Document:

Exhibit 10.7

 

MANAGEMENT SERVICES AGREEMENT

 

This MANAGEMENT SERVICES AGREEMENT (the “Agreement”), dated as of
October 18, 2002 (the “Effective Date”), is entered into by and between
Mattress Firm, Inc., a Delaware corporation with offices at 5815 Gulf Freeway,
Houston, Texas 77023 (the “Company”), and Sun Capital Partners Management, LLC,
a Delaware limited liability company with offices at 5200 Town Center Circle,
Suite 470, Boca Raton, Florida 33486 (the “Manager”).

 

WHEREAS, the Company desires to receive financial and management
consulting services from the Manager and to obtain the benefit of the
experience of the Manager in business and financial management;

 

WHEREAS, the Manager desires to provide financial and management
consulting services to the Company pursuant to the terms of this Agreement; and

 

WHEREAS, the compensation arrangements set forth in this Agreement are
designed to compensate the Manager for providing such financial and management
consulting services to the Company;

 

NOW, THEREFORE, in consideration of the mutual agreements hereinafter
set forth, the parties hereto agree as follows:

 

1.             Agreement; Term.

 

(a)           The
Company hereby retains the Manager to perform, and the Manager agrees to render
to the Company, on the terms herein set forth, management and consulting
services regarding the business of the Company and such other services relating
to the Company as may from time to time be reasonably requested by the Board of
Directors or executive officers of the Company. 
Without limiting the generality of the foregoing, the parties currently
contemplate that these services shall include advice regarding improvements to
the Company’s financial reporting, accounting and management information
systems and staffing.

 

(b)           It
is expressly understood and agreed that the Manager shall devote only so much
time, and shall consult with and advise the officers and managers of the
Company only to such extent and at such times and places as may be mutually
convenient to the Company and the Manager. 
The Manager shall be free to provide similar services to such other
business enterprises or activities as the Manager may deem fit without any
limitation or restriction whatsoever.

 

(c)           The
term of this Agreement shall commence as of the Effective Date and shall
terminate on the tenth anniversary of the Effective Date.

 

2.             Compensation and
Expenses.

 

(a)           For
the services to be rendered by the Manager hereunder, the Manager shall receive
an annual fee (the “Management Fee”) equal to the greater of (i) $400,000.00 or
(ii) 5% of the Company’s EBITDA (as such term is hereinafter defined), computed
without taking into consideration the fees payable under this Section 2, as
determined by the Company’s regular

 

1

 

auditors, or in the absence
thereof, by the Company’s Board of Directors, with respect to each fiscal
year.  The Company shall pay the
Management Fee in quarterly installments, in advance, equal to the greater of
(i) $100,000.00 or (ii) 5% of EBITDA (as such term is hereinafter defined) for
the immediately preceding quarter, computed without taking into consideration
the fees payable under this Section 2. 
At the end of each fiscal year during the term of this Agreement, an
amount shall be paid to the Manager based on any adjustments made to the
calculation of EBITDA described above as a result of an audit of the Company’s
financial statements.  On the date
hereof, the Company shall pay the Manager $14,130.43, representing the pro rata
portion of the Management Fee for the quarter ending October 31, 2002.  For purposes of this Agreement, the term
“EBITDA” means, for any period, the sum of the amounts for such period of (A)
net income (or loss) after taxes of the Company and its direct and indirect
subsidiaries on a consolidated basis (“Net Income”), plus (B) interest expense
which has been deducted in the determination of Net Income, plus (C) federal,
state and local taxes which have been deducted in determining Net Income, plus
(D) depreciation and amortization expenses which have been deducted in
determining Net Income, including without limitation amortization of
capitalized transaction expenses incurred in connection with the acquisition of
all of the outstanding capital stock of Mattress Firm, Inc. (the “Mattress Firm
Acquisition”), plus (E) extraordinary losses which have been deducted in the
determination of Net Income, plus (F) uncapitalized transaction expenses
incurred in connection with the Mattress Firm Acquisition, plus (G) all other
non-cash charges, minus (H) extraordinary gains which have been included in the
determination of Net Income.  Each item
used in calculating EBITDA shall be determined in accordance with generally
accepted accounting principles, consistent with that used in prior periods.

 

(b)           The
Company shall reimburse the Manager for the cost of all reasonable
out-of-pocket fees and expenses incurred by the Manager and its affiliates in
the performance of the services hereunder and all matters related thereto.

 

(c)           The
Manager shall also be entitled to additional customary and reasonable fees for
investment banking services provided to the Company or to any of its direct or
indirect subsidiaries or shareholders, including, without limitation,
refinancings, restructurings, equity or debt offerings, acquisitions, mergers,
consolidations, business combinations, sales and divestitures.  In the event that at any time during the term
hereof, there shall occur a refinancing, restructuring, equity or debt offering,
acquisition, merger, consolidation, business combination, sale or divestiture
of all or substantially all of the assets, or the outstanding shares of the
capital stock, of or involving the Company or any of the Company’s direct or
indirect subsidiaries or shareholders, the Company shall pay the Manager a fee,
in cash, equal to 1% of the aggregate consideration (including assumed debt and
long-term liabilities) paid to or by the Company or to or by any of its direct
or indirect subsidiaries or shareholders in consideration for the Manager’s performance
of investment banking services in connection with such transaction.  The Manager and the Company acknowledge and
agree that on the Effective Date the Manager shall be entitled to receive an
investment banking fee equal to $305,000.

 

(d)           If
for any reason the Company is unable to pay any or all of the amounts otherwise
owed to the Manager pursuant to this Agreement, the Company shall make such
payments as soon as the Company is able to do so.

 

2

 

3.             Relationship of the Parties.  The Manager is providing services hereunder
as an independent contractor, retaining control and responsibility for its
operations and personnel.  Nothing in
this Agreement shall be deemed to constitute the parties hereto joint
venturers, partners or participants in an unincorporated business or other
separate entity, nor in any manner create any employer-employee relationship
between the Company on the one hand, and the Manager or any of the Manager’s
employees on the other hand.

 

4.             Board of Directors and Officers.  Nothing in this Agreement shall be construed
to relieve the directors or officers of the Company from the performance of
their respective duties or limit the exercise of their powers in accordance
with the Company’s Articles of Incorporation or Bylaws, any applicable
provisions of the applicable corporate law, or otherwise.  The activities of the Company shall at all
times be subject to the control and direction of its Board of Directors and
officers.  The Company reserves the right
to make all decisions with regard to any matter upon which the Manager has
rendered its advice and consultation.

 

5.             Limitation of Liability.  Neither the Manager nor any of its
affiliates, members, partners, managers, officers, employees or agents shall be
liable to the Company or any of its subsidiaries or affiliates for any loss,
liability, damage or expense arising out of or in connection with the
performance of services contemplated by this Agreement, unless such loss,
liability, damage or expense shall be proven to result directly from the
willful misconduct of such person.  In no
event will the Manager or any of its affiliates, members, partners, managers,
officers, employees or agents be liable to the Company for special, indirect, punitive
or consequential damages, including, without limitation, loss of profits or
lost business, even if the Manager has been advised of the possibility of such
damages.  Under no circumstances will the
liability of the Manager and its affiliates, members, partners, managers,
officers, employees or agents exceed, in the aggregate, the fees actually paid
to the Manager hereunder.

 

6.             Indemnification.  The Company shall reimburse, defend,
indemnify and hold the Manager and its affiliates, members, partners, managers,
officers, employees and agents, harmless from and against any damage, loss,
liability, deficiency, diminution in value, action, suit, claim, proceeding,
investigation, audit, demand, assessment, fine, judgment, cost and other
expense (including, without limitation, reasonable legal fees and expenses)
arising out of, related to or in connection with (a) any act or omission of, or
on behalf of, the Company or the Manager, except to the extent proven to result
directly from the willful misconduct of the person seeking indemnification, or
(b) any act or omission made at the direction of the Company.

 

7.             Notices.  Any notice, request, demand or other
communication permitted or required to be given hereunder shall be in writing,
shall be sent by one of the following means to the addressee at the address set
forth in the preamble to this Agreement (or at such other address as shall be
designated hereunder by notice to the other party hereto, effective upon actual
receipt) and shall be deemed conclusively to have been given:  (a) on the first business day following the
day timely deposited with a nationally recognized overnight delivery service
with an order for next-day delivery, with the cost of delivery prepaid for the
account of the sender; (b) on the fifth business day following the day duly
sent by certified or registered United States mail, postage prepaid and return
receipt requested; or (c) if delivered by other means, when actually received
by the addressee on a business day (or on the next business day if received
after the close of normal business hours or on any non-business day).

 

3

 

8.             Assignment; Successors and
Assigns.  This Agreement and the
rights, duties and obligations of the Company hereunder may not be assigned or
delegated by the Company without the prior written consent of the Manager.  This Agreement and the rights, duties and
obligations of the Manager hereunder may not be assigned or delegated by the
Manager, other than to an affiliate of the Manager, without the prior written
consent of the Company.  All covenants,
promises and agreements by or on behalf of the parties contained in this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective heirs, legal representatives, successors and
assigns.

 

9.             Amendments.  No amendment, supplement or waiver of any
provision of this Agreement shall be effective unless the same shall be in
writing and signed by the Manager and the Company (in the case of an amendment
or supplement) or by the waiving party (in the case of a waiver).

 

10.           Applicable Law.  This Agreement shall be governed by, and
construed and enforced in accordance with, the laws of the State of Delaware,
without giving effect to principles of conflicts of law or choice of law that
would compel the application of the substantive laws of any other jurisdiction.

 

11.           Section Headings.  The headings of each section are contained
herein for convenience of reference only and shall not affect in any way the
meaning or interpretation of this Agreement.

 

12.           Entire Agreement.  This Agreement sets forth the entire
agreement of the parties hereto with regard to the subject matter hereof and
supersedes and replaces all prior agreements, understandings and
representations, oral or written, with regard to such matters.

 

13.           Severability.  If any provision of this Agreement or
application thereof under any circumstances is adjudicated to be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
not affect any other provision or application of this Agreement which can be
given effect without the invalid or unenforceable provision or application and
shall not invalidate or render unenforceable such provision or application in
any other jurisdiction.  If any provision
is held void, invalid or unenforceable with respect to particular
circumstances, it shall nevertheless remain in full force and effect in all
other circumstances.

 

14.           Counterparts.  This Agreement may be executed in
counterparts, each of which shall be an original, and both of which together
shall constitute one and the same document.

 

[SIGNATURES ON NEXT PAGE]

 

4

 

IN WITNESS WHEREOF, the parties have executed this Management Services
Agreement as of the date first above written.

 

	
   

  	
  SUN CAPITAL
  PARTNERS

  MANAGEMENT, LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ M.
  Steven Liff

  	
   

  
	
   

  	
  Name: M.
  Steven Liff

  
	
   

  	
  Title: Vice
  President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  MATTRESS
  FIRM, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Gary T.
  Fazio

  	
   

  
	
   

  	
  Name: Gary
  T. Fazio

  
	
   

  	
  Title:
  President

  

 

5Exhibit 10.8

 

EXECUTION COPY

 

LOAN AGREEMENT

 

AMONG

 

MALACHI MATTRESS AMERICA, INC.,

 

MATTRESS HOLDINGS INTERNATIONAL, LLC

 

AND

 

MATTRESS HOLDING CORP.

 

 

Dated as of October 18, 2002

 

 

TABLE OF CONTENTS

 

	
  SECTION 1
  DEFINITIONS

  	
   

  
	
  1.1

  	
  Definitions

  	
   

  
	
  1.2

  	
  Accounting
  Terms

  	
   

  
	
  1.3

  	
  Other
  Terms

  	
   

  
	
  1.4

  	
  References

  	
   

  
	
  1.5

  	
  Sections

  	
   

  
	
  1.6

  	
  Number
  and Gender

  	
   

  
	
  1.7

  	
  Incorporation of Exhibits

  	
   

  
	
  1.8

  	
  Certain Other Matters of Construction

  	
   

  
	
   

  	
   

  
	
  SECTION 2
  CONDITIONS

  	
   

  
	
  2.1

  	
  Conditions to the Advance by Each Lender

  	
   

  
	
   

  	
   

  
	
  SECTION 3
  THE COMMITMENT

  	
   

  
	
  3.1

  	
  Term Loan Advances

  	
   

  
	
  3.2

  	
  Purpose

  	
   

  
	
  3.3

  	
  Prepayment

  	
   

  
	
   

  	
   

  
	
  SECTION 4
  TERMS OF LOAN

  	
   

  
	
  4.1

  	
  Interest

  	
   

  
	
  4.2

  	
  Maximum
  Rate

  	
   

  
	
  4.3

  	
  Payments of Principal and Interest.

  	
   

  
	
   

  	
   

  
	
  SECTION 5
  REPRESENTATIONS AND WARRANTIES

  	
   

  
	
  5.1

  	
  Representations and Warranties of Borrower

  	
   

  
	
   

  	
   

  
	
  SECTION 6
  AFFIRMATIVE COVENANTS

  	
   

  
	
  6.1

  	
  Covenants of Borrower

  	
   

  
	
   

  	
   

  
	
  SECTION 7
  NEGATIVE COVENANTS

  	
   

  
	
  7.1

  	
  Negative Covenants of Borrower

  	
   

  
	
   

  	
   

  
	
  SECTION 8
  EVENTS OF DEFAULT

  	
   

  
	
  8.1

  	
  Events
  of Default

  	
   

  
	
   

  	
   

  
	
  SECTION 9
  RIGHTS AND REMEDIES OF LENDERS

  	
   

  
	
  9.1

  	
  Acceleration

  	
   

  
	
  9.2

  	
  Additional
  Rights

  	
   

  
	
  9.3

  	
  Termination of Obligations

  	
   

  
	
   

  	
   

  
	
  SECTION 10 MISCELLANEOUS

  	
   

  
	
  10.1

  	
  Other
  Loans

  	
   

  
	
  10.2

  	
  No Duty or Special Relationship

  	
   

  
	
  10.3

  	
  Other Remedies Not Required

  	
   

  
	
  10.4

  	
  NO CONTROL BY LENDER

  	
   

  

 

i

 

	
  10.5

  	
  No
  Partnership

  	
   

  
	
  10.6

  	
  Representations and Warranties

  	
   

  
	
  10.7

  	
  Headings

  	
   

  
	
  10.8

  	
  Notice

  	
   

  
	
  10.9

  	
  Binding
  Effect

  	
   

  
	
  10.10

  	
  Assignment

  	
   

  
	
  10.11

  	
  Inconsistencies and Conflicts

  	
   

  
	
  10.12

  	
  Renewal of Indebtedness

  	
   

  
	
  10.13

  	
  No
  Waiver

  	
   

  
	
  10.14

  	
  APPLICABLE
  LAW

  	
   

  
	
  10.15

  	
  Amendment

  	
   

  
	
  10.16

  	
  Severability

  	
   

  
	
  10.17

  	
  Lenders’ Discretion

  	
   

  
	
  10.18

  	
  Entire
  Agreement

  	
   

  
	
  10.19

  	
  Counterparts

  	
   

  
	
  10.20

  	
  Controlling Agreement

  	
   

  
	
  10.21

  	
  Business
  Loans

  	
   

  

 

	
  LIST OF EXHIBITS AND SCHEDULES

  
	
   

  
	
  EXHIBIT A - FORM OF COMPLIANCE CERTIFICATE

  
	
  EXHIBIT B - PROMISSORY NOTE [FORM OF]

  
	
   

  
	
   

  
	
  SCHEDULE A

  	
  -

  	
  PERMITTED
  LIENS

  
	
  SCHEDULE 7.1(a)

  	
  -

  	
  BORROWER’S
  PERMITTED DEBT

  

 

ii

 

LOAN AGREEMENT

 

THIS LOAN
AGREEMENT (this “Agreement”)
is made and entered into as of this 18th day of October, 2002 by and among,
MALACHI MATTRESS AMERICA, INC., a Delaware corporation (“Borrower”), Mattress Holdings
International, LLC, a Delaware limited liability company (“MHI”) and
Mattress Holding Corp., a Delaware corporation (“MHC” and, together with
MHI, the “Lenders”).

 

W  I  T  N  E  S
S  E  T  H:

 

In
consideration of the mutual covenants and agreements herein contained, Lender
and Borrower agree as follows:

 

SECTION 1

DEFINITIONS

 

1.1                                 Definitions.  In addition to the defined terms set forth
elsewhere herein, the following terms shall have the meanings set forth below:

 

“Accounts” shall have the meaning given
to it in the Security Agreement.

 

“Addison Note” shall have the meaning
set forth in the definition of Subordinated Debt in this Section 1.1.

 

“Adjusted Base Rate” shall mean, on any
day, the lesser of (a) the Base Rate, or (b) the Maximum Rate.

 

“Advance” shall mean the advance made
under a Note.

 

“Affiliate” shall mean, with respect to
any Person, any other Person that, directly or indirectly, controls, is
controlled by or is under common control with such Person or is a director or
officer of such Person.  For purposes of
this definition, the term “control” (including the terms “controlling,”
“controlled by” and “under common control with”) of a Person means the
possession, direct or indirect, of the power to vote 50% or more of the
outstanding voting interests of such Person and to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting interests, by contract or otherwise.  For all purposes hereof (except as provided
in the definition of “Related Party”), none of R T G Furniture Corporation,
Nationwide Furniture, Inc.  or
Wickes Furniture Corp., Inc. or any Affiliate of any of the foregoing shall be
deemed to be an Affiliate of MHC or the Sun Fund.

 

“Agent” shall mean MHC in its capacity
as agent under the Security Agreement and the Pledge Agreement, and any
successor thereto in such capacity.

 

“Authorized Officer” shall mean, as to
any Person, any officer of such Person who is duly authorized by the board of
directors, or its equivalent, of such Person to execute the Loan Documents or
any other documents or certificates to be executed by such Person hereunder in
connection with this Agreement (and the transactions described herein).

 

 

“Base Rate” shall mean seven percent
(7%) per annum.

 

“Borrower” and “Lender” shall mean the
parties identified above.

 

“Business Day” shall mean a day of the
year on which banks are not authorized or required by applicable law or
executive order to be closed in New York, New York.

 

“Busker Note” shall have the meaning set
forth in the definition of Subordinated Debt in this Section 1.1.

 

“Capitalized Lease” shall mean any
indebtedness represented by obligations under a lease that is required to be
capitalized for financial reporting purposes in accordance with GAAP, and the
amount of such indebtedness shall be the capitalized amount of such obligations
determined in accordance with GAAP.

 

“Change of Control” shall mean (i) any
sale of all or substantially all of the assets of Borrower and its Subsidiaries
on a consolidated basis (or any sale of stock with a similar result) in one or
more transactions or (ii) any sale of shares of Common Stock or Common Stock
equivalents (whether by sale of stock, merger, consolidation, recapitalization
or otherwise) or other transaction the result of which is that none of Mattress
Holdings International, LLC, a Delaware limited company, MHI Co-Investor, LLC,
a Delaware limited liability company, Sun Fund nor any of their respective
Affiliates in the aggregate (a) own, directly or indirectly (1) in excess of
50% of the number of issued and outstanding shares of Common Stock and (2) in
excess of 50% of the number of issued and outstanding shares of Common Stock on
a fully diluted basis or (b) possess voting control over the requisite number
of voting shares of Borrower’s capital stock to elect a majority of the members
of Borrower’s board of directors, in each case, immediately following the time
of such sale or transaction; provided, that if a Change of Control
occurs as a result of Sun Fund (together with its Affiliates) ceasing to own
the requisite equity securities set forth in clause (a) above or controlling
the requisite equity securities set forth in clause (b) above, then any such
sale or other transaction shall not be deemed to be a Change of Control if
immediately following such transaction the Sun Fund (together with its
Affiliates) and Jeff Seaman and/or any Affiliate thereof collectively own in
the aggregate in excess of 66 2/3% of the number of issued and outstanding
shares of Common Stock and the number of issued and outstanding shares of
Common Stock on a fully diluted basis, so long as in no event, shall the number
of shares of Common Stock owned or controlled by Jeff Seaman exceed the number
of shares of Common Stock owned or controlled by the Sun Fund (together with its
Affiliates).  For purposes of the
preceding proviso, none of R T G Furniture Corporation, Nationwide Furniture,
Inc.  or Wickes Furniture Corp.,
Inc. or any Affiliate of any of the foregoing shall be deemed to be an
Affiliate of Jeff Seaman.

 

“Closing Date” shall mean the date this
Agreement and the Loan Documents are fully executed and delivered.

 

“Closing Date Financial Statements”
shall have the meaning set forth in Section 6.1(c)

 

2

 

“Code” shall mean the Internal Revenue
Code of 1986, as amended from time to time, and related rules and regulations
promulgated thereunder by the Internal Revenue Service.

 

“Committed Loan Sum” shall mean an
aggregate amount equal to $6,000,000. 
The Committed Loan Sum of MHI shall be $3,272,727.00 and the Committed
Loan Sum of MHC shall be $2,727,273.00.

 

“Common Stock” shall mean prior to the
consummation of the Short-Form Merger, the common stock of Borrower, par value
$.01 per share and following the consummation of the Short-Form Merger, the
common stock of the surviving corporation.

 

“Compliance Certificate” shall mean a
certificate substantially in the form of the attached Exhibit A and signed by
an Authorized Officer.

 

“Debt” shall mean (a) all items of
indebtedness or liability (other than deferred credits and reserves) which in
accordance with GAAP would be included in determining total liabilities as
shown on the liability side of a balance sheet as of the date as of which
indebtedness is to be determined, (b) indebtedness or other liabilities secured
by any mortgage, security agreement, pledge, or lien existing on or encumbering
property owned by Borrower or any Subsidiary of Borrower, whether or not the
indebtedness or other liabilities secured thereby shall have been assumed by
Borrower or such Subsidiary, (c) obligations of such Person as lessee under
Capitalized Leases required to be capitalized under GAAP, and (d) all
indebtedness of any Person (i) which Borrower or any Subsidiary of Borrower has
directly or indirectly guaranteed, endorsed (otherwise than for collection or
deposit in the ordinary course of business), discounted with recourse, agreed
(contingently or otherwise) to purchase or repurchase or otherwise acquire,
(ii) in respect of which Borrower or any Subsidiary of Borrower has agreed to
supply or advance funds (whether by way of loan, purchase of securities or
capital contribution, through a commitment to pay for property or services
regardless of the nondelivery of such property or the nonfurnishing of such
services or otherwise), or (iii) in respect of which Borrower or any Subsidiary
of Borrower has otherwise become directly or indirectly liable, contingently or
otherwise, whether now existing or hereafter arising.

 

“Default” shall mean any of the events
specified in Section 8 of this Agreement, whether or not any requirement
for the giving of notice or lapse of time or other condition precedent has been
satisfied.

 

“Default Rate” shall mean the lesser of
(a) the rate of three percent (3%) per annum plus the Base Rate or (b) the
Maximum Rate.  The Default Rate shall
automatically fluctuate upward and downward as and in the amount by which the
Maximum Rate or the Base Rate per annum, as the case may be, fluctuates,
without notice to Borrower.

 

“Distribution” shall mean and include
(a) the payment of any dividends or other distributions on capital stock of the
corporation (except distributions in such stock) and (b) the redemption or
acquisition of its securities unless made contemporaneously from the net
proceeds of the sale of securities.

 

3

 

“Dollars” and the “$” symbol refer to lawful currency of
the United States of America.

 

“Equipment” shall have the meaning given
to it in the Security Agreement.

 

“ERISA” shall mean the Employee
Retirement Income Security Act of 1974, as amended, from time to time, and the
rules and regulations promulgated thereunder and the interpretations thereof.

 

“Event of Default” shall mean any of the
events specified in Section 8 of this Agreement, provided that any
applicable requirements specifically provided for in Section 8 for notice,
lapse of time, or otherwise have been satisfied.

 

“Finova Debt” shall mean the outstanding
indebtedness of Borrower incurred pursuant to the terms of that certain loan
agreement dated as of August 6, 1999 by and among Borrower, the other
borrowers named therein and Finova Mezzanine Capital Inc.

 

“Four Quarter Period” shall mean a
period of four full consecutive fiscal quarter-annual periods, taken together
as one accounting period.

 

“GAAP” shall mean generally accepted
accounting principles established by the Financial Accounting Standards Board
or the American Institute of Certified Public Accountants and in effect in the
United States from time to time, applied on a basis consistent with that of the
preceding fiscal year of Borrower, reflecting only such changes in accounting
principles or practice with which the independent public accountants of
Borrower concur.

 

“General Intangibles” shall have the
meaning given to it in the Security Agreement.

 

“Governmental Authorities” shall mean
any nation, country, commonwealth, territory, government, state, county,
parish, municipality, agency, or other political subdivision and any entity
exercising executive, legislative, judicial, regulatory, or administrative
functions of or pertaining to government, including, without limitation, any
state agencies and Persons responsible in whole or in part for environmental
matters in the states in which Borrower is located or otherwise conducting its
business activities and the United States Environmental Protection Agency.

 

“Guaranties” shall mean those certain
loan guaranties executed by the Guarantors in favor of Lenders.

 

“Guarantors” shall mean all present and
future Subsidiaries of the Borrower.

 

“Intellectual Property” shall have the
meaning given to it in the Security Agreement.

 

“Inventory” shall have the meaning given
to it in the Security Agreement.

 

“Lien” shall mean any interest in
Property securing an obligation owed to, or a claim by, a Person other than the
owner of the Property, whether such interest is based on the common law,
statute or contract, and including, but not limited to, the security interest,

 

4

 

security title
or lien arising from a security agreement, mortgage, deed of trust, deed to
secure debt, encumbrance, pledge, conditional sale or trust receipt or a lease,
consignment or bailment for security purposes. 
The term “Lien” shall include
reservations, exceptions, encroachments, easements, right-of-way, covenants,
conditions, restrictions, leases and other title exceptions and encumbrances
affecting Property.  For the purpose of
this Agreement, Borrower or any of its Subsidiaries shall be deemed to be the
owner of any Property which either has acquired or holds subject to a
conditional sale agreement or other arrangement pursuant to which title to the
Property has been retained by or vested in some other Person for security
purposes.

 

“Loan Documents” shall mean this
Agreement, the Notes, the Security Instruments, the Guaranties, and such other
instruments, documents, and agreements evidencing, securing, or pertaining to
the loans evidenced by the Notes, which have heretofore been or hereafter are
from time to time executed and delivered to any Lender by Borrower or any of
its Subsidiaries, or any other Person pursuant to this Agreement.

 

“Material Adverse Change” shall mean any
act, circumstance, or event (including, without limitation, any announcement of
action) which (a) could reasonably be expected to cause or be a material and
adverse change to the business, property, assets, financial conditions or
operations of Borrower and its Subsidiaries taken as a whole from the business,
property, assets, financial condition or operations of Borrower and its
Subsidiaries taken as a whole existing on the date of the Closing Date
Financial Statements or (b) in any manner could reasonably be expected to
materially and adversely affect the validity or enforceability of any Loan
Document.

 

“Maturity Date” shall mean
October 18, 2007.

 

“Maximum Rate” shall have the meaning
set forth in Section 10.19.

 

“Notes” shall mean those certain
promissory notes of Borrower, of even date herewith, in an aggregate amount of
$6,000,000.00, in substantially the form of Exhibit C, payable to the order of
each Lender (in the amount equal to the amount of such Lender’s Committed Loan
Sum), and any and all renewals, extensions, modifications, replacements,
substitutions, increases, and rearrangements thereof.

 

“Obligations” shall mean all
indebtedness, obligations, and liabilities of Borrower to any Lender of every
nature and description, now or hereafter existing or arising, whether such
indebtedness is direct or indirect, primary or secondary, fixed or contingent
or arises out of or is evidenced by a promissory note, deed of trust, security
agreement, open account, overdraft, endorsement, surety agreement, guaranty, or
otherwise, including, without limitation, all such obligations, liabilities,
and indebtedness of Borrower to any Lender under or in connection with the Loan
Documents.  Obligations shall include all
renewals, extensions, and rearrangements of any of the above described
obligations and indebtedness.

 

“OSHA” shall mean the Occupational
Safety and Health Act and all rules and regulations from time to time
promulgated thereunder and all amendments thereof and thereto.

 

5

 

“Permitted Debt” shall mean:

 

(a)                                  the
Debt included in the Obligations;

 

(b)                                 Debt
arising from endorsing negotiable instruments for collection in the ordinary
course of business and which in no event become due following the later of 90
days after the invoice date or 45 days after the due date thereof;

 

(c)                                  unsecured
trade payables that are for goods furnished or services rendered in the
ordinary course of business and that are payable in accordance with customary
trade terms and which in no event become due following the later of 90 days
after the invoice date or 45 days after the due date thereof;

 

(d)                                 the
Finova Debt in an amount not exceeding $5,000,000 in outstanding principal
amount plus all accrued interest thereon;

 

(e)                                  any
Debt, the proceeds of which are used to prepay any or all of the outstanding
amounts owing under the Notes which Debt if it is received from a Lender other
than an Affiliate of any Lender may rank senior in right of payment to any
outstanding or unpaid portion of the Obligations;

 

(f)                                    Debt
up to, but not exceeding, $3,000,000 in the aggregate which Debt may rank
senior in right of payment to the outstanding or unpaid portion of the
Obligations; and

 

(g)                                 Subordinated
Debt.

 

“Permitted Investments” shall mean:

 

(a)                                  securities
with maturities of one year or less from the date of acquisition issued or
fully guaranteed or insured by the United States Government or any agency
thereof;

 

(b)                                 certificates
of deposit and LIBOR time deposits with maturities of one year or less from the
date of acquisition and overnight bank deposits of any commercial bank (i)
having capital and surplus in excess of $500,000,000.00 or (ii) which has a
short-term commercial paper rating which satisfies the requirements set forth
in clause (d) of this definition;

 

(c)                                  repurchase
obligations of any commercial bank satisfying the requirements of clause (b) or
this definition, having a term of not more than thirty (30) days with respect
to securities issued, fully guaranteed or insured by the United States
Government or any agency thereof;

 

(d)                                 commercial
paper rated P-1 by Moody’s Investors Service, Inc. or A-1 by Standard &
Poor’s Ratings Group on the date of acquisition;

 

6

 

(e)                                  securities
with maturities of one year or less from the date of acquisition which are
issued, insured, or fully guaranteed by any state, commonwealth or territory of
the United States or by any political subdivision or taxing authority of such
state, commonwealth or territory;

 

(f)                                    securities
with maturities of one year or less from the date of acquisition backed by
standby letters of credit issued by any commercial bank satisfying the
requirements of clause (b) of this definition;

 

(g)                                 shares
of money market mutual or similar funds which invest primarily in assets
satisfying the requirements of clauses (a) through (f) of this definition;

 

(h)                                 expense
accounts for, and other advances to, directors, officers, and employees in the
ordinary course of business;

 

(i)                                     demand
deposit accounts maintained in the ordinary course of business; and

 

(j)                                     current
trade and customer accounts receivable that are for goods furnished or services
rendered in the ordinary course of business and that are payable in accordance
with customary trade terms.

 

“Permitted Liens” shall mean, as applied
to the Property of any specified Person:

 

(a)                                  Liens
created pursuant to any Loan Document;

 

(b)                                 Liens
for taxes and other impositions imposed by a Governmental Authority if the same
are not at the time due and delinquent or are being contested in good faith and
by appropriate proceedings, and if the specified Person has set aside on its
books such reserves as may be required by GAAP;

 

(c)                                  Liens
of carriers, warehousemen, mechanics, laborers, materialmen, and landlords and
other similar Liens arising by operation of law for sums not yet due or being
contested in good faith and by appropriate proceedings, if the specified Person
has set aside on its books such reserves as may be required by GAAP, or which
have been subordinated in a manner satisfactory to the Special Requisite
Lenders;

 

(d)                                 Liens
incurred in the ordinary course of the specified Person’s business in
connection with workmen’s compensation, unemployment insurance and other social
security legislation (other than pursuant to ERISA or Section 412(n) of
the Code) or to secure liabilities to insurance carriers under insurance or
self-insurance arrangements and other obligations of a like nature, so long as,
in each case with respect to this clause (d), such Liens do not secure
obligations constituting Debt;

 

7

 

(e)                                  rights
reserved to or vested in any Governmental Authority by the terms of any right,
power, franchise, grant, license or permit, or by any provision of law, to
terminate such right, power, franchise; grant, license or permit or to
purchase, condemn, expropriate or recapture or to designate a purchaser of any
of the Property of the specified Person;

 

(f)                                    Liens
upon Property, including any attachment of Property or other legal process,
prior to adjudication of a dispute on the merits, if the same are being
contested in good faith and by appropriate proceedings and if the specified
Person has set aside on its books such reserves as may be required by GAAP;

 

(g)                                 good
faith pledges or deposits made to secure performance of bids, tenders,
contracts (other than for the repayment of borrowed money) or leases (other
than for Capitalized Leases), or to secure statutory obligations, surety or
appeal bonds, or indemnity, performance or other similar bonds in the ordinary course
of business;

 

(h)                                 Liens
satisfactory to each of the Lenders in respect of the Post-Closing Subordinated
Note;

 

(i)                                     Liens
in existence as of the date hereof and set forth on Schedule A attached
hereto;

 

(j)                                     any
interest or title of a lessor in assets being leased to Borrower (other than
for Capitalized Leases); and

 

(k)                                  Purchase
Money Liens.

 

“Person” shall mean any individual,
corporation, partnership, joint venture, association, joint stock company,
trust, unincorporated organization, government or any agency or political
subdivision thereof, or any other form of entity.

 

“Plan” shall mean an employee benefit
plan of Borrower or any of its Subsidiaries subject to ERISA.

 

“Pledge Agreement” shall mean the Pledge
Agreement of even date herewith between MHC as owner of the stock of the
Borrower, the Borrower, and the Agent on behalf of the Lenders

 

“Post-Closing
Subordinated Note” shall mean that certain amended
and restated secured $17,500,000 promissory note dated as of the Closing Date
executed by Borrower and payable to the order of MHI.

 

“Property” shall mean any interest in
any kind of property or asset, whether real, personal or mixed, tangible or
intangible.

 

8

 

“Pro
Rata Share” of any amount means, with respect to
any Lender at any time, the product of (a) a fraction the numerator of which is
the amount of such Lender’s Committed Loan Sum at such time and the denominator
of which is the aggregate amount of the Committed Loan Sum at such time multiplied
by (b) such amount.

 

“Purchase
Money Lien” means a Lien granted on a fixed asset
to secure a Purchase Money Obligation permitted to be incurred hereunder, and
incurred solely to finance the acquisition of such asset; provided, however,
that such Lien encumbers only such asset and is granted within 180 days of such
acquisition.

 

“Purchase
Money Obligations” of any Person means any
obligations of such Person to any seller or any other Person incurred or
assumed to finance the acquisition of a fixed asset to be used in the business
of such Person or any of its Subsidiaries in an amount that is not more than
100% of the cost of such asset, and incurred within 180 days after the date of
such acquisition (excluding accounts payable to trade creditors incurred in the
ordinary course of business).

 

“Regulation D” shall mean Regulation D
of the Board of Governors of the Federal Reserve System as the same may be
amended or supplemented from time to time.

 

“Regulation U” shall mean Regulation U
of the Board of Governors of the Federal Reserve System as the same may be
amended or supplemented from time to time.

 

“Related Party” shall mean (a) a
corporation the majority of whose outstanding shares are owned (individually or
collectively) by (i) Borrower, (ii) any Person identified in this paragraph,
(iii) any Subsidiary of Borrower or any Person identified in this paragraph,
(iv) the direct and indirect parent corporation or other entity of Borrower, or
(v) any Subsidiary of Borrower’s direct and indirect parent corporation or
other entity (if any), (b) any joint venture in which Borrower or any Person
identified in this paragraph is a joint venturer, (c) any general or limited
partnership in which Borrower or any Person identified in this paragraph is a
general partner, (d) any shareholder who owns more than ten percent (10%) of
the outstanding common stock of Borrower or any other Person identified in this
Paragraph, (e) any employee, officer, or director of Borrower or any other
Person identified in this Paragraph, (f) any limited liability partnership or
limited liability company in which Borrower or any Person identified in this
Paragraph is a partner or member, and (g) any blood relation of any living
Person identified in this Paragraph.  For
all purposes hereof, each of R T G Furniture Corporation, Nationwide Furniture,
Inc.  or Wickes Furniture Corp.,
Inc. and their respective successors and assigns shall be deemed to be Related
Parties of MHC.

 

“Reportable Event” shall mean a
reportable event as defined by ERISA.

 

“Requirement of Law” shall mean, as to
any Person, the certificate or articles of incorporation and by-laws or other
organizational or governing documents of such Person, and any applicable law,
treaty, ordinance, order, judgment, rule, decree, regulation, or determination
of an arbitrator, court, or other Governmental Authority, including, without
limitation, rules, decrees, judgments, regulations, orders, and

 

9

 

requirements
for permits, licenses, registrations, approvals, or authorizations (and any
authoritative interpretation of any of the foregoing), in each case as such now
exist or may be hereafter amended and are applicable to or binding upon such
Person or any of its property or to which such Person or any of its property is
subject.

 

“Requisite Lenders” shall mean at any
time, Lenders owed or holding at least a majority in interest of the aggregate
principal amount of the Advances outstanding at such time.  Notwithstanding anything herein to the
contrary, unless each Lender otherwise consents in the event the Company makes
any payment (whether voluntary, involuntary or otherwise) to Lenders that is
not in proportion to such Lender’s Pro Rata Share, the Lenders will be deemed
to have received their Pro Rata Share for purposes of determining the Requisite
Lenders.

 

“Seaman Related Party” means any entity
owned or controlled directly or indirectly by Jeff Seaman or any spouse or
descendants (whether natural or adopted) of Jeff Seaman.

 

“Securities” shall mean “securities” as
defined in Article 8 of the UCC.

 

“Security Agreement” shall mean one or
more General Security Agreements, of even date herewith, between Borrower,
Agent on behalf of Lenders and such other persons as applicable covering, among
other things, Borrower’s Accounts, Equipment, Inventory, and Securities, as may
be amended, modified, restated, and affirmed from time to time.

 

“Security Instruments” shall mean the
Security Agreement, the Pledge Agreement and any and all other heretofore and
hereafter existing security and other agreements which create or grant a lien
or security interest as security for any of the Notes or other Obligations.

 

“Short-Form Merger” shall mean the
merger, if any, of Borrower with and into MMA Acquisition Company, Inc.
pursuant to which MMA Acquisition Company, Inc. survives and changes its name
to “Mattress Firm, Inc.”

 

“Special Requisite Lenders” shall mean
at any time, Lenders owed or holding at least a majority in interest of the
aggregate principal amount of the Advances outstanding at such time and, for so
long as MHC continues to hold at least 15% of the aggregate principal amount of
Advances outstanding, MHC. 
Notwithstanding anything herein to the contrary, unless each Lender
otherwise consents in the event the Company makes any payment (whether
voluntary, involuntary or otherwise) to Lenders that is not in proportion to
such Lender’s Pro Rata Share, the Lenders will be deemed to have received their
Pro Rata Share for purposes of determining the Requisite Lenders.

 

“Subordination Agreements” shall mean
each Subordination Agreement (in a form approved in writing by the Special
Requisite Lenders, among Borrower, Lenders, and one or more other Persons,
whereby such other Person or Persons, among other things, subordinates its or
their right to payment of amounts owing to it or them by Borrower to Lenders’
right to full and final payment and performance of the Obligations, in a manner
satisfactory to the Special Requisite Lenders shall be required).

 

10

 

“Subordinated Debt” shall mean (a) that
certain promissory note dated as of August 5, 1999 in original principal
amount of $1,925,000 executed by Borrower and payable to the order of Philip C.
Busker (the “Busker Note”),
(b) that certain promissory note dated as of August 5, 1999 in original
principal amount of $1,925,000 executed by Borrower and payable to the order of
Mitchell D. Addison (the “Addison Note”),
(c) the Post-Closing Subordinated Note, and (d) all other general subordinated
debt which does not create a Default hereunder and the terms of which are
satisfactory to the Special Requisite Lenders.

 

“Subsidiary” means, with respect to any
Person, any corporation, limited liability company, partnership, association or
other business entity of which (i) if a corporation, a majority of the total
voting power of shares of stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by that
Person or one or more of the other Subsidiaries of that Person or a combination
thereof, or (ii) if a limited liability company, partnership, association or
other business entity, a majority of the partnership or other similar ownership
interest thereof is at the time owned or controlled, directly or indirectly, by
any Person or one or more Subsidiaries of that Person or a combination
thereof.  For purposes hereof, a Person
or Persons shall be deemed to have a majority ownership interest in a limited
liability company, partnership, association or other business entity if such
Person or Persons shall be allocated a majority of limited liability company,
partnership, association or other business entity gains or losses or shall be
or control any managing director or general partner of such limited liability
company, partnership, association or other business entity.

 

“Sun Fund” shall mean Sun Capital
Partners II, L.P.

 

“Tax Expense” shall mean consolidated cash
taxes paid.

 

“UCC” shall mean the Uniform Commercial
Code, as adopted in the State of New York.

 

1.2                                 Accounting
Terms.  All accounting terms not
specifically defined herein shall be construed in accordance with GAAP
consistent with such principles.  In the
event that changes in GAAP shall be mandated by the Financial Accounting
Standards Board and/or the American Institute of Certified Public Accountants
or any similar accounting body of comparable standing, or shall be recommended
by Borrower’s certified public accountants, to the extent that such changes
would modify such accounting terms or the interpretation or computation thereof
as contemplated by this Agreement at the time of execution hereof, then in such
event, such changes shall be followed in defining such accounting terms only
after each of the Lenders and Borrower amend this Agreement to reflect the
original intent of such terms in light of such changes, and such terms shall
continue to be applied and interpreted without such change until such
agreement.

 

1.3                                 Other
Terms.  All other terms contained in
this Agreement shall have, when the context so indicates, the meanings provided
for in the Uniform Commercial Code, as adopted in New York, to the extent the
same are used or defined therein.

 

11

 

1.4                                 References.  References in this Agreement to
Section or Exhibit Numbers shall be to Sections and Exhibits of this
Agreement, unless expressly stated to the contrary.  References in this Agreement to “hereby,”
“herein,” “hereinabove,” “hereinafter,” “hereinbelow,” “hereof,” and
“hereunder” shall be to this Agreement in its entirety and not only to the
particular Section or Exhibit in which such reference appears.

 

1.5                                 Sections.  This Agreement, for convenience only, has
been divided into Sections; and it is understood that the rights and other
legal relations of the parties hereto shall be determined from this instrument
as an entirety and without regard to the aforesaid division into Sections and
without regard to headings prefixed to such Sections.

 

1.6                                 Number
and Gender.  Whenever the context
requires, reference herein made to the single number shall be understood to
include the plural; and likewise, the plural shall be understood to include the
singular.  Definitions of terms defined
in the singular or plural shall be equally applicable to the plural or
singular, as the case may be, unless otherwise indicated.  Words denoting sex shall be construed to
include the masculine, feminine and neuter, when such construction is
appropriate; and specific enumeration shall not exclude the general but shall
be construed as cumulative.

 

1.7                                 Incorporation
of Exhibits.  The Exhibits attached
to this Agreement are incorporated herein and shall be considered a part of this
Agreement for all purposes.

 

1.8                                 Certain
Other Matters of Construction.  All
references to statutes and related regulations shall include any amendments of
same and any successor statutes and regulations.  All references to any instruments or agreements,
including, without limitation, references to any of the Loan Documents, shall
include any and all modifications or amendments thereto and any and all
extensions or renewals thereof.  Current,
for purposes of this Agreement, shall mean within thirty (30) days from the
applicable date.  Knowledge, for purposes
of this Agreement, shall mean actual and constructive knowledge of the
applicable Person.  The term “or” when
used in this Agreement in a sequence shall mean “and/or.” When calculating time
periods, the term “from” shall mean “from and including” and the terms “to,”
“through,” and “until” shall mean through but not including.

 

SECTION 2

CONDITIONS

 

2.1                                 Conditions
to the Advance by Each Lender.  The
obligations of each Lender to enter into this Agreement and to make its Advance
under this Agreement are subject to the full, complete, and timely satisfaction
of each of the following conditions precedent as of the date hereof:

 

(a)                                  Each
Lender shall have received each of the following and found them each to be
satisfactory:

 

(i)                                     each
of the Loan Documents, each executed by an Authorized Officer of Borrower;

 

12

 

(ii)                                  a
certified copy of the certificate of incorporation, articles of incorporation,
and bylaws of Borrower, together with any and all modifications thereof as of
the date hereof;

 

(iii)                               all
certificates of authority, certificates of good standing, certificates of
existence, borrowing resolutions (with secretary’s certificate), secretary’s
certificates of incumbency, and all other documents required by Lenders to
evidence Borrower, and its representatives are empowered and duly authorized to
enter into the agreements evidenced by the Loan Documents;

 

(b)                                 All
other applicable requirements of this Agreement and the other Loan Documents
shall have been fully and completely satisfied;

 

(c)                                  As
security for the payment of the Notes and the performance of the Obligations,
Lenders shall have received, in addition to the items set forth elsewhere in
this Section, all other instruments reasonably required by Lenders to give
Lenders a first and prior perfected lien and security interest in and to the
collateral covered by the Loan Documents; and

 

(d)                                 Each
of the foregoing conditions shall be fully and completely satisfied or waived
by each of the Lenders in writing on or before the Closing Date.

 

SECTION 3

THE COMMITMENT

 

3.1                                 Term
Loan Advances.  Subject to the full,
complete, and timely satisfaction or written waiver by each Lender of each of
the terms and conditions of Section 2.1 and as elsewhere set forth herein,
and relying on the representations, warranties and covenants of Borrower
hereinafter set forth, each Lender severally agrees to make a single advance in
an amount equal to its Committed Loan Sum in Dollars to Borrower which such
loans shall be evidenced by the issuance, execution, and delivery of a Note in
the principal amount equal to such Lender’s Committed Loan Sum.

 

3.2                                 Purpose.  This Agreement is delivered to provide
Borrower with term loans, the proceeds of which shall be used (along with any
other funds of Borrower that may be necessary) to repay in full all amounts
outstanding under (a) Borrower’s senior debt facility with Bank of America,
N.A., which has a pay-off amount as of the date hereof of $6,081,925, and (b)
the secured promissory note, dated June 28, 1999, and issued by Borrower
to Stephen Fendrick, Harry Roberts and Paul Stork, which has a pay-off amount
as of the date hereof of $925,417.

 

3.3                                 Prepayment.  The Notes may be prepaid in whole or in part,
without premium or penalty.

 

13

 

SECTION 4

TERMS OF LOAN

 

4.1                                 Interest.  Interest shall accrue on the outstanding
principal balances of the Notes, or any portion thereof, as follows:

 

(a)                                  For
the Notes, subject to the applicable provisions of this Agreement, commencing
on the date hereof up to and including the Maturity Date (or the earlier
termination thereof) at the applicable Adjusted Base Rate; and

 

(b)                                 All
past due principal and interest shall bear interest from its due date until
paid at the Default Rate (after as well as before judgment).

 

4.2                                 Maximum
Rate.  Notwithstanding anything to
the contrary herein, if at any time the interest charged on a Note as provided
for herein exceeds the Maximum Rate, the rate of interest chargeable on the
Note shall be limited to the Maximum Rate, but any subsequent reductions in the
Base Rate shall not reduce the rate of interest chargeable on the Note below
the Maximum Rate until the total amount of interest accrued on the Note equals
the amount of interest which would have accrued if the Base Rate had at all
times been in effect.

 

4.3                                 Payments
of Principal and Interest.

 

(a)                                  The
Notes shall be due and payable as follows:

 

(i)                                     Commencing
on the 31st day of December, 2002, and continuing on the last day of each
March 31, June 30, September 30, and December 31 thereafter
through, but not including, the Maturity Date (or the earlier termination
thereof), interest, as it accrues on the outstanding balance of the Notes
accruing interest shall be due and payable; and

 

(ii)                                  The
entire unpaid principal sum of the Notes and all interest accrued and unpaid
thereon shall be fully and finally due and payable on the Maturity Date (or the
earlier termination hereof).

 

(b)                                 All
payments made on any Note shall be credited first to past due accrued interest
proportion to such and then to principal; and interest shall thereupon cease
upon the principal so credited.

 

(c)                                  All
payments made by Borrower on any Note shall be made to each Lender in
proportion to such Lender’s Pro Rata Share at its address set forth in this
Agreement (or otherwise designated by such Lender) in federal or other
immediately available funds before 1:00 p.m., Houston time, on the date such
payment is required to be made.  Any
payment received and accepted by any Lender after such time shall be considered
for all purposes (including the calculation of interest, to the extent
permitted by law) as having been made on the next following Business Day.  If any Lender obtains any payment (whether
voluntary, involuntary, by application of offset or otherwise) of

 

14

 

principal,
interest or other amount with respect to any Note in excess of such Lender’s
Pro Rata Share of such payment, such Lender agrees to distribute the excess
portion of such payment as is necessary to cause each Lender to receive its Pro
Rata Share of such payment.

 

(d)                                 Any
and all payments by Borrower hereunder or under the Notes shall be made, in accordance
with Section 4.3, free and clear of and without deduction for any
and all present or future Taxes.  If
Borrower shall be required by law to deduct any federal, state or local taxes
from or in respect of any sum payable hereunder or under the Notes, (i) the sum
payable shall be increased as much as shall be necessary so that after making
all required deductions (including deductions applicable to additional sums
payable under this Section 4.3) Lenders receive an amount equal to
the sum they would have received had no such deductions been made, (ii)
Borrower shall make such deductions, and (iii) Borrower shall pay the full
amount deducted to the relevant taxing or other authority in accordance with
applicable law.  Within 30 days after the
date of any payment of federal, state or local taxes, Borrower shall furnish to
each Lender the original or a certified copy of a receipt evidencing payment
thereof.  Except as provided in
Section 4.3(c), Lenders shall not be obligated to return or refund any
amounts received pursuant to this Section.

 

(e)                                  To
the extent permitted by law, a delinquency charge will be imposed in an amount
not to exceed four percent (4%) of any payment on a Note or other Obligation
that is more than fifteen (15) days late.

 

SECTION 5

REPRESENTATIONS AND WARRANTIES

 

5.1                                 Representations
and Warranties of Borrower.  Borrower
represents and warrants to each Lender (which representations and warranties
are made in addition to the warranties and representations made in the Loan
Documents and will survive the delivery of this Agreement) that: (i) Borrower
is a corporation duly organized, validly existing and in good standing under
the laws of the State of Delaware, and has full power and authority to
consummate the transactions contemplated in this Agreement; (ii) Borrower has
the corporate power to own its properties and carry on its business as it is
now being conducted, and is duly authorized to do business and is in good
standing in the State of Texas and in every other jurisdiction where qualification
is necessary to conduct its operations; (iii) Borrower is duly authorized and
empowered to create, issue, execute, and deliver the Loan Documents, and all
action on its part requisite for the due creation, issuance, and delivery of
the Loan Documents has been duly and effectively taken; and (iv) the Loan
Documents do not violate any provision of Borrower’s corporate charter or
bylaws, or any contract, agreement, law or regulation to which Borrower is
subject, and do not require the consent or approval of any Governmental
Authority.

 

SECTION 6

AFFIRMATIVE COVENANTS

 

6.1                                 Covenants
of Borrower.  In addition to the
covenants and agreements of Borrower made elsewhere in the Loan Documents,
Borrower covenants and agrees, unless the Requisite Lenders shall otherwise
consent in writing, that Borrower shall:

 

15

 

(a)                                  Corporate
Existence.  Do or cause to be done
all things necessary to preserve and keep in full force and effect its
corporate existence, rights, and franchises; and at all times maintain,
preserve and protect its assets used or useful in the conduct of its business,
keep the same in good repair, working order and condition, and make, or cause
to be made, all needful or proper repairs, replacements and improvements
thereto so that Borrower’s business may be properly and advantageously
conducted at all times;

 

(b)                                 Comply
With Laws.  (i) Comply with all
applicable statutes, government regulations, and other Requirements of Law;
(ii) remain licensed with all applicable state and federal regulatory and other
agencies; (iii) pay and discharge promptly all taxes, assessments and
governmental charges or levies imposed on it, the collateral described in any
Security Instrument or any part thereof, its income and profits, and any of its
property, real, personal or mixed, or any part thereof, before the same shall
be in default; and (iv) pay all lawful claims for labor, materials, supplies,
or other claims, which, if unpaid, might become a valid lien or charge upon
such property or any part thereof, unless such claims are being contested by
Borrower in good faith;

 

(c)                                  Financial
Reporting.  Promptly furnish to each
Lender such information regarding the business affairs, financial condition,
assets, liabilities, operations, and transactions of Borrower or any Subsidiary
as any Lender may reasonably request, and, without limiting the foregoing,
furnish to each Lender the following:

 

(i)                                     As
soon as available, and in any event within 90 days after the Closing Date, a consolidated
balance sheet as at the Closing Date (the “Closing
Date Financial Statement”) prepared by Borrower, in a form
acceptable to each Lender, signed by an Authorized Officer of Borrower, which
balance sheet shall be prepared in accordance with GAAP.

 

(ii)                                  As
soon as available, and in any event within 30 days from the end of each
calendar month of Borrower, a financial statement, prepared by Borrower, in a
form acceptable to each Lender, signed by an Authorized Officer of Borrower,
showing the financial condition of Borrower and each of its Subsidiaries, on a
consolidated basis (if applicable), at the end of such calendar month and the
results of operations during such calendar month, which financial statement
shall be prepared in accordance with GAAP and shall include, but shall not be
limited to, a balance sheet, income statement, and such other matters as any
Lender may reasonably request, setting forth, in each case comparisons to
Borrower’s annual budget and to the corresponding period in the preceding
fiscal year;

 

(iii)                               As
soon as available, and in any event within 45 days from the end of each
quarterly period of Borrower, a financial statement, prepared by Borrower, in a
form acceptable to

 

16

 

each Lender,
signed by an Authorized Officer of Borrower, showing the financial condition of
Borrower and each of its Subsidiaries, on a consolidated basis (if applicable),
at the end of such quarterly period and the results of operations during such
quarterly period, which financial statement shall be prepared in accordance
with GAAP and shall include, but shall not be limited to, a balance sheet,
income statement, and such other matters as any Lender may reasonably request,
setting forth, in each case comparisons to Borrower’s annual budget and to the
corresponding period in the preceding fiscal year.

 

(iv)                              A
Compliance Certificate shall be due within 45 days after the end of each fiscal
quarter, signed and certified by an Authorized Officer of Borrower;

 

(v)                                 As
soon as available, and in any event within 120 days from the end of Borrower’s
fiscal year, an audited financial statement, prepared by an independent
certified public accounting firm acceptable to each Lender, showing the
financial condition of Borrower and each of its Subsidiaries, on a consolidated
basis (if applicable), at the close of its fiscal year and the results of its
operations during such fiscal year and which financial statement shall be
materially complete and correct and shall be prepared in accordance with GAAP
and shall include, but shall not be limited to, an operating statement, a
balance sheet, an income statement, a statement of cash flows, a statement of
changes in shareholder’s equity, and such other matters as any Lender may reasonably
request;

 

(d)                                 Movement
of Collateral.  (i) Comply with
Section 4.4 of the Security Agreement, (ii) if required by the Special
Requisite Lenders, cause the landlord, warehouseman, tenant, and/or subtenant
at the particular location where Inventory or Equipment is located to execute
and deliver to Lenders a lien waiver, in form and substance satisfactory to the
Special Requisite Lenders, and (iii) take any other actions reasonably required
by any Lender to ensure the continued perfection of the security interests
granted under the Security Agreement;

 

(e)                                  Subsidiary
Guaranty.  Cause any now existing or
hereafter created direct or indirect Subsidiary of Borrower to fully and
unconditionally guaranty the Obligations in a manner acceptable to each Lender,
to grant a first security interest in and to all of its assets as security for
the Obligations, and to cause its outstanding stock to be pledged as collateral
for the Obligations;

 

(f)                                    Inspections.  Permit each Lender, or any of its duly
authorized representatives and/or agents, from time to time during Borrower’s
business hours, but

 

17

 

with at least
48 hours prior notice, to enter upon any premises of Borrower or any of its
Subsidiaries (at Borrower’s cost and expense up to an aggregate of $15,000 per
year with respect to each Lender) for the purpose (i) of examining the
property, books, and records of Borrower and making copies of any such books
and records, (ii) of discussing the affairs, finances and accounts of Borrower
or any Subsidiary with any of their officers, directors, independent public
accountants or other agents or representatives and (iii) of conducting an audit
of Borrower’s or any Subsidiary’s Inventory subject to and as set forth in
Section 3.5; provided that, in the course of any such examination, such
Lender or its representatives and agent shall not materially interfere with
Borrower’s or any Subsidiary’s normal and customary business operations.  Notwithstanding the foregoing, after the occurrence
of an Event of Default, each Lender may enter upon the premises of Borrower or
any of its Subsidiaries, for the purposes expressed above, without prior
notice, and at Borrower’s sole cost and expense;

 

(g)                                 Further
Assurances.  Promptly cure any defects
in the execution and delivery of the Loan Documents and immediately execute and
deliver to each Lender all such other and further instruments as may be
reasonably required by each Lender from time to time in order to satisfy or
comply with the covenants and agreements of Borrower made in this Agreement;

 

(h)                                 Reimbursement.  Promptly reimburse each Lender upon request
for all reasonable amounts expended, advanced, or incurred by such Lender as
are reasonably necessary (i) to satisfy any obligation of Borrower under this
Agreement, (ii) to protect the assets or business of Borrower or any of its
Subsidiaries, (iii) to collect the Notes, or any other amounts advanced under
this Agreement or otherwise on behalf of Borrower, or (iv) to enforce the
rights of such Lender under the Loan Documents, which amounts will include,
without limitation, all reasonable court costs, attorneys’ fees, and fees of
auditors, accountants, and investigators incurred by such Lender in connection
with any such matters, together with interest at the Default Rate on each such
amount from 30 days after the date of notification to Borrower that the same
was expended, advanced or incurred by such Lender until the date it is repaid
to such Lender;

 

(i)                                     Maintain
Insurance.  Continue to maintain
insurance with respect to its assets and business against such liabilities,
casualties, risks, and contingencies (including, without limitation, insurance
for business interruption and for worker’s compensation or an acceptable
alternative plan) in such types and amounts as is normal and customary for
carrying on Borrower’s business.  The
Borrower shall cause all property insurance policies shall name Agent on behalf
of Lenders as loss payee, and all liability insurance policies shall name Agent
on behalf of Lenders as additional insured within fifteen days of the date
hereof. 
On the date hereof, at the close of Borrower’s fiscal year,
and at any other time any Lender may request, Borrower will furnish each Lender
a summary of such insurance and, if requested, will furnish each Lender copies
of the applicable policies.  The proceeds
of any such policies insuring physical loss or damage shall be used by Borrower
either to repair the damaged property, replace lost property, or prepay the
outstanding balances of the Notes (such payment to be applied in reverse order
of maturities);

 

18

 

(j)                                     Copyright.  Prior to the time any property described in
or covered by any Security Instrument is copyrighted, licensed, patented, or
trademarked by Borrower or any of its Subsidiaries, pursuant to any duly filed
registration or otherwise, or is subjected to any registered copyright,
license, patent, or trademark by Borrower or any of its Subsidiaries, notify
each Lender thereof and take (or cause to be taken) all actions necessary to
preserve the perfection and first priority of each Lenders’ security interest
in and to such property;

 

(k)                                  Foreign
Qualification.  Qualify as a foreign
corporation in all other jurisdictions wherein the property now or hereafter
owned by Borrower, any Subsidiary or the business now or hereafter transacted
by Borrower or any Subsidiary makes such qualifications necessary;

 

(l)                                     Reportable
Events.  Furnish to each Lender (i)
as soon as possible, and in any event within 30 days after Borrower or a duly
appointed administrator of a Plan knows or has reason to know that any
Reportable Event with respect to any Plan has occurred, a statement of the
chief financial officer of Borrower setting forth details as to such Reportable
Event and the action which Borrower proposes to take with respect thereto,
together with a copy of the notice of such Reportable Event given to the
Pension Benefit Guaranty Corporation or a statement that said notice will be filed
with the annual report to the United States Department of Labor with respect to
such Plan, if such filing has been authorized, and (ii) promptly after receipt
thereof, a copy of any notice Borrower may receive from the United States
Department of Labor, the Internal Revenue Service or the Pension Benefit
Guaranty Corporation with respect to any Reportable Event;

 

(m)                               Additional
Notices.  In addition to, and without
in any way limiting, the other requirements in this Agreement provide certain
notices to each Lender, deliver to each Lender, promptly upon any officer of
Borrower having knowledge of the occurrence of any of the following events or
circumstances, a written statement with respect thereto, signed by the chief
financial officer of Borrower, or other Authorized Officer of Borrower,
advising each Lender of the occurrence of such event or circumstance and the
steps, if any, being taken by Borrower with respect thereto:

 

(i)                                     any
Default or Event of Default;

 

(ii)                                  any
litigation or proceeding involving Borrower as a defendant or in which any
Property of Borrower is subject, directly or indirectly, to a claim, and the
uninsured amount in controversy is in excess of $250,000.00;

 

(iii)                               any
Reportable Event or imminently expected Reportable Event with respect to any
Plan;

 

(iv)                              at
least 10 Business Days prior thereto, of Borrower’s or any Subsidiary’s opening
of any new office or place of

 

19

 

business or
Borrower’s or any Subsidiary’s closing of any existing office or place of
business;

 

(v)                                 any
labor dispute to which Borrower or any Subsidiary may become a party, any
strikes or walkouts relating to any of its plants or other facilities, and the
expiration of any labor contract to which any of them is a party or by which
they are bound, in each case where the same could reasonably be expected to
cause a Material Adverse Change;

 

(vi)                              any
material change in the management of Borrower or any Subsidiary; and

 

(vii)                           any
other event or occasion which could reasonably be expected to cause a Material
Adverse Change.

 

(n)                                 INDEMNITY.  BORROWER
SHALL AND DOES HEREBY INDEMNIFY AND HOLD HARMLESS AGENT, EACH LENDER, THE
DIRECTORS, TRUSTEES, SUBSTITUTE TRUSTEES, OFFICERS, PARTNERS, EMPLOYEES,
AGENTS, REPRESENTATIVES, ATTORNEYS, SUCCESSORS AND PERMITTED ASSIGNS OF AGENT
AND EACH LENDER, AND ANY PERSONS OWNED OR CONTROLLED BY, OWNING OR CONTROLLING,
OR UNDER COMMON CONTROL OR AFFILIATED WITH AGENT AND EACH LENDER, FROM AND
AGAINST, ANY AND ALL INDEMNIFIED MATTERS (DEFINED BELOW). HOWEVER, SUCH
INDEMNITIES SHALL NOT APPLY TO A PARTICULAR INDEMNIFIED PERSON TO THE EXTENT
THAT THE SUBJECT OF THE INDEMNIFICATION IS CAUSED BY OR ARISES OUT OF THE GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH INDEMNIFIED PERSON.  NOTHING IN THIS SECTION, ELSEWHERE IN THIS
AGREEMENT, OR IN ANY OTHER LOAN DOCUMENT SHALL LIMIT OR IMPAIR ANY RIGHTS OR
REMEDIES OF ANY LENDER, OR ANY OTHER INDEMNIFIED PERSON, INCLUDING WITHOUT
LIMITATION, ANY RIGHTS OF CONTRIBUTION OR INDEMNIFICATION, AGAINST BORROWER OR
ANY OTHER PERSON UNDER ANY OTHER PROVISION OF THIS AGREEMENT, ANY OTHER LOAN
DOCUMENT, ANY OTHER AGREEMENT, OR ANY APPLICABLE REQUIREMENT OF LAW.  AS USED HEREIN, THE TERM “INDEMNIFIED
MATTERS” MEANS ANY AND ALL CLAIMS, DEMANDS, LIABILITIES (INCLUDING STRICT
LIABILITY), DAMAGES (EXCLUDING CONSEQUENTIAL AND PUNITIVE DAMAGES), CAUSES OF
ACTION, JUDGMENTS, PENALTIES, FINES, COSTS, AND EXPENSES (INCLUDING, WITHOUT
LIMITATION, REASONABLE FEES AND EXPENSES OF ATTORNEYS AND OTHER PROFESSIONAL
CONSULTANTS AND EXPERTS, AND OF THE INVESTIGATION AND DEFENSE OF ANY CLAIM,
WHETHER OR NOT SUCH CLAIM IS ULTIMATELY DEFEATED, AND THE SETTLEMENT OF ANY
CLAIM OR JUDGMENT INCLUDING ALL VALUE PAID OR GIVEN IN SETTLEMENT) OF EVERY
KIND, KNOWN OR

 

20

 

UNKNOWN,
FORESEEABLE OR UNFORESEEABLE, WHICH MAY BE IMPOSED UPON, ASSERTED AGAINST, OR
INCURRED OR PAID BY ANY LENDER OR ANY INDEMNIFIED PERSON AT ANY TIME AND FROM
TIME TO TIME, WHENEVER IMPOSED, ASSERTED, OR INCURRED, BECAUSE OF, RESULTING
FROM, IN CONNECTION WITH, OR ARISING OUT OF ANY TRANSACTION, ACT, OMISSION,
EVENT, OR CIRCUMSTANCE IN ANY WAY CONNECTED WITH THIS AGREEMENT OR ANY OTHER
LOAN DOCUMENT, INCLUDING DISBURSEMENT OF PROCEEDS, AND ANY CIRCUMSTANCE ARISING
FROM OR IN CONNECTION WITH AGENT’S OR ANY LENDER’S OBLIGATIONS HEREUNDER.  THE TERM “RELEASE DATE” AS USED HEREIN
MEANS THE DATE ON WHICH THE OBLIGATIONS HAVE BEEN PAID AND PERFORMED IN FULL
AND THE LOAN DOCUMENTS HAVE BEEN RELEASED; PROVIDED, THAT IF SUCH PAYMENT,
PERFORMANCE, OR RELEASE IS CHALLENGED IN BANKRUPTCY PROCEEDINGS OR OTHERWISE,
THE RELEASE DATE SHALL BE DEEMED NOT TO HAVE OCCURRED UNTIL SUCH CHALLENGE IS
REJECTED, DISMISSED, OR WITHDRAWN WITH PREJUDICE.  THE INDEMNITIES IN THIS SECTION SHALL BE
SOLELY FOR EVENTS OCCURRING PRIOR TO THE RELEASE DATE, SHALL NOT TERMINATE UPON
THE RELEASE DATE OR UPON THE RELEASE, FORECLOSURE, OR OTHER TERMINATION OF ANY
LOAN DOCUMENT, AND SHALL SURVIVE THE RELEASE DATE, THE PAYMENT AND PERFORMANCE
OF THE OBLIGATIONS, THE DISCHARGE AND RELEASE OF THE LOAN DOCUMENTS, ANY
BANKRUPTCY OR OTHER DEBTOR RELIEF PROCEEDING, AND ANY OTHER EVENT
WHATSOEVER.  THE TERMS OF THIS
SECTION ARE CUMULATIVE WITH, AND NOT LIMITED BY, THE TERMS AND PROVISIONS
OF ANY SECURITY INSTRUMENT.

 

SECTION 7

NEGATIVE COVENANTS

 

7.1                                 Negative
Covenants of Borrower.  Until payment
in full of the Notes and performance of all other Obligations of Borrower
hereunder, Borrower covenants and agrees (unless the Requisite Lenders shall
otherwise consent in writing) that Borrower will not, either directly or
indirectly, itself or through any of its Subsidiaries:

 

(a)                                  Permitted
Debt.  Incur, create, assume, or
permit to exist any Debt, on a consolidated basis, except for Permitted Debt,
or Debt listed on Schedule 7.1(a) attached hereto and incorporated herein
for all purposes;

 

(b)                                 Permitted
Investments.  Make or permit to
remain outstanding any loans or advances to or investments in any Person,
including, without limitation to any Affiliate, except that the foregoing
restrictions shall not apply to Permitted Investments;

 

(c)                                  No
Distributions.  Pay or declare any
Distributions;

 

21

 

(d)                                 No
Mergers, Consolidations or Acquisitions. 
Consolidate with or merge with or into any other Person (other than in
connection with the Short-Form Merger or in connection with a merger of
Borrower with or into Mattress Holding Corp., but only if at the time of the
merger Mattress Holding Corp. owns no assets other than stock and/or debt
securities of Borrower and Mattress Holding Corp. is not a party to any
contracts or agreements except for permitted contracts and agreements with the
Borrower) or acquire all or substantially all of the assets or capital stock of
any Person;

 

(e)                                  No
Mortgages.  (i) Create, incur,
assume, or permit to exist, or allow any joint venture or partnership of which
Borrower is a partner or venturer to create, incur, assume, or permit to exist
any lien on its existing or hereafter acquired Property, including, without
limitation, any accounts and accounts receivables, except for Permitted Liens,
(ii) acquire or agree to acquire assets under any conditional sale agreement or
title retention contract, or (iii) sell and leaseback any assets;

 

(f)                                    No
Change of Control.  Permit any Change
of Control of Borrower;

 

(g)                                 No
Transfer of Assets.  Sell, lease,
transfer, convey, or otherwise dispose (except in the ordinary course of
business) of all or any material part of its assets (it being understood that
exiting non-core markets would not be deemed to be “material”);

 

(h)                                 No
Change in Business.  Change the
general character of business as conducted as of the date hereof or engage in
any type of business not reasonably related to its business as presently and
normally conducted;

 

(i)                                     No
Change in Accounting Practices. 
Materially change accounting practices, methods, or standards or the
reporting format for any information furnished to Lenders under the terms and
provisions of this Agreement, which accounting practices shall conform with GAAP
throughout the term of this Agreement;

 

(j)                                     Use
of Proceeds.  Permit the proceeds of
the Notes to be used for any purpose other than the purposes set forth in
Section 3.2 of this Agreement;

 

(k)                                  Related
Party Transactions.  Except as
disclosed to each Lender in writing prior to the date of this Agreement, enter
into any transaction with a Related Party (other than the Loan Documents) or,
any Seaman Related Entity, including, without limitation, the purchase, sale,
or exchange of property of Borrower or the rendering of any service, unless the
transaction is in the ordinary course of and pursuant to the reasonable
requirements of Borrower’s business and upon fair and reasonable terms no less
favorable to Borrower than would be obtained in a comparable arm’s length
transaction with a Person not a Related Party; provided, that Borrower shall be
permitted to pay a management fee in an amount not to exceed $400,000 per year
to Sun Fund or one of its Affiliates so long as no Default or potential Default
has or is reasonably expected to occur; provided further, that any portion of
such management fee that has accrued but is not permitted to be paid pursuant
to the preceding proviso, shall not be paid by Borrower until the Advances and
all accrued interest thereon have been paid in full.

 

22

 

(l)                                     Adverse
Affects.  Enter into any transaction
which materially and adversely affects any of the collateral securing the
Obligations or Borrower’s ability to repay the Obligations or permit or agree
to any material extension, compromise, or settlement or make any material
change or modification of any kind or nature with respect to any Account,
including any of the terms relating thereto, other than discounts and
allowances in the ordinary course of business;

 

(m)                               Use
of Other Names.  Use any corporate
name (other than its own or Mattress Firm, Inc.) or any fictitious name,
tradestyle, or “d/b/a” without prior consent of the Requisite Lenders, except
for the use of the d/b/a of “The Mattress Firm”;

 

(n)                                 Subordinated
Debt.  Make any payment of principal
on Subordinated Debt except (i) for the regularly scheduled monthly payments of
principal set forth in each of the Busker Note and the Addison Note or (ii) as
expressly permitted under the terms of a subordination agreement approved by
the Special Requisite Lenders;

 

(o)                                 Margin
Stock.  Own, purchase, or acquire (or
enter into any contract to purchase or acquire) any “margin security” as
defined by any regulation of the Federal Reserve Board as now in effect or as
the same may hereafter be in effect unless, prior to any such purchase or
acquisition or entering into any such contract, each Lender shall have received
an opinion of counsel satisfactory to the effect that such purchase or acquisition
will not cause this Agreement to violate Regulations U or X or any other
regulation of the Federal Reserve Board then in effect;

 

(p)                                 No
Change in Fiscal Year.  Change its
fiscal year without first notifying each Lender; and

 

(q)                                 Tax
Returns.  File or consent to the
filing of any consolidated income tax return with any Person other than a
Subsidiary.

 

SECTION 8

EVENTS OF DEFAULT

 

8.1                                 Events
of Default.  Each of the following
shall constitute an Event of Default under this Agreement:

 

(a)                                  Payment
Default.  The failure to make any
payment of interest or principal on the Notes or of any fee or other payment
under this Agreement or any of the other Loan Documents; provided that
the failure to make payment of interest may be fully cured within five (5) days
after the same becomes due and payable;

 

(b)                                 Non-Payment
Default.  The failure by Borrower to
fully and timely observe and comply with any of its obligations under this
Agreement and the other Loan Documents and such failure is not fully cured
within ten (10) days after written notice thereof is provided by any Lender to
Borrower; provided that such notice and opportunity to cure shall not be
required (i) for the failure to timely satisfy Section 2.1, (ii) for a
breach of Section 7.1(f), (iii) for an Event of Default under
Section 8.1(a), or (iv) for any other Event of Default enumerated in any
other subsection of this Section 8.1;

 

23

 

(c)                                  False
Representation.  Any representation
or warranty made by Borrower or any Subsidiary in any of the Loan Documents
proves to have been untrue in any material respect.

 

(d)                                 Material
Adverse Change.  The occurrence of a
Material Adverse Change.

 

(e)                                  Other
Indebtedness.  (i) Borrower or any of
its Subsidiaries fail to pay when due (after lapse of any applicable grace
period) any Debt in excess (collectively) of $500,000; (ii) any default exists
under any agreement to which Borrower or any of its Subsidiaries is a party,
the effect of which is to cause, or to permit any Person (other than Borrower
or any of its Subsidiaries) to cause, an amount in excess (collectively) of
$500,000 to become due and payable by Borrower or any of its Subsidiaries
before its stated maturity (other than any such default under or pursuant to the
Finova Debt); or (iii) any Debt in excess (collectively) of $500,000 is
declared to be due and payable or required to be prepaid by Borrower or any of
its Subsidiaries before its stated maturity;

 

(f)                                    Insolvency.  Borrower or any of its Subsidiaries shall (i)
apply for or consent to the appointment of a receiver, trustee or liquidator of
it or all or a substantial part of its assets, (ii) file a voluntary petition
commencing a bankruptcy or other insolvency proceeding, (iii) make a general
assignment for the benefit of creditors, (iv) be unable, or admit in writing
its inability, to pay its debts generally as they become due, or (v) file an
answer admitting the material allegations of a petition filed against it in a
bankruptcy or other insolvency proceeding;

 

(g)                                 Bankruptcy
Decree.  An order, judgment, or
decree shall be entered against Borrower or any of its Subsidiaries by any
court of competent jurisdiction or by any other duly authorized authority, on
the petition of a creditor or otherwise, granting relief in a bankruptcy or
other insolvency proceeding or approving a petition seeking reorganization or
an arrangement of its debts or appointing a receiver, trustee, conservator,
custodian or liquidator of it or all or any substantial part of its assets and
such order, judgment or decree shall not be dismissed or stayed within 90 days;

 

(h)                                 Levy.  The levy against any significant portion of
the property of Borrower or any of its Subsidiaries or any execution,
garnishment, attachment, sequestration, or other writ or similar proceeding
which is not permanently dismissed or discharged within 90 days after the levy
in each case with respect to property having a value of at least $500,000;

 

(i)                                     Judgment.
A final and non-appealable order, judgment or decree, which is uninsured in an
amount in excess of $500,000, shall be entered against Borrower or any of its
Subsidiaries, and such order, judgment or decree shall not be paid, dismissed,
or stayed within 90 days;

 

(j)                                     ERISA.  Any Person shall engage in any “prohibited
transaction” (as defined in Section 406 of ERISA or Section 4975 of
the Code) involving any Plan; any ‘accumulated funding deficiency” (as defined
in Section 302 of ERISA), whether or not waived, shall exist with respect
to any Plan for which an excise tax is due or would be

 

24

 

due in the
absence of a waiver; a Reportable Event shall occur with respect to, or
proceedings shall commence to have a trustee appointed, or a trustee shall be
appointed, to administer or to terminate, any Single Employer Plan (as defined
in Section 4001(a)(15) of ERISA), which Reportable Event or commencement
of proceedings or appointment of a trustee is, in the reasonable opinion of
each Lender, likely to result in the termination of such Plan for purposes of
Title IV of ERISA; any Single Employer Plan (as defined in
Section 4001(a)(15) of ERISA)shall terminate for purposes of Title IV of
ERISA; the Borrower, or any Affiliate shall incur, or in the reasonable opinion
of each Lender, be likely to incur any liability in connection with a
withdrawal from, or the insolvency or reorganization of, a multi-employer plan;
or any other event or condition shall occur or exist with respect to a Plan and
the result of such events or conditions referred to in this subsection (j)
could subject the Borrower, or any Affiliate to any tax (other than an excise
tax under Section 4980 of the Code), penalty or other liabilities which
taken in the aggregate would have an adverse effect on Borrower and any such
circumstance shall exist for in excess of 90 days;

 

(k)                                  Cessation
of Business.  Cessation of a
substantial part of the business of Borrower or any of its Subsidiaries for a
period which results in a Material Adverse Change; or Borrower or any of its
Subsidiaries shall suffer the loss or revocation of any license or permit now
held or hereafter acquired by Borrower or any of its Subsidiaries which is
necessary to continue the lawful operation of this particular business; or
Borrower or any of its Subsidiaries shall be enjoined, restrained, or in any
way prevented by court, governmental, or administrative order from conducting
all or any material part of its respective business affairs;

 

(l)                                     Challenges.  Borrower or any of its Subsidiaries shall
challenge or contest in any action, suit, or proceeding the validity or
enforceability of this Agreement or any of the other Loan Documents, the
legality or enforceability of any of the Obligations or the perfection or
priority of any lien or security interests granted to Agent on behalf of
Lenders;

 

(m)                               Criminal
Indictments.  Borrower or any of its
Subsidiaries shall be criminally indicted or convicted under any law that could
lead to a forfeiture of any material portion of the property of Borrower or any
of its Subsidiaries;

 

(n)                                 Concealment.  Borrower shall have (i) concealed, removed,
or diverted, or permitted to be concealed, removed, or diverted, any part of
its property, with intent to hinder, delay or defraud its creditors or any of
them; (ii) made or suffered a transfer of any of its property which may be
fraudulent under any bankruptcy, fraudulent conveyance or similar law; or (iii)
shall have suffered or permitted, while insolvent, any creditor to obtain a
lien upon any of their respective property through legal proceedings or
otherwise which is not vacated within 90 days from the date thereof; and

 

(o)                                 Lien
Priority.  The liens and/or security
interests granted in any Security Instrument shall not constitute a first and
prior lien and/or security interest upon the collateral described therein,
except for Permitted Liens.

 

25

 

SECTION 9

RIGHTS AND REMEDIES OF LENDERS

 

9.1                                 Acceleration.  Upon the occurrence and continuance of any
Event of Default, the Requisite Lenders, at their option and upon 45 days prior
written notice to Borrower of intent to accelerate, may declare the entire
principal amounts of the Notes then outstanding and the interest accrued
thereon immediately due and payable, and the said entire principal, interest
and all other amounts owing thereunder shall thereupon become immediately due
and payable without presentment, demand, protest, notice of protest or other
notice of default or dishonor of any kind, all of which are hereby expressly waived
by Borrower; provided that no such notice of intent to accelerate, or any
notice of acceleration or other notice or demand shall be required upon the
occurrence of any Event of Default as described in Sections 8.1(b) (but only to
the extent such Event of Default is in respect of a breach of
Section 7.1(f)), 8.1(e)(iii), 8.1(f) or 8.1(g), in which case, such
acceleration shall be automatic.

 

9.2                                 Additional
Rights.  Upon the occurrence and
continuance of any Event of Default and after giving effect to the notice
requirements (if any) contained in Section 9.1 and all other applicable
notice and cure periods, each Lender shall have, subject to the rights and
remedies given it in the Loan Documents, all of the rights and remedies allowed
by applicable ordinances, statutes, rules, regulations, orders, injunctions,
writs or decrees of any governmental or political subdivision or agency
thereof, or any court or similar entity established by any such subdivision or
agency.  Notwithstanding anything
contained in this Agreement to the contrary, no claim may be made by any Lender
against Borrower and no claim shall be made by Borrower against any Lender for
any lost profits or any special, indirect or consequential damages in respect
of any breach or wrongful conduct (other than willful misconduct or actual
fraud) in connection with, arising out of or in any way related to the
transactions contemplated hereunder, or any act, omission or event occurring in
connection therewith.

 

9.3                                 Termination
of Obligations.  Upon the occurrence
and continuance of any Event of Default and after giving effect to the notice
requirements (if any) contained in Section 9.1 and all other applicable
notice and cure periods, any obligation of any Lender under this Agreement
shall immediately and automatically cease and terminate unless and until any
such Lender shall reinstate the same in writing, which reinstatement shall be
required if the Default or Event of Default is cured in a timely manner and in
a manner satisfactory to such Lender.

 

SECTION 10

MISCELLANEOUS

 

10.1                           Other
Loans.  Borrower and each Lender
acknowledge and agree that in the future, Borrower may apply for and Lenders
may agree to fund additional loans to Borrower. 
Borrower and each Lender agree that all existing and hereafter created
loans and other advances from Lenders (but not from less than all of the
Lenders), or any of their predecessors or successors in interest, to Borrower,
whether or not such loans are particularly described in this Agreement, as may
be amended from time to time, shall constitute Obligations for purposes of this
Agreement and shall be subject to the terms, provisions, covenants, and
agreements set forth in this Agreement.

 

26

 

10.2                           No
Duty or Special Relationship. 
Borrower acknowledges that no Lender has any duty to Borrower with
respect to the loan transactions set forth in this Agreement except as
expressly provided for in this Agreement and the other Loan Documents.

 

10.3                           Other
Remedies Not Required.  Borrower may
be required to pay the Notes in full without the assistance of any other party,
or any collateral or security for the Notes. 
Lenders shall not be required to mitigate damages, file suit, or take
any action to foreclose, proceed against or exhaust any collateral or security
in order to enforce payment of the Notes.

 

10.4                           NO CONTROL BY LENDER.  BORROWER AGREES AND ACKNOWLEDGES THAT ALL OF
THE COVENANTS AND AGREEMENTS PROVIDED FOR AND MADE BY BORROWER IN THIS
AGREEMENT AND IN THE OTHER LOAN DOCUMENTS ARE THE RESULT OF EXTENSIVE AND
ARMS-LENGTH NEGOTIATIONS BETWEEN BORROWER AND LENDERS.  LENDERS’ RIGHTS AND REMEDIES PROVIDED FOR IN
THIS AGREEMENT AND IN THE OTHER LOAN DOCUMENTS ARE INTENDED TO PROVIDE LENDERS
WITH A RIGHT TO OVERSEE BORROWER’S ACTIVITIES AS THEY RELATE TO THE LOAN
TRANSACTIONS PROVIDED FOR IN THIS AGREEMENT, WHICH RIGHT IS BASED ON LENDERS’
VESTED INTEREST IN BORROWER’S ABILITY TO PAY THE NOTES AND PERFORM THE OTHER
OBLIGATIONS.  NONE OF THE COVENANTS OR
OTHER PROVISIONS CONTAINED IN THIS AGREEMENT SHALL, OR SHALL BE DEEMED TO, GIVE
LENDER THE RIGHT OR POWER TO EXERCISE CONTROL OVER, OR OTHERWISE IMPAIR, THE
DAY-TO-DAY AFFAIRS, OPERATIONS, AND MANAGEMENT OF BORROWER; PROVIDED THAT IF
ANY LENDER BECOMES THE OWNER OF ANY STOCK OF ANY ENTITY, WHICH ENTITY OWNS AN
INTEREST IN BORROWER, WHETHER THROUGH FORECLOSURE OR OTHERWISE, SUCH LENDER
THEREAFTER SHALL BE ENTITLED TO EXERCISE SUCH LEGAL RIGHTS AS IT MAY HAVE BY
BEING A SHAREHOLDER OF SUCH ENTITY.

 

10.5                           No
Partnership.  Nothing herein is
intended, nor shall it be deemed or construed, to create a partnership, joint
venture, or common interest in profits or income between Borrower and each
Lender, or to make any Lender in any way responsible for the debts or losses of
Borrower or with respect to the collateral described in the Security
Instruments. 
Borrower and each Lender disclaim any sharing of liabilities,
losses, costs or expenses.

 

10.6                           Representations
and Warranties.  All representations
and warranties of Borrower herein, and all covenants and agreements made by
Borrower herein before the effective date of this Agreement, shall survive such
date.

 

10.7                           Headings.  The headings, captions and arrangements used
in any of the Loan Documents are, unless specified otherwise, for convenience
only and shall not be deemed to limit, amplify or modify the terms of the Loan
Documents, nor affect the meaning thereof.

 

10.8                           Notice.  All notices, demands, requests, and
communications permitted or required under this Agreement shall be in writing,
may be personally served or sent by telex (confirmed by telephone), telecopier
(confirmed by telephone), U.S. mail or any express mail

 

27

 

service, and
shall be effective upon receipt, such receipt being deemed to occur forty-eight
(48) hours after its deposit in the U.S. mail, postage prepaid or twenty-four
(24) hours after its transmission by telex, telecopier or express mail service,
as the case may be, addressed to the individuals and addresses indicated below:

 

(a)                                  If
to Borrower:

Malachi Mattress America, Inc.

5815 Gulf Freeway

Houston, Texas 77023

	
  Attention:

  	
  Chief
  Executive Officer

  
	
  Telecopy:

  	
  (713)
  923-1096

  

 

 

(b)                                 If
to Lenders:

 

Mattress
Holdings International, LLC

c/o Sealy Corporation

One Office Parkway

Trinity, NC 27370

	
  Attention:

  	
  Secretary

  
	
  Telecopy:

  	
  (336)
  861-3786

  

 

and

 

Mattress
Holding Corp.

c/o Sun Capital Partners, Inc.

5200 Town Center Circle, Suite 470

Boca Raton, Florida  33486

	
  Attention:

  	
  Marc J.
  Leder, Rodger R. Krouse and C. Deryl Couch

  
	
  Telecopy:

  	
  (561)
  394-0540

  

 

With copies
(which shall not constitute notice) to:

 

Kirkland &
Ellis

153 East 53rd Street

New York, New York 10022

	
  Attention:

  	
  W. Brian
  Raftery

  
	
  Telecopy:

  	
  (212)
  446-4900

  

 

28

 

and

 

Jenkens &
Gilchrist Parker Chapin LLP

405 Lexington Avenue

New York, New York  10174

	
  Attention:

  	
  James D.
  Garbus

  
	
   

  	
  Michael
  Weinsier

  
	
  Telecopy:

  	
  (212)
  704-6288

  

 

Any party may,
by proper written notice to the other party, change the individuals or
addresses to which such notices shall thereafter be sent.

 

10.9                           Binding
Effect.  All covenants and agreements
of Borrower under this Agreement shall bind the respective successors and
assigns of Borrower (including the successor corporation to the Short-Form
Merger) and shall inure to the benefit of each Lender and its successors and
assigns. 
The rights of Borrower under this Agreement are not
assignable.

 

10.10                     Assignment.  The rights and obligations of Borrower
hereunder shall not be assigned without the prior written consent of each
Lender.  The rights and obligations of
each Lender hereunder shall not be assigned without the prior written consent
of all other Lenders (which consent shall not be unreasonably withheld);
provided that (i) MHI shall be permitted to transfer all or any portion of the
Note held by it to Sealy Corporation or any Subsidiary of Sealy Corporation,
and (ii) MHC shall be permitted to transfer all or any portion of the Note held
by it to the Sun Fund or any Affiliate of the Sun Fund, in each case without
the prior written consent of any other Lender.

 

10.11                     Inconsistencies
and Conflicts.  To the extent any
irreconcilable conflicts or inconsistencies exist between the terms of this
Agreement and any of the other Loan Documents, the terms of this Agreement
shall govern and control.

 

10.12                     Renewal
of Indebtedness.  All provisions of
this Agreement relating to the Notes shall apply with equal force and effect to
each and all promissory notes hereafter executed which in whole or in part
represent a renewal, extension or rearrangement of any part of the indebtedness
originally represented by the Notes, or either of them, provided that nothing
herein shall constitute a commitment or offer by any Lender to such a renewal,
extension or rearrangement.

 

10.13                     No
Waiver.  No course of dealing on the
part of any Lender, its officers or employees, nor any failure or delay by any
Lender with respect to exercising any of its rights, remedies, powers or
privileges under the Loan Documents shall operate as a waiver thereof.  No
indulgence by any Lender, or waiver of compliance with any of the terms,
covenants, or provisions of the Loan Documents, shall be construed as a waiver
of such Lender’s right to subsequently require strict performance by Borrower
and any other Person of the Loan Documents.  The rights and remedies of any
Lender under the Loan Documents shall be cumulative and the exercise or partial
exercise of any such rights or remedies shall not preclude the exercise of any
other rights or remedies.

 

29

 

10.14                     APPLICABLE LAW.  EXCEPT AS OTHERWISE PROVIDED IN THE LOAN
DOCUMENTS, THE LOAN DOCUMENTS SHALL BE DEEMED TO BE CONTRACTS MADE UNDER, AND
SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY, THE LAWS OF THE STATE OF
NEW YORK AND THE LAWS OF THE UNITED STATES OF AMERICA APPLICABLE TO
TRANSACTIONS WITHIN THE STATE OF NEW YORK IN EITHER CASE, WITHOUT REGARD TO
CONFLICT OF LAWS PRINCIPLES THAT WOULD DEFER TO THE SUBSTANTIVE LAWS OF ANY
OTHER JURISDICTION.

 

10.15                     Amendment.  Neither this Agreement nor any provision
hereof may be changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against whom enforcement of the
change, waiver, discharge or termination is sought.

 

10.16                     Severability.  In the event any provision contained in any
of the Loan Documents shall, for any reason, be held invalid, illegal or
unenforceable in any respect, such provision shall be severed from the
applicable Loan-Document, and such invalidity, illegality or unenforceability
shall not affect any other provision of the applicable Loan Document.

 

10.17                     Lenders’
Discretion.  All matters hereunder
that require the Requisite Lenders’ discretion (including, without limitation,
whether Borrower has satisfied any condition precedent), the Requisite Lenders
shall use its sole and reasonable discretion, except as otherwise provided for
herein. 
Further, the Requisite Lenders may in their sole discretion
waive any of its rights with respect to a particular Event of Default.

 

10.18                     Entire
Agreement.  This Agreement and the
documents referred to herein embody the entire agreement with respect to the
respective rights, obligations, and liabilities of the Parties and supersedes
all prior agreements and understandings, if any, relating to the subject matter
hereof. 
THIS AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND
MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES.  THERE
ARE NO ORAL AGREEMENTS BETWEEN THE PARTIES.

 

10.19                     Counterparts.  This Agreement may be executed in two or more
counterparts, and it shall not be necessary that any one counterpart be
executed by all of the parties hereto.  Each fully or partially executed
counterpart shall be deemed an original, but all such counterparts taken
together shall constitute but one and the same instrument.

 

10.20                     Controlling
Agreement.  Borrower and each Lender
intend to conform strictly to the applicable usury laws.  All agreements between Lenders and Borrower
(or any other party liable with respect to any indebtedness under this
Agreement and the other Loan Documents) are hereby limited by the provisions of
this Section which shall override and control all such agreements, whether
now existing or hereafter arising and whether written or oral.  In
no way, nor in any event or contingency (including but not limited to
prepayment, default, demand for payment, or acceleration of the maturity of any
obligation), shall the interest contracted for, charged, or received under the
Notes or otherwise exceed the maximum rate permitted by applicable law (the “Maximum
Rate”). 
If, from any possible construction of any document, interest
would otherwise be payable to any Lender in excess of the Maximum Rate, any
such

 

30

 

construction
shall be subject to the provisions of this section and such document shall
be automatically reformed and the interest payable to such Lender shall be
automatically reduced to the Maximum Rate, without the necessity of execution
of any amendment or new document.  If any Lender shall ever receive
anything of value which is characterized as interest under applicable law and
which would apart from this provision be in excess of the Maximum Rate, an
amount equal to the amount which would have been excessive interest shall at
the option of such Lender, be refunded to Borrower or applied to the reduction
of the principal amount owing hereunder in the inverse order of its maturity
and not to the payment of interest.  The right to accelerate maturity
of the Notes or any other indebtedness does not include the right to accelerate
any interest which has not otherwise accrued on the date of such acceleration,
and Lenders do not intend to charge or receive any unearned interest in the
event of acceleration.  All interest paid or agreed to be
paid to any Lender shall, to the extent permitted by applicable law, be
amortized, prorated, allocated and spread throughout the full stated term
(including any renewal or extension) of such indebtedness so that the amount of
interest on account of such indebtedness does not exceed the Maximum Rate.

 

10.21                     Business
Loans.  Borrower warrants and
represents to each Lender, and to all other holders of any debt evidenced by
the Notes, that the loan evidenced by the Notes are and shall be for business,
commercial, investment or other similar purpose and not primarily for personal,
family, household or agricultural use.

 

[SIGNATURES ON FOLLOWING PAGE]

 

31

 

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

 

 

	
   

  	
  MALACHI
  MATTRESS AMERICA, INC., a

  Delaware corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Gary T.
  Fazio

  
	
   

  	
   

  	
  Name: Gary
  T. Fazio

  
	
   

  	
   

  	
  Title:
  President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  MATTRESS
  HOLDINGS INTERNATIONAL, LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Steven
  Barnes

  
	
   

  	
   

  	
  Name: Steven
  Barnes

  
	
   

  	
   

  	
  Title:
  President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  MATTRESS
  HOLDING CORP.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ M.
  Steven Liss

  
	
   

  	
   

  	
  Name: M.
  Steven Liss

  
	
   

  	
   

  	
  Title: Vice
  President

  

 

32

 

EXHIBIT A

 

FORM OF COMPLIANCE CERTIFICATE

 

[Mattress
Holdings International, LLC]

c/o Sealy Corporation

One Office Parkway

Trinity, NC 27370

Attention:                                         Secretary

Telecopy:                                           (336)
861-3786

 

Mattress Holding
Corp.

c/o Sun Capital Partners, Inc.

5200 Town Center Circle, Suite 470

Boca Raton, Florida  33486

Attention:                                         Marc
J. Leder, Rodger R. Krouse and C. Deryl Couch

Telecopy:                                           (561)
394-0540

 

Reference is
made to the Loan Agreement dated as of October       ,
2002 (as amended, supplemented or replaced from time to time, the “Loan Agreement”),
among the undersigned (“Borrower”)
and [Mattress Holdings International, LLC]
and Mattress Holding Corp. (collectively, “Lenders”).  Capitalized terms used but not otherwise
defined in this Compliance Certificate have the meanings given such terms in
the Loan Agreement.

 

This
Compliance Certificate is delivered pursuant to Section 6.1(c) of the Loan
Agreement.

 

I certify to
Agent that I am an Authorized Officer of Borrower on the date hereof and that:

 

i.                                          The
financial statements attached hereto were prepared in accordance with GAAP and
present fairly, in all material respects, the consolidated financial condition
and results of operations of the Borrower as of, and for the              
ending on
                  ,
             (the “Subject Period”).  During
the Subject Period, no Default has occurred which has not been cured or waived
(except for any Defaults set forth on the attached schedule).

 

A-1

 

ii.                                       This
certificate is being delivered on behalf of Borrower.  No person or entity
other than Lenders shall be entitled to receive or rely upon this certificate
for any purpose.  The Lenders agrees by their
acceptance hereof that (a) it shall look solely to Borrower for any loss, cost,
damage, expense, claim, demand, suit or cause of action arising out of or
relating in any way to this certificate or its preparation and delivery, and
(b) the undersigned shall not under any circumstances have any personal
liability whatsoever for the preparation or execution of this certificate.

 

	
   

  	
  Very truly
  yours,

  
	
   

  	
   

  
	
   

  	
  MALACHI MATTRESS AMERICA, INC.,

  
	
   

  	
  a Delaware
  corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
					

 

A-2

 

EXHIBIT B

 

[FORM OF NOTE]

 

PROMISSORY NOTE

 

	
  $[                            ]

  	
  Houston,
  Texas

  	
  September         , 2002

  

 

FOR VALUE
RECEIVED, the undersigned (“Maker”) promises to pay to the order of [MHI/MHC] (“Payee”), the sum of [                                                      
DOLLARS ($3,272,727.00/$2,727,273.00)], pursuant to the Loan
Agreement dated of even date herewith by and between Maker and Payee (as may be
amended, modified, supplemented, or restated from time to time, the “Loan  Agreement”), together with interest at
the rates and calculated as provided in the Loan Agreement.

 

Reference is
hereby made to the Loan Agreement for matters governed thereby, including,
without limitation, certain events which will entitle the holder hereof to
accelerate the maturity of all amounts due hereunder.  Capitalized terms
used but not defined in this Note shall have the meanings assigned to such
terms in the Loan Agreement.

 

This Note is
issued pursuant to, is one of the “Notes” under, and is payable as provided in
the Loan Agreement.  Subject to compliance with
applicable provisions of the Loan Agreement, Maker may at any time pay the full
amount or any part of this Note without the payment of any premium or fee, but
such payment shall not, until this Note is fully paid and satisfied, excuse the
payment as it becomes due of any payment on this Note provided for in the Loan
Agreement.

 

Without being
limited thereto or thereby, this Note is secured by certain of the Security
Instruments as provided for therein.

 

THIS
NOTE SHALL BE GOVERNED AND CONTROLLED BY THE LAWS OF THE STATE OF NEW YORK
WITHOUT GIVING EFFECT TO PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW THAT
WOULD DEFER TO THE SUBSTANTIVE LAWS OF ANY OTHER JURISDICTION.

 

	
   

  	
  MALACHI
  MATTRESS AMERICA, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

B-1

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