Document:

Exhibit 10.12

 

2003 STOCK OPTION PLAN

of

MATTRESS HOLDING CORP.

 

1.                                      Purposes
of the Plan.  This Stock Option Plan
(the “Plan”) is designed to provide an incentive to key employees
(including managers and officers who are key employees) of Mattress Holding Corp.,
a Delaware corporation (the “Company”), or any of its Subsidiaries (as
defined in Paragraph 21) and consultants and board members who are not
employees of the Company, and to offer an additional inducement in obtaining
the services of such persons.  The Plan
provides for the grant of options to acquire shares of Non-Voting Common Stock
(as defined in Paragraph 21 hereof) of the Company which may be subject
to contingencies or restrictions.

 

2.                                      Subject
to the Plan.  Subject to the
provisions of Paragraph 13, the aggregate number of shares of Non-Voting
Common Stock for which options may be granted under the Plan shall not exceed
100,000 shares.  Such shares of
Non-Voting Common Stock may, in the discretion of the Board of Directors of the
Company (the “Board of Directors” or the “Board”), consist either
in whole or in part of authorized but unissued shares of Non-Voting Common
Stock or shares of Non-Voting Common Stock held in the treasury of the
Company.  Subject to the provisions of Paragraph
14, any share of Non-Voting Common Stock underlying an option granted under
this Plan which for any reason expires, is canceled or is terminated
unexercised or which ceases for any reason to be exercisable, shall again
become available for the granting of options under the Plan.  The Company shall at all times during the
term of the Plan reserve and keep available such number of shares of Non-Voting
Common Stock as will be sufficient to satisfy the requirements of the Plan.

 

3.                                      Administration
of the Plan.  The Plan shall be
administered by the Board of Directors or a committee of the Board of Directors
(the Board of Directors and such committee being referred to collectively as
the “Committee”).  A majority of
the members of the Committee shall constitute a quorum, and the acts of a
majority of the members present at any meeting at which a quorum is present,
and any acts approved in writing by all members of the Committee without a
meeting, shall be the acts of the Committee.

 

Subject to the
express provisions of the Plan and the grant agreement referred to in Paragraph
12 hereof (the “Agreement”), the Committee shall have the authority,
in its sole discretion, to make all determinations relating to the Plan,
including, but not limited to, the right to determine:  the key employees of the Company (or its
Subsidiaries), consultants and members of the Board, who shall be granted
options; the type of option to be granted; the times when an option shall be
granted; the number of shares of Non-Voting Common Stock to be subject to each
option; the term of each option; the date each option shall vest and become
exercisable; whether an option shall be exercisable in whole, in part or in
installments and, if in installments, the number of shares of Non-Voting Common
Stock to be subject to each installment, whether the installments shall be
cumulative, the date each installment shall become exercisable and the term of
each installment; whether to accelerate the date of exercise of any option or
installment; whether shares of Non-Voting Common Stock may be issued upon the
exercise of an option as partly

 

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paid and, if
so, the dates when future installments of the exercise price shall become due
and the amounts of such installments; the exercise price of each option; the
form of payment of the exercise price; whetherto restrict the sale or other disposition of the shares of
Non-Voting Common Stock acquired upon the exercise of an option and, if so,
whether and under what conditions to waive any such restriction; whether and
under what conditions to subject all or a portion of the grant or exercise of
an option or the shares of Non-Voting Common Stock acquired pursuant to the
exercise of an option to the fulfillment of certain restrictions or
contingencies as specified in the Agreement, including without limitation,
restrictions or contingencies relating to entering into a covenant not to
compete with the Company, any of its Subsidiaries or a Parent (as defined in Paragraph
21), to financial objectives for the Company, any of its Subsidiaries or a
Parent or any of its affiliates, a division of any of the foregoing, a product
line or other category, and/or to the period of continued employment of the
optionee with the Company, any of its Subsidiaries or a Parent or any of its
affiliates, and to determine, in each case, whether such limitations,
restrictions or contingencies have been met; whether an optionee is Disabled
(as defined in Paragraph 21); the amount, if any, necessary to satisfy
the obligation of the Company, a Subsidiary or Parent to withhold taxes or
other amounts; the fair market value (as defined in Paragraph 21 hereof)
of a share of Non-Voting Common Stock; to construe the respective Agreement and
the Plan; with the consent of the optionee, to cancel or modify an option, provided,
that the modified provision is permitted to be included in an option granted
under the Plan on the date of the modification, and further, provided,
that in the case of a modification, such option as modified would be permitted
to be granted on the date of such modification under the terms of the Plan; to
prescribe, amend and rescind rules and regulations relating to the Plan; and to
make all other determinations necessary or advisable for administering the
Plan.  Any controversy or claim arising
out of or relating to the Plan, any option granted under the Plan or any
Agreement shall be determined unilaterally by the Committee in its sole
discretion.  The determinations of the
Committee on the matters referred to in this Paragraph 3 shall be
conclusive and binding on the parties. 
No member or former member of the Committee shall be liable for any
action, failure to act or determination made in good faith with respect to the
Plan, any Agreement or any option hereunder.

 

In the event
the Company becomes a “publicly-held corporation” as defined in
Section 162(m)(2) of the Code, the Company may establish a committee of
outside directors meeting the requirements of Code Section 162(m) to (i)
approve the grant of options that might reasonably be anticipated to result in
the payment of employee remuneration that would otherwise exceed the limit on
employee remuneration deductible for income tax purposes by the Company
pursuant to Code Section 162(m) and (ii) administer the Plan.  In such event, the powers reserved to the
Committee in the Plan shall be exercised by such compensation committee.  In addition, options under the Plan shall be
granted upon satisfaction of the conditions to such grants provided pursuant to
Code Section 162(m) and any Treasury Regulations promulgated thereunder.

 

4.                                      Eligibility.  The Committee may from time to time, in its
sole discretion, consistent with the purposes of the Plan, grant options to (a)
key employees (including officers and managers or directors who are key
employees) of the Company or any of its Subsidiaries, (b) consultants to the
Company or any of its Subsidiaries or (c) members of the Board.  Such options granted shall cover such number
of shares of Non-Voting

 

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Common Stock
as the Committee may determine, in its sole discretion, as set forth in the
applicable Agreement.

 

5.                                      Incentive
and Non-qualified Options.  The
Committee may from time to time grant to eligible participants Incentive Stock
Options, Non-qualified Stock Options, or any combination thereof; provided that
the Committee may grant Incentive Stock Options only to eligible employees of
the Company or its Subsidiaries.  The
options granted shall take such form as the Committee shall determine, subject
to the terms and conditions herein.

 

It is the
Company’s intent that Non-qualified Stock Options granted under the Plan not be
classified as Incentive Stock Options, that Incentive Stock Options be
consistent with and contain or be deemed to contain all provisions required
under Section 422 of the Code and any successor thereto, and that any
ambiguities in construction be interpreted in order to effectuate such
intent.  If an Incentive Stock Option
granted under the Plan does not qualify as such for any reason, then to the
extent of such non-qualification, the stock option represented thereby shall be
regarded as a Non-qualified Stock Option duly granted under the Plan, provided
that such stock option otherwise meets the Plan’s requirements for
Non-qualified Stock Options.

 

To the extent
that the  aggregate Fair Market
Value (determined at the time the respective Incentive Stock Option is granted)
of Shares with respect to which Incentive Stock Options are exercisable for the
first time by an individual during any calendar year under all incentive stock
option plans of the Company exceeds $100,000 (within the meaning of
Section 422 of the Code), such excess Incentive Stock Options shall be
treated as options that do not constitute Incentive Stock Options.  The Committee shall determine, in accordance
with applicable provisions of the Code, Treasury Regulations and other
administrative pronouncements, which of a participant’s Incentive Stock Options
will not constitute Incentive Stock Options because of such limitation and
shall notify the participant of such determination as soon as practicable after
such determination.

 

6.                                      Exercise
Price.  The exercise price of the
shares of Non-Voting Common Stock under each option shall be determined by the
Committee, in its sole discretion, as set forth in the applicable Agreement.

 

In the case of
the grant of any Incentive Stock Option, the exercise price may not be less
than 100% of the Fair Market Value of a share of Non-Voting Common Stock as of
the date of grant of the option, and in the case of the grant of any Incentive
Stock Option to an employee who, at the time of the grant, owns more than 10%
of the total combined voting power of all classes of stock of the Company or
any of its Subsidiaries, the exercise price may not be less than 110% of the
Fair Market Value of a share of Non-Voting Common Stock as of the date of grant
of the option unless otherwise permitted by Section 422 of the Code or any
successor thereto.

 

7.                                      Term.  The term of each option granted pursuant to
the Plan shall be such term as is established by the Committee, in its sole
discretion, as set forth in the applicable Agreement; provided, however,
that the term of each option granted pursuant to the Plan shall be for a period
not exceeding 10 years from the date of grant thereof, and no

 

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Incentive
Stock Option granted to an employee who at the time of the grant owns more than
10% of the total combined voting power of all classes of stock of the Company
or any of its Subsidiaries shall be exercisable more than five years from the
date of grant thereof; and further, provided, that options shall
be subject to earlier termination as hereinafter provided.

 

8.                                      Exercise.  An option (or any part or installment
thereof), to the extent then exercisable, shall be exercised by giving written
notice to the Company, c/o Sun Capital Partners Management, LLC, 5200 Town
Center Circle, Suite 470, Boca Raton, Florida 33486, Attention: Marc J. Leder,
Rodger R. Krouse and C. Deryl Couch, in the form established by the Committee
and accompanied by payment in full of the aggregate exercise price therefor (a)
in cash or by certified check or (b) in such other form as the Committee may approve.  The Company shall not be required to issue
any shares of Non-Voting Common Stock pursuant to any such option until all
required payments, including any required withholding, have been made and all
required actions have been taken.

 

A person
entitled to receive shares of Non-Voting Common Stock upon the exercise of an
option shall not have the rights of a stockholder of the Company with respect
to such stock until the date of issuance of a certificate for such shares of
Non-Voting Common Stock, or in the case of uncertificated shares of Non-Voting
Common Stock, an entry is made on the books of the Company’s transfer agent
representing such shares.

 

In no case may
a fraction of a share of Non-Voting Common Stock be purchased or issued under
the Plan.

 

9.                                      Termination
of Relationship.

 

(a)                                  Employees
and Consultants.  Except as may
otherwise be expressly provided in the applicable Agreement, an optionee whose
relationship with the Company, its Parent or Subsidiaries as an employee or a
consultant has terminated for any reason (other than as a result of the death
or Disability of the optionee) may exercise his options, to the extent
exercisable on the date of such termination, at any time within three months
after the date of termination, but not thereafter and in no event after the
date the option would otherwise have expired; provided, however,
that (i) if such relationship is terminated for Cause (as defined in Paragraph
21), such option shall terminate an the day immediately before the date of
such termination and (ii) if such relationship is terminated without the
consent of the Company, such option shall terminate on the day of such
termination.  Except as may otherwise be
expressly provided in the applicable Agreement, options granted under the Plan
to an employee or consultant shall not be affected by any change in the status
of the optionee so long as the optionee continues to be an employee of, or a
consultant to, the Company, or any of the Subsidiaries or a Parent (regardless
of having changed from one to the other or having been transferred from one
corporation to another).

 

(b)                                 Board
Members.  Except as may otherwise be
expressly provided in the applicable Agreement, an optionee whose relationship
with the Company as a Board member ceases for any reason (other than as a
result of his death or Disability) may exercise his options, to the extent
exercisable on the date of such termination, at any time within three months
after the date of termination, but not thereafter and in no event after the

 

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date
the option would otherwise have expired; provided, however, that
(i) if such relationship is terminated for Cause, such option shall terminate
on the day immediately before the date of such termination and (ii) if such
relationship is terminated without the consent of the Company, such option
shall terminate on the day of such termination. 
Except as may otherwise be expressly provided in the applicable
Agreement, options granted to a Board member shall not be affected by the
optionee becoming an employee of, or consultant to, the Company, any of its
Subsidiaries or a Parent.

 

(c)                                  General.  Nothing in the Plan or in any option granted
under the Plan shall confer on any optionee any right to continue in the employ
of, or as a consultant to, the Company, any of its Subsidiaries or a Parent, or
as a manager or director of the Company, or interfere in any way with any right
of the Company, any of its Subsidiaries or a Parent to terminate the optionee’s
relationship at any time for any reason whatsoever without liability to the
Company, any of its Subsidiaries or a Parent.

 

10.                               Death
or Disability of an Optionee.

 

(a)                                  Employees
and Consultants.

 

(i)                                     Except
as may otherwise be expressly provided in the applicable Agreement, if an
optionee dies while he is an employee of, or consultant to, the Company, any of
its Subsidiaries or a Parent, the options that were granted to him as an
employee or consultant may be exercised, to the extent exercisable on the date
of his death, by his Legal Representative (as defined in Paragraph 21)
at any time within one year after death, but not thereafter and in no event
after the date the option would otherwise have expired.

 

(ii)                                  Except
as may otherwise be expressly provided in the applicable Agreement, any
optionee whose relationship as an employee of, or consultant to, the Company,
its Parent and Subsidiaries has terminated by reason of such optionee’s
Disability may exercise the options that were granted to him as an employee or consultant,
to the extent exercisable upon the effective date of such termination, at any
time within one year after such date, but not thereafter and in no event after
the date the option would otherwise have expired.

 

(b)                                 Board
Members.  Except as may otherwise be
expressly provided in the applicable Agreement, any optionee whose relationship
as a Board member ceases as a result of his death or Disability may exercise
the options that were granted to him as a Board member, to the extent
exercisable on the date of such termination, at any time within one year after
the date of termination, but not thereafter and in no event after the date the
option would otherwise have expired.  In
the case of the death of the Board member, the option may be exercised by his
Legal Representative.

 

11.                               Compliance
with Securities Laws.  The Committee
may require, in its sole discretion, as a condition to the exercise of any
option that either (a) a Registration Statement under the Securities Act of
1933, as amended (the “Securities Act”), with respect to the shares of
Non-Voting Common Stock to be issued upon such grant or exercise shall be

 

5

 

effective
and current at the time of grant or exercise, or (b) there is an exemption from
registration under the Securities Act for the issuance of the shares of
Non-Voting Common Stock upon such grant or exercise.  Nothing herein shall be construed as
requiring the Company to register the shares of Non-Voting Common Stock subject
to any option under the Securities Act or to keep any Registration Statement
effective or current.

 

The Committee
may require, in its sole discretion, as a condition to the receipt of an option
or the exercise of any option hereunder that the optionee execute and deliver
to the Company his representations and warranties, in form, substance and scope
satisfactory to the Committee, which representations and warranties the
Committee determines are necessary or convenient in connection with qualifying
for an exemption from the registration requirements of the Securities Act,
applicable state securities laws or satisfying other legal requirements.

 

In addition,
if at any time the Committee shall determine, in its sole discretion, that the
listing or qualification of the shares of Non-Voting Common Stock subject to
any option on any securities exchange or under any applicable law, or the
consent or approval of any governmental agency or regulatory body, is necessary
or desirable as a condition to, or in connection with, the granting of an
option or the issuing of shares of Non-Voting Common Stock thereunder, such
option may not be granted and such option may not be exercised in whole or in
part unless such listing, qualification, consent or approval shall have been
effected or obtained free of any conditions not acceptable to the Committee.

 

12.                               Agreements.  Each option shall be evidenced by an
appropriate Agreement which  shall
be duly executed by the Company and the optionee, and shall contain such terms,
provisions and conditions not inconsistent herewith as may be determined by the
Committee.  The terms of each option and
Agreement need not be identical.

 

13.                               Adjustments
Upon Changes in Interests.  Notwithstanding any other provision of the
Plan, in the event of:

 

(a)                                  A
dividend, recapitalization, or a spin-off, split-up, combination or exchange of
shares of Non-Voting Common Stock or the like which results in a change in the
number or kind of shares of Non-Voting Common Stock outstanding immediately
prior to such event, the Committee shall appropriately adjust the aggregate
number and kind of shares of Non-Voting Common Stock subject to the Plan, the
aggregate number and kind of shares of Non-Voting Common Stock subject to each
outstanding option and the exercise price thereof.  Such adjustments shall be conclusive and
binding on all parties and may provide for the elimination of fractional shares
of Non-Voting Common Stock which might otherwise be subject to options without
payment therefor.

 

(b)                                 A
merger, consolidation, or sale by the Company of all or substantially all of
its assets, in which the Company is not the surviving corporation, except as
set forth below or in the Agreement, the options granted hereunder as of the
date of such event shall continue to be outstanding and the optionee shall be
entitled to receive in exchange therefor an option in the surviving corporation
for the same number of shares of Non-Voting Common Stock as he would have been
entitled to receive if he had exercised the

 

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options
granted hereunder immediately prior to the transaction and actually owned the
shares of Non-Voting Common Stock subject to such option.  The exercise price of the option in the
surviving corporation shall be such that the aggregate consideration for the
shares of Non-Voting Common Stock subject to the option in the surviving
corporation shall be equal to the aggregate consideration payable with respect
to the option granted under the Plan.

 

Notwithstanding
the foregoing, the Company shall have the right, by written notice, provided to
an optionee sent no later than 5 days prior to the proposed sale of assets,
merger or consolidation (as determined by the Board of Directors in its sole
discretion) or by inclusion in the applicable Agreement, to advise the optionee
that upon consummation of the transaction all options granted to any optionee
under the Plan and not therefore exercised (or which are not then currently
exercisable) shall terminate and be void, in which event, the optionee shall
have the right to exercise all options then currently exercisable in accordance
with the terms of the applicable Agreement within 2 days after the date of the
notice from the Company or as otherwise provided in the Agreement.

 

14.                               Amendments
and Termination of the Plan.  The
Plan was adopted by the Board of Directors as of March 24, 2003.  The Board of Directors, without further
approval of the Company’s stockholders, may at any time suspend or terminate
the Plan, in whole or in part, or amend it from time to time in such respects
as it may deem advisable, including, without limitation, to comply with any
change in applicable law, regulations, rulings or interpretations of any
administrative agency; provided, however, that no amendment for
which applicable law requires stockholder approval shall be effective without
the requisite prior or subsequent stockholder approval.  No termination, suspension or amendment of
the Plan shall, without the consent of the optionee, adversely affect his
rights under any option granted under the Plan. 
The power of the Committee to construe and administer any option granted
under the Plan prior to the termination  or suspension of the Plan
nevertheless shall continue after such termination or during such suspension.

 

15.                               Non-Transferability.  No option granted under the Plan shall be
transferable other than by will or the laws of descent and distribution, and
options may be exercised, during the lifetime of the optionee, only by the
optionee or his Legal Representatives; provided that Incentive Stock
Options may be exercised by Legal Representative only if permitted by the Code
and any regulations thereunder.  Except
to the extent provided above, options may not be assigned, transferred, pledged,
hypothecated or disposed of in any way (whether by operation of law or
otherwise) and shall not be subject to execution, attachment or similar
process, and any such attempted assignment, transfer, pledge, hypothecation or
disposition shall be null and void ab  initio and of no force or
effect.

 

16.                               Withholding
Taxes.  The Company, a Subsidiary or
Parent may withhold (a) cash, (b) shares of Non-Voting Common Stock to be
issued upon exercise of an option having an aggregate fair market value on the
relevant date, or (c) any combination thereof, in an amount equal to the amount
which the Committee determines is necessary to satisfy the obligation of the
Company, a Subsidiary or Parent to withhold Federal, state and local income
taxes or other amounts incurred by reason of the grant, vesting, exercise or
disposition of an option, or the disposition of the underlying shares of
Non-Voting Common

 

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Stock.  Alternatively, the Company may require the
holder to pay to the Company such amount, in cash, promptly upon demand.

 

The Company
may require, as a condition to any grant or exercise under the Plan, that the grantee make provision for the payment to the Company of
federal, state or local taxes of any kind required by law to be withheld with
respect to any grant, vesting, exercise or disposition of any option.  Participants shall be required to indemnify
or reimburse the Company with respect to any federal, state or local taxes of
any kind that the Company is required by law to withhold with respect to any
grant, vesting, exercise or disposition of any option, to the extent the
Company does not or cannot withhold such amount.  Without limiting the generality of the
foregoing, the Company, to the extent permitted or required by law, shall have
the right to deduct from any payment(s) of any kind (including salary or bonus)
otherwise due to a grantee, a total amount not to exceed the amount of any
federal, state or local taxes of any kind required by law to be withheld with
respect to any grant, vesting, exercise or disposition of any option.

 

17.                               Legends;
Payment of Expenses.  The Company may
endorse such legend or legends upon the certificates for shares of Non-Voting
Commas Stock issued upon exercise of an option under the Plan and may issue
such “stop transfer” instructions to its transfer agent in respect of such
shares as it determines, in its discretion, to be necessary or appropriate to
(a) prevent a violation of, or to qualify for an exemption from, the
registration requirements of the Securities Act and any applicable state
securities laws, or (b) implement the provisions of the Plan or any agreement
between the Company and the optionee with respect to such shares of Non-Voting
Common Stock.  Each optionee may, in the
Committee’s discretion, be required either to execute a stockholders’ agreement
as a condition to receiving a grant of options hereunder or to exercising any
options granted hereunder.

 

The Company
shall pay all issuance taxes with respect to the issuance of shares of Non-Voting
Common Stock upon the exercise of an option granted under the Plan, as well as
all fees and expenses incurred by the Company in connection with such issuance.

 

18.                               Use
of Proceeds.  The cash proceeds
received upon the exercise of an option under the Plan shall be added to the
general funds of the Company and used for such corporate purposes as the Board
of Directors may determine.

 

19.                               Substitutions
and Assumptions of Options of Certain Constituent Corporations.  Anything in this Plan to the contrary
notwithstanding, the Board of Directors may, without further approval by the
stockholders, substitute new options for prior options of a Constituent
Corporation (as defined in Paragraph 21) or assume the prior options of
such Constituent Corporation.

 

20.                               Right
of First Refusal; Right to Repurchase.

 

(a)                                  The
Company shall have a right of first refusal with respect to any proposed sale
or other disposition by optionees (and their successors in interest by

 

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purchase,
gift or other mode of transfer) of any shares of Non-Voting Common Stock issued
to them under the Plan which are transferable. 
This right of first refusal shall be exercisable by the Company in
accordance with terms and conditions established by the Committee.

 

(b)                                 In
the case of any optionee whose employment or service terminates for any reason
(including, without limitation, death, Disability, retirement, voluntary
resignation or termination, or involuntary termination with or without Cause), except
as otherwise provided in any Agreement, the Company shall have a right,
exercisable at any time and from time to time after such termination, to
repurchase from the optionee (or any successor in interest by purchase, gift or
other mode of transfer) all (but not less than all) shares of Non-Voting Common
Stock issued to the optionee under the Plan. 
Such repurchase shall be made at the Fair Market Value of the shares of
Non-Voting Common Stock at the time of repurchase unless the Company terminates
the optionee’s employment or service for Cause (or, in the Committee’s
determination, the optionee has taken any action prior to or following the
termination of his employment or service which would have constituted grounds
for a termination for Cause), in either of which case such repurchase shall be
made at the lower of the Fair Market Value of the shares of Non-Voting Common
Stock at the time of repurchase or the purchase price paid by the optionee for
such shares of Non-Voting Common Stock. 
This right to repurchase shall be exercisable by the Company at any time
within one hundred eighty (180) days of the termination of such optionee’s
employment or service with the Company for any reason (including, without
limitation, death, Disability, retirement, voluntary resignation or
termination, or involuntary termination with or without Cause) by:  (i) giving written notice of such repurchase
to such optionee, (ii) tendering payment of the purchase price of such shares
of Non-Voting Common Stock to such optionee within thirty (30) days of the
delivery of such written notice and (iii) complying with such other terms and
conditions established by the Committee.

 

21.                               Definitions.  For purposes of the Plan, the following terms
shall be defined as set forth below:

 

(a)                                  “Board”
or “Board of Directors” shall mean the Board of Directors of the Company.

 

(b)                                 “Cause”
shall mean (i) in the case of an employee or consultant, if there is a written
employment or consulting agreement between the optionee and the Company, any of
its Subsidiaries or a Parent which defines termination of such relationship for
cause, cause as defined in such agreement, and (ii) in the absence of such
agreement, (A) conviction of the employee or consultant of any felony, or the
conviction of the employee or consultant of a misdemeanor which involves moral
turpitude, or the entry by the employee or consultant of a plea of guilty or nolo contendere with respect to any of the
foregoing, (B) the commission of any act or failure to act by such employee or
consultant that involves moral turpitude, dishonesty, theft, destruction of
property, fraud, embezzlement or unethical business conduct, or that is
otherwise injurious to the Company or any of its affiliates, whether
financially or otherwise, (C) any violation by such employee or consultant of
any rule or policy of the Company or any of its affiliates, or (D) any
violation by such employee or consultant of the requirements of any other
contract or agreement between the Company

 

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(or any of its
affiliates) and such employee or consultant, and the failure of such employee
or consultant to cure such violation within ten (10) days after receipt of
written notice from the Company; in each case, with respect to subsections (A)
through (D), as determined in good faith by the Board of Directors of the
Company in the exercise of its reasonable business judgment.

 

(c)                                  “Code”
shall mean the Internal Revenue Code of 1986, as amended, and any successor
thereto.

 

(d)                                 “Common
Stock” means the Voting Common Stock and the Non-Voting Common Stock.

 

(e)                                  “Constituent
Corporation” shall mean any corporation which engages with the Company, any of
its Subsidiaries or a Parent in a transaction to which Section 424(a) of
the Code applies, or any Parent, Subsidiary or affiliate of such corporation.

 

(f)                                    “Disabled”
or “Disability” shall mean a permanent and total disability within the meaning
of Section 22(e)(3) of the Code.

 

(g)                                 “Fair
Market Value” shall mean as of any date, the Board of Directors’ good faith
determination of the fair value of one share of Non-Voting Common Stock as of
the applicable reference date, which determination shall be consistent with the
requirements of Section 422(c) of the Code.

 

(h)                                 “Incentive
Stock Option” means an option conforming to the requirements of
Section 422 of the Code and any successor thereto.

 

(i)                                     “Legal
Representative” shall mean the executor, administrator or other person who at
the time is entitled by law to exercise the rights of a deceased or
incapacitated optionee with respect to an option granted under the Plan.

 

(j)                                     “Non-qualified
Stock Option” means any stock option other than an Incentive Stock Option.

 

(i)                                     “Non-Voting
Common Stock” means the shares of Non-Voting Common Stock of the Company, par
value $0.01 per share.

 

(j)                                     “Parent”
shall have the same definition as “parent corporation”
in Section 424(e) of the Code.

 

(k)                                  “Subsidiary”
shall have the same definition as “subsidiary corporation”
in Section 424(f) of the Code.

 

(l)                                     “Voting
Common Stock” means the shares of Voting Common Stock of the Company, par value
$0.01 per share.

 

10

 

22.                               Governing
Law; Construction.  The Plan, the
options and any Agreement hereunder and all related matters shall be governed
by, and construed in accordance with, the laws of the State of Delaware,
without regard to conflict of law provisions.

 

Neither the
Plan nor any Agreement shall be construed or interpreted with any presumption
against the Company by reason of the Company causing the Plan or Agreement to
be drafted.  Whenever from the context it
appears appropriate, any term stated in either the singular or plural shall
include the singular and plural, and any term stated in the masculine, feminine
or neuter gender shall include the masculine, feminine and neuter.

 

23.                               Partial
Invalidity.  The invalidity,
illegality or unenforceability of any provision in the Plan, any option or
Agreement shall not affect the validity, legality or enforceability of any
other provision, all of which shall be valid, legal and enforceable to the
fullest extent permitted by applicable law.

 

11Exhibit 10.16

 

EMPLOYMENT AGREEMENT

 

THIS
EMPLOYMENT AGREEMENT is entered into as of the 23rd day of January, 2001, by
and between MALACHI MATTRESS AMERICA, INC.,
a Delaware corporation (the “Company”), and GARY
T. FAZIO (the “Employee”).

 

W I T N E S S E T H:

 

WHEREAS, the
Company and the Employee (collectively “the Parties”) desire to enter into this
Employment Agreement (the “Agreement”) as hereinafter set forth;

 

NOW,
THEREFORE, the Company and Employee agree as follows:

 

1.                                       EMPLOYMENT
TERM.

 

(a)                                  During
the period specified in Subsection 1(b) hereof (the “Employment Term”),
the Company shall employ the Employee, and the Employee shall serve the
Company, as its President, Chief Executive Officer, and non-voting Chairman of
the Board of Directors, based on the terms and subject to the conditions set
forth herein.

 

(b)                                 The
Employment Term shall:

 

(i)                                     be
for an initial two (2) year term commencing on January 25, 2001; provided,
however, that such term shall automatically be extended one calendar day for
each calendar day of this Agreement that the Employee is employed by the
Company, so that the remaining Employment Term shall always be two (2) years;

 

(ii)                                  provided
that the Employment Term may terminate as provided in Section 4 hereof
prior to the date specified above in this Subsection 1(b).

 

2.                                       POSITION,
DUTIES, AND RESPONSIBILITIES.  At all
times during the Employment Term, the Employee shall:

 

(a)                                  Hold
the position of President and Chief Executive Officer reporting to the full
Board of Directors of the Company (the “Board”), and not to any single
individual or to a committee of less than the full Board [except as provided in
Section 2(g) hereof], and also serve as the non-voting Chairman of the
Board.  As non-voting Chairman of the
Board, the Employee shall (i) receive due notice of and be entitled to attend
all meetings of the Board, (ii) receive all information provided to the Board,
(iii) participate in all Board discussions, (iv) preside at Board meetings, and
(v) prepare Board meeting agendas;

 

 

(b)                                 Have
those duties and responsibilities, and the power and authority, customarily
possessed by the President and Chief Executive Officer of a corporation and
such additional duties as may be assigned to the Employee from time to time by
the Board which are consistent with the position of President and Chief
Executive Officer;

 

(c)                                  Adhere
to such reasonable written policies and directives, and such reasonable
unwritten policies and directives as are of common knowledge to executive
officers of the Company, in all cases as may be promulgated from time to time
by the Board and which are applicable to executive officers of the Company and
consistent with the Employee’s position as President and Chief Executive
Officer;

 

(d)                                 Invest
in the Company only in accordance with any insider trading policy of the
Company in effect at the time of the investment;

 

(e)                                  Devote
the Employee’s entire business time, energy, and talent to the business, and to
the furtherance of the purposes and objectives, of the Company, and neither
directly nor indirectly act as an employee of or render any business,
commercial, or professional services to any other person, firm or organization
for compensation, without the prior written approval of the Board.  Nothing in this Agreement shall preclude the
Employee from devoting reasonable periods of time to charitable and community
activities or the management of the Employee’s investment assets, provided such
activities do not interfere with the performance by the Employee of the
Employee’s duties hereunder;

 

(f)                                    Have
reporting solely to him all employees of the Company, either directly or
indirectly through other employees reporting solely to him; and

 

(g)                                 During
the first six (6) months of the Employment Term all Company policy and
significant business decisions must be approved by the operating committee
established by the Board.  The Employee
shall be a member of that committee.

 

3.                                       SALARY,
BONUS AND BENEFITS.  For services
rendered by the Employee on behalf of the Company, during the Employment Term
the following salary, bonus and benefits shall be provided to the Employee by
the Company:

 

(a)                                  The
Company shall pay to the Employee, in equal installments, according to the
Company’s then current practice for paying its executive officers in effect from
time to time during the Employment Term, but in no case less frequently than
monthly, an annual base salary at the initial rate of Three Hundred Thousand
Dollars ($300,000).  This salary shall be
subject to annual review by the Board or the Human Resources Committee of the
Board (the “Committee”) and may be increased, but not decreased, to the extent,
if any, that the Committee may determine.

 

2

 

(b)                                 The
Employee shall participate in the Company’s annual bonus system (the “Bonus
Plan”) in accordance with the provisions of that Plan as in effect as of the
date of this Agreement.  The Employee’s
“target annual bonus”, as established by the Board or the Committee under the
Bonus Plan as of the date of this Agreement, shall be sixty percent (60%) of
annual base salary (such percentage, the “Target Annual Bonus Percentage” and
such bonus, the “Target Bonus”), with a range of zero percent (0%) to one
hundred twenty percent (120%) of annual base salary based on achievement of
financial targets established annually under the Bonus Plan by the Board or the
Committee.  The Employee is guaranteed a
minimum bonus for his first fiscal year with the Company of one hundred thousand
dollars ($100,000).

 

(c)                                  Within
thirty (30) days hereof, the Employee shall be granted options (the “Options”)
to purchase two hundred fifty thousand (250,000) shares of the Company’s common
stock (the “Shares”) at a price per Share which is equal to an eight (8) times
multiple of the Company’s twelve (12) months trailing EBITDA, less debt,
divided by the fully diluted number of outstanding Shares (all as of
January 28, 2001 and based on the Company’s performance for the fiscal
year which ends on January 28, 2001). 
The Company’s stock option plan under which these Options are to be
granted shall be consistent with this Agreement and essentially similar to the
Employee’s current employer’s stock option plan.  However, that stock option plan shall not
require that the Options granted pursuant to this Agreement and the Shares
acquired from those Options be sold to the Company or any other entity for a
price below fair market value at the time of any such sale.  These Options shall have a ten-year life and
shall vest at the rate of 20% per year, with the first 20% vesting on
January 25, 2002.  These Options, at
the sole discretion of the Employee, may be exercised by the Employee on a
“cashless” basis in accordance with their terms (including vesting requirements)
if the Employee terminates his employment with the Company for “Good Reason”
(as defined below) or if the Company terminates his employment without “Cause”
(as defined below).  In addition, these
Options shall fully vest if the Employee is employed by the Company under this
Agreement at the time that an entity or entities unrelated to the current
shareholders of the Company directly or indirectly acquire more than fifty
percent (50%) of the outstanding shares of the voting stock of the Company or
acquire all or substantially all of the assets of the Company (“Sale of the
Company”).

 

(d)                                 During
the period that the Employee is employed by the Company under this Agreement,
the Company shall not enter into an agreement for the Sale of the Company,
unless the Company provides the Employee the opportunity to participate in such
transaction with respect to his Options and the Shares subject to his Options
on the same terms and conditions

 

3

 

available to
all holders of Company common stock participating in such transaction.

 

(e)                                  The
Employee shall be eligible for participation in the current Company provided
executive benefits as outline in Exhibit A attached hereto but modified, as to
the Employee, to provide the Employee term life insurance in an amount at least
equal to one and one half times his base annual salary (initially $450,000 of
coverage), a vehicle allowance of at least six hundred fifty dollars ($650) per
month, and at least five (5) weeks of paid vacation per year.  The Employee shall also be eligible for
participation in such other benefit plans as the Board may adopt from time to
time and in which the Company’s executive officers are eligible to
participate.  Such participation shall be
subject to the terms and conditions set forth in the applicable plan
documents.  The employee shall not be
entitled to duplicative payments under this Agreement and any other Company
benefit plans, including severance benefits.

 

(f)                                    The
Company shall reimburse the Employee for up to sixty (60) days of reasonable
commuting and temporary living expenses related to the commencement of his
employment with the Company.  The
Employee’s expenses of commuting to and living in the Houston area after such
initial sixty (60) days shall not be reimbursed by the Company.  If the Employee remains employed by the
Company until July 25, 2001, on that date the Company shall pay him a lump
sum of one hundred thirty-five thousand dollars ($135,000) as a relocation
allowance and shall then have no further obligation to pay any expenses of the
Employee in relocating from North Carolina to the Company’s headquarters
area.  The amount of the Relocation
Allowance may be reduced by all applicable tax withholding amounts, and will
not be grossed up by the Company for taxes.

 

4.                                       TERMINATION
OF EMPLOYMENT.  As indicated in
Subsection 1(b)(ii), the Employment Term may terminate prior to the date
specified in Subsection 1(b)(i) as follows:

 

(a)                                  The
Employee’s employment hereunder will terminate without further notice upon the
death of the Employee.

 

(b)                                 The
Company may terminate the Employee’s employment hereunder effective immediately
upon giving written notice of such termination for “Cause”.  For these purposes, “Cause” shall mean the
following:

 

(i)                                     Commission
by the Employee (evidenced by a conviction or written, voluntary and freely
given confession) of a criminal act constituting a felony;

 

(ii)                                  Commission
by the Employee of a material breach or material default of any of the
Employee’s agreements or obligations under any provision of this Agreement,
including, without limitation, the

 

4

 

Employee’s
agreements and obligations under Subsections 2(a) through 2(e) and Sections 8
and 9 of this Agreement, which is not cured in all material respects within
thirty (30) days after the Board has given such written notice thereof to the
Employee, which notice must be given by the Board within sixty (60) days after
the Board’s first knowledge of an event causing such material breach or
material default; or

 

(iii)                               Commission
by the Employee, when carrying out the Employee’s duties under this Agreement,
of acts or the omission of any act, which both: 
(A) constitutes gross negligence or willful misconduct and (B) results
in material economic harm to the Company or has a materially adverse effect on
the Company’s operations, properties or business relationships.

 

(c)                                  The
Employee’s employment hereunder may be terminated by the Company upon the
Employee’s disability, if the Employee is prevented from performing the
Employee’s duties hereunder by reason of physical or mental incapacity for a
period of one hundred eighty (180) consecutive days in any period of two
consecutive fiscal years of the Company, but the Employee shall be entitled to
full compensation and benefits hereunder until the close of such one hundred
and eighty (180) day period.

 

(d)                                 The
Company may terminate the Employee’s employment hereunder without Cause at any
time upon thirty (30) days written notice.

 

(e)                                  The
Employee may terminate employment hereunder effective immediately upon giving
written notice of such termination for “Good Reason”, as defined in
Subsection 4(g) below, if:

 

(i)                                     the
Employee has given the detailed written notice of such “Good Reason”, as
required under 4(g) below, within sixty (60) days after the first knowledge of
an event causing such “Good Reason” and

 

(ii)                                  the
Company has failed to cure the “Good Reason” within thirty (30) days after the
Employee has given the detailed written notice of such “Good Reason”.

 

(f)                                    The
Employee may terminate employment hereunder without Good Reason at any time
upon thirty (30) days written notice, without any liability or obligation of
the Employee to the Company arising from such termination.

 

(g)                                 For
purposes of this Agreement, “Good Reason” means any of the following items
continuing for thirty (30) days after the Employee has given each member of the
Company’s Board of Directors detailed written notice of:  (i) any failure to pay when due either the
annual base salary of

 

5

 

the Employee
of at least three hundred thousand dollars ($300,000), the Employee’s
guaranteed bonus of $100,000 for the first year of the Employment Term, or the
Target Annual Bonus Percentage or maximum annual bonus percentage applicable to
the Employee under the Bonus Plan, (ii) any material reduction in the position,
authority or office of the Employee, (iii) any material reduction in the
Employee’s responsibilities or duties for the Company, (iv) any material adverse
change or reduction in the aggregate benefits provided to the Employee by the
Company as of the start of his employment with the Company (provided that any
material reduction in such benefits that is required by law or applies
generally to all senior employees of the Company shall not constitute “Good
Reason” as defined hereunder), (v) any relocation of the Employee’s principal
place of work with the Company currently in Houston, Texas to a place involving
materially longer travel than from Charlotte, North Carolina, or (vi) the
material breach or material default by the Company of any of its agreements or
obligations under any provisions of this Agreement.  The Parties agree that “Good Reason” will not
be deemed to have occurred merely because the Company becomes a subsidiary or
division of another entity provided the Employee continues to serve in the
position set forth in Section 2 above of such subsidiary or division and
such subsidiary or division is comparable or greater in size to the organization
consisting of the Company and its subsidiaries.

 

5.                                       SEVERANCE
COMPENSATION.  If the Employee’s
employment is terminated, the following severance provisions will apply:

 

(a)                                  If
the Employee’s employment is terminated by the Company other than for Cause or
is terminated by the Employee for Good Reason, then, through the remaining
Employment Term as specified in Subsection 1(b) hereof, determined without
regard to Subsection 1(b)(ii) hereof (such remaining Employment Term
calculated without regard to Subsection 1(b)(ii), and without regard to
whether the Employee elects accelerated payments of the Employee’s annual base
salary and bonus in accordance with Subsection 5(a)(v), is hereinafter
referred to as the “Payment Term”), the Company shall:

 

(i)                                     continue
to pay the Employee’s annual base salary in the then prevailing amount and at
the times specified in Subsection 3(a) hereof;

 

(ii)                                  regardless
of the achievement of financial targets established annually by the Board, pay
the Employee an amount equal to one (1) year’s full Target Bonus for the
Employee, such payment shall be made on the date that annual bonuses are
normally paid by the Company to its senior executives; and

 

6

 

(iii)                               continue
in effect any medical and dental coverage, any disability protection, any life
insurance protection (including life insurance protection being paid for by the
Employee) and car allowance hereunder being provided to the Employee
immediately prior to the Employee’s termination of employment, or if any of
such benefits have decreased during the one year period ending on the
Employee’s termination of employment, at the highest level in effect during
such one year period;

 

(iv)                              pay
for executive outplacement services for the Employee from Drake, Beam &
Morin or a similar nationally recognized executive outplacement firm selected
by the Company, such services shall be at the level provided for chief
executive officers of similar size corporations, provided that such outplacement
services will be provided for a one year period commencing on the date of
termination of employment regardless of the Payment Term;

 

(v)                                 In
lieu of the payments described in Subsections 5(a)(i) and 5(a)(ii) hereof, at
the Employee’s request, submitted in writing to the Company within twenty (20)
business days after the date of the Employee’s termination of employment, the
Company shall pay the total of the Employee’s annual base salary payments
described in Subsection 5(a)(i), discounted for the time value of money
using the then prime rate, plus the amount provided in
Subsection 5(a)(ii), such payment shall be made in a single sum within
forty-five (45) days following the Employee’s termination of employment; and

 

(b)                                 If
the Employee’s employment hereunder terminates due to the Employee’s
termination by the Company for Cause, due to the death or disability of the
Employee, or due to the termination by the Employee other than for Good Reason,
then no further compensation or benefits will be provided to the Employee by
the Company under this Agreement following the date of such termination of
employment other than payment of compensation earned to the date of termination
of employment but not yet paid.  As more
fully and generally provided in Section 15 hereof, this
Subsection 5(b) shall not be interpreted to deny the Employee any benefits
to which he may be entitled under any plan or arrangement of the Company
applicable to the Employee.  Likewise,
this Subsection 5(b) shall not be interpreted to entitle the Employee to a
bonus under the Bonus Plan following his termination of employment except as
provided in the Bonus Plan.

 

(c)                                  Notwithstanding
anything contained in this Agreement to the contrary, other than
Section 15 hereof, if the Employee breaches any of the Employee’s
obligations under Section 8 or 9 hereof, no further severance

 

7

 

payments or
other benefits will be payable to the Employee under this Section 5.

 

6.                                       SEVERANCE
PLAN.  It is the intention of the Parties
that this Agreement provide the sole severance benefit to the Employee.  The severance benefits under this Agreement
shall be in lieu of any other severance benefits payable under any other
severance benefit plan of the Company.

 

7.                                       PLAN
AMENDMENTS.  To the extent any
provisions of this Agreement modify the terms of any existing plan, policy or
arrangement affecting the compensation or benefits of the Employee, as
appropriate (a) such modification as set forth herein shall be deemed an
amendment to such plan, policy or arrangement as to the Employee, and both the
Company and the Employee hereby consent to such amendment, (b) the Company will
appropriately modify such plan, policy or arrangement to correspond to this
Agreement with respect to the Employee, or (c) the Company will provide an
“Alternative Benefit,” as defined in Section 13 hereof, to or on behalf of
the Employee in accordance with the provisions of such Section 13.

 

8.                                       CONFIDENTIAL
INFORMATION.  The Employee agrees
that the Employee will not, during the Employment Term or at any time
thereafter, either directly or indirectly, disclose to make known to any other
person, firm, or corporation any confidential information, trade secret or
proprietary information of the Company that the Employee may acquire in the
performance of the Employee’s duties hereunder (except in good faith in the
ordinary course of business for the Company to a person who will be advised by
the Employee to keep such information confidential) or make use of any of such
confidential information except in the performance of the Employee’s duties or
when required to do so by legal process, by any governmental agency having
supervisory authority over the business of the Company or by any administrative
or legislative body (including a committee thereof) that requires the Employee
to divulge, disclose or make accessible such information.  In the event that the Employee is so ordered,
the Employee shall so advise the Company in order to allow the Company the
opportunity to object to or otherwise resist such order.  Upon the termination of the Employee’s
employment with the Company, the Employee agrees to deliver forthwith to the
Company any and all proprietary literature, documents, correspondence, and
other proprietary materials and records furnished to or acquired by the
Employee during the course of such employment. 
In the event of a breach or threatened breach of this Section 8 by
the Employee, the Company will be entitled to preliminary and permanent
injunctive relief, without bond or security, sufficient to enforce the
provisions hereof and the Company will be entitled to pursue such other
remedies at law or in equity which it deems appropriate.

 

9.                                       NON-COMPETITION.  In consideration of this Agreement, the
Employee agrees that, during the period of the Employee’s employment with the
Company, and for one (1) year thereafter, the Employee shall not act as a
proprietor, investor, director, officer, employee, substantial stockholder,
consultant, or partner in any business engaged to a material extent in the sale
of (a) mattresses or other bedding products or (b) any other products which
constitute more than ten percent (10%) of the Company’s revenues at the time in
direct competition with the Company in any market.  The Employee agrees that he will not at any
time without the prior written consent of the Company, directly or indirectly
solicit or induce any employee, agent,

 

8

 

representative,
associate, customer, or supplier of the Company to terminate such entity’s
relationship with the Company or take any action to interfere with such
relationship.  The Employee understands
that the foregoing restrictions may limit the Employee’s ability to engage in
certain business pursuits during the period provided for above, but
acknowledges that the Employee will receive sufficiently higher remuneration
and other benefits from the Company hereunder than the Employee would otherwise
receive to justify such restriction.  The
Employee acknowledges that the Employee understands the effect of the
provisions of this Section 9, and that the Employee has had reasonable
time to consider the effect of these provisions, and that the Employee was
encouraged to and had an opportunity to consult an attorney with respect to
these provisions.  The Company and the
Employee consider the restrictions contained in this Section 9 to be
reasonable and necessary.  Nevertheless,
if any aspect of these restrictions is found to be unreasonable or otherwise
unenforceable by a court of competition jurisdiction, the Parties intend for
such restricitons to be modified by such court so as to be reasonable and
enforceable and, as so modified by the court, to be fully enforced.  In the event of a breach or threatened breach
of this Section 9 by the Employee, the Company will be entitled to
preliminary and permanent injunctive relief, without bond or security,
sufficient to enforce the provisions hereof and the Company will be entitled to
pursue such other remedies at law or in equity which it deems appropriate.

 

10.                                 NOTICES.  For purposes of this Agreement, all
communications provided for herein shall be in writing and shall be deemed to
have been duly given when hand delivered or mailed by United States registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:

 

(a)                                  If
the notice is to the Company:

 

Malachi
Mattress America, Inc.

Attention:  Chief Financial Officer

5815 Gulf Freeway

Houston, Texas  77023

 

(b)                                 If
the notice is to the Employee:

 

Gary T. Fazio

172 Tuckertown Road

New London, North Carolina  28127

 

with a copy
to:

 

Baker and
Hostetler LLP

3200 National City Center

1900 East Ninth Street

Cleveland, Ohio  44114-3485

Attn:  Hewitt B. Shaw, Jr.

 

9

 

or to such
other address as either Party may have furnished to the other in writing and in
accordance herewith, except that notices of change of address shall be
effective only upon receipt.

 

11.                                 ASSIGNMENT;
BINDING EFFECT.  This Agreement shall
be binding upon and inure to the benefit of the Parties to this Agreement and
their respective successors, heirs (in the case of the Employee) and permitted
assigns.  No rights or obligations of the
Company under this Agreement may be assigned or transferred by the Company
except that such rights or obligations may be assigned or transferred in
connection with the sale or transfer of all or substantially all of the assets
of the Company, provided that the assignee or transferee is the successor to
all or substantially all of the assets of the Company and such assignee or
transferee expressly assumes the liabilities, obligations and duties of the
Company, as contained in this Agreement, either contractually or as a matter of
law.   The Company further agrees that,
in the event of a sale or transfer of assets as described in the preceding
sentence, it shall be a condition precedent to the consummation of any such
transaction that the assignee or transferee expressly assumes the liabilities,
obligations and duties of the Company hereunder.  No rights or obligations of the Employee
under this Agreement may be assigned or transferred by the Employee other than
the Employee’s rights to compensation and benefits, which may be transferred
only by will or operation of law, except as provided in this Section 11.

 

The Employee
shall be entitled, to the extent permitted under any applicable law, to select
and change a beneficiary or beneficiaries to receive any compensation or
benefits payable hereunder following the Employee’s death by giving the Company
written notice thereof.  In the absence
of such a selection, any compensation or benefit payable under this Agreement
following the death of the Employee shall be payable to the Employee’s spouse,
or if such spouse shall not survive the Employee, to the Employee’s
estate.  In the event of the Employee’s
death or a judicial determination of his incompetence, reference in this
Agreement to the Employee shall be deemed, where appropriate, to refer to the
Employee’s beneficiary, estate or other legal representative.

 

12.                                 INVALID
PROVISIONS.  Any provision of this
Agreement that is prohibited or unenforceable shall be ineffective to the
extent, but only to the extent, of such prohibition or unenforceability without
invalidating the remaining portions hereof and such remaining portions of this
Agreement shall continue to be in full force and effect.  In the event that any provision of this
Agreement shall be determined to be invalid or unenforceable, the Parties will
negotiate in good faith to replace such provision with another provision that
will be valid or enforceable and that is as close as practicable to the
provisions held invalid or unenforceable.

 

13.                                 ALTERNATIVE
SATISFACTION OF COMPANY’S OBLIGATIONS. 
In the event this Agreement provides for payments or benefits to or on
behalf of the Employee which cannot be provided under the Company’s benefit
plans, policies or arrangements either because such plans, policies or
arrangements no longer exist or no longer provide such benefits or because
provision of such benefits to the Employee would adversely affect the tax
qualified or tax advantaged status of such plans, policies or arrangements for
the Employee or other participants therein, the Company may provide the
Employee with an “Alternative Benefit,” as defined in this Section 13, in
lieu thereof.  The Alternative Benefit is
a benefit or payment which

 

10

 

places the
Employee and the Employee’s dependents in at least as good of an economic
position as if the benefit promised by this Agreement (a) were provided exactly
as called for by this Agreement, and (b) had the favorable economic, tax and
legal characteristics customary for plans, policies or arrangements of that
type.  Furthermore, if such adverse
consequence would affect the Employee or the Employee’s dependents, the
Employee shall have the right to require that the Company provide such an
Alternative Benefit.

 

14.                                 ENTIRE
AGREEMENT, MODIFICATION.  Subject to
the provisions of Section 15 hereof, this Agreement contains the entire
agreement between the Parties with respect to the employment of the Employee by
the Company, as well as with respect to his Company stock and stock options
(other than as provided in the Company’s stock option plan and his Company
stock option grant agreement) and supersedes all prior and contemporaneous
agreements, representations, and understandings of the Parties, whether oral or
written.  The Employee has no obligation
to enter into any shareholders agreement related to the Company or any other
agreement regarding his Company stock or stock options.  No modification, amendment, or waiver of any
of the provisions of this Agreement shall be effective unless in writing,
specifically referring hereto, and signed by both Parties.

 

15.                                 NON-EXCLUSIVITY
OF RIGHTS.  Notwithstanding the
foregoing provisions of Section 14, nothing in this Agreement shall
prevent or limit the Employee’s continuing or future participation in any
benefit, bonus, incentive or other plan, program, policy or practice provided
by the Company for its executive officers, nor shall anything herein limit or
otherwise affect such rights as the Employee has or may have under any stock
option, restricted stock or other agreements with the Company or any of its
subsidiaries.  Amounts which the Employee
or the Employee’s dependents or beneficiaries are otherwise entitled to receive
under any such plan, policy, practice or program shall not be reduced by this
Agreement except as provided in Section 6 hereof with respect to payments
under the Executive Severance Benefit Plan if cash payments of annual base
salary are made hereunder.

 

16.                                 WAIVER
OF BREACH.  The failure at any time
to enforce any of the provisions of this Agreement or to require performance by
the other Party of any of the provisions of this Agreement shall in no way be
construed to be a waiver of such provisions or to affect either the validity of
this Agreement or any part of this Agreement or the right of either Party
thereafter to enforce each and every provision of this Agreement in accordance
with the terms of this Agreement.

 

17.                                 GOVERNING
LAW.  This Agreement has been made
in, and shall be governed and construed in accordance with the laws of, the
State of Texas.  The Parties agree that
this Agreement is not an “employee benefit plan” or part of an “employee
benefit plan” which is subject to the provisions of the Employee Retirement
Income Security Act of 1974, as amended.

 

18.                                 TAX
WITHHOLDING.  The Company may
withhold from any amounts payable under this Agreement such federal, state or
local taxes as shall be required to be withheld pursuant to any applicable law
or regulation.

 

11

 

19.                                 SUBSIDIARIES
AND AFFILIATES.  Notwithstanding any
contrary provision of this Agreement, to the extent it does not adversely
affect the Employee, the Company may provide the compensation and benefits to
which the Employee is entitled hereunder through one or more subsidiaries or
affiliates; provided, however, that the Company shall in all events remain
financially responsible for such compensation and benefits.

 

20.                                 NO
MITIGATION OR OFFSET.  In the event
of any termination of employment, the Employee shall be under no obligation to
seek other employment.  Amounts due the
Employee under this Agreement shall not be offset by any remuneration
attributable to any subsequent employment he may obtain.

 

21.                                 SOLE
REMEDY.  The Parties agree that the
remedies of each against the other for breach of this Agreement shall be
limited to enforcement of this Agreement and recovery of the amounts and
remedies provided for herein.  The
Parties, however, further agree that such limitation shall not prevent either
Party from proceeding against the other to recover for a claim other than under
this Agreement.

 

22.                                 ARBITRATION.  Any controversy or dispute hereunder,
including any dispute relating to the existence of Cause or Good Reason, shall
be settled by arbitration in Houston, Texas by an arbitrator that is mutually
acceptable to the Company and the Employee. 
The arbitration shall be conducted in accordance with the rules of the
American Arbitration Association.  The
cost of any arbitration proceeding hereunder shall be borne equally by the
Company and the Employee.  The award of
the arbitrator shall be final and binding upon the Parties, and judgment upon
the award rendered by the arbitrator may be entered in any court having
jurisdiction thereof.

 

23.                                 COMPANY
REPRESENTATIONS AND WARRANTIES.  The
Company is a corporation duly organized, validly existing and in good standing
under the laws of the state of Delaware and has all of the requisite power and
authority to execute and deliver this Agreement and perform its obligations
hereunder.  All necessary and appropriate
corporate action has been taken by the Company with respect to the execution
and delivery of this Agreement.  The
undersigned has been duly authorized to execute this Agreement on behalf of and
thereby bind the Company.

 

IN WITNESS
WHEREOF, the Company and the Employee have executed this Agreement as of the
day and year first above written.

 

 

	
   

  	
  MALACHI
  MATTRESS AMERICA, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/

  	
   

  
	
   

  	
   

  
	
   

  	
  GARY T.
  FAZIO  -  “Employee”

  
	
   

  	
   

  
	
   

  	
  /s/ Gary T.
  Fazio

  	
   

  
					

 

12

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