding cash in bank accounts or uncashed checks, all in the Ordinary
Course of Business.
 
“Release” means any release, spill, emission, leaking, pumping, injection,
deposit, disposal, discharge, dispersal, or leaching into the environment.
 
“Remedial Action” means all actions required under Environmental Laws to clean
up, remove, treat or address any Hazardous Material in the environment at levels
exceeding those allowed by applicable Environmental Laws, including pre-remedial
studies and investigations or post-remedial monitoring and care.
 
“Senior Executives” means the following individuals: Joe Paviglianti, Terry
Horsley, Richard Thomas, Charles Dieteker, Jacqueline Steven and, for 2005,
Steven Fendrich.
 
“Software” means any and all (i) computer programs, including any and all
software implementations of algorithms, models and methodologies, whether in
source code or object code, and (ii) databases and compilations, including any
and all data and collections of data, whether machine readable or otherwise.
 
“Subsidiary” means any Person of which a majority of the outstanding share
capital, voting securities or other voting equity interests are owned, directly
or indirectly, by the Company.
 
“Tax” or “Taxes” means (i) all federal, state, local or foreign taxes, charges,
fees, imposts, levies or other assessments, including all net income, gross
receipts, capital, sales, use, ad valorem, value added, transfer, franchise,
profits, inventory, capital stock, license, withholding, payroll, employment,
social security, unemployment, excise, severance, stamp, occupation, property
and estimated taxes, customs duties, fees, assessments and charges of any kind
whatsoever, and (ii) all interest, penalties, fines, additions to tax or
additional amounts imposed by any Taxing Authority in connection with any item
described in clause (i).
 
“Taxing Authority” means the IRS and any other Governmental Body responsible for
the administration of any Tax.
 
“Tax Return” means any return, report or statement required to be filed with
respect to any Tax (including any attachments thereto, and any amendment
thereof), including any information return, claim for refund, amended return or
declaration of estimated Tax, and including, where permitted or required,
com-bined, consolidated or unitary returns for any group of entities that
includes Holdings or any of their Affiliates.
 
“Technology” means, collectively, all information, designs, formulae,
algorithms, procedures, methods, techniques, ideas, know-how, research and
development, technical data, programs, subroutines, tools, materials,
specifications, processes, inventions (whether patentable or unpatentable and
whether or not reduced to practice), apparatus, creations, improvements, works
of authorship and other similar materials, and all recordings, graphs, drawings,
reports, analyses, and other writings, and other tangible embodiments of the
foregoing, in any form whether or not specifically listed herein, and all
related technology, that are used in, incorporated in, embodied in, displayed by
or relate to, or are used by the Company.
 
“WARN Act” means the Worker Adjustment and Retraining Notification Act of 1988,
as amended, and the rules and regulations promulgated thereunder.
 
“Working Capital” means the current assets (excluding Petty Cash and deferred
tax benefits) of the Company, reduced by the current liabilities of the Company
(including any intercompany Liabilities owed to Simmons, Dreamwell, Ltd. and
their Affiliates (other than the Company), in each case determined in accordance
with GAAP. Items already included in Closing Date Debt shall not be included in
Working Capital.
 
1.2  Terms Defined Elsewhere in this Agreement. For purposes of this Agreement,
the following terms have meanings set forth in the sections indicated:
 
Term
Section
Actual Closing Date Working Capital
3.3(a)
Actual Closing Date Working Capital Statement
3.3(a)
Agreement
Recitals
Allocation Statement
2.2(c)
Antitrust Laws
8.4
Arbiter
3.3(b)
Audited Financial Statements
5.6
Balance Sheet
5.6
Balance Sheet Date
5.6
Basket
10.5(a)
Cap
10.5(a)
Closing
4.1
Closing Date
4.1
Common Stock
5.4(a)
Company
Recitals
Company Documents
5.2
Company Plan
5.14
Company Properties
5.10
Confidentiality Agreement
8.6
Consolidated Returns
8.13(a)
Continuing Employees
8.9(a)
Co-op Agreement
9.1(i)
Copyrights
1.1 (in Intellectual Property definition)
Dealer Agreement
9.1(i)
Dealer Incentive Agreement
9.1(h)
Employee Benefit Plan
5.14
Environmental Permits
5.18(a)
Equipment
5.11
ERISA
5.14
Estimated Closing Date Working Capital
3.2
Estimated Closing Date Working Capital Statement
3.2
Excluded Matter
1.1 (in definition of Material Adverse Effect)
Expenses
10.2(a)(ii)
Extra Taxes
8.13(c)
Financing
8.14
Golden Parachute
5.9(p)
Incentives
3.1
Indemnification Claim
10.4(b)
Indemnified Party
10.4(b)
Indemnifying Party
10.4(b)
Losses
10.2(a)(i)
Marks
1.1 (in Intellectual Property definition)
Material Contracts
5.13(a)
Multiemployer Plan
5.14
Patents
1.1 (in Intellectual Property definition)
Personal Property Leases
5.11
Plan
5.14
Pre-Closing Periods
8.13(a)
Preliminary Statement
3.2
Purchase Price
3.1
Purchaser
Recitals
Purchaser Documents
7.2
Purchaser Indemnified Parties
10.2(a)
Purchaser Plans
8.9(b)
Real Property Lease
5.10
Revised Statements
2.2(c)
Securities Act
7.5
Simmons Documents
6.2
Simmons Indemnified Parties
10.3(a)
Shares
Recitals
Supplemental Material
8.10
Survival Period
10.1
Tax Claim
8.13(b)
Territory
8.11(a)
Unaudited Financial Statements
5.6
Units
Recitals
Welfare Plan
5.14

1.3  Other Definitional and Interpretive Matters.
 
(a)  Unless otherwise expressly provided, for purposes of this Agreement, the
following rules of interpretation shall apply:
 
Calculation of Time Period. When calculating the period of time before which,
within which or following which any act is to be done or step taken pursuant to
this Agreement, the date that is the reference date in calculating such period
shall be excluded. If the last day of such period is a non-Business Day, the
period in question shall end on the next succeeding Business Day.
Notwithstanding the foregoing, for purposes of any calculation used herein
referring to July 1, 2006, the calculation date shall be July 1, 2006,
notwithstanding the fact it is a Saturday.
 
Dollars. Any reference in this Agreement to $ shall mean U.S. dollars.
 
Exhibits/Schedules. The Exhibits and Schedules to this Agreement are hereby
incorporated and made a part hereof and are an integral part of this Agreement.
All Exhibits and Schedules annexed hereto or referred to herein are hereby
incorporated in and made a part of this Agreement as if set forth in full
herein. Any matter or item disclosed on one Schedule shall be deemed to have
been disclosed on each other Schedule, to the extent reasonably apparent on its
face. Disclosure of any item on any Schedule shall not constitute an admission
or indication that such item or matter is material or would have a Material
Adverse Effect. No disclosure on a Schedule relating to a possible breach or
violation of any Contract, Law or Order shall be construed as an admission or
indication that breach or violation exists or has actually occurred. Any
capitalized terms used in any Schedule or Exhibit but not otherwise defined
therein shall be defined as set forth in this Agreement.
 
Gender and Number. Any reference in this Agreement to gender shall include all
genders, and words imparting the singular number only shall include the plural
and vice versa.
 
Headings. The provision of a Table of Contents, the division of this Agreement
into Articles, Sections and other subdivisions and the insertion of headings are
for convenience of reference only and shall not affect or be utilized in
construing or interpreting this Agreement. All references in this Agreement to
any “Section” are to the corresponding Section of this Agreement unless
otherwise specified.
 
Herein. The words such as “herein,” “hereinafter,” “hereof,” and “hereunder”
refer to this Agreement as a whole and not merely to a subdivision in which such
words appear unless the context otherwise requires.
 
Including. The word “including” or any variation thereof means (unless the
context of its usage otherwise requires) “including, without limitation” and
shall not be construed to limit any general statement that it follows to the
specific or similar items or matters immediately following it.
 
Reflected On or Set Forth In. An item arising with respect to a specific
representation or warranty shall be deemed to be “reflected on” or “set forth
in” a balance sheet or financial statements, to the extent any such phrase
appears in such representation or warranty, if (a) there is a reserve, accrual
or other similar item underlying a number on such balance sheet or financial
statements that related to the subject matter of such representation, (b) such
item is otherwise specifically set forth on the balance sheet or financial
statements or (c) such item is reflected on the balance sheet or financial
statements and is specifically set forth in the notes thereto.
 
(b)  The parties hereto have participated jointly in the negotiation and
drafting of this Agreement and, in the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as jointly drafted
by the parties hereto and no presumption or burden of proof shall arise favoring
or disfavoring any party by virtue of the authorship of any provision of this
Agreement.
 
ARTICLE II  
 

 
SALE AND PURCHASE OF UNITS
 
2.1  Sale and Purchase of Units. Upon the terms and subject to the conditions
contained herein, on the Closing Date, Holdings agrees to sell to Purchaser, and
Purchaser agrees to purchase from Holdings, the Units.
 
2.2  Allocation of Purchase Price. The sale of the Units shall be treated as a
sale of assets of the Company for federal, state and local income Tax purposes.
At Closing, Simmons and Purchaser shall agree upon a good faith allocation of
the Purchase Price and any other items that are treated as additional purchase
price for federal, state and local income Tax purposes among the different items
of assets of the Company and the covenant described in Section 8.11 and attach
hereto as Schedule 2 a statement (the “Allocation Statement”) evidencing such
allocation. Purchaser shall provide to Simmons from time to time revised copies
of the Allocation Statement (the “Revised Statements”) so as to report any
matter on the Allocation Statement that needs updating (including Purchase Price
adjustments, if any). Simmons shall have 20 days to review the last Revised
Statements and will notify Purchaser of disputes with any revised allocation.
The parties shall act in good faith to resolve any such dispute. If the parties
cannot resolve the disputed allocation then the Arbiter (as defined herein)
shall review and determine the proper allocation. This allocation will be
binding on the parties. Any Arbiter fees and expenses shall be borne one-half by
Purchaser and one-half by Simmons.
 
ARTICLE III  
 

 
PURCHASE PRICE
 
3.1  Purchase Price. The aggregate consideration for the Units shall be an
amount in cash equal to (i) 6.0 times the Adjusted EBITDA for the last full
12-month period ended on July 1, 2006, minus (ii) any Closing Date Debt, minus
(iii) any amount by which Estimated Closing Date Working Capital is less than
zero, plus (iv) any amount by which the Estimated Closing Date Working Capital
exceeds zero, minus (v) the amount, if any, by which the aggregate rebates,
co-op advertising and return allowances as of the Closing Date (collectively,
the “Incentives”) exceeds the aggregate receivables relating to Incentives as of
the Closing Date, plus (vi) the amount, if any, by which the aggregate
receivables relating to Incentives as of the Closing Date exceeds the amount of
the Incentives (the “Purchase Price”). Any Excess Cash will be distributed by
the Company to Holdings immediately prior to Closing (after calculation of the
Estimated Closing Date Working Capital), and all Petty Cash will be retained by
the Company.
 
3.2  Calculation and Payment of Purchase Price. Attached as Schedule 3 hereto is
a statement agreed to by the parties estimating as of July 1, 2006 (as if the
Closing had occurred as of the end of business on such date) the items set forth
in items (i) - (vi) of this Section 3.2 below (the “Preliminary Statement”). At
least 5 Business Days prior to the Closing Date, the Company shall deliver to
Purchaser: (i) a calculation of Adjusted EBITDA; (ii) a calculation of the
estimated Working Capital of the Company as of the Closing Date (prior to the
distribution of any Excess Cash) determined in accordance with GAAP (the
“Estimated Closing Date Working Capital”) and reflected in a statement in
substantially the form attached hereto as Exhibit A and in accordance with the
methodology used in Schedule 3 hereto (the “Estimated Closing Date Working
Capital Statement”); (iii) a calculation of the Closing Date Debt (together with
customary pay-off letters from all holders of Closing Date Debt to be repaid as
of or prior to the Closing); (iv) a calculation of Excess Cash and Petty Cash;
(v) a calculation of the amounts under Section 3.1 (iv) and (v) above; and (vi)
a calculation of the Purchase Price to be paid at Closing. Such calculations and
statements provided by the Company shall be subject to the review and approval
of Purchaser. On the Closing Date, Purchaser shall pay the Purchase Price to
Holdings, which shall be paid by wire transfer of immediately available United
States funds into an account designated by Holdings.
 
3.3  Post-Closing Purchase Price Adjustment. Following the Closing, the Purchase
Price shall be adjusted as provided in this Section 3.3 to reflect any
difference between the Actual Closing Date Working Capital and the Estimated
Closing Date Working Capital.
 
(a)  Within 60 days following the Closing Date, Purchaser shall deliver to
Simmons a calculation of the actual Working Capital of the Company as of the
Closing Date (prior to the distribution of any Excess Cash) determined in
accordance with GAAP (the “Actual Closing Date Working Capital”) and reflected
in a statement substantially in the form of Exhibit A attached hereto (the
“Actual Closing Date Working Capital Statement”).
 
(b)  Acceptance of Statements; Dispute Procedures. The Actual Closing Date
Working Capital Statement delivered by Purchaser to Simmons shall be conclusive
and binding upon the parties unless Simmons, within 20 Business days after
delivery to Simmons of the Actual Closing Date Working Capital Statement,
notifies Purchaser in writing that Simmons disputes any of the amounts set forth
therein, specifying the nature of the dispute and the basis therefor. Purchaser
shall grant Holdings, Simmons and their Affiliates and representatives
(including advisors and accountants) access to all books, records and employees
of the Company that is reasonably requested by Holdings or Simmons in connection
with Purchaser’s preparation of the Actual Closing Date Working Capital
Statement. The parties shall in good faith attempt to resolve any dispute and,
if the parties so resolve all disputes, the Actual Closing Date Working Capital
Statement, as amended to the extent necessary to reflect the resolution of the
dispute, shall be conclusive and binding on the parties. If the parties do not
reach agreement in resolving the dispute within 15 days after notice is given by
Simmons to Purchaser pursuant to the second preceding sentence, the parties
shall submit the dispute to Deloitte & Touche or such other nationally
recognized independent accounting firm which is mutually agreeable to the
parties (the “Arbiter”) for resolution. Promptly, but no later than 20 days
after acceptance of its appointment as Arbiter, the Arbiter shall determine (it
being understood that in making such determination, the Arbiter shall be
functioning as an expert and not as an arbitrator), based solely on written
submissions by Purchaser and Simmons, and not by independent review, only those
issues in dispute and shall render a written report as to the resolution of the
dispute and the resulting computation of the Actual Closing Date Working Capital
which shall be conclusive and binding on the parties. In resolving any disputed
item, the Arbiter (x) shall be bound by the provisions of this Section 3.3 and
(y) may not assign a value to any item greater than the greatest value for such
items claimed by either party or less than the smallest value for such items
claimed by either party. The fees, costs and expenses of the Arbiter shall be
allocated to and borne equally by Purchaser and Simmons.
 
(c)  Payment. Upon final determination of Actual Closing Date Working Capital as
provided in Section 3.3(b) above, (A) if Actual Closing Date Working Capital is
greater than Estimated Closing Date Working Capital, the Purchase Price shall be
increased by the excess of the Actual Closing Date Working Capital over
Estimated Closing Date Working Capital and Purchaser shall promptly, but no
later than five Business Days after such final determination, pay the amount of
such difference, together with interest thereon from the Closing Date to the
date of payment thereof, to be distributed to Holdings, and (B) if Actual
Closing Date Working Capital is less than Estimated Closing Date Working
Capital, the Purchase Price shall be decreased by the excess of Estimated
Closing Date Working Capital over Actual Closing Date Working Capital and
Simmons shall promptly, but no later than five Business Days after such final
determination, pay to Purchaser the amount of such difference, together with
interest thereon from the Closing Date to the date of payment thereof as
determined below.
 
(d)  Interest. For the purposes of Section 3.3(c), interest will be payable at
the “prime” rate, as announced by the Wall Street Journal, Eastern Edition, as
of the Closing Date, calculated based on a 365 day year and the actual number of
days elapsed.
 
ARTICLE IV  
 

 
CLOSING AND TERMINATION
 
4.1  Closing Date. The closing of the sale and purchase of the Units provided
for in Section 2.1 hereof (the “Closing”) shall take place at the offices of
Shartsis Friese LLP, One Maritime Plaza, 18th Floor, San Francisco, California
94111 (or at such other place as the parties may designate in writing) at
10:00 a.m. (San Francisco time) on a date to be specified by the parties (the
“Closing Date”), which date shall be no later than the second Business Day after
the satisfaction or waiver of the conditions set forth in Article IX (other than
conditions that by their nature are to be satisfied at the Closing, but subject
to the satisfaction or waiver of those conditions at such time), but in no event
later than August 28, 2006, unless another time, date or place is agreed to in
writing by the parties hereto. At the election of any party hereto, the Closing
may take place through an exchange of consideration and documents using
overnight courier service or facsimile.
 
4.2  Termination of Agreement. This Agreement may be terminated prior to the
Closing as follows:
 
(a)  At the election of Holdings or Purchaser on or after August 15, 2006, (the
“Termination Date”), if the Closing shall not have occurred by the close of
business on such date, provided that the terminating party is not in breach in
any material respect of any of its covenants hereunder. Notwithstanding the
foregoing, (i) the Termination Date shall be extended to August 28, 2006 if the
only reason the Closing shall not have occurred by such date is due to either
the waiting period applicable to the transactions contemplated by this Agreement
under the HSR Act shall not have expired or early termination shall not have
been granted (provided that the parties have complied with their obligations
under Section 8.4 hereof); and (ii) the Termination Date shall be extended to
August 22, 2006 if the only reason the Closing shall not have occurred by such
date is due to the fact the condition set forth in Section 9.1(f) (consents) has
not been met, but the Termination Date shall not be extended beyond August 28,
2006 without the consent of Simmons and Purchaser.
 
(b)  by mutual written consent of Holdings and Purchaser;
 
(c)  by Purchaser if Purchaser is not then in material breach of its obligations
under this Agreement and there has been a material breach of any representation,
warranty, covenant or agreement contained in this Agreement on the part of
Company, Simmons or Holdings which has or would prevent one of the conditions
set forth in section 9.1(a) or (b) from being satisfied, and Company, Simmons or
Holdings, as the case may be, has not cured such breach within 15 days after
notice thereof by Purchaser;
 
(d)  by Company, Simmons or Holdings if none of Company, Simmons or Holdings is
then in material breach of its obligations under this Agreement and there has
been a material breach of any representation, warranty, covenant or agreement
contained in this Agreement on the part of Purchaser which has or would prevent
one of the conditions set forth in section 9.2(a) or (b) from being satisfied,
and Purchaser has not cured such breach within 15 days after notice thereof by
Company, Simmons or Holdings; or
 
(e)  by Holdings or Purchaser if there shall be in effect a final nonappealable
Order of a Governmental Body of competent jurisdiction restraining, enjoining or
otherwise prohibiting the consummation of the transactions contemplated hereby;
provided, however, that the right to terminate this Agreement under this Section
4.2(c) shall not be available to a party if such Order was primarily due to the
failure of such party to perform any of its obligations under this Agreement.
 
4.3  Procedure Upon Termination. In the event of termination and abandonment by
Purchaser or Holdings, or both, pursuant to Section 4.2 hereof, written notice
thereof shall forthwith be given to the other party or parties, and this
Agreement shall terminate, and the purchase of the Units hereunder shall be
abandoned, without further action by Purchaser or Holdings.
 
4.4  Effect of Termination.
 
(a)  In the event that this Agreement is validly terminated in accordance with
Section 4.2 and 4.3, then each of the parties shall be relieved of their duties
and obligations arising under this Agreement after the date of such termination
and such termination shall be without liability to Purchaser, Simmons, the
Company or Holdings; provided, however that no such termination shall relieve
any party hereto from liability for any willful breach of this Agreement and,
provided, further, that the obligations of the parties set forth in Section 8.6
and Article XI hereof shall survive any such termination and shall be
enforceable hereunder.
 
(b)  Nothing in this Section 4.4 shall relieve Simmons, Holdings, the Company or
Purchaser of any liability for a breach of any of its covenants or agreements or
willful breach of its representations and warranties contained in this Agreement
prior to the date of termination. The damages recoverable by the non-breaching
party shall include all attorneys’ fees reasonably incurred by such party in
connection with the transactions contemplated hereby.
 
ARTICLE V  
 

 
REPRESENTATIONS AND WARRANTIES REGARDING THE COMPANY
 
Simmons and Holdings hereby represent and warrant to Purchaser that:
 
5.1  Organization and Good Standing. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has all requisite corporate power and authority to own, lease and
operate its properties and to carry on its business as now conducted. The
Company is duly qualified or authorized to do business and is in good standing
under the laws of each jurisdiction in which it owns or leases real property and
each other jurisdiction in which the conduct of its business or the ownership of
its properties requires such qualification or authorization, except where the
failure to be so qualified, authorized or in good standing would not result in
Liabilities or Losses in excess of $75,000 individually or $150,000 in the
aggregate.
 
5.2  Authorization of Agreement. The Company has all requisite power and
authority to execute and deliver this Agreement and each other agreement,
document, or instrument or certificate contemplated by this Agreement or to be
executed by the Company in connection with the consummation of the transactions
contemplated by this Agreement (the “Company Documents”), and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the Company Documents and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by all requisite corporate action
on the part of the Company. This Agreement has been, and each of the Company
Documents will be at or prior to the Closing, duly and validly executed and
delivered by the Company and (assuming the due authorization, execution and
delivery by the other parties hereto and thereto) this Agreement constitutes the
legal, valid and binding obligations of the Company, enforceable against it in
accordance with its terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws affecting creditors’ rights and
remedies generally, and subject, as to enforceability, to general principles of
equity, including principles of commercial reasonableness, good faith and fair
dealing (regardless of whether enforcement is sought in a proceeding at law or
in equity).
 
5.3  Conflicts; Consents of Third Parties.
 
(a)  Except as set forth on Schedule 5.3(a), none of the execution and delivery
by the Company of this Agreement or the Company Documents, the consummation of
the transactions contemplated hereby or thereby, or compliance by the Company
with any of the provisions hereof or thereof will conflict with, or result in
any violation of or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination or cancellation under, any
provision of (i) the certificate of incorporation and by-laws or comparable
organizational documents of the Company; (ii) any Material Contract or Permit to
which the Company is a party or by which any of the properties or assets of the
Company are bound; (iii) any Order of any Governmental Body applicable to the
Company or by which any of the properties or assets of the Company are bound; or
(iv) any applicable Law, other than, in the case of Permits or clause (iv), such
conflicts or violations that would not result in Liabilities or Losses in excess
of $75,000 individually or $150,000 in the aggregate.
 
(b)  Except as set forth on Schedule 5.3(b), no consent, waiver, approval,
Order, Permit or authorization of, or declaration or filing with,
or notification to, any Person or Governmental Body is required on the part of
the Company in connection with the execution and delivery of this Agreement or
the Company Documents or the compliance by the Company with any of the
provisions hereof or thereof, or the consummation of the transactions
contemplated hereby or thereby, except for compliance with the applicable
requirements of the HSR Act. The consents obtained by the Company prior to
Closing are sufficient to enable the Purchaser to operate the business
immediately following Closing in all material respects as it was operated prior
to Closing.
 
5.4  Capitalization.
 
(a)  The authorized capital stock of the Company as of the date hereof consists
of 3,000 shares of common stock, $0.01 par value per share (“Common Stock”). As
of the date hereof, there are 3,000 shares of Common Stock issued and
outstanding and no shares of Common Stock are held by the Company as treasury
stock. All of the issued and outstanding Common Stock were duly authorized for
issuance and are validly issued, fully paid and non-assessable and were not
issued in violation of any purchase or call option, right of first refusal,
subscription right, preemptive right or any similar rights. Except as set forth
on Schedule 5.4(a), all of the Shares are free and clear of all Liens and claims
of every kind.
 
(b)  Except as set forth on Schedule 5.4(b), there is no existing option,
warrant, call, right, or Contract of any character to which the Company is a
party requiring, and there are no securities of the Company outstanding which
upon conversion or exchange would require, the issuance, of any equity interests
of the Company or other securities convertible into, exchangeable for or
evidencing the right to subscribe for or purchase equity interests of the
Company. The Company is not a party to any voting trust or other Contract with
respect to the voting, redemption, sale, transfer or other disposition of the
Common Stock of the Company.
 
(c)  Except as set forth on Schedule 5.4(c), the Company has not authorized or
issued debt securities or other instruments of indebtedness.
 
5.5  Subsidiaries. The Company has no Subsidiaries. The Company does not own,
directly or indirectly, any capital stock or equity securities of any Person.
 
5.6  Financial Statements. The Company has made available to Purchaser copies of
(i) the audited consolidated balance sheet of the Company as at December 28,
2002 and the related audited consolidated statement of income and of cash flows
of the Company for the year then ended (such audited statements, including the
related notes and schedules thereto, complete and correct copies of which are
attached as Schedule 5.6, are referred to herein as the “Audited Financial
Statements”), (ii) the unaudited consolidated balance sheets of the Company as
at December 27, 2003, December 25, 2004 and December 31, 2005 and the related
unaudited consolidated statements of income and cash flows of the Company for
the years then ended (complete and correct copies of which are attached as
Schedule 5.6), and (iii) the unaudited consolidated balance sheet of the Company
as at June 3, 2006 and the related unaudited consolidated statement of income
and cash flows of the Company for the five (5) month period then ended (such
unaudited statements, including the related notes and schedules thereto,
complete and correct copies of which are attached as Schedule 5.6, are referred
to herein as the “Unaudited Financial Statements”). Except as set forth in the
notes thereto and as disclosed in Schedule 5.6, each of the Audited Financial
Statements has been prepared in accordance with GAAP and presents fairly in all
material respects the financial position, results of operations and cash flows
of the Company as at the dates and for the periods indicated therein. Except as
set forth in the notes thereto and as disclosed in Schedule 5.6, each of the
Unaudited Financial Statements has been prepared in accordance with the
historical accounting practices of the Company and presents fairly in all
material respects the financial position, results of operations and cash flows
of the Company as at the dates and for the periods indicated therein.
 
For the purposes hereof, the unaudited balance sheet of the Company as at
June 3, 2006 is referred to as the “Balance Sheet” and June 3, 2006 is referred
to as the “Balance Sheet Date”.
 
5.7  No Undisclosed Liabilities. The Company does not have any Liabilities of
any kind that would have been required to be reflected in, reserved against or
otherwise described on the Balance Sheet or in the notes thereto in accordance
with GAAP and were not so reflected, reserved against or described, other than
(i) Liabilities incurred in the Ordinary Course of Business after the Balance
Sheet Date, (ii) Liabilities incurred in connection with the transactions
contemplated hereby and (iii) Liabilities that would not be in excess of $75,000
individually or $150,000 in the aggregate.
 
5.8  Absence of Certain Developments. Except as set forth on Schedule 5.8, since
the Balance Sheet Date, the business has been conducted only in the Ordinary
Course of Business and there has not been:
 
(a)  any change in its financial condition, assets, liabilities (contingent or
otherwise), income, operations or business which would have an effect on the
financial condition, assets, liabilities (contingent or otherwise), income,
operations of the Company or the business, taken as a whole, resulting in Losses
in excess of $75,000 individually or $150,000 in the aggregate;
 
(b)  any damage, destruction or loss (whether or not covered by insurance)
adversely affecting any material portion of its properties or business;
 
(c)  any capital expenditure or commitment by the Company in excess of $75,000
individually or $150,000 in the aggregate;
 
(d)  any unfair labor practices or charges, strikes, work stoppages, slowdowns
or lockouts or labor grievance or complaints that would reasonably be expected
to result in Losses in excess of $75,000 individually or $150,000;
 
(e)  any plan, agreement or arrangement granting any preferential rights to
purchase or acquire any interest in any of its assets, property or rights or
requiring consent of any part to the transfer and assignment of any such assets,
property or rights;
 
(f)  any new or any amendment or termination of any existing Material Contract
to which it is a party; or
 
(g)  any action or event that, if it occurred after the date of this Agreement,
would have required the consent of Purchaser under Section 8.2.
 
5.9  Taxes. Except as set forth on Schedule 5.9:
 
(a)  All income Tax and other material Tax Returns required to be filed by the
Company have been properly completed and filed on a timely basis or otherwise
properly extended for subsequent filing by the authorized due dates. The
foregoing Tax Returns are correct in all material respects. No extension of time
within which to file any income Tax or other material Tax Return of the Company
is outstanding.
 
(b)  With respect to all taxable periods or portions of periods ending on or
prior to Closing, all material amounts of Taxes required to be paid by the
Company (whether or not required to be shown on any Tax Return and whether or
not any Tax Return was required) have been paid.
 
(c)  No material issues have been raised (and are currently pending) in writing
in respect of the Company by any Taxing Authority in connection with any of its
Tax Returns. As of the date hereof, no waivers of statutes of limitation with
respect to any of the Tax Returns described in clause (a) above have been given
by or requested from the Company. All material deficiencies asserted or
assessments made as a result of any examinations have been fully paid, or are
fully reflected as a liability in the Audited Financial Statements in accordance
with GAAP or the Unaudited Financial Statements in accordance with the
historical accounting practices of the Company, as the case may be. There are no
Liens on any of the assets of the Company that arose in connection with any
failure or alleged failure to pay any Tax, except for Permitted Exceptions.
 
(d)  The Company has withheld and paid all material Taxes required to have been
withheld and paid in connection with amounts paid or owing to any employee,
independent contractor, creditor, stockholder or other third party.
 
(e)  Except for the affiliated group of which Simmons is the ultimate parent,
since February 1, 2003, the Company has not been a member of an affiliated group
of corporations, within the meaning of Section 1504 of the Code.
 
(f)  The Company is not a party to and has no obligation under any Tax sharing,
Tax indemnity or Tax allocation agreement or arrangement (other than such
agreements existing as of the date hereof between current members of the
Company’s affiliated group and customary Tax indemnification contained in credit
or other commercial agreements, the primary purpose of which does not relate to
Taxes).
 
(g)  To the Knowledge of the Company, none of the Company’s assets are
tax-exempt use property within the meaning of Section 168(h) of the Code.
 
(h)  The Company has not with respect to any open taxable period applied for and
been granted permission to adopt a change in its method of Tax accounting
requiring adjustments under Section 481 of the Code or comparable state or
foreign Law.
 
(i)  During the two-year period ending on the Closing Date, the Company was not
a distributing corporation or a controlled corporation in a transaction intended
to be governed by Section 355 of the Code.
 
(j)  No payment made to any employee, officer, director or independent
contractor of the Company (the “Recipient”) pursuant to any employment contract,
severance agreement or other arrangement (a “Golden Parachute Payment”) will be
nondeductible by the Company because of the application of Sections 280G and
4999 of the Code to any Golden Parachute Payment, nor will the Company be
required to compensate any Recipient because of the imposition of an excise tax
(including any interest or penalties related thereto) on the Recipient by reason
of Sections 280G and 4999 of the Code.
 
(k)  This Section 5.9 represents the sole and exclusive representations and
warranties of Simmons and Holdings with respect to Tax matters of the Company.
 
5.10  Real Property.
 
(a)  The Company does not own any real property. Schedule 5.10(a) sets forth a
complete list of all leases of real property by the Company (individually, a
“Real Property Lease” and collectively, the “Real Property Leases” or “Company
Properties”) as lessee or lessor. The Company Properties constitute all
interests in real property currently used, occupied or currently held for use in
connection with the business of the Company and which are necessary for the
continued operation of the business of the Company as the business is currently
conducted. The Company has provided Purchaser with true, correct and complete
copies of the Real Property Leases, together with all amendments, modifications
or supplements, if any, thereto. The Company has a valid, binding and
enforceable leasehold interest under each of the Real Property Leases under
which it is a lessee, free and clear of all Liens other than Permitted
Exceptions. Each of the Real Property Leases is in full force and effect. The
Company has not received any written notice of any default or event that with
notice or lapse of time, or both, would constitute a default by the Company
under any of the Real Property Leases. To the Actual Knowledge of the Company,
Holdings and Simmons the landlord is not in material default under any of the
Real Property Leases. The Company has not assigned any such lease or sublet all
or any part of the Company Properties. Except as described on Schedule 5.10(a),
there are no material physical or mechanical defects in any of the Company
Properties and  each such facility is in the condition and repair required under
the Lease.
 
(b)  To the Actual Knowledge of the Company, the Real Property Leases and the
Company Properties (and improvements thereon) are presently in compliance with
all Laws relating to the Real Property, including the Americans with
Disabilities Act, except where the failure to be in compliance would not result
in Liabilities or Losses in excess of $75,000 individually or $150,000 in the
aggregate. The Company has not received any notice from any party asserting that
any of the Real Property Leases or the Company Properties are  in violation of
any Laws. The Company has not received notice of any pending or threatened
condemnation, annexation, special assessments, zoning or subdivision changes, or
other adverse claims affecting the Company Properties.
 
5.11  Tangible Personal Property; Condition of Assets. Schedule 5.11 sets forth
a list of all leases of personal property by the Company (“Personal Property
Leases”) involving annual payments in excess of $75,000. The Company has not
received any written notice of any default or any event that with notice or
lapse of time, or both, would constitute a default, by the Company under any of
the Personal Property Leases. The furniture, fixtures, machinery, shelving,
racks, equipment, tools, dies, molds, jigs, fixtures, office equipment, business
machines, telephones and telephone systems, parts, accessories and other
tangible personal property (other than inventory) owned or leased by the Company
and used in its operations (collectively, the “Equipment”) constitute all
tangible personal property necessary in order for the Company to conduct its
business as it has been conducted in the past. All Equipment operates
substantially in accordance with its specifications, adequately performs the
functions it is supposed to perform, is free of any material structural,
mechanical, installation or engineering defects and in good operating condition
and repair (ordinary wear and tear excepted). The Company possesses good, valid
and marketable title to, or valid leaseholder interest in, or valid license to
use all the property under the Personal Property Leases and the Equipment used
or necessary for the conduct of the business, free and clear of all Liens other
than Permitted Exceptions.
 
5.12  Intellectual Property.
 
(a)  Schedule 5.12(a) sets forth an accurate and complete list of all issued
Patents, pending Patent applications, registered Marks, pending applications for
registration of Marks, registered Copyrights and Internet domain names owned by
the Company.
 
(b)  Except as set forth on Schedule 5.12(b), the Company owns, or possesses
adequate licenses or other valid rights to use (in each case, free and clear of
any Liens), all Intellectual Property and Technology used by the Company in the
Ordinary Course of Business. Without limiting the generality of the foregoing,
except as set forth on Schedule 5.12(b), the Company owns all rights, title and
interests in and to all of the Marks throughout the respective jurisdictions set
forth on Schedule 5.12(a) (free and clear of all Liens), and no Person has or
has claimed or alleged any right or interest therein or thereto.
 
(c)  The conduct of the business and operations of the Company and the use of
the Intellectual Property and Technology owned by the Company does not infringe
or constitute a misappropriation of the Intellectual Property of any Person.
 
(d)  As of the date of this Agreement, there is no pending Legal Proceeding (and
the Company has not received written notice of any claim) challenging any right
of the Company in or the validity of any Intellectual Property or Technology
owned by or exclusively licensed to the Company, which, to the Knowledge of the
Company, if adversely determined, would result in Liabilities or Losses in
excess of $75,000 individually or $150,000 in the aggregate.
 
(e)  Except as set forth on Schedule 5.12(e),As of the date of this Agreement,
there are no Orders to which the Company is a party that restrict the Company’s
right to use any Intellectual Property or Technology used by the Company in the
Ordinary Course of Business.  
 
(f)  Except as set forth on Schedule 5.12(f), to the Knowledge of the Company,
no Person is infringing or misappropriating any Intellectual Property owned by
or exclusively licensed to the Company.
 
(g)  To the Knowledge of the Company, no Intellectual Property owned by or
exclusively licensed to the Company is invalid or unenforceable.
 
(h)  The Intellectual Property and Technology are sufficient to continue to
operate the business of the Company immediately after the Closing as currently
conducted. All patents, trademarks, trade names, service marks and copyrights,
and all registrations thereof, included in the Intellectual Property owned by
the Company, and all Intellectual Property licensed to the Company, are valid
and in full force and effect.
 
5.13  Material Contracts.
 
(a)  Schedule 5.13(a) sets forth all of the following Contracts to which the
Company is a party or by which it is bound (collectively, the “Material
Contracts”):
 
(i)  Contracts for the employment of any individual on a full-time, part-time or
consulting or other basis providing annual compensation in excess of $75,000;
 
(ii)  Contracts providing for severance, retention, change in control or other
similar payments;
 
(iii)  Contracts in which the Company has agreed or is bound not to compete in
any manner or geographic area or in any business;
 
(iv)  Contracts limiting the Company’s freedom to operate, own, pledge, sell,
transfer or otherwise dispose of or encumber any of its assets;
 
(v)  all Contracts regarding capital stock of the Company, including any
shareholder agreement, voting or voting trust agreement or proxy;
 
(vi)  Contracts between the Company, on one hand, and Simmons, Holdings or any
of their Affiliates or any current officer or director of the Company, on the
other hand;
 
(vii)  Contracts with any labor union or association representing any employee
of the Company;
 
(viii)  Contracts for the sale of any of the assets of the Company other than in
the Ordinary Course of Business;
 
(ix)  Contracts relating to any acquisition to be made by the Company of any
operating business or the capital stock of any other Person;
 
(x)  Contracts relating to the incurrence of indebtedness for borrowed money, or
the making of any loans, in each case involving amounts in excess of $75,000;
 
(xi)  Contracts for indemnification, reimbursement, guaranty, suretyship or
other obligation to assume or incur any obligation of a third party involving
amounts in excess of $75,000 individually or $150,000 in the aggregate;
 
(xii)  Contracts for joint ventures, strategic alliances, partnerships, or
sharing of profits or proprietary information;
 
(xiii)  Contracts, including distribution, supply and advertising Contracts,
which involve the expenditure of more than $75,000 in the aggregate or require
performance by any party more than one year from the date hereof that, in either
case, are not terminable by the Company without penalty on notice of 90 days’ or
less;
 
(xiv)  Real Property Leases set forth on Schedule 5.10;
 
(xv)  Personal Property Leases set forth on Schedule 5.11; and
 
(xvi)  Contracts under which the Company has licensed any material Intellectual
Property or material Technology from any third Person or under which the Company
licenses any material Intellectual Property or material Technology to any third
Person.
 
(b)  All Material Contracts are in full force and binding upon the parties
thereto. Except as set forth on Schedule 5.13(b), the Company has not received
any notice of any default or event that with notice or lapse of time, or both,
would constitute a default by the Company under any Material Contract. The
Company has provided Purchaser with true, correct and complete copies of all of
the Material Contracts, together with all amendments, modifications or
supplements thereto.
 
5.14  Employee Benefits Plans.
 
(a)  Schedule 5.14(a) lists each employment, bonus, deferred compensation,
incentive compensation, stock purchase, stock option, stock appreciation right
or other stock-based incentive, severance, change-in-control or termination pay,
hospitalization or other medical, disability, life or other insurance,
supplemental unemployment benefits, profit-sharing, pension or retirement plan,
program, agreement or arrangement and each other material employee benefit plan,
program, agreement or arrangement, sponsored, maintained or contributed to or
required to be contributed to by the Company for the benefit of any current or
former employee, independent contractor or director of the Company (the “Company
Plans“). Except for amendments that are required for the Company Plans to meet
the requirements of applicable law, tax-qualified status under Section 401(a) of
the Code, if applicable, or Section 409A of the Code, if applicable, applicable
regulatory guidance, the terms of such Company Plans, the Company has no formal
plan or commitment, whether legally binding or not, to create any additional
Company Plans or modify or change any existing Company Plan that would
materially affect any current or former employee, independent contractor or
director of the Company.
 
(b)  With respect to each of the Company Plans, true and complete copies of each
of the following documents, as applicable, have been made available to the
Purchaser:
 
(i)  a copy of the Company Plan documents (including all amendments thereto) for
each written Company Plan or a written description of any Company Plan that is
not otherwise in writing;
 
(ii)  a copy of the annual report or Internal Revenue Service Form 5500 Series,
if required under ERISA or the Code, with respect to each Company Plan for the
last three (3) Plan years ending prior to the date of this Agreement for which
such a report was filed;
 
(iii)  a copy of the actuarial report, if required under ERISA, with respect to
each Company Plan subject to ERISA (each, an “ERISA Plan”) for the last three
(3) Plan years ending prior to the date of this Agreement for which a report was
required;
 
(iv)  a copy of the most recent Summary Plan Description (“SPD“), together with
all Summaries of Material Modification issued with respect to such SPD, if
required under ERISA, with respect to each ERISA Plan, and all other material
employee communications relating to each ERISA Plan;
 
(v)  if the Company Plan is funded through a trust or any other funding vehicle,
a copy of the trust or other funding agreement (including all amendments
thereto) and the latest financial statements thereof, if any; and
 
(vi)  the most recent determination letter received from the Internal Revenue
Service (“IRS”) with respect to each Company Plan that is intended to be
qualified under Section 401(a) of the Code.
 
(c)  None of the Company Plans is (or during the prior 6 years has been) subject
to Title IV of ERISA.
 
(d)  The Company has not engaged in a transaction or has taken or failed to take
any action in connection with a Company Plan that could subject the Company to
any material liability for either a civil penalty assessed pursuant to Section
409, 502(i) or 502(l) of ERISA, or a tax imposed pursuant to Section 4975(a) or
(b), 4976 or 4980B of the Code.
 
(e)  All contributions and premiums that the Company and each ERISA Affiliate is
required to pay under the terms of each of the ERISA Plans and Section 412 of
the Code, have, to the extent due, been paid in full or properly recorded on the
financial statements or records of the Company consistent with historical
practice or as otherwise required by GAAP, and none of the ERISA Plans or any
trust established thereunder has incurred any “accumulated funding deficiency”
(as defined in Section 302 of ERISA and Section 412 of the Code), whether or not
waived, as of the last day of the most recent fiscal year of each of the ERISA
Plans ended prior to the date of this Agreement. No lien has been imposed under
Section 412(n) of the Code or Section 302(f) of ERISA on the assets of the
Company or any ERISA Affiliate, and no event or circumstance has occurred that
is reasonably likely to result in the imposition of any such lien on any such
assets on account of any ERISA Plan.
 
(f)  Each of the Company Plans has been operated and administered in all
material respects in accordance with its terms and applicable laws, including
ERISA and the Code.
 
(g)  Each of the ERISA Plans that is intended to be “qualified” within the
meaning of Section 401(a) of the Code is so qualified, and with respect to such
ERISA Plans, the Company has received a currently effective determination letter
from the IRS stating that the ERISA Plan is so qualified, and no event has
occurred that would affect such qualified status.
 
(h)  Any fund established under an ERISA Plan that is intended to satisfy the
requirements of Section 501(c)(9) of the Code has so satisfied such
requirements.
 
(i)  No Company Plan provides benefits coverage, including without limitation
death or medical benefits coverage (whether or not insured), with respect to
current or former employees of the Company after retirement or other termination
of service (other than coverage (i) mandated by applicable laws or (ii) the full
direct cost of which is borne by the current or former employee (or beneficiary
thereof)).
 
(j)  Except as set forth on Schedule 5.14(a) the consummation of the
transactions contemplated by this Agreement will not, either alone or in
combination with any other event, (i) entitle any current or former employee,
officer or director of the Company to severance pay, unemployment compensation
or any other similar termination payment, or (ii) accelerate the time of payment
or vesting, or increase the amount of or otherwise enhance any benefit due from
the Company to any such employee, officer or director.
 
(k)  There are no pending or, to the Actual Knowledge of the Company, Holdings
or Simmons, threatened or anticipated claims by any current or former employee
or beneficiary under any Company Plan (other than routine claims for benefits).
 
5.15  Labor and Employment.
 
(a)  Except as set forth on Schedule 5.15(a), the Company is not a party to any
labor or collective bargaining agreement.
 
(b)  Except as set forth on Schedule 5.15(b), there are no (i) strikes, work
stoppages, work slowdowns or lockouts pending or, to the Actual Knowledge of the
Company, threatened against or involving the Company, (ii) unfair labor practice
charges, or grievances or complaints pending or, to the Knowledge of the
Company, threatened by or on behalf of any employee or group of employees of the
Company, or (iii) union organizational activities existing with respect to the
Company’s employees that, to the Actual Knowledge of the Company, could
reasonably be expected to result in Losses or Liabilities in excess of $75,000
individually or $150,000 in the aggregate. Except as set forth on Schedule
5.15(b), no charge is pending nor, to the Company’s Actual Knowledge,
threatened, against the Company before any court or agency alleging unlawful
discrimination in employment practices and no charge or proceeding with regard
to any unfair labor practice is pending before the National Labor Relations
Board or any other tribunal. No one has petitioned within the last 3 years, and
no one is now petitioning the Company, for union representation of any employees
of the Company. The Company has not experienced any labor strike, slow-down,
stoppage, labor difficulty or other job action during the last 3 years that,
individually or in the aggregate, could reasonably be expected to result in
Losses or Liabilities in excess of $75,000 individually or $150,000 in the
aggregate.
 
(c)  Except as set forth in Schedule 5.15(c), the Company: (i) is in compliance
with all Laws respecting employment, employment practices, terms and conditions
of employment and wages and hours, in each case, with respect to its employees
and independent contractors, except where the failure to be in compliance would
not result in Liabilities or Losses in excess of $75,000 individually or
$150,000 in the aggregate; (ii) has paid, withheld and reported all amounts
required by Law or by agreement to be paid in respect of or withheld and
reported from the wages, salaries and other payment to employees; (iii) is not
liable for any arrears of wages or any Taxes or any penalty relating thereto;
and (iv) is not liable for any payment to any trust or other fund relating to
Company Plans or to any Governmental Body with respect to unemployment
compensation benefits, social security or similar types of benefits mandated by
Law for employees (other than routine payments to be made in the Ordinary Course
of Business).
 
5.16  Litigation. Except as set forth on Schedule 5.16, there are no Legal
Proceedings pending or, to the Actual Knowledge of the Company, threatened
against the Company (or its officers, directors, employees or agents (while
acting as an agent of the Company)) or the Company’s assets, operations or
personnel before any Governmental Body. Except as set forth on Schedule 5.16,
the Company is not subject to any Order, and the Company is not in breach or
violation of any Order.
 
5.17  Compliance with Laws; Permits.
 
(a)  The Company is in compliance with all Laws of any Governmental Body
applicable to its business or operations, except where the failure to be in
compliance would not result in Liabilities or Losses in excess of $75,000
individually or $150,000 in the aggregate.
 
(b)  The Company has not received any written notice of or been charged with the
violation of any Laws, except where such violation would not result in
Liabilities or Losses in excess of $75,000 individually or $150,000 in the
aggregate.
 
(c)  The Company currently has all Permits which are required for the operation
of their respective businesses as presently conducted, other than those the
failure of which to possess would not result in Liabilities or Losses in excess
of $75,000 individually or $150,000 in the aggregate. The Company is not in
default or violation (and no event has occurred which, with notice or the lapse
of time or both, would constitute a default or violation) of any term, condition
or provision of any Permit to which it is a party, except where such default or
violation would not result in Liabilities or Losses in excess of $75,000
individually or $150,000 in the aggregate.
 
5.18  Environmental Matters. Except as set forth on Schedule 5.18 hereto:
 
(a)  the operations of the Company are in material compliance with all
applicable Environmental Laws, which compliance includes obtaining, maintaining
and complying in all material respects with any Permits required under all
applicable Environmental Laws necessary to operate its business (“Environmental
Permits”);
 
(b)  the Environmental Permits are valid and in full force and effect, and are
transferable;
 
(c)  the Company is not subject to any pending, or to the Actual Knowledge of
the Company, threatened claim alleging that the Company may be in violation of
any Environmental Law or any Environmental Permit or may have any Liability
under any Environmental Law;
 
(d)  there are no pending or, to the Actual Knowledge of the Company, threatened
investigations of the business of the Company, or any currently or previously
owned or, to the Actual Knowledge of the Company, leased property of the Company
under Environmental Laws, which would reasonably be expected to result in the
Company incurring any material liability pursuant to any Environmental Law;
 
(e)  No Hazardous Material has been Released by the Company, at, on or under the
Real Property as to which Remedial Action is required under any Environmental
Law within the past 3 years or, to the Actual Knowledge of the Company, at any
time prior thereto;
 
(f)  the Company has not received any notice of any private, administrative or
judicial action, or notice of any intended private, administrative or judicial
action relating to the presence or alleged presence of Hazardous Material in,
under, upon or emanating from any of the real property now or during the 3 years
prior to the Closing Date owned or leased by the Company; and
 
(g)  there are no environmental audits or investigation reports conducted within
the last 5 years in the possession of the Company relating to the Real Property
or any Company operations thereon which have not been previously provided to the
Purchaser.
 
5.19  Suppliers. Since the Balance Sheet Date, none of the 10 largest suppliers
of bedding products to the Company, as measured by the dollar amount of
purchases thereby during fiscal year 2005, has terminated its relationship with
the Company or materially reduced or changed the pricing or other terms of its
business with the Company and no such supplier has notified the Company in
writing that it intends to terminate or materially reduce or change the pricing
or other terms of its business with the Company.
 
5.20  Financial Advisors. No Person has acted, directly or indirectly, as a
broker, finder or financial advisor for Holdings or the Company in connection
with the transactions contemplated by this Agreement and no such Person is
entitled to any fee or commission or like payment from Purchaser in respect
thereof.
 
5.21  Insurance. Schedule 5.21 is a complete list of all insurance policies
currently in effect, or with respect to “occurrence” policies, that were in
effect during the 3 years prior to the date hereof, that relate to operation of
the business, or cover the Real Property. Schedule 5.21 summarizes the following
information for each such policy: the name of the insurer, the type of risks
insured, the deductible and limits of coverage and the annual premium. True and
complete copies of such policies have been made available to the Purchaser.
During the last three (3) years, no material insurance coverage of the Company
has lapsed. The Company is not in default or breach with respect to any
provision contained in any such insurance policies, nor has the Company failed
to give any notice or to present any claim thereunder in due and timely fashion.
 
5.22  Related Party Transactions. Schedule 5.22 is an accurate list of the
accounts and notes receivable of the Company from and advances to employees,
former employees, officers, directors, shareholders and any Affiliate of the
foregoing which have not been fully repaid (other than advances provided to
employees in connection with the performance of their duties in the Ordinary
Course of Business which do not exceed $5,000 in any one instance). Neither
Holdings nor any of its Affiliates has entered into any transaction with or is a
party to any agreement, lease or other instrument or arrangement, or as of the
Closing Date is indebted to or is owed money by the Company that is not
disclosed in the Financial Statements. Except as disclosed in the Financial
Statements, neither Simmons nor any of its Subsidiaries owns any direct or
indirect interest of any kind in, or controls or is a director, officer,
employee, shareholder or partner of, or consultant or lender to or borrower from
or has the right to participate in the profits of, any Person which is a
competitor, supplier, customer, landlord, tenant, creditor or debtor of the
Company.
 
5.23  No Other Representations or Warranties; Schedules. Except for the
representations and warranties contained in this Article V and Article VI (each
as modified by the Schedules thereto), neither Simmons, Holdings, the Company
nor any other Person makes any other express or implied representation or
warranty with respect the Company or the transactions contemplated by this
Agreement, and the Company disclaims any other representations or warranties,
whether made by the Company, Holdings, Simmons or any of their respective
Affiliates, officers, directors, employees, agents or representatives. Except
for the representations and warranties contained in Article V and Article
VI hereof (each as modified by the Schedules thereto as supplemented or
amended), the Company, Holdings and Simmons hereby disclaim all liability and
responsibility for any representation, warranty, projection, forecast,
statement, or information made, communicated, or furnished (orally or in
writing) to Purchaser or its Affiliates or representatives (including any
opinion, information, projection, or advice that may have been or may be
provided to Purchaser by any director, officer, employee, agent, consultant, or
representative of the Company or any of their respective Affiliates). The
Company, Holdings and Simmons make no representations or warranties to Purchaser
regarding the probable success or profitability of the Company.
 
ARTICLE VI  
 

 
REPRESENTATIONS AND WARRANTIES OF HOLDINGS AND SIMMONS
 
Holdings and Simmons hereby represent and warrant to Purchaser that:
 
6.1  Organization and Good Standing. Each of Holdings and Simmons is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and each has all requisite corporate power and
authority to own, lease and operate its respective properties and to carry on
its respective business.
 
6.2  Authorization of Agreement. Each of Holdings and Simmons has all requisite
corporate power, authority and legal capacity to execute and deliver this
Agreement and each other agreement, document, or instrument or certificate
contemplated by this Agreement or to be executed by Holdings and Simmons in
connection with the consummation of the transactions contemplated by this
Agreement (together with this Agreement, the “Simmons Documents”), and to
consummate the transactions contemplated hereby and thereby. The execution and
delivery of this Agreement and each of the Simmons Documents and the
consummation of the transactions contemplated hereby and thereby have been duly
authorized by all required corporate action on the part of Holdings and Simmons.
This Agreement has been, and each of the Simmons Documents will be at or prior
to the Closing, duly and validly executed and delivered by Holdings and Simmons,
and (assuming the due authorization, execution and delivery by the other parties
hereto and thereto) this Agreement constitutes, and each Simmons Document, when
so executed and delivered will constitute, the legal, valid and binding
obligation of Holdings and Simmons, enforceable against Holdings and Simmons in
accordance with its terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws affecting creditors’ rights and
remedies generally, and subject, as to enforceability, to general principles of
equity, including principles of commercial reasonableness, good faith and fair
dealing (regardless of whether enforcement is sought in a proceeding at law or
in equity).
 
6.3  Conflicts; Consents of Third Parties. Except as set forth on Schedule 6.3:
 
(a)  None of the execution and delivery by Holdings and Simmons of this
Agreement or the Simmons Documents, the consummation of the transactions
contemplated hereby or thereby, or compliance by Holdings and Simmons with any
of the provisions hereof or thereof will conflict with, or result in any
violation of or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination or cancellation under, any
provision of (i) the respective certificates of incorporation and by-laws (or
other organizational and governing documents) of Holdings and Simmons; (ii) any
Contract, or Permit to which Holdings or Simmons is a party or by which any of
the properties or assets of Holdings or Simmons are bound; (iii) any Order of
any Governmental Body applicable to Holdings or Simmons or by which any of the
respective properties or assets of Holdings or Simmons are bound; or (iv) any
applicable Law.
 
(b)  No consent, waiver, approval, Order, Permit or authorization of, or
declaration or filing with, or notification to, any Person or Governmental Body
is required on the part of Holdings or Simmons in connection with the execution
and delivery of this Agreement or the Simmons Documents, or the compliance by
Holdings and Simmons with any of the provisions hereof or thereof, the
consummation of the transactions contemplated hereby, except for (A) compliance
with the applicable requirements of the HSR Act and (B) for such other consents,
waivers, approvals, Orders, permits or authorizations the failure of which to
obtain would not have a material adverse effect on Holdings’ or Simmons’ ability
to consummate the transactions contemplated hereby.
 
6.4  Ownership and Transfer of Units. Holdings is the record and beneficial
owner of the Shares, and as of the Closing Date will be the owner of the Units,
free and clear of any and all Liens. Holdings has the corporate power and
authority to sell, transfer, assign and deliver such Units as provided in this
Agreement, and such delivery will convey to Purchaser good and marketable title
to such Units, free and clear of any and all Liens.
 
6.5  Litigation. There are no Legal Proceedings pending or, to the Actual
Knowledge of Holdings and Simmons threatened that are reasonably likely to
prohibit or restrain the ability of Holdings or Simmons to enter into this
Agreement or consummate the transactions contemplated hereby.
 
6.6  Financial Advisors. No Person has acted, directly or indirectly, as a
broker, finder or financial advisor for Holdings or Simmons in connection with
the transactions contemplated by this Agreement and no Person is entitled to any
fee or commission or like payment in respect thereof.
 
ARTICLE VII  
 

 
REPRESENTATIONS AND WARRANTIES OF PURCHASER
 
Purchaser hereby represents and warrants to Holdings and Simmons that:
 
7.1  Organization and Good Standing. Purchaser is a limited liability company
duly formed, validly existing and in good standing under the laws of the State
of California and has all requisite limited liability power and authority to
own, lease and operate properties and carry on its business.
 
7.2  Authorization of Agreement. Purchaser has full limited liability company
power and authority to execute and deliver this Agreement and each other
agreement, document, instrument or certificate contemplated by this Agreement or
to be executed by Purchaser in connection with the consummation of the
transactions contemplated hereby and thereby (the “Purchaser Documents”), and to
consummate the transactions contemplated hereby and thereby. The execution,
delivery and performance by Purchaser of this Agreement and each Purchaser
Document have been duly authorized by all necessary limited liability company,
action on behalf of Purchaser. This Agreement has been, and each Purchaser
Document will be at or prior to the Closing, duly executed and delivered by
Purchaser and (assuming the due authorization, execution and delivery by the
other parties hereto and thereto) this Agreement constitutes, and each Purchaser
Document when so executed and delivered will constitute, the legal, valid and
binding obligation of Purchaser, enforceable against Purchaser in accordance
with its terms, subject to applicable bankruptcy, insolvency, reorganization,
moratorium and similar laws affecting creditors’ rights and remedies generally,
and subject, as to enforceability, to general principles of equity, including
principles of commercial reasonableness, good faith and fair dealing (regardless
of whether enforcement is sought in a proceeding at law or in equity).
 
7.3  Conflicts; Consents of Third Parties.
 
(a)  Except as set forth on Schedule 7.3(a) hereto, none of the execution and
delivery by Purchaser of this Agreement or the Purchaser Documents, the
consummation of the transactions contemplated hereby or thereby, or the
compliance by Purchaser with any of the provisions hereof or thereof will
conflict with, or result in any violation of or default (with or without notice
or lapse of time, or both) under, or give rise to a right of termination or
cancellation under, any provision of (i) the organizational or governing
documents of Purchaser; (ii) any Contract or Permit to which Purchaser is a
party or by which Purchaser or its properties or assets are bound; (iii) any
Order of any Governmental Body applicable to Purchaser or by which any of the
properties or assets of Purchaser are bound; or (iv) any applicable Law.
 
(b)  No consent, waiver, approval, Order, Permit or authorization of, or
declaration or filing with, or notification to, any Person or Governmental Body
is required on the part of Purchaser in connection with the execution and
delivery of this Agreement or the Purchaser Documents, the compliance by
Purchaser with any of the provisions hereof or thereof, the consummation of the
transactions contemplated hereby or the taking by Purchaser of any other action
contemplated hereby, except for compliance with the applicable requirements of
the HSR Act.
 
7.4  Litigation. There are no Legal Proceedings pending or, to the actual
knowledge of Purchaser (without any docket or other electronic search having
been conducted), threatened that are reasonably likely to prohibit or restrain
the ability of Purchaser to enter into this Agreement or consummate the
transactions contemplated hereby.
 
7.5  Investment Intention. Purchaser is acquiring the Units for its own account,
for investment purposes only and not with a view to the distribution (as such
term is used in Section 2(11) of the Securities Act of 1933, as amended (the
“Securities Act”) thereof. Purchaser understands that the Units have not been
registered under the Securities Act and cannot be sold unless subsequently
registered under the Securities Act or an exemption from such registration is
available.
 
7.6  Financial Advisors. No Person has acted, directly or indirectly, as a
broker, finder or financial advisor for Purchaser in connection with the
transactions contemplated by this Agreement and no Person is entitled to any fee
or commission or like payment in respect thereof.
 
7.7  Financing. Schedule 7.7 sets forth complete and correct copies of a
commitment letter from Wells Fargo (the “Financing Commitment”) for the debt
financing to be used in connection with the transactions contemplated hereby
(the “Financing”). The amount of the Financing, if obtained, together with
financing to be provided by Purchaser and its Affiliates, will provide
sufficient funds for Purchaser to consummate the transactions contemplated by
this Agreement.
 
7.8  Condition of the Business. Notwithstanding anything contained in this
Agreement to the contrary, Purchaser acknowledges and agrees that neither the
Company, Holdings nor Simmons is making any representations or warranties
whatsoever, express or implied, beyond those expressly given by the Company,
Holdings and Simmons, as the case may be, in Article V and Article VI,
respectively (as modified by the Schedules hereto as supplemented or amended).
Any claims Purchaser may have for breach of representation or warranty shall be
based solely on the representations and warranties of the Company, Holdings or
Simmons set forth in Article V or Article VI, respectively (as modified by the
Schedules hereto as supplemented or amended). Purchaser further represents that
none of the Company, Holdings, Simmons or any of their respective Affiliates nor
any other Person has made any representation or warranty, express or implied, as
to the accuracy or completeness of any information regarding the Company,
Holdings, Simmons or the transactions contemplated by this Agreement not
expressly set forth in this Agreement, and none of the Company, Holdings,
Simmons any of their respective Affiliates or any other Person will have or be
subject to any liability to Purchaser or any other Person resulting from the
distribution to Purchaser, its Affiliates or their representatives or
Purchaser’s or its Affiliates use of, any such information, or other
publications or data room information provided to Purchaser, its Affiliates or
their representatives, or any other document or information in any form provided
to Purchaser, its Affiliates or their representatives in connection with the
sale of the Company and the transactions contemplated hereby. Purchaser
acknowledges that it has conducted to its satisfaction, its own independent
investigation of the condition, operations and business of the Company.
 
ARTICLE VIII  
 

 
COVENANTS
 
8.1  Access to Information. Prior to the Closing, Purchaser shall be entitled,
through its officers, employees and representatives (including its legal
advisors and accountants), to make such investigation of the properties,
businesses and operations of the Company, including an audit of the Company’s
inventory, and such examination of the books and records of the Company as it
reasonably requests and to make extracts and copies of such books and records.
Any such investigation and examination shall be conducted during regular
business hours upon reasonable advance notice and under reasonable circumstances
and shall be subject to restrictions under applicable Law. The Company shall
cause the officers, employees, consultants, agents, accountants, attorneys and
other representatives of the Company to cooperate with Purchaser and its
representatives in connection with such investigation and examination, and
Purchaser and its representatives shall cooperate with the Company and its
representatives and shall use their reasonable efforts to minimize any
disruption to the business.
 
8.2  Conduct of the Business Pending the Closing.
 
(a)  Prior to the Closing, except (I) as set forth on Schedule 8.2, (II) as
required by applicable Law, (III) as otherwise contemplated by this Agreement or
(IV) with the prior written consent of Purchaser, the Company shall:
 
(i)  conduct the business of the Company only in the Ordinary Course of Business
and not introduce any new method, or discontinue any existing method, of
operation or accounting;
 
(ii)  use its commercially reasonable efforts to (A) preserve the present
business operations, organization and goodwill of the Company, and (B) preserve
the present relationships with suppliers of the Company;
 
(iii)  maintain its properties and facilities, including those held under the
Real Property Leases, in as good working order and condition as at present,
ordinary wear and tear excepted;
 
(iv)  file on a timely basis (or properly file for extensions) all notices,
reports or other filings required to be filed with or reported to any
Governmental Body with respect to the continuing operations of the Company; and
 
(v)  perform in all material respects in the Ordinary Course of Business, its
obligations under all Material Contracts and comply with the terms and
conditions of all licenses and Permits and all applicable Laws.
 
(b)  Except (I) as set forth on Schedule 8.2, (II) as required by applicable
Law, (III) as otherwise contemplated by this Agreement (including the
Conversion) or (IV) with the prior written consent of Purchaser (which consent
shall not be unreasonably withheld, delayed or conditioned), the Company shall
not:
 
(i)  declare, set aside, make or pay any dividend or other distribution (other
than the distribution of Excess Cash to Holdings as contemplated herein or the
payment of inter-company Liabilities) in respect of the capital stock of the
Company or repurchase, redeem or otherwise acquire any outstanding securities
of, or other ownership interests in, the Company;
 
(ii)  transfer, issue, sell or dispose of any shares of capital stock or other
securities of the Company or grant options, warrants, calls or other rights to
purchase or otherwise acquire shares of the capital stock or other securities of
the Company;
 
(iii)  effect any recapitalization, reclassification or like change in the
capitalization of the Company;
 
(iv)  amend the certificate of incorporation or by-laws of the Company;
 
(v)  other than as required by Law or any written Contract or Company Plan (as
disclosed in Schedule 5.14(a)) (A)  increase the annual level of compensation of
any director, officer, employee, consultant or agent of the Company other than
in the Ordinary Course of Business, (B) grant any unusual or extraordinary
bonus, benefit or other direct or indirect compensation to any director,
officer, employee, consultant or agent, (C) materially increase the coverage or
benefits available under any (or create any new) Company Plan or (D) enter into
any employment, deferred compensation, severance, consulting, non-competition or
similar agreement (or amend any such agreement) to which the Company is a party
or involving a director or executive officer of the Company;
 
(vi)  subject to any Lien, any of the properties or assets (whether tangible or
intangible) of the Company, except for Permitted Exceptions;
 
(vii)  acquire any properties, rights or assets or sell, assign, license,
transfer, convey, lease or otherwise dispose of any of the properties, rights or
assets of the Company (except as contemplated by (i) above or pursuant to an
existing Contract for fair consideration in the Ordinary Course of Business or
for the purpose of disposing of obsolete or worthless assets) to any Person,
including Simmons, Holdings or any Affiliate thereof;
 
(viii)  modify, amend, terminate any of the existing Real Property Leases or
enter into any construction contracts with respect to improvements or
alterations with respect to any of the Real Property Leases for an amount in
excess of $75,000;
 
(ix)  cancel or compromise any material debt or claim or waive or release any
right of the Company;
 
(x)  enter into, modify or terminate any labor or collective bargaining
agreement of the Company;
 
(xi)  permit the Company to enter into or agree to enter into any merger or
consolidation with any Person;
 
(xii)  make or rescind any material election relating to Taxes, or settle or
compromise any material claim, action, suit, litigation, proceeding,
arbitration, investigation, audit or controversy relating to Taxes;
 
(xiii)  issue, create, incur, assume, guarantee, endorse or otherwise become
liable or responsible with respect to (whether directly, contingently or
otherwise) any indebtedness for borrowed money (in excess of such amount set
forth on the Balance Sheet);
 
(xiv)  enter into any transaction or Contract relating primarily to the Company
involving obligations or payments in excess of $75,000 in any year; or
 
(xv)  agree to do anything prohibited by this Section 8.2.
 
8.3  Consents. The Purchaser and the Company shall use their commercially
reasonable efforts, and Simmons and Holdings shall cooperate with Purchaser and
the Company, to obtain at the earliest practicable date all consents and
approvals required to consummate the transactions contemplated by this
Agreement, including, without limitation, the consents and approvals referred to
in Sections 5.3(b) and 7.3(b) hereof (and Simmons shall use its commercially
reasonable efforts to obtain at the earliest practicable date all consents under
Section 6.3(b)); provided, however, that no party shall be obligated to pay any
consideration to any third party from whom consent or approval is requested
except for any payment which is required to be made under the terms of any
Contract. In addition, the Company will request from, and use good faith efforts
to obtain, an estoppel certificate (“Estoppel Certificates”) from the landlords
under all Real Estate Leases to which the Company is a party in the form
attached hereto as Exhibit B.
 
8.4  Regulatory Approvals. Each of Purchaser, the Company and Holdings (if
necessary) shall (a) make or cause to be made all filings required of each of
them or any of their respective Affiliates under the HSR Act or the Sherman Act,
as amended, the Clayton Act, as amended, the Federal Trade Commission Act, as
amended, and any other United States federal or state or foreign statutes,
rules, regulations, orders, decrees, administrative or judicial doctrines or
other laws that are designed to prohibit, restrict or regulate actions having
the purpose or effect of monopolization or restraint of trade (collectively, the
“Antitrust Laws”) with respect to the transactions contemplated hereby as
promptly as practicable and, in any event, within one (1) Business Day after the
date of this Agreement in the case of all filings required under the HSR Act
(and such filing shall request early termination of the waiting period under the
HSR Act), (b) comply at the earliest practicable date with any request under the
HSR Act or other Antitrust Laws for additional information, documents, or other
materials received by each of them or any of their respective subsidiaries or
Affiliates from the FTC, the Antitrust Division or any other Governmental Body
in respect of such filings or such transactions, and (c) cooperate with each
other in connection with any such filing (including, to the extent permitted by
applicable law, providing copies of all such documents to the non-filing parties
prior to filing and considering all reasonable additions, deletions or changes
suggested in connection therewith) and in connection with resolving any
investigation or other inquiry of any of the FTC, the Antitrust Division or
other Governmental Body under any Antitrust Laws with respect to any such filing
or any such transaction. Each such party shall use its reasonable best efforts
to furnish to each other all information required for any application or other
filing to be made pursuant to any applicable law in connection with the
transactions contemplated by this Agreement. Each such party shall promptly
inform the other parties hereto of any oral communication with, and provide
copies of written communications with, any Governmental Body regarding any such
filings or any such transaction. No party hereto shall independently participate
in any formal meeting with any Governmental Body in respect of any such filings,
investigation, or other inquiry without giving the other parties hereto prior
notice of the meeting and, to the extent permitted by such Governmental Body,
the opportunity to attend and/or participate. Subject to applicable Law, the
parties hereto will consult and cooperate with one another in connection with
any analyses, appearances, presentations, memoranda, briefs, arguments, opinions
and proposals made or submitted by or on behalf of any party hereto relating to
proceedings under the HSR Act or other Antitrust Laws. Any party may, as it
deems advisable and necessary, reasonably designate any competitively sensitive
material provided to the other parties under this Section 8.4 as “outside
counsel only.” Such materials and the information contained therein shall be
given only to the outside legal counsel of the recipient and will not be
disclosed by such outside counsel to employees, officers, or directors of the
recipient, unless express written permission is obtained in advance from the
source of the materials.
 
8.5  Further Assurances. Subject to, and not in limitation of, Section 8.4, each
of Purchaser, Simmons and the Company shall use its commercially reasonable
efforts to (i) take all actions necessary or appropriate to consummate the
transactions contemplated by this Agreement and (ii) cause the fulfillment at
the earliest practicable date of all of the conditions to their respective
obligations to consummate the transactions contemplated by this Agreement.
 
8.6  Confidentiality. Purchaser acknowledges that the information provided to it
in connection with this Agreement and the transactions contemplated hereby is
subject to the terms of the confidentiality agreement between Sleep Train, Inc.
and the Company dated June 7, 2006 (the “Confidentiality Agreement”), the terms
of which are incorporated herein by reference.
 
8.7  Preservation of Records. Holdings, Simmons and Purchaser agree that each of
them shall preserve and keep the records held by them or their Affiliates
relating to the business of the Company for a period of 7 years from the Closing
Date and shall make such records and personnel available to the other as may be
reasonably required by such party in connection with, among other things, any
insurance claims by, Legal Proceedings or Tax audits against or governmental
investigations of Simmons, Holdings or Purchaser or any of their Affiliates or
in order to enable Holdings, Simmons or Purchaser to comply with their
respective obligations under this Agreement and each other agreement, document
or instrument contemplated hereby or thereby. In the event Holdings, Simmons or
Purchaser wishes the other party to continue to maintain such records after that
time, such party shall first give 90 days prior written notice to the other and
such party shall have the right at its option and expense, upon prior written
notice given to such other party within that 90 day period, to take possession
of the records within 180 days after the date of such notice.
 
8.8  Publicity.
 
(a)  None of Holdings, Simmons, the Company, Purchaser or their Affiliates shall
issue any press release or public announcement concerning this Agreement or the
transactions contemplated hereby without obtaining the prior written approval of
the other party hereto, which approval will not be unreasonably withheld or
delayed, unless, in the sole judgment of Holdings, Simmons, the Company or
Purchaser, as applicable, disclosure is otherwise required by applicable Law or
by the applicable rules of any stock exchange on which Holdings, Simmons, the
Company or Purchaser lists securities, provided that, to the extent required by
applicable Law, the party intending to make such release shall use its
commercially reasonable efforts consistent with such applicable Law to consult
with the other party with respect to the timing and content thereof.
 
(b)  Each of Purchaser, the Company, Simmons, and Holdings acknowledge and agree
that Simmons shall have the right to file this Agreement (without schedules and
exhibits) with the Securities and Exchange Commission, making the Agreement
publicly available, and each party hereto further shall have the right to make
such other public disclosures to the extent required by Law.
 
8.9  Employee Benefits.
 
(a)  Purchaser intends to continue in effect the Company Plans on and after the
Closing Date through the respective insurance coverage periods thereof (or, if
terminated early, replace any such Company Plan with a reasonably comparable
plan) on behalf of each employee of the Company who continues in the employment
of the Company or its Affiliates (a “Continuing Employee”). Purchaser hereby
agrees to cause the Company to make a payment at the end of the Company’s fiscal
year to the Company’s 401(k) Profit Sharing Plan in an amount at least equal to
the amount accrued by the Company as of the Closing Date and included in the
Actual Closing Date Working Capital.
 
(b)  If Company Plans are replaced as set forth above, then for purposes of
eligibility and vesting (but not benefit accrual) under the employee benefit
plans of Purchaser or its Affiliates providing benefits to Continuing Employees
(the “Purchaser Plans”), Purchaser shall credit each Continuing Employee with
his or her years of service with the Company and any predecessor entities, to
the same extent as such Continuing Employee was entitled immediately prior to
the Closing to credit for such service under any similar Company Plan. To the
extent not prohibited by the Purchaser Plans, Purchaser shall not deny
Continuing Employees coverage on the basis of pre-existing conditions (to the
extent provided under an applicable Company Plan) and shall credit such
Continuing Employees for any deductibles and out-of-pocket expenses paid in the
year of initial participation in the Purchaser Plans.
 
8.10  Supplementation and Amendment of Schedules. From time to time prior to the
Closing, the Company shall have the right to supplement or amend the Schedules
with respect to any matter hereafter arising or discovered after the delivery of
the Schedules pursuant to this Agreement (the “Supplemental Material”). No
Supplemental Material shall have any effect on the satisfaction of the condition
to closing set forth in Section 9.1(a). If the Supplemental Material discloses
facts that would constitute (in the absence of any amendment to the Schedules
for such Supplemental Material) a breach of the Company, Holdings or Simmons’
representations and warranties hereunder and such breach would have a Material
Adverse Effect, the Company shall have 15 days to cure any such breach, and if
not cured within such 15-day period, the Purchaser may terminate this Agreement
by delivering a termination notice to the Company within 10 days after
expiration of the 15-day cure period. The termination notice must specify the
representation or warranty breached, identify the specific facts in the
Supplemental Material that constitute the breach, and describe why the breach
would have a Material Adverse Effect. If the Agreement shall not have been
terminated during such 10-day period, the Purchaser shall have waived the right
to terminate the Agreement based on such Supplemental Material.
 
8.11  Non-Competition by Holdings, Simmons and their Subsidiaries. In
consideration of the benefits of this Agreement to Holdings and Simmons and in
order to induce Purchaser to enter into this Agreement, Holdings and Simmons
hereby covenant and agree as follows:
 
(a)  from and after the Closing and until the earlier to occur of (1) the fourth
anniversary of the Closing Date and (2) the date upon which a Simmons Sale (as
defined below) occurs, Holdings, Simmons and their Subsidiaries shall not,
directly or indirectly, as a partner, stockholder, proprietor, joint venturer,
or investor, and whether for the benefit of Holdings, Simmons, any of their
Subsidiaries, or any other Person: engage in, or own, manage, operate or
control, any business or entity which engages anywhere in the States of
Washington and Oregon (the “Territory”) in the business of the retail sale of
mattresses and bedding products; provided, however, that nothing herein shall
prohibit Holdings, Simmons or their Subsidiaries from (i) selling mattresses to
other dealers, provided that the terms of any such sales shall not breach the
Dealer Incentive Agreement; or (ii) owning, in the aggregate, not more than two
percent (2%) of any class of securities of a publicly traded entity in any of
the foregoing lines of business so long as neither Holdings, Simmons nor any of
their Subsidiaries participates in any way in the management, operation or
control of such entity; or (iii) operating discount outlet stores solely for the
sale of (A) Simmons’ salvage, discontinued, returned or excess products or floor
samples, (B) products of licensees of Simmons or its Affiliates, and (iii)
inventory from dealers which Simmons agrees to sell on such dealers’ behalf in
order to create space at a dealer’s location for Simmons’ products; provided
that such outlet stores will be limited to those in operation as of the Closing
Date plus one additional outlet store in each of the States of Oregon and
Washington (y) of comparable floor space as any pre-existing outlet store and
(x) in a comparable location as Simmons’ existing outlet stores; or (iv)
entering into a retail business dedicated exclusively to Luxury Products (as
defined below) distributed by Windsor Bedding Co., LLC, a Subsidiary of Simmons,
or a successor company or Affiliates; or (v) selling products directly to
consumers via the internet or permitting dealers to sell products directly to
consumers via the internet; or (vi) ownership in a dealer or retail store
pursuant to the foreclosure of any pledge of interests in such dealer or retail
store to secure any obligations owed to Simmons or any of its Subsidiaries;
provided that, Simmons shall use commercially reasonable efforts to divest
itself of any such dealer, stores or assets and shall provide Purchaser a right
of first refusal to purchase such interests.
 
As used herein, “Luxury Products” means mattresses and bedding-related products
where the mattresses are offered or sold at price points higher than the
top-of-the-line products offered by the Company or Simmons’ then current top 10
dealers (by volume) (i.e. it being understood that “Luxury Products” excludes
any product or line of products being sold by the Company as of the Closing
Date).

As used herein, “Simmons Sale” means solely: (1) a sale of all, or substantially
all, of the assets of Simmons and its Subsidiaries, taken as a whole, to an
independent third party, or (2) the acquisition by a person or group of related
persons (other than the existing stockholders of Simmons) of more than 50% of
the voting securities of Simmons, in each case in which the acquirer shall have
been, at the time of such acquisition and throughout the 6-month period prior
thereto, already engaged in the retail sale of mattresses or bedding products in
the States of Oregon and Washington.

(b)  Holdings and Simmons acknowledge that, given the nature of the business of
Purchaser and the Company, the covenants contained in this Section 8.11 contain
reasonable limitations as to time, geographical area and scope of activity to be
restrained, and do not impose a greater restraint than is necessary to protect
and preserve for the benefit of Purchaser the goodwill of the Company and to
protect the legitimate business interests of Purchaser. If, however, this
Section 8.11 is determined by any court of competent jurisdiction to be
unenforceable by reason of its extending for too long a period of time or over
too large a geographic area or by reason of its being too extensive in any other
respect or for any other reason it will be interpreted to extend only over the
longest period of time for which it may be enforceable and/or over the largest
geographical area as to which it may be enforceable and/or to the maximum extent
in all other aspects as to which it may be enforceable, all as determined by
such court and in such action. Holdings and Simmons agree that Purchaser’s
remedies at law for any breach or threat of breach by Holdings or Simmons of the
provisions of this Section 8.11 may be inadequate, and that Purchaser shall be
entitled to seek an injunction or injunctions, without the necessity for the
posting of a bond or other collateral security, to prevent breaches of the
provisions of this Section 8.11 and to seek enforcement specifically the terms
and provisions hereof.
 
8.12  Insurance.
 
(a)  Coverage of the Company under all insurance policies maintained by Simmons
shall cease for post-Closing incidents, acts, events or occurrences. From and
after the Closing, Purchaser will be responsible for obtaining and maintaining
all insurance coverages for the Company for post-closing incidents in their own
right. All current policies maintained by Simmons under which the Company has
coverage, which policies are identified as “Shared Policies” on Schedule 5.21
hereto (the “Shared Policies”) will be retained by Simmons, together with all
rights, benefits and privileges thereunder (including the right to receive any
and all return premiums with respect thereto). From and after the Closing, the
Company will have the right to assert claims for any loss, liability or damage
with respect to the Company (i) under Shared Policies with third party insurers
that are “occurrence basis” insurance policies (“Occurrence Basis Policies”)
arising out of insured incidents occurring from the date coverage thereunder
first commenced until the Closing; (ii) under Shared Policies with third party
insurers that are insurance policies written on a “claims made” basis (“Claims
Made Policies”) arising out of insured incidents occurring from the date
coverage thereunder first commenced until the Closing; and (iii) Simmons will
keep the Company, its officers, directors and employees as named insureds under
Claims Made Policies (Director’s and Officers, Employment Practices and
Fiduciary Liability) for claims arising out of insured incidents occurring from
the date of coverage thereunder first commenced until the Closing and for a
discovery period of five (5) years post-Closing, or comparable policies with the
same or substantially similar terms and conditions. Notwithstanding the
foregoing, it is understood and agreed that the retention by the Company of the
benefit of Occurrence Basis Policies or Claims Made Policies shall, to the
extent such coverage also exists with respect to Simmons or any of its current
or former Affiliates (other than the Company), be without prejudice to the
rights of Simmons or such other current or former Affiliates (other than the
Company) to continue to retain the benefit of such policies at and after the
Closing Date as such policies were in effect on the date prior to the Closing
Date. Simmons’ and Holdings’ obligation to use reasonable best efforts to assist
the Company and Purchaser in asserting claims under applicable Shared Policies
will include using commercially reasonable efforts in assisting the Company and
Purchaser to establish their right to coverage under such Shared Policies.
 
(b)  Purchaser, the Company and Simmons agree that any claims made under the
insurance policies referred to herein in respect of the Company and as to which
coverage remains available after Closing shall be administered and collected by
Simmons (or by a claims handler appointed by Simmons) on behalf of Purchaser and
the Company. Purchaser and the Company shall cooperate fully with Simmons to
enable Simmons to comply with the requirements of the relevant insurer, and
Purchaser and the Company shall provide such information and assistance as
Simmons may reasonably request in connection with any such claim. Any monies
received by Simmons as a result of such claims shall be paid over to the Company
or Purchaser, net (to the extent such monies are not being paid over to
Purchaser pursuant to Simmons’ indemnity obligations under Article X) of all
reasonable costs and expenses of recovery (including, without limitation, all
reasonable handling and collection charges by any claims handler appointed by
Simmons).
 
8.13  Tax Matters.
 
(a)  Simmons shall prepare or cause to be prepared and either the Company or
Simmons, as appropriate, shall file all Tax Returns with respect to the Company
for all taxable periods ending on or prior to the Closing Date (“Pre-Closing
Periods”). Except as required by Law, without the prior written consent of
Simmons (which consent shall not be unreasonably withheld), neither the Company,
Purchaser nor any Affiliate of the Company or Purchaser shall file any amended
Tax Return with respect to any Pre-Closing Period. To the extent permitted by
applicable Law, the Company shall not carry back any Tax attribute to any such
period. For the avoidance of doubt, (i) all management bonuses, severance
payments, interest payments and deductible financing costs and expenses accrued
or paid by the Company on or prior to the Closing Date shall be treated as
incurred in a Pre-Closing Period or the pre-Closing portion of a Straddle
Period, and (ii) all transactions outside of the ordinary course of business
occurring after the Closing shall not be treated as occurring in a Pre-Closing
Period or the pre-Closing portion of a Straddle Period. Purchaser shall prepare
or cause to be prepared and file all Tax Returns with respect to the Company for
all taxable periods that begin before and end after the Closing Date (“Straddle
Periods”); provided that all such Tax Returns shall be prepared in manner that
is consistent with the prior practice of the Company. Purchaser shall deliver to
Simmons copies of each such Tax Return relating to Straddle Periods, along with
a statement (a “Tax Statement”) showing the pre-Closing portion of any Tax
Liability required to be paid with such Tax Return (computed in accordance with
Section 8.13(b)), at least 20 days prior to the due date for filing such Tax
Return, and shall permit Simmons to review and comment on such Tax Return and
Tax Statement prior to filing. Purchaser shall not file any such Tax Return
relating to Straddle Periods without the prior written consent of Simmons (which
shall not be unreasonably withheld or delayed). If the parties have not resolved
any dispute relating to any such Tax Return prior to the due date for filing
such Tax Return, then Purchaser shall file such Tax Return as prepared, but such
filing shall not prejudice the rights of any party to pursue such dispute. If
the parties cannot resolve the dispute then any disputed matter shall be
submitted to the Arbiter for resolution, which resolution shall be binding on
the parties.
 
(b)  Simmons shall pay or cause to be paid all Taxes of the Company that are
allocable to Pre-Closing Periods and the pre-Closing portion of Straddle
Periods. With respect to a Straddle Period, the parties hereto will, to the
extent permitted by applicable Law, elect with the relevant Taxing Authorities
to treat for all purposes the Closing Date as the last day of a taxable period
of the Company, and such period shall be treated as a Pre-Closing Period for
purposes of this Agreement. In any case where applicable Law does not permit the
Company to treat the Closing Date as of the last day of a taxable period, then
for purposes of this Agreement, the portion of such Taxes that is attributable
to the pre-Closing portion of a Straddle Period shall be (i) in the case of
Taxes that are not based on income or gross receipts, the total amount of such
Taxes for the period in question multiplied by a fraction, the numerator of
which is the number of days in the period up to the Closing Date, and the
denominator of which is the total number of days in the entire period in
question, and (ii) in the case of Taxes that are based on income or gross
receipts, the Taxes that would be due with respect to the period up to the
Closing Date, if such period were a taxable period.
 
(c)  Purchaser shall indemnify Simmons and Holdings for any Extra Taxes incurred
by Simmons or Holdings. The term “Extra Taxes” shall mean the excess (on a fully
grossed-up after-Tax basis), if any, of (A) any Taxes actually paid by Simmons
or Holdings on the sale of all of the units of the Company pursuant to a
transaction whereby the Company prior to the Closing effects a Conversion over
(B) the actual amount of Taxes that would have been paid by Simmons or Holdings
on the sale of all of the capital stock of the Company pursuant to a transaction
in which the Company, in lieu of a Conversion, remained a corporation and an
election under Section 338(h)(10) of the Code was made by the parties. If
between the date of this Agreement and the Conversion (which shall occur one
Business Day prior to the Closing Date) any of the parties (or any of their
respective advisers) determines that Extra Taxes actually may be incurred by
virtue of the Conversion, such party shall notify the other party promptly and
the Purchaser may require a 338(h)(10) election be taken in lieu of a
Conversion, in which event the Agreement will be revised accordingly. Simmons
and Holdings shall take any reasonable action requested in writing by Purchaser,
including taking a position on a Tax Return, to minimize the amount of Extra
Taxes; provided that any such action that would have an adverse effect on either
Simmons or Holdings in the reasonable good faith judgment of Simmons or Holdings
shall be deemed not to constitute a reasonable action for purposes of this
sentence. Purchaser shall have the right to review and comment on any Tax Return
of Simmons or Holdings that reflects any Extra Taxes, and Simmons shall give
good faith consideration to any such comments offered by Purchaser.
 
(d)  Notwithstanding any other provisions hereof, if an audit or other
proceeding is commenced, an adjustment is proposed, or any other claim is made
by any Taxing Authority with respect to the Company (a “Tax Claim”) for a
Pre-Closing Period or a Straddle Period, Purchaser shall (to the extent that it
has been contacted by the Taxing Authority) promptly notify Simmons of such
audit or other proceeding, proposed adjustment or claim. Simmons shall have the
right to handle, defend, conduct and control any Tax Claim relating to a
Pre-Closing Period. Simmons shall also have the right to compromise or settle
any such Tax Claim for Pre-Closing Periods that it has the authority to control
pursuant to the preceding sentence, provided any such settlement involving
conduct or other equitable remedies shall be subject to Purchaser’s prior
written approval; and provided further that, with respect to any Tax Claim
involving Extra Taxes, (i) Simmons shall keep Purchaser reasonably informed and
consult seriously and in good faith with Purchaser and its tax advisors with
respect to any issue relating to such Extra Taxes, (ii) Simmons shall provide
Purchaser with copies of all correspondence, notices and other written materials
received from any Taxing Authorities and shall otherwise keep Purchaser and its
tax advisors advised of significant developments in the Tax Claim with respect
to such Extra Taxes and of significant communications involving representatives
of the Taxing Authorities, and (iii) Simmons shall provide Purchaser with a copy
of any written submission to be sent to a Taxing Authority relating to Extra
Taxes prior to the submission thereof and shall give serious and good faith
consideration to any comments or suggested revisions that Purchaser or its tax
advisors may have with respect thereto. In the event Simmons settles or
compromises any Tax Claim relating to a Pre-Closing Period which requires
Purchaser to pay Extra Taxes without Purchaser’s consent (not to be unreasonably
withheld), and Purchaser in good faith objects to the terms of such settlement
or compromise with respect to the Extra Taxes, then Purchaser shall have the
right to submit the matter to the Arbiter. The Arbiter shall determine within 30
days of the submission of the matter to it (which such determination shall be
final and binding upon the parties) whether the settlement or compromise by
Simmons with respect to Extra Taxes was reasonable with respect to the Extra
Taxes that are as a result due. If the Arbiter determines that such settlement
or compromise was not reasonable with respect to the Extra Taxes that are as a
result due, then Purchaser shall have no obligation to pay the Extra Taxes.
Where a Tax Claim relates to a Straddle Period, both Simmons and Purchaser shall
equally represent the Company, and shall jointly consent to any compromise or
settlement, which consents shall not be unreasonably withheld. To the extent
that Simmons requires a power of attorney to represent the Company before a
Taxing Authority, Purchaser, the Company or any of their Affiliates (as
appropriate), promptly upon written request by Simmons, shall execute such
powers or specific authorizations of representative capacity, including
acknowledgment on such power or authorization of Simmons’s settlement authority
described in this Section 8.13(d). In the event of a conflict between the
provisions of this Section 8.13(d), on the one hand, and the provisions of
Section 10.4, on the other, the provisions of this Section 8.13(d) shall
control.
 
(e)  Any refunds (and any interest received thereon) of any Tax with respect to
the Company attributable to a taxable period beginning after the Closing Date or
the post-Closing portion of a Straddle Period shall belong to the Company. Any
refunds (and any interest received thereon) of any Tax with respect to the
Company attributable to a Pre-Closing Period or the pre-Closing portion of a
Straddle Period shall belong to Simmons except for refunds attributable to Extra
Taxes, which shall be paid to the Company net of any Taxes imposed on the
receipt thereof.
 
(f)  Following the Closing, Purchaser and Simmons shall provide each other with
such assistance as may reasonably be requested by either of them in connection
with the preparation of any Tax Return, any audit or other examination by any
Taxing Authority, or any judicial or administrative proceedings relating to
Liability for Taxes of the Company. The party requesting assistance hereunder
shall reimburse the other for reasonable out-of-pocket expenses incurred in
providing such assistance.
 
(g)  Any and all Tax allocation or Tax sharing agreements between the Company on
the one hand, and Simmons or any of its Affiliates on the other hand, shall be
terminated as to the Company as of the Closing Date and, from and after the
Closing Date, the Company shall not be obligated to make any payment pursuant to
any such agreement for any past or future period.
 
8.14  Financing. Purchaser shall use commercially reasonable efforts to take, or
cause to be taken, all actions and to do, or cause to be done, all things
necessary, proper or advisable to arrange the Financing. In the event any
portion of Financing becomes unavailable, Purchaser shall use commercially
reasonable efforts to arrange to obtain alternative financing from alternative
sources in an amount sufficient to consummate the transactions contemplated
herein on terms not materially less beneficial to Purchaser as promptly as
practicable following the occurrence of such event.
 
ARTICLE IX  
 

 
CONDITIONS TO CLOSING
 
9.1  Conditions Precedent to Obligations of Purchaser. The obligation of
Purchaser to consummate the transactions contemplated by this Agreement is
subject to the fulfillment, on or prior to the Closing Date, of each of the
following conditions (any or all of which may be waived by Purchaser in whole or
in part to the extent permitted by applicable Law):
 
(a)  the representations and warranties of the Company and Holdings set forth in
this Agreement shall be true and correct at and as of the Closing, except to the
extent such representations and warranties relate to an earlier date (in which
case such representations and warranties shall be true and correct on and as of
such earlier date); provided, however that, the representations and warranties
set forth in Sections 5.1 and 5.4 shall instead be read as set forth on Schedule
9.1 hereto, and provided further however, that in the event of a breach of a
representation or warranty, the condition set forth in this Section 9.1(a) shall
be deemed satisfied unless the effect of any or all such breaches of
representations and warranties result in a Material Adverse Effect, and
Purchaser shall have received a certificate signed by an authorized officer of
the Company, dated the Closing Date, to the foregoing effect;
 
(b)  the Company and Holdings shall have performed and complied in all material
respects with all obligations and agreements required by this Agreement to be
performed or complied with by them on or prior to the Closing Date, and
Purchaser shall have received a certificate signed by an authorized officer of
the Company, dated the Closing Date, to the foregoing effect;
 
(c)  there shall not be in effect any Order by a Governmental Body of competent
jurisdiction restraining, enjoining or otherwise prohibiting the consummation of
the transactions contemplated hereby;
 
(d)  there shall not have been or occurred any event, change, occurrence or
circumstance that, individually or in the aggregate with any such events,
changes, occurrences or circumstances, has had a Material Adverse Effect since
the Balance Sheet Date;
 
(e)  the waiting period applicable to the transactions contemplated by this
Agreement under the HSR Act shall have expired or early termination shall have
been granted;
 
(f)  Holdings and the Company shall have obtained at least 90% of the consents
listed on Schedule 9.1(f) and copies thereof shall have been delivered to
Purchaser; provided that such 90% shall include the 5 largest revenue producing
(based on 2005 fiscal year revenues) stores;
 
(g)  the Company shall have received the written resignations, effective as of
the Closing Date, of such of the Managers and officers of the Company other than
such officers of the Company who are Continuing Employees of the Company;
 
(h)  Simmons shall have executed and delivered to Purchaser the Dealer Incentive
Agreement substantially in the form of Exhibit C (the “Dealer Incentive
Agreement”);
 
(i)  Simmons shall have executed and delivered to Purchaser (A) a new Authorized
Dealer Agreement between The Sleep Train, Inc. or one of its Affiliates (which
shall cover The Sleep Train, Inc. and the Company) and Simmons (the “Dealer
Agreement”) and (B) a new Co-op Advertising Agreement between The Sleep Train,
Inc. or one of its Affiliates (which shall cover The Sleep Train, Inc. and the
Company) and Simmons (the “Co-op Agreement”), in each case only to revise the
existing forms of such agreements attached hereto as Exhibit E and Exhibit F,
respectively, in order to make the termination provisions consistent with the
termination provisions contained in the Dealer Incentive Agreement and to
provide no greater rights for either party to terminate the Authorized Dealer
Agreement or Co-op Agreement than set forth in the Dealer Incentive Agreement;
 
(j)  Holdings shall have delivered, or caused to be delivered, to Purchaser
certificates representing the Units, duly endorsed in blank or accompanied by
separate assignment of units;
 
(k)  all undischarged judgments and Liens (other than Permitted Exceptions)
shall have been paid off in full and Purchaser shall have received copies of all
pay-off letters in respect of all Closing Date Debt (or, with respect to any
capitalized leases, at the election of Purchaser, assumed by Purchaser) and such
other instruments evidencing the satisfaction and cancellation of such Closing
Date Debt, including, without limitation, executed UCC-3 termination statements
as reasonably requested by Purchaser;
 
(l)  Holdings shall have delivered to Purchaser a statement certifying that it
is not a foreign person within the meaning of Section 1445 of the Code;
 
(m)  the Company shall deliver to the Purchaser an opinion of counsel for the
Company, Holdings and Simmons, dated as of the Closing Date, in substantially
the form of Exhibit D; and
 
(n)  this Agreement and the consummation of the transactions completed hereunder
shall have been approved by the Board of Directors or Managers of Company and
Holdings, and each of Company and Holdings shall have delivered to Purchaser a
copy of the resolutions of the Board of Directors and Managers, approving this
Agreement and the transactions described herein, certified by each entity’s
respective Secretary.
 
9.2  Conditions Precedent to Obligations of Holdings and Simmons. The
obligations of Holdings and Simmons to consummate the transactions contemplated
by this Agreement are subject to the fulfillment, prior to or on the Closing
Date, of each of the following conditions:
 
(a)  the representations and warranties of Purchaser set forth in this Agreement
shall be true and correct at and as of the Closing, except to the extent such
representations and warranties relate to an earlier date (in which case such
representations and warranties shall be true and correct on and as of such
earlier date) and Holdings and Simmons shall have received a certificate signed
by an authorized officer of Purchaser, dated the Closing Date, to the foregoing
effect;
 
(b)  Purchaser shall have performed and complied in all material respects with
all obligations and agreements required by this Agreement to be performed or
complied with by Purchaser on or prior to the Closing Date, and Holdings and
Simmons shall have received a certificate signed by an authorized officer of
Purchaser, dated the Closing Date, to the foregoing effect;
 
(c)  there shall not be in effect any Order by a Governmental Body of competent
jurisdiction restraining, enjoining or otherwise prohibiting the consummation of
the transactions contemplated hereby;
 
(d)  the waiting period applicable to the transactions contemplated by this
Agreement under the HSR Act shall have expired or early termination shall have
been granted;
 
(e)  Purchaser shall have delivered, or caused to be delivered, to Holdings and
Simmons evidence of the wire transfers referred to in Section 3.2 hereof;
 
(f)  Purchaser shall have executed and delivered to Holdings and Simmons the
Dealer Incentive Agreement;
 
(g)  Purchaser shall have executed and delivered to Holdings and Simmons the
Dealer Agreement;
 
(h)  Purchaser shall have executed and delivered to Holdings and Simmons the
Co-op Agreement; and
 
(i)  this Agreement and the consummation of the transactions completed hereunder
shall have been approved by the Board of Managers of Purchaser, and Purchaser
shall have delivered to Simmons a copy of the resolutions of the Board of
Managers, approving this Agreement and the transactions described herein,
certified by Purchaser’s Secretary.
 
9.3  Notices; Frustration of Closing Conditions.
 
(a)  Each of the Company, Holdings and Simmons, on the one hand, and Purchaser,
on the other hand, agree to give prompt notice to each other of, and to use
reasonable efforts to remedy, (i) the occurrence or failure to occur of any
event which occurrence or failure to occur would be likely to cause any of its
or their representations or warranties in this Agreement to be untrue or
inaccurate in any material respect at the Closing Date, and (ii) any material
failure on its or their part to comply with or satisfy any covenant, condition
or agreement to be complied with or satisfied by it or them hereunder; provided,
however, that the delivery of any notice pursuant to this Section 9.3 shall not
limit or otherwise affect the remedies available hereunder to the party
receiving such notice.
 
(b)  None of the Company, Purchaser, Holdings or Simmons may rely on the failure
of any condition set forth in Sections 9.1 or 9.2, as the case may be, if such
failure was caused by such party’s (or its affiliates) failure to comply with
any provision of this Agreement.
 
ARTICLE X  
 

 
INDEMNIFICATION
 
10.1  Survival of Representations and Warranties.
 
(a)  The representations and warranties of the parties contained in this
Agreement shall, subject to Section 10.5, survive the Closing and claims may be
asserted with respect thereto to the extent permitted by this Article X.
 
(b)  All of the covenants or other agreements of the parties contained in this
Agreement shall survive until fully performed or fulfilled, unless and to the
extent only that non-compliance with such covenants or agreements is waived in
writing by the party entitled to such performance.
 
10.2  Indemnification by Simmons.
 
(a)  Subject to Sections 8.13 and 10.5 hereof, Simmons hereby agrees to
indemnify and hold Purchaser, the Company, and their respective directors,
officers, employees, Affiliates, stockholders, agents, attorneys,
representatives, successors and permitted assigns (collectively, the “Purchaser
Indemnified Parties”) harmless from and against (without duplication) any and
all losses, liabilities, claims, demands, judgments, damages, fines, suits,
actions, costs and expenses including without limitation, interest, penalties,
cost of investigation and defense, and reasonable attorneys’ and other
professional fees and expenses (individually, a “Loss” and, collectively,
“Losses”):
 
(i)  based upon or resulting from the failure of any of the representations or
warranties made by Simmons, Holdings or the Company in this Agreement to be true
and correct in all respects at and as of the date hereof and at and as of the
Closing Date, regardless of whether the Purchaser relied on the truth of such
representation or warranty or had any knowledge of any breach thereof;
 
(ii)  based upon or resulting from the breach or nonfulfillment of any covenant
on the part of Simmons, Holdings or the Company;
 
(iii)  except as provided in Sections 8.13(c) and 10.3(c) below, (A) based upon
or resulting from any Taxes (including pursuant to any Tax Sharing, Tax
Indemnity or Tax allocation agreement or arrangement) of the Company or any of
its Affiliates with respect to any Pre-Closing Period or the pre-Closing portion
of any Straddle Period (computed in accordance with Section 8.13(b)) (whether
now or hereafter known or due upon audit or adjustment by any Governmental Body
or otherwise) and (B) any Taxes for which Simmons is responsible under Section
11.1;
 
(iv)  based upon or resulting from any Closing Date Debt;
 
(v)  based upon or resulting from (A) any undischarged judgments existing as of
the Closing or (B) any Liens existing as of the Closing (other than Permitted
Exceptions); and
 
(vi)  based upon or resulting from any restricted stock agreement, registration
rights agreement, securityholders’ agreement, or other similar Contract relating
to equity or phantom equity incentive compensation to which any employee is a
party or is subject, including any such type of Contract between any employee
and Simmons Company, a Delaware corporation, Simmons or any of their respective
Affiliates.
 
(b)  Purchaser acknowledges that Simmons shall not be liable for any Losses or
Liabilities arising out of or relating to the failure to obtain the consent of
any party under any Contract to the consummation of the transactions
contemplated hereby if Purchaser closes the transactions contemplated hereunder
without such consent being obtained.
 
10.3  Indemnification by Purchaser. Subject to Section 10.5, Purchaser hereby
agrees to indemnify and hold Holdings or Simmons and their respective directors,
officers, employees, Affiliates, stockholders, agents, attorneys,
representatives, successors and permitted assigns (collectively, the “Simmons
Indemnified Parties”) harmless from and against, and pay to the applicable
Simmons Indemnified Parties the amount of, any and all Losses:
 
(a)  based upon or resulting from the failure of any of the representations or
warranties made by Purchaser in this Agreement to be true and correct in all
respects at the date hereof and as of the Closing Date;
 
(b)  based upon or resulting from the breach or nonfulfillment of any covenant
on the part of Purchaser; and
 
(c)  any Taxes for which Purchaser is responsible under Section 8.13 or 11.1.
 
10.4  Indemnification Procedures.
 
(a)  A claim for indemnification for any matter not involving a third-party
claim may be asserted by notice to the party from whom indemnification is
sought.
 
(b)  Subject to Section 8.13(d), which shall control with respect to Tax Claims
for Pre-Closing Periods or the pre-Closing portion of Straddle Periods, if any
Legal Proceeding shall be instituted, or any claim shall be asserted, by any
Person that is not a party (or an Affiliate of a party) hereto as to which
indemnification may be sought by any Purchaser Indemnified Party under
Section 10.2 or any Simmons Indemnified Party under Section 10.3 hereof
(regardless of the limitations set forth in Section 10.5) (an “Indemnification
Claim”), the Purchaser Indemnified Party or the Simmons Indemnified Party, as
applicable (each, an “Indemnified Party”), shall promptly cause written notice
of the assertion of any Indemnification Claim of which it has knowledge to be
forwarded to the other party (the “Indemnifying Party”). The failure of the
Indemnified Party to give reasonably prompt notice of any Indemnification Claim
shall not release, waive or otherwise affect the Indemnifying Party’s
obligations with respect thereto except to the extent that the Indemnifying
Party is prejudiced as a result of such failure. The Indemnifying Party shall
have the right, at its expense, to be represented by counsel of its choice,
which must be reasonably satisfactory to the Indemnified Party, and to defend
against, negotiate, settle or otherwise deal with any Indemnification Claim
which relates to any Losses indemnified against by it hereunder. If the
Indemnifying Party elects to defend against, negotiate, settle or otherwise deal
with any Indemnification Claim, it shall within 30 days (or sooner, if the
nature of the Indemnification Claim so requires) notify the Indemnified Party
whether or not it shall do so; provided that the attorneys’ fees and other
Losses incurred by the Indemnifying Party in connection with such defense,
negotiation, settlement or other dealings shall not reduce the amount
recoverable under the Cap by the Indemnified Parties. If the Indemnifying Party
elects not to defend against, negotiate, settle or otherwise deal with any
Indemnification Claim which relates to any Losses indemnified against hereunder,
the Indemnified Party may defend against, negotiate, settle or otherwise deal
with such Indemnification Claim, and the Indemnifying Party shall promptly, and
in any event within 20 days after demand therefor, reimburse the Indemnified
Party for the reasonable costs and expenses of such defense, including
attorneys’ fees and other Losses incurred by the Indemnified Party in connection
therewith. If the Indemnifying Party shall assume the defense of any
Indemnification Claim, the Indemnified Party may participate, at his or its own
expense, in the defense of such Indemnification Claim; provided, however, that
such Indemnified Party shall be entitled to participate in any such defense with
separate counsel at the expense (so long as such fees and expenses are
reasonable) of the Indemnifying Party if, (i) so requested by the Indemnifying
Party to participate or (ii) in the reasonable opinion of counsel to the
Indemnified Party, a conflict or potential conflict exists between the
Indemnified Party and the Indemnifying Party that would make such separate
representation advisable; provided, further, that the Indemnifying Party shall
not be required to pay for more than one such counsel (plus any appropriate
local counsel) for all Indemnified Parties in connection with any
Indemnification Claim. The parties hereto agree to cooperate fully with each
other in connection with the defense, negotiation or settlement of any such
Indemnification Claim, and the party assuming the defense of any Indemnification
Claim shall keep the other party reasonably informed at all times of the
progress and development of its defense of and compromise efforts with respect
to such Indemnification Claim and shall furnish the other party with copies of
all relevant pleadings, correspondence and other documents. Notwithstanding
anything in this Section 10.4 to the contrary, neither the Indemnifying Party
nor the Indemnified Party shall, without the written consent of the other party,
settle or compromise any Indemnification Claim or permit a default or consent to
entry of any judgment unless (i) the claimant and such party provide to such
other party an unqualified release from all liability in respect of the
Indemnification Claim and (ii) the settlement, compromise, or judgment involves
only the payment of money damages by the Indemnifying Party and does not impose
an injunction or other equitable relief on the Indemnified Party or impose any
restrictions on the operation of the business of the Indemnified Party or its
Affiliates, in which case the consent of the other party shall not be
unreasonably withheld or delayed.
 
(c)  After any final decision, judgment or award shall have been rendered by a
Governmental Body of competent jurisdiction and the expiration of the time in
which to appeal therefrom, or a settlement shall have been consummated, or the
Indemnified Party and the Indemnifying Party shall have arrived at a mutually
binding agreement with respect to an Indemnification Claim hereunder, the
Indemnified Party shall forward to the Indemnifying Party notice of any Losses
and other sums due and owing by the Indemnifying Party pursuant to this
Agreement with respect to such matter.
 
(d)  Any amount due and payable hereunder shall accrue interest from and after
the date due until paid in full at the “prime” rate, as announced by The Wall
Street Journal, Eastern Edition, in effect as of the date payment first became
due, calculated based on a 365-day year and the actual number of days elapsed.
 
10.5  Certain Limitations on Indemnification.
 
(a)  Notwithstanding the provisions of this Article X, neither Simmons nor
Purchaser shall have any indemnification obligations for Losses under Sections
10.2(a)(i) and 10.2(a)(ii) or Sections 10.3(a) and 10.3(b), for any individual
item, or group of items arising out of the same event, unless the aggregate
amount of all such Losses exceeds $450,000 (the “Basket”) and then only for
Losses in excess of the Basket. In no event shall the aggregate indemnification
to be paid by Simmons or Purchaser under this Article X exceed $12,000,000 (the
“Cap”). Notwithstanding the foregoing, neither the Basket nor the Cap shall
apply to Losses based upon or related to (i) fraud, criminal wrongdoing or
willful breach, (ii) any matter subject to indemnification pursuant to
Sections 10.2(a)(iii) through 10.2(a)(vi), or (iii) the failure to be true and
correct of any of the representations and warranties set forth in Section 5.1
(Organization), 5.2 (Authorization), 5.4 (Capitalization), 5.9 (Taxes), 5.14(e)
through 5.14(j) (Employee Benefit Plans), 5.15(c)(ii) - 5.15(c)(iv), 6.1
(Organization), 6.2 (Authorization), 6.4 (Ownership), 6.6 (Financial Advisors),
7.1 (Organization), 7.2 (Authorization) or 7.6 (Financial Advisors) hereof.
 
(b)  No Indemnifying Party shall be required to indemnify the Indemnified Party
to the extent of any Losses that a court of competent jurisdiction shall have
determined by final judgment to have resulted from the bad faith, gross
negligence or willful misconduct of the Indemnified Party.
 
(c)  The indemnification obligations set forth in this Article X with respect to
a breach of a particular representation, warranty, agreement or covenant shall
survive the Closing for a period of 21 months from the Closing Date; provided,
however, that Simmons’ obligation to indemnify the Purchaser for any Losses
based upon or related to (i) fraud, criminal wrongdoing or willful breach, (ii)
any matter subject to indemnification pursuant to Sections 10.2(a)(iii) through
10.2(a)(vi), or (iii) the failure to be true and correct of any of the
representations and warranties set forth in Sections 5.2 (Authorization), 5.4
(Capitalization), 5.9 (Taxes) and 6.4 (Ownership) shall survive the Closing Date
until expiration of the applicable statute of limitations.
 
(d)  Absent fraud, Purchaser shall not make any claim for indemnification under
this Article X in respect of any matter that is taken into account in the
calculation of any adjustment to the Purchase Price pursuant to Section 3.3.
 
10.6  Calculation of Losses; Materiality.
 
(a)  The amount of any Losses for which indemnification is provided under this
Article X shall be net of any Tax benefit actually recognized or any other
amounts actually recovered by the Indemnified Party from any other Person with
respect thereto; provided, however, that each Indemnifying Party waives any
right to require any Indemnified Party to (i) recover under any insurance
policies for any Losses, (ii) proceed against any other Person, or (iii) pursue
any other remedy whatsoever in the power of any Purchaser Indemnified Party. An
Indemnified Party shall not be entitled to any right of set-off against any
payment due the Indemnifying Party for any Losses to which any Indemnified Party
is entitled to be indemnified hereunder with respect to any Indemnification
Claim unless (i) the Indemnifying Party has agreed in writing it is obligated to
pay the amount of the Losses which the Indemnified Party seeks to set-off, or
(ii) a judgment has been rendered by a court of competent jurisdiction that the
Indemnifying Party owes the Indemnified Party the amount of the Losses which the
Indemnified Party seeks to set-off.
 
(b)  Materiality; Material Adverse Effect. For purposes of determining whether a
representation or warranty has been breached for purposes of indemnification
under this Article X, the words “material” and “Material Adverse Effect” or
variations thereof shall be disregarded, and the phrase “resulting in
Liabilities or Losses in excess of $75,000 individually or $150,000 in the
aggregate” (or substantially similar variations thereof) shall as a measure of
materiality, also be disregarded.
 
10.7  Tax Treatment of Indemnity Payments. Simmons and Purchaser agree to treat
any indemnity payment made pursuant to this Article X as an adjustment to the
Purchase Price for federal, state, local and foreign income Tax purposes.
 
10.8  Exclusive Remedy. From and after the Closing, the sole and exclusive
remedy for any breach or failure to be true and correct, or alleged breach or
failure to be true and correct, of any representation or warranty or any
covenant or agreement in this Agreement, shall be indemnification in accordance
with this Article X, except with respect to claims resulting from fraud,
criminal wrongdoing or willful breach. In furtherance of the foregoing, the
parties hereby waive, to the fullest extent permitted by applicable Law, any and
all other rights, claims and causes of action (including rights of
contributions, if any) known or unknown, foreseen or unforeseen, which exist or
may arise in the future, that it may have against Holdings, Simmons or
Purchaser, as the case may be, arising under or based upon any federal, state or
local Law (including any such Law relating to environmental matters or arising
under or based upon any securities Law, common Law or otherwise).
Notwithstanding the foregoing, this Section 10.9 shall not operate to interfere
with or impede the operation of the provisions of Article III providing for the
(i) resolution of certain disputes relating to the Purchase Price between the
parties and/or by the Arbiter and (ii) limit the rights of the parties to seek
equitable remedies (including specific performance or injunctive relief),
including under Section 8.11.
 
ARTICLE XI  
 

 
MISCELLANEOUS
 
11.1  Payment of Sales, Use or Similar Taxes. All sales, use, transfer,
intangible, recordation, documentary stamp or similar Taxes or charges, of any
nature whatsoever (collectively, the “Transfer Taxes”), applicable to, or
resulting from, the transactions contemplated by this Agreement shall be borne
50% by Simmons and 50% by Purchaser; provided, however, that Purchaser shall be
responsible for any and all Transfer Taxes resulting from the consummation of
the transactions contemplated by this Agreement (including, without limitation,
the Conversion) which Taxes would not have arisen had the transaction been
structured as a transfer of stock of a corporation to the Purchaser in a
transaction pursuant to which an election under Section 338(h)(10) of the Code
had been made; provided, further, it is acknowledged and agreed by the parties
that Purchaser shall not be responsible for any Transfer Taxes arising out of
the transfer of real property or improvements thereon.
 
11.2  Expenses. Except as otherwise provided in this Agreement, each of Holdings
and Simmons (with respect to their and the Company’s expenses) and Purchaser
shall bear its own expenses incurred in connection with the negotiation and
execution of this Agreement and each other agreement, document and instrument
contemplated by this Agreement and the consummation of the transactions
contemplated hereby and thereby; provided, however, that Purchaser shall bear
all pre-Closing expenses related to the Conversion, including obtaining consents
from the Board of Directors and the sole stockholder of the Company and the
filing of a certificate of conversion with the Delaware Secretary of State
(which shall be performed by Simmons or its counsel) and obtaining or seeking to
obtain any rulings requested by Purchaser from any Taxing Authorities with
respect to the Conversion (which shall be performed by Purchaser or its
counsel), as well as any post-Closing expenses related to the Conversion,
including filing fees or other costs and expenses associated with assigning
Intellectual Property and filing notices of name changes with any Governmental
Body (which shall be performed by Purchaser or its counsel). Purchaser shall be
responsible for all filing fees required in connection with compliance with the
HSR Act.
 
11.3  Submission to Jurisdiction; Consent to Service of Process.
 
(a)  The parties hereto hereby irrevocably submit to the non-exclusive
jurisdiction of any federal or state court located within Seattle, Washington
over any dispute arising out of or relating to this Agreement or any of the
transactions contemplated hereby and each party hereby irrevocably agrees that
all claims in respect of such dispute or any suit, action proceeding related
thereto may be heard and determined in such courts. The parties hereby
irrevocably waive, to the fullest extent permitted by applicable law, any
objection which they may now or hereafter have to the laying of venue of any
such dispute brought in such court or any defense of inconvenient forum for the
maintenance of such dispute. Each of the parties hereto agrees that a judgment
in any such dispute may be enforced in other jurisdictions by suit on the
judgment or in any other manner provided by law.
 
(b)  Each of the parties hereto hereby consents to process being served by any
party to this Agreement in any suit, action or proceeding by the delivery of a
copy thereof in accordance with the provisions of Section 11.7.
 
11.4  Entire Agreement; Amendments and Waivers. This Agreement (including the
schedules and exhibits hereto) and the Confidentiality Agreement represent the
entire understanding and agreement between the parties hereto with respect to
the subject matter hereof and thereof. This Agreement can be amended,
supplemented or changed, and any provision hereof can be waived, only by written
instrument making specific reference to this Agreement signed by the party
against whom enforcement of any such amendment, supplement, modification or
waiver is sought. No action taken pursuant to this Agreement, including any
investigation by or on behalf of any party, shall be deemed to constitute a
waiver by the party taking such action of compliance with any representation,
warranty, covenant or agreement contained herein. The waiver by any party hereto
of a breach of any provision of this Agreement shall not operate or be construed
as a further or continuing waiver of such breach or as a waiver of any other or
subsequent breach. No failure on the part of any party to exercise, and no delay
in exercising, any right, power or remedy hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of such right, power or remedy
by such party preclude any other or further exercise thereof or the exercise of
any other right, power or remedy.
 
11.5  Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware applicable to contracts made
and performed in such State without giving effect to the choice of law
principles of such State that would require or permit the application of the
laws of another jurisdiction.
 
11.6  Notices. All notices and other communications under this Agreement shall
be in writing and shall be deemed given (i) when delivered personally by hand
(with written confirmation of receipt), (ii) when sent by facsimile (with
written confirmation of transmission) or (iii) one business day following the
day sent by overnight courier (with written confirmation of receipt), in each
case at the following addresses and facsimile numbers (or to such other address
or facsimile number as a party may have specified by notice given to the other
party pursuant to this provision):
 
If to Holdings or Simmons, to:
 
c/o Simmons Bedding Company
One Concourse Parkway, Suite 800
Atlanta, GA 30328
Facsimile: (770) 206-2669
Attention:  Chief Financial Officer and General Counsel
 
With copies (which shall not constitute notice) to:
 
Thomas H. Lee Partners, L.P.
100 Federal Street, 35th Floor
Boston, MA 02110
Facsimile: (617) 227-3514
Attention:  Scott Schoen
Todd Abbrecht
George Taylor

and
 
Weil, Gotshal & Manges LLP
 
100 Federal Street, 34th Floor
 
Boston, MA 02110
 
Facsimile:  (617) 772-8333
 
Attention:  Marilyn French, Esq.
 
If to Purchaser, to:
 
ST San Diego, LLC
 
8391 Auburn Boulevard
 
Citrus Heights, CA 95610
 
Facsimile: (916) 735-1382
 
Attention: Dale Carlsen
 

 
With a copy to:
 

 
Shartsis Friese LLP
 
One Maritime Plaza, 18th Floor
 
San Francisco, CA 94111
 
Facsimile: (415) 421-2922
 
Attention: Derek Wilson, Esq.
 

 
11.7  Severability. If any term or other provision of this Agreement is invalid,
illegal, or incapable of being enforced by any law or public policy, all other
terms or provisions of this Agreement shall nevertheless remain in full force
and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner materially adverse to any
party. Upon such determination that any term or other provision is invalid,
illegal, or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner in order that the
transactions contemplated hereby are consummated as originally contemplated to
the greatest extent possible.
 
11.8  Binding Effect; Assignment. This Agreement shall be binding upon and inure
to the benefit of the parties and their respective successors and permitted
assigns. Nothing in this Agreement shall create or be deemed to create any third
party beneficiary rights in any person or entity not a party to this Agreement
except as provided below. No assignment of this Agreement or of any rights or
obligations hereunder may be made by either Holdings, Simmons or Purchaser,
directly or indirectly (by operation of law or otherwise), without the prior
written consent of the other parties hereto and any attempted assignment without
the required consents shall be void. No assignment of any obligations hereunder
shall relieve the parties hereto of any such obligations. Upon any such
permitted assignment, the references in this Agreement to Purchaser shall also
apply to any such assignee unless the context otherwise requires.
 
11.9  Non-Recourse. Excluding fraud or criminal wrongdoing, no past, present or
future director, officer, employee, incorporator, member, partner, stockholder,
Affiliate, agent, attorney or representative of Holdings, Simmons or the Company
or any of their respective Affiliates shall have any liability for any
obligations or liabilities of Holdings, Simmons or the Company under this
Agreement of or for any claim based on, in respect of, or by reason of, the
transactions contemplated hereby and thereby.
 
11.10  Counterparts. This Agreement may be executed in one or more counterparts,
each of which will be deemed to be an original copy of this Agreement and all of
which, when taken together, will be deemed to constitute one and the same
agreement.
 
** REMAINDER OF PAGE INTENTIONALLY LEFT BLANK **
 

 

 

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their respective authorized officers, as of the date first written above.

 

 
ST SAN DIEGO, LLC
   
By:
/s/ Dale R. Carlsen
   
Name:
Dale R. Carlsen
 
Title:
Managing Member
     
SLEEP COUNTRY USA, INC.
   
By:
/s/ William S. Creekmuir
   
Name:
William S. Creekmuir
 
Title:
Executive Vice President, Assistant Treasurer and Assistant Secretary
     
SC HOLDINGS, INC.
   
By:
/s/ William S. Creekmuir
   
Name:
William S. Creekmuir
 
Title:
Executive Vice President, Assistant Treasurer and Assistant Secretary
     
SIMMONS BEDDING COMPANY
   
By:
/s/ Charles R. Eitel
   
Name:
Charles R. Eitel
 
Title:
Chief Executive Officer

 
 
 
 

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Guarantee

The Sleep Train, Inc., a California corporation (“Sleep Train”) and an affiliate
of the Purchaser, hereby guarantees to Simmons the payment and performance of
all obligations and covenants of Purchaser under this Unit Purchase Agreement
dated as of July 24, 2006 among ST San Diego, LLC, Sleep Country USA, Inc., SC
Holdings, Inc. and Simmons Bedding Company (the “Agreement”), it being
acknowledged that Simmons need not exhaust its remedies against Purchaser in
order to enforce this guarantee. Capitalized terms used herein but not defined
shall have the meanings set forth in the Agreement.
 
Sleep Train hereby represents and warrants (and agrees to indemnify Simmons for
any losses arising out of any breach of such representation and warranties) to
Simmons the following:
 
1.  Organization and Good Standing. Sleep Train is a corporation duly organized,
validly existing and in good standing under the laws of the State of California
and has all requisite limited liability power and authority to own, lease and
operate properties and carry on its business.
 
2.  Authorization of Guarantee. Sleep Train has full corporate power and
authority to execute and deliver this Guarantee and to perform its obligations
hereunder. The execution, delivery and performance by Sleep Train of this
Guarantee have been duly authorized by all necessary limited liability company
action on behalf of Sleep Train. This Guarantee has been duly executed and
delivered by Sleep Train and this Guarantee constitutes the legal, valid and
binding obligation of Sleep Train, enforceable against Sleep Train in accordance
with its terms, subject to applicable bankruptcy, insolvency, reorganization,
moratorium and similar laws affecting creditors’ rights and remedies generally,
and subject, as to enforceability, to general principles of equity, including
principles of commercial reasonableness, good faith and fair dealing (regardless
of whether enforcement is sought in a proceeding at law or in equity).
 
3.  Conflicts; Consents of Third Parties.
 
(a)  None of the execution, delivery and performance by Sleep Train of this
Guarantee will conflict with, or result in any violation of or default (with or
without notice or lapse of time, or both) under, or give rise to a right of
termination or cancellation under, any provision of (i) the certificate of
incorporation or by-laws of Sleep Train; (ii) any Contract or Permit to which
Sleep Train is a party or by which Sleep Train or its properties or assets are
bound; (iii) any Order of any Governmental Body applicable to Sleep Train or by
which any of the properties or assets of Sleep Train are bound; or (iv) any
applicable Law.
 
(b)  No consent, waiver, approval, Order, Permit or authorization of, or
declaration or filing with, or notification to, any Person or Governmental Body
is required on the part of Sleep Train in connection with the execution and
delivery of this Guarantee or the performance of its obligations hereunder.
 
4.  Litigation. There are no Legal Proceedings pending or, to the actual
knowledge of Sleep Train (without any docket or other electronic search having
been conducted) threatened, that are reasonably likely to prohibit or restrain
the ability of Sleep Train to enter into this Guarantee or perform its
obligations hereunder.
 
This Guarantee shall be governed by and construed in accordance with the laws of
the State of Delaware applicable to contracts made and performed in such State
without giving effect to the choice of law principles of such State that would
require or permit the application of the laws of another jurisdiction.
 

 
 

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

 

 
THE SLEEP TRAIN, INC.
   
By:
/s/ Dale R. Carlsen
   
Name:
Dale R. Carlsen
 
Title:
President

 
 
 

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

Schedule 1

“Adjusted EBITDA” means the earnings before interest, income taxes, depreciation
and amortization of the Company (“EBITDA”), but including to the extent not
already added or deducted in EBITDA, (a) as an add-back, that portion of the
annual management fee payable by the Company to Simmons equal to (i) the total
management fee for the last full 12-month period ended on July 1, 2006 less (ii)
$115,000, representing that portion of the fee attributable to recurring costs
of the Company (e.g., audits fees, insurance and tax preparation), (b) as
add-backs, any bonus expense for Senior Executives for that portion of the 2005
fiscal year from January 1, 2005 through June 30, 2005 as if bonuses for 2005
were accrued in 12 equal installments during the year, (c) as deductions, bonus
expense for Senior Executives as if the anticipated bonus expense for such
executives for that portion of the 2006 fiscal year up to and including the
Closing Date (based on the Company’s projection’s for bonus expense for fiscal
year 2006) were accrued in 12 equal installments during the year, (d) as a
deduction, $20,000 relating to equity incentive compensation, (e) as a
deduction, $100,000 relating to Simmons’ one-time rebate fees, and (f) as
add-backs, business and occupation taxes.
 

 
 

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

Exhibit A

Closing Date Working Capital Statement

A Closing Date Working Capital Statement will be provided prior to Closing (the
Preliminary Closing Date Working Capital Statement), at Closing (the Estimated
Working Capital Statement) and post-Closing (the Actual Closing Date Working
Capital Statement) pursuant to Article III.

Closing Date Current Assets include the sum of the following items ($ in
thousands):

Cash $
 
Accounts Receivable, Net of Allowances $
 
Co-op Receivable $
 
Inventory $
 
Prepaids & Short Term Deposits $
 
TOTAL CURRENT ASSETS $
 
LESS:
 
Closing Date Current Liabilities includes the sum of the following items ($ in
thousands):

 
Accounts Payable $
 
Accrued Liabilities $
 
Customer Deposits $
 
Salaries, Wages, Commissions &
 
Bonuses Payable $
 
Benefits & Payroll Taxes Payable $
 
401(k) Profit Sharing Contribution $
 
State Sales and Local Taxes $
 
Intercompany Liabilities, Net $
 
TOTAL CURRENT LIABILITIES $
 

 
EQUALS:

WORKING CAPITAL $________________