Document:

Exhibit
4.1

 

EXECUTION
COPY

 

 

 

STOCK
PURCHASE AGREEMENT

 

DATED AS OF OCTOBER 18, 2002

 

AMONG

 

MATTRESS HOLDING CORP.

 

MATTRESS HOLDINGS INTERNATIONAL, LLC

 

SEALY MATTRESS COMPANY

 

AND

 

MMA ACQUISITION COMPANY, INC.

 

 

Table of Contents

 

	
  Preamble

  	
   

  
	
   

  	
   

  
	
  Recitals

  	
   

  
	
   

  	
   

  
	
  Article I
  Purchase and Sale of Shares; Consideration; Closing

  	
   

  
	
  Section 1.1

  	
  Purchase and Sale of Shares

  	
   

  
	
  Section 1.2

  	
  Purchase Price

  	
   

  
	
  Section 1.3

  	
  Closing

  	
   

  
	
   

  	
   

  
	
  Article II
  Representations and Warranties of the Seller

  	
   

  
	
  Section 2.1

  	
  Corporate Organization,
  Etc.

  	
   

  
	
  Section 2.2

  	
  Power
  and Authority; Authorization; Enforceability; No Conflicts; Etc.

  	
   

  
	
  Section 2.3

  	
  Capitalization.

  	
   

  
	
  Section 2.4

  	
  Acquisition Company
  Activities

  	
   

  
	
  Section 2.5

  	
  Brokers and Finders

  	
   

  
	
  Section 2.6

  	
  Related Party Transactions

  	
   

  
	
  Section 2.7

  	
  EXCLUSIVITY
  OF REPRESENTATIONS AND WARRANTIES

  	
   

  
	
   

  	
   

  
	
  Article III
  Representations and Warranties of the Buyer

  	
   

  
	
  Section 3.1

  	
  Corporate Organization,
  Etc.

  	
   

  
	
  Section 3.2

  	
  Power
  and Authority; Authorization; Enforceability; No Conflicts; Etc.

  	
   

  
	
  Section 3.3

  	
  Securities Law Matters.

  	
   

  
	
  Section 3.4

  	
  Brokers and Finders

  	
   

  
	
  Section 3.5

  	
  EXCLUSIVITY
  OF REPRESENTATIONS AND WARRANTIES

  	
   

  
	
   

  	
   

  
	
  Article IV
  Covenants

  	
   

  
	
  Section 4.1

  	
  Senior Credit Agreement

  	
   

  
	
  Section 4.2

  	
  MHI Stock Purchase
  Agreements

  	
   

  
	
  Section 4.3

  	
  MHI Contribution

  	
   

  
	
  Section 4.4

  	
  Merger
  of the Company and Acquisition Company; Finova Warrants.

  	
   

  
	
  Section 4.5

  	
  Conduct of Business

  	
   

  
	
  Section 4.6

  	
  No-Shop

  	
   

  
	
  Section 4.7

  	
  Best Efforts

  	
   

  
	
  Section 4.8

  	
  Notification of Certain
  Matters

  	
   

  
	
  Section 4.9

  	
  Non-Competition;
  Non-Solicitation; Confidentiality.

  	
   

  
	
  Section 4.10

  	
  Buyer Contribution to New
  MMA

  	
   

  
	
  Section 4.11

  	
  Reduction in New
  MMA’s Franchise Fees.

  	
   

  
	
  Section 4.12

  	
  Reduction
  in the Company’s Accounts Payable to Sealy Mattress

  	
   

  
	
  Section 4.13

  	
  Cash at the Company

  	
   

  

 

 

	
  Article V
  Conditions Precedent to the Transaction

  	
   

  
	
  Section 5.1

  	
  Conditions
  Precedent to the Obligation of the Buyer

  	
   

  
	
  Section 5.2

  	
  Conditions
  Precedent to the Obligation of the Seller and Acquisition Company

  	
   

  
	
   

  	
   

  
	
  Article VI
  Survival; Indemnification

  	
   

  
	
  Section 6.1

  	
  Survival
  of Representations, Warranties, Covenants and Obligations of the Seller and
  Acquisition Company.

  	
   

  
	
  Section 6.2

  	
  Survival
  of Representations, Warranties, Covenants and Obligations of the Buyer.

  	
   

  
	
  Section 6.3

  	
  Indemnification by the
  Seller

  	
   

  
	
  Section 6.4

  	
  Indemnification by the
  Buyer

  	
   

  
	
  Section 6.5

  	
  Indemnification Procedures.

  	
   

  
	
  Section 6.6

  	
  Limitations
  on Indemnification by the Seller.

  	
   

  
	
  Section 6.7

  	
  Indemnification by
  Sealy Mattress

  	
   

  
	
  Section 6.8

  	
  Exclusive Remedy

  	
   

  
	
   

  	
   

  
	
  Article VII
  Termination

  	
   

  
	
  Section 7.1

  	
  Termination

  	
   

  
	
  Section 7.2

  	
  Effect of Termination

  	
   

  
	
   

  	
   

  
	
  Article VIII
  Miscellaneous

  	
   

  
	
  Section 8.1

  	
  Notices

  	
   

  
	
  Section 8.2

  	
  Further Assurances

  	
   

  
	
  Section 8.3

  	
  Publicity

  	
   

  
	
  Section 8.4

  	
  No Waiver

  	
   

  
	
  Section 8.5

  	
  Entire Agreement

  	
   

  
	
  Section 8.6

  	
  Governing Law

  	
   

  
	
  Section 8.7

  	
  Jurisdiction, Etc.

  	
   

  
	
  Section 8.8

  	
  Assignment.

  	
   

  
	
  Section 8.9

  	
  Binding
  Effect; Third-Party Beneficiaries

  	
   

  
	
  Section 8.10

  	
  Fees and Expenses

  	
   

  
	
  Section 8.11

  	
  Amendment and Waiver

  	
   

  
	
  Section 8.12

  	
  Unenforceability,
  Severability

  	
   

  
	
  Section 8.13

  	
  Specific Performance

  	
   

  
	
  Section 8.14

  	
  Counterparts

  	
   

  
	
  Signatures

  	
   

  	
   

  

 

2

 

EXECUTION
COPY

 

STOCK
PURCHASE AGREEMENT

 

This Stock
Purchase Agreement is made as of October 18, 2002 (this “Agreement”)
among Mattress Holding Corp., a Delaware corporation (the “Buyer”);
Mattress Holdings International, LLC, a Delaware limited liability company (the
“Seller”); Sealy Mattress Company, an Ohio corporation (“Sealy
Mattress”) and MMA Acquisition Company, Inc., a Delaware corporation (“Acquisition
Company”; unless the context otherwise requires, the Buyer, on the one
hand, and the Seller, Sealy Mattress and Acquisition Company, on the other
hand, are each sometimes referred to in this Agreement as a “party”).

 

Recitals

 

WHEREAS, as of the
date hereof, the issued and outstanding capital stock of Acquisition Company
consists of 1,010.7135 shares of common stock, par value $0.001 per share (“Acquisition
Company Common Stock”; or such common stock after the Merger (as herein
defined), “New MMA Common Stock”), all of which are owned by the Seller;

 

WHEREAS, as of the
date hereof, the issued and outstanding capital stock of Malachi Mattress of
America, Inc., a Delaware corporation (the “Company”), consists of (i)
10,107,135 shares of common stock, par value $0.01 per share (“MMA Common
Stock”), of which 4,952,630 shares are owned either by the Seller or
Acquisition Company, and (ii) 565,000 shares of Preferred Stock, par value
$0.01 per share (“MMA Preferred Stock”), all of which are owned by
Acquisition Company;

 

WHEREAS, as of the
date hereof, the Seller is a party to certain Stock Purchase Agreements, as
amended (the “MHI Stock Purchase Agreements”) pursuant to which, subject
to the satisfaction and/or waiver of certain conditions contained therein, the
Seller shall purchase an additional 4,443,016 shares of MMA Common Stock;

 

WHEREAS,
immediately after the consummation of the transactions contemplated by the MHI Stock
Purchase Agreements, the Seller shall contribute all of the MMA Common Stock
then owned by the Seller to the capital of Acquisition Company (such
contribution, the “MHI Contribution”); and

 

WHEREAS, as of
immediately after the MHI Contribution, (i) Acquisition Company shall continue
to be a wholly-owned subsidiary of the Seller, (ii) Acquisition Company shall
own (x) 9,395,646 shares of MMA Common Stock and (y) all of the issued and
outstanding MMA Preferred Stock and (iii) certain other persons (such other
persons, the “Remaining MMA Stockholders”) shall own the remaining
711,489 shares of issued and outstanding MMA Common Stock (such shares, the “Remaining
MMA Common Stock”).

 

NOW, THEREFORE, in
consideration of the representations, warranties and mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereby agree as follows:

 

3

 

Article I

Purchase and Sale of Shares; Consideration; Closing

 

Section 1.1             Purchase
and Sale of Shares.  Subject to the
terms and conditions set forth in this Agreement, the Seller hereby agrees to,
sell, transfer, convey, assign and deliver to the Buyer at the Closing (as
defined in Section 1.3 below), and the Buyer hereby agrees to purchase,
accept and acquire from the Seller at the Closing, all of the issued and
outstanding shares of New MMA Common Stock (collectively, the “Shares”),
consisting of 1,010.7135 shares, free and clear of all mortgages, liens,
claims, pledges, charges, security interests, restrictions, prior assignments
and encumbrances of any kind whatsoever, or any conditional sale agreement or
other title retention agreement (collectively, “Liens”).

 

Section 1.2             Purchase Price.  As consideration in full for its acquisition
of the Shares, the Buyer shall pay an aggregate amount equal to the sum of
$1.00 (the “Purchase Price”).

 

Section 1.3             Closing.  Subject to the satisfaction of the conditions
precedent hereinafter set forth, the consummation of the transactions
contemplated by this Agreement (the “Closing”) shall take place at the
offices of Kirkland & Ellis in New York, New York, at 3:15 p.m.,
Eastern Time, on October 18, 2002 or at such other time, date or place as
the parties hereto may agree upon (the “Closing Date”).

 

Article II

Representations and Warranties of the Seller

 

The
Seller represents and warrants to the Buyer as follows:

 

Section 2.1             Corporate Organization, Etc. 
Acquisition Company is a corporation duly organized, validly existing
and in good standing under the laws of the state of Delaware, with full
corporate power and authority to own its assets and to carry on its business as
it is now being conducted.  The Seller is
a limited liability company duly organized, validly existing and in good
standing under the laws of the state of Delaware.  The Seller has delivered to the Buyer true,
complete and correct copies of Acquisition Company’s certificate of
incorporation and bylaws, as currently in effect.

 

Section 2.2             Power
and Authority; Authorization; Enforceability; No Conflicts; Etc.

 

(a)           The Seller and
Acquisition Company each has full corporate (or other) power and authority to
execute and deliver this Agreement and the other agreements and instruments contemplated
herein and to perform its obligations hereunder and thereunder (together with
this Agreement, the “Transaction Documents”) to which either of them is
a party and to consummate the transactions contemplated hereby and thereby.

 

(b)           The execution, delivery
and performance by the Seller and Acquisition Company of this Agreement and the
other Transaction Documents to which they are a party and the consummation by
the Seller and Acquisition Company of the transactions contemplated hereby and
thereby has been duly authorized by all requisite corporate (or other) action
of the Seller and Acquisition Company.

 

4

 

(c)           This Agreement has
been, and the other Transaction Documents will at the Closing be, duly and
validly executed and delivered by the Seller and Acquisition Company and
(assuming due authorization, execution and delivery by the Buyer) constitute or
will then constitute, as the case may be, the legal, valid and binding
obligations of the Seller and Acquisition Company, enforceable against it in
accordance with their respective terms.

 

(d)           The execution and
delivery of each of the Transaction Documents by the Seller and Acquisition
Company, the performance by the Seller and Acquisition Company of its
obligations thereunder and the consummation by the Seller and Acquisition
Company of the transactions contemplated thereby do not:  (i) violate any provision of the certificate
of incorporation or bylaws (or comparable organizational documents) of the Seller
or Acquisition Company; (ii) result in a violation or breach of, or constitute
(with or without due notice or lapse of time or both) a default (or give rise
to any right of termination, amendment, cancellation or acceleration) under any
of the terms, conditions or provisions of any note, bond, mortgage, indenture,
guarantee, other evidence of indebtedness, license, lease, option, contract,
undertaking, understanding (oral or written), covenant, agreement or other
instrument or document (each, a “Contract”) to which either the Seller
or Acquisition Company is a party or by which any of the properties or assets
of the Seller or Acquisition Company may be bound or otherwise subject; or
(iii) contravene or violate any order, writ, judgment, injunction, decree, law,
statute, rule or regulation (each or, a “Law”) applicable to the Seller
or Acquisition Company or any of their respective properties or assets.

 

(e)           No prior or subsequent
filing or registration with, notification to, or authorization, consent or approval
of, any foreign, provincial, United States federal, state, county, municipal or
other local jurisdiction, political entity, body, organization, subdivision or
branch, legislative or executive agency or department or other regulatory
service, authority or agency (a “Governmental Entity”) is required to be
made or obtained by the Seller or Acquisition Company in connection with the
execution, delivery and performance of this Agreement by the Seller or
Acquisition Company or any of the other Transaction Documents to which the
Seller or Acquisition Company is a party or the consummation by the Seller of
the transactions contemplated hereby and thereby, except for such filings,
registrations, notifications, authorizations, consents and approvals with the
Secretary of State of Delaware in connection with the Merger.

 

Section 2.3             Capitalization.

 

(a)           The authorized capital
stock of Acquisition Company consists of (i) 10,000 shares of Common Stock, par
value $0.001 per share, of which 1,010.7135 shares are issued and outstanding,
and (ii) 1,000 shares of Preferred Stock, par value $0.001 per share, all of
which are designated as “Undesignated Preferred Stock”.  All of the outstanding shares of Acquisition
Company Common Stock were duly authorized and validly issued and are fully paid
and non-assessable and are owned by the Seller. 
At the Closing, the Seller will own all of the Shares free and clear of
any and all Liens.  As of the date hereof
and as of immediately prior to the Merger, there are no outstanding options,
warrants, rights to acquire or subscribe to, or calls or commitments of any
character whatsoever to which Acquisition Company is a party or may be bound,
requiring the issuance or sale of shares of any class of capital stock or other
equity securities of Acquisition Company or securities or rights convertible
into or exchangeable for

 

5

 

such shares or other
equity securities, and there are no contracts, commitments, understandings or
arrangements for which Acquisition Company is or may become bound to issue
additional shares of its capital stock or other equity securities or options,
warrants or rights to acquire or subscribe to any additional shares of any
class of its capital stock or other equity securities or securities convertible
into or exchangeable for such shares or other equity securities.  There is no existing arrangement that
requires or permits any shares of the capital stock of Acquisition Company to
be voted by or at the discretion of anyone other than the record owner thereof
and there are no proxies providing for such a voting arrangement.  Except for restrictions imposed by applicable
securities laws, there are no restrictions of any kind on the transfer of any
of the outstanding shares of capital stock of Acquisition Company.  None of Acquisition Company’s capital stock
has been issued in violation of any federal or state law or any statutory,
contractual or other preemptive or similar rights.

 

(b)           As of the date hereof
and as of immediately prior to the Merger, Acquisition Company has no
subsidiaries and does not own any outstanding shares of capital stock or have
any direct or indirect interest in or control over any corporation,
partnership, joint venture, trust, corporation, limited liability company or
other entity other than its ownership of MMA Preferred Stock and MMA Common
Stock.

 

(c)           As of immediately after
the MHI Contribution and prior to the Merger, Acquisition Company shall own in
excess of 90% of (i) the number of then issued and outstanding shares of MMA
Common Stock and (ii) the number of then issued and outstanding shares of MMA
Preferred Stock.  As of immediately prior
to the Merger, MMA will not have outstanding any options or warrants to
purchase MMA Common Stock or other securities or rights that are exercisable or
exchangeable for or convertible into capital stock of MMA except for the
warrants outstanding pursuant to the Finova Stock Purchase Warrant (as herein
defined) and the Growth Capital Warrants (as herein defined).

 

(d)           The Merger shall result
in the Company merging with and into Acquisition Company, with Acquisition
Company surviving and changing its name to “Mattress Firm, Inc.”  As of immediately after the Merger and as of
immediately prior to the Closing, the Seller shall own all of the issued and
outstanding shares of capital stock of New MMA (as herein defined) free and
clear of all Liens.

 

Section 2.4             Acquisition
Company Activities.  Acquisition
Company was organized for the sole purpose of entering into this Agreement and
consummating the Merger and the other transactions contemplated hereby and has
not engaged in any activities or business, and has incurred no liabilities or
obligations whatsoever, in each case, other than (i) those incident to its organization,
the execution of this Agreement and the consummation of the Merger and the
other transactions contemplated hereby, (ii) obligations as a party to that
certain Amended and Restated Stockholders Agreement, dated as of June 28,
1999, (the “MMA Stockholders Agreement”) by and among the Company, the
Seller and certain other holders of MMA Common Stock and (iii) the
$17.5 million in principal amount promissory note issued by Acquisition
Company to the Seller (the “Acquisition Company Note”), a complete and
accurate copy of which has previously been delivered to the Buyer.

 

6

 

Section 2.5             Brokers and
Finders.  Neither the Seller,
Acquisition Company nor the Company nor any of their respective officers, directors,
employees or other agents has employed any broker, agent or finder or incurred
any liability for any brokerage fees, agents’ commissions or finders’ fees in
connection with the transactions contemplated hereby.

 

Section 2.6             Related Party
Transactions.  Schedule 2.6
sets forth all arrangements between New MMA (as successor to the Company) and
its subsidiaries, on the one hand, and Sealy Corporation, the Seller and their
respective subsidiaries, on the other hand, that will not be terminated as of
the Closing other than this Agreement, the Secured Credit Agreement (as herein
defined), the New MMA Subordinated Note and the other loan documents associated
with the Secured Credit Agreement and the New MMA Subordinated Note and the
Supply Agreement (as herein defined).

 

Section 2.7             EXCLUSIVITY
OF REPRESENTATIONS AND WARRANTIES. 
THE REPRESENTATIONS AND WARRANTIES MADE BY THE SELLER IN THIS AGREEMENT
ARE IN LIEU OR AND ARE EXCLUSIVE OF ALL OTHER REPRESENTATIONS AND WARRANTIES,
INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES.  THE SELLER HEREBY DISCLAIMS ANY SUCH OTHER OR
IMPLIED REPRESENTATIONS OR WARRANTIES, NOTWITHSTANDING THE DELIVERY OR
DISCLOSURE TO THE BUYER OR ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS OR REPRESENTATIVES
OF ANY DOCUMENTATION OR OTHER INFORMATION (INCLUDING ANY FINANCIAL PROJECTIONS
OR OTHER SUPPLEMENTAL DATA OR ANY INFORMATION OR DOCUMENTATION REGARDING THE
COMPANY OR ANY OF ITS SUBSIDIARIES OR BUSINESSES).

 

Article III

Representations and Warranties of the Buyer

 

The
Buyer represents and warrants to the Seller as follows:

 

Section 3.1             Corporate Organization, Etc. 
The Buyer is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware.  The Buyer has the power and authority to execute
and deliver this Agreement and the other agreements and instruments
contemplated herein and to perform its other obligations hereunder and
thereunder.  The Buyer is a newly formed
corporation formed solely for the purpose of consummating the transactions
contemplated hereby.

 

Section 3.2             Power
and Authority; Authorization; Enforceability; No Conflicts; Etc.

 

(a)           The Buyer has the
corporate power and authority to execute and deliver this Agreement and the
other Transaction Documents to which it is a party and to perform its
obligations hereunder and thereunder.

 

(b)           The execution, delivery
and performance by the Buyer of this Agreement and the other transaction
Documents to which it is a party and the connection by the Buyer of the
transactions contemplated hereby  and thereby have been duly authorized
by all requisite corporate action of the Buyer.

 

7

 

(c)           This Agreement has
been, and the other agreements and instruments contemplated hereby will be,
duly and validly executed and delivered by the Buyer and (assuming due
authorization, execution and delivery by the Seller and Acquisition Company)
constitute or will then constitute, as the case may be, the legal, valid and
binding obligations of the Buyer, enforceable against it in accordance with
their respective terms.

 

(d)           The execution and
delivery of each of the Transaction Documents by the Buyer, the performance by
the Buyer of its obligations thereunder and the consummation by the Buyer of
the transactions contemplated thereby do not: 
(i) violate any provision of the certificate of incorporation or bylaws
of the Buyer; (ii) result in a violation or breach of, or constitute (with or
without due notice or lapse of time or both) a default (or give rise to any
right of termination, amendment, cancellation or acceleration) under any of the
terms, conditions or provisions of any note Contract to which the Buyer is a
party or by which the properties or assets of the Buyer may be bound or
otherwise subject; or (iii) contravene or violate any Law applicable to the
Buyer or any of its properties or assets.

 

(e)           No prior or subsequent
filing or registration with, notification to, or authorization, consent or
approval of, any Governmental Entity is required to be made or obtained by the
Buyer in connection with the execution, delivery and performance of this
Agreement by the Buyer or any of the other Transaction Documents to which the
Buyer is a party or the consummation by the Buyer of the transactions
contemplated hereby and thereby.

 

Section 3.3             Securities Law
Matters.

 

(a)           The Buyer acknowledges
that it is able to fend for itself, can bear the economic risk of its
investment in the Shares, and has such knowledge and experience in financial or
business matters that it is capable of evaluating the merits and risks of
owning an investment in the Shares.

 

(b)           The Buyer is an
“accredited investor” as defined under Rule 501 promulgated under the
Securities Act of 1933, as amended (the “Securities Act”).

 

(c)           The Buyer is acquiring
the Shares for its own account, not as nominee or agent, and has no intention
of selling such securities in a public distribution in violation of the federal
securities laws or any applicable state securities laws.

 

(d)           The Buyer understands
that no public market now exists for the Shares and that there is no assurance
that a public market will ever exist for the Shares.  The Buyer also understands that Rule 144
promulgated under the Securities Act is not presently available with respect to
the sale of any of the Shares.

 

Section 3.4             Brokers and
Finders.  The Buyer has not employed
any broker, agent or finder or agreed to incur any liability for any brokerage
fees, agents’ commissions or finders’ fees in connection with the transactions
contemplated hereby.

 

Section 3.5             EXCLUSIVITY
OF REPRESENTATIONS AND WARRANTIES. 
THE REPRESENTATIONS AND WARRANTIES MADE BY THE BUYER IN THIS AGREEMENT
ARE IN LIEU OR AND ARE EXCLUSIVE OF ALL OTHER

 

8

 

REPRESENTATIONS
AND WARRANTIES, INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES.  THE BUYER HEREBY DISCLAIMS ANY SUCH OTHER OR
IMPLIED REPRESENTATIONS OR WARRANTIES, NOTWITHSTANDING THE DELIVERY OR
DISCLOSURE TO THE SELLER OR ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS OR
REPRESENTATIVES OF ANY DOCUMENTATION OR OTHER INFORMATION (INCLUDING ANY
FINANCIAL PROJECTIONS OR OTHER SUPPLEMENTAL DATA OR ANY INFORMATION OR
DOCUMENTATION REGARDING THE COMPANY OR ANY OF ITS SUBSIDIARIES OR BUSINESSES).

 

Article IV

Covenants

 

Section 4.1             Senior
Credit Agreement.  Promptly
after the execution and delivery of this Agreement (and in any event by no
later than October 18, 2002), but subject to the approval of the Company’s
board of directors, the Seller and the Buyer each agree to enter into with the
Company a $6 million in principal amount secured credit agreement in a
form mutually agreeable to the Seller and the Buyer (the “Secured Credit
Agreement”) pursuant to which (i) the Seller will lend $3,272,727 to the
Company, (ii) the Buyer will lend $2,727,273 to the Company and (iii) the
Company will use the proceeds from the Secured Credit Agreement (as well as any
other funds of the Company that may be necessary) to repay in full
(collectively, the “Company Debt Repayments”) all amounts then
outstanding under (x) the Company’s senior debt facility with Bank of America,
N.A. (the “BOA Senior Debt Facility”), which has a pay-off amount as of
the date hereof of approximately $6,081,925 and (y) the secured promissory
note, dated June 28, 1999, and issued by the Company to Stephen Fendrick,
Harry Roberts and Paul Stork (the “Stork Secured Promissory Note”),
which has a pay-off amount as of the date hereof of approximately $925,417.

 

Section 4.2             MHI Stock Purchase
Agreements.  As of immediately after
(i) the execution and delivery of the Secured Credit Agreement by the Seller,
the Buyer and the Company and (ii) the completion by the Company of the Company
Debt Repayments, the Seller hereby agrees to consummate the transactions
contemplated by the MHI Stock Purchase Agreements.

 

Section 4.3             MHI
Contribution.  As of
immediately after the consummation of the transactions contemplated by the MHI
Stock Purchase Agreements, the Seller hereby agrees to complete the MHI
Contribution.

 

Section 4.4             Merger
of the Company and Acquisition Company; Finova Warrants.

 

(a)           As of immediately after
the completion of the MHI Contribution, Acquisition Company hereby agrees to
consummate a Delaware General Corporation Law Section 253 merger (the “Merger”)
of the Company with and into Acquisition Company, with Acquisition Company
surviving the Merger and changing its name to “Mattress Firm, Inc.”, by filing
an appropriate Certificate of Ownership and Merger (the “Certificate of
Ownership”) with the Secretary of State of Delaware; provided that,
as set forth in the Certificate of Ownership, Acquisition Company’s board of
directors has resolved that, in connection with the Merger, the holders of the
Remaining MMA Common Stock shall be entitled to receive a cash payment of

 

9

 

$0.75 per share (the “Per
Share Merger Consideration”) of Remaining MMA Common Stock; accordingly, as
of immediately prior to the consummation of the Merger, the Seller hereby
agrees to set aside $533,616.75 (the “Aggregate Merger Consideration”),
which has been calculated as follows: 
the 711,489 shares of Remaining MMA Common Stock multiplied by
the Per Share Merger Consideration and, after the Merger, to pay the Aggregate
Merger Consideration to the applicable holders of the Remaining MMA Common
Stock in the amounts and when New MMA would otherwise be required to make such
payment; provided that if any portion of the Aggregate Merger
Consideration has not been paid by MHI to holders of the Remaining MMA Common
Stock as of the date 90 days after the Closing Date, then MHI shall
transfer such portion of the Aggregate Merger Consideration to New MMA.

 

(b)           Reference is hereby
made to that certain Stock Purchase Warrant, dated as of August 6, 1999
(the “Finova Stock Purchase Warrant”) between the Company and FINOVA
Mezzanine Capital Inc. (“Finova”) pursuant to which, as of immediately
prior to the Merger, Finova has the right to purchase 105,283 shares of MMA
Common Stock at an exercise price (the “Finova Exercise Price”) of $0.01
per share of MMA Common Stock (the “2002 Finova Warrants”).  As a result of the Merger, pursuant to
Section 8(e) of the Finova Stock Purchase Warrant, the 2002 Finova
Warrants will be converted into the right of the holder of the 2002 Finova
Warrants to receive, upon exercise in full of the 2002 Finova Warrants, cash in
the amount of $78,963 (the “Finova Cash Amount”) (which represents
105,283 shares of MMA Common Stock multiplied by the Per Share Merger
Consideration).  Thus, as a result of the
Merger, the 2002 Finova Warrants will have a cash value of $77,910 (the “Finova
Warrant Value”) (which represents the Finova Cash Amount minus the
aggregate Finova Exercise Price of $1,053). 
As of immediately prior to the consummation of the Merger, the Seller
hereby agrees to contribute to the capital of Acquisition Company cash in an
amount equal to the Finova Warrant Value.

 

Section 4.5             Conduct
of Business.  From and after
the date of this Agreement until the Closing Date or the earlier termination of
this Agreement, except as contemplated by this Agreement, the Seller and
Acquisition Company agree to use their respective best efforts (to the extent
permitted by law) to cause the activities and operations of the Company to be
conducted in the ordinary course in the same manner as presently conducted and
in compliance with all applicable laws and to: 
(A) preserve and keep intact the assets and properties of the Company,
(B) keep available the services of its officers, employees and agents as of the
date hereof and (C) preserve its relationships with customers and suppliers.

 

Section 4.6             No-Shop.  From and after the date hereof and continuing
until the Closing or the earlier termination of this Agreement pursuant to
Article VII hereof (the “Exclusivity Period”), neither the Seller,
Acquisition Company nor any of their respective affiliates or representatives
will solicit offers for sale or discuss a possible merger, sale, restructuring,
refinancing or other disposition of all or any material part of the Company or
any of its assets or issued or unissued capital stock (a “Company Sale”)
with any party other than the Buyer and its affiliates or provide any
information to any person other than the Buyer and its affiliates regarding the
Company in that connection and will not permit or participate in any Company
Sale except for a Company Sale to the Seller or the Buyer or any of their
respective affiliates.  The Seller shall
inform the Buyer of any unsolicited offers it receives during the Exclusivity
Period regarding a Company Sale as well as the terms and conditions of any such
offer.

 

10

 

Section 4.7             Best Efforts.  Upon the terms and subject to the conditions
hereof, each of the parties hereto agrees to use its best efforts promptly to
take, or cause to be taken, all actions and to do, or cause to be done, all
things necessary to consummate and make effective the transactions contemplated
by this Agreement and will use its best efforts to obtain all waivers, permits,
consents, approvals and releases and to effect all registrations, filings,
assignments and notices with or to third parties or Governmental Entities
which, in each case, are required by the express terms of this Agreement.  An undertaking of a person under this
Agreement to use such person’s best efforts shall not require such person to
incur unreasonable expenses or obligations in order to satisfy such
undertaking.  If at any time after the
Closing any further action is necessary or desirable to carry out the purposes
of this Agreement, each party hereto and its proper officers, directors or
other representatives will promptly take such action.

 

Section 4.8             Notification
of Certain Matters.  The
Buyer, on the one hand, and the Seller, on the other hand, will each give
prompt notice to the other of (i) the occurrence, or failure to occur, of any
event the occurrence or failure of which would reasonably be likely to cause
any of their respective representations or warranties contained in this Agreement
to be untrue or incorrect at any time from the date hereof to the Closing Date,
and (ii) any failure on their respective parts or on the part of any of their
respective officers, directors, partners, employees, representatives or agents,
if any, to comply with or satisfy any covenant or obligation to be complied
with or performed or condition to be satisfied by any of them under this
Agreement; provided, however, that no such notification will
alter or otherwise affect such representations, warranties, covenants,
obligations or conditions.

 

Section 4.9             Non-Competition;
Non-Solicitation; Confidentiality.

 

(a)           During the two-year
period commencing on the Closing Date, Sealy Mattress shall not, and Sealy
Mattress shall cause Sealy Corporation and all of its direct and indirect
subsidiaries not to, directly or indirectly, operate or franchise any retail
mattress stores or other retail mattress sellers in any regional market that
the Company is operating retail mattress stores as of the Closing Date; provided
that, with respect to any such regional market, if, after the date hereof, the
Company ceases to operate any retail mattress stores in such regional market,
then the provisions of this Section 4.9(a) will cease to apply with
respect to such regional market.

 

(b)           During the one year
period commencing of the Closing Date, the Seller and Sealy Mattress shall not,
and the Seller and Sealy Mattress shall cause their respective employees,
officers, directors and affiliates not to, directly or indirectly, for itself
or on behalf of any other person, contact any officer or management employee of
the Company or any of its subsidiaries for the purpose of soliciting or
diverting any such officer or management employee from the Company or such
subsidiary.

 

(c)           During the three year
period commencing of the Closing Date, the Seller and Sealy Mattress agrees not
to, and to cause their respective employees, officers, directors and affiliates
not to, disclose or furnish at any time to any person any confidential
information relating to the operations or financial condition of the Company
and its subsidiaries (including, without limitation, financial data and sources
of financing), which in any such case is not specifically a matter of public
knowledge; provided, however, that the foregoing shall not apply
with respect to any such information that (i) becomes generally known to the
public or third

 

11

 

parties through no fault
of the Seller, Sealy Mattress or their respective employees, officers,
directors and affiliates, (ii) is independently obtained by the Seller, Sealy
Mattress or any of their respective employees, officers, directors and
affiliates or (iii) is required to be and is actually disclosed by operation of
law or court order; provided  further that the parties hereto
hereby acknowledge that, in connection with the Merger, Acquisition Company may
deliver a copy of this Agreement to the Remaining MMA Stockholders and any such
delivery will not be a breach of the provisions of this Section 4.9(c).

 

(d)           If, at the time of
enforcement of this Section 4.9, a court shall hold that the duration,
scope or area restrictions stated herein are unreasonable under circumstances
then existing, the parties agree that the maximum duration, scope or area
reasonable under such circumstances shall be substituted for the stated
duration, scope or area and that the court shall be allowed to revise the
restrictions contained herein to cover the maximum period, scope and area
permitted by law.

 

(e)           For purposes of this
Section 4.9, the term “affiliate” means with respect to any person,
any other person directly or indirectly controlling (including but not limited
to all directors and executive officers of such person) or controlled by such
person.  A person shall be deemed to
control a corporation for the purposes of this definition if such person
possesses, directly or indirectly, the power to vote greater than 50% of the
securities having ordinary voting power for the election of directors of such
corporation.

 

Section 4.10           Buyer
Contribution to New MMA. 
Immediately after the Closing, Buyer hereby agrees that it will
contribute $5 million in cash to the capital of New MMA.

 

Section 4.11           Reduction in New
MMA’s Franchise Fees.

 

(a)           The Buyer and Acquisition
Company hereby agree that promptly after the Closing (but in no event later
than one hundred and twenty (120) days after the Closing Date), the Buyer shall
cause New MMA and its subsidiaries (including Mattress Venture LP, a Texas
partnership (“Mattress Venture”)) to, and New MMA (as successor to
Acquisition Company) will, reduce royalties charged by New MMA and its
subsidiaries (including Mattress Venture) to each and every “Mattress Firm”
franchisee who has satisfied the conditions set forth in Section 4.11(b)
to no more than three percent (3%) of such franchisee’s gross sales.  Such reduction of royalties shall stay in
place so long as any amounts remain outstanding under the New MMA Subordinated
Note (as herein defined).

 

(b)           The obligation of the
Buyer and New MMA to reduce the royalties charged to any franchisee described
in Section 4.11(a) shall be subject to the satisfaction by such franchisee
of the following conditions precedent:

 

(i)            such franchisee shall
have executed and delivered to New MMA a release, in form and substance
reasonably satisfactory to New MMA, that shall release New MMA and its
affiliates from any and all claims arising prior to the date of such release
from such franchisee;

 

(ii)           such franchisee shall
have agreed in writing to a reduction in the level of advertising-related,
training and advisory provided by the franchisor; and

 

12

 

(iii)          such franchisee shall
have agreed in writing to provide New MMA with such franchisee’s balance sheet
as of the end of each fiscal quarter and statements of income (or loss) and
cash flows for such quarter.

 

(c)           With respect to each
franchisee described in Section 4.11(a), the Buyer and Acquisition Company
hereby agree to use their respective reasonable best efforts to have each of
the conditions set forth in Section 4.11(b) satisfied prior to the date
one hundred and twenty (120) days after the Closing Date.

 

Section 4.12           Reduction in the
Company’s Accounts Payable to Sealy Mattress.  Sealy Mattress hereby agrees that, effective
as of the Closing, all rights of Sealy Corporation and its direct and indirect
subsidiaries, including Sealy Mattress (collectively, the “Sealy Entities”)
to collect all amounts owed by the Company and its direct and indirect
subsidiaries (collectively, the “MMA Companies”) to Sealy Entities as
accounts payable on gross purchases that represent the gross amount set forth
on the face of invoices for inventory, which inventory the MMA Companies
received from any Sealy Entity more than 60 days prior to the Closing Date
(such accounts payable, the “Foregone Accounts Payable”) are hereby
irrevocably waived and terminated; accordingly, after the Closing, no MMA
Company shall have any obligation to make any payments to any Sealy Entity with
respect to the Foregone Accounts Payable. 
The foregoing shall in no event affect the rights (such rights, the “Remaining
MMA Rights”) of the MMA Companies as of the Closing to (i) collect existing
receivables from the Sealy Entities (the “Receivables”), (ii) offset
against accounts payable of the MMA Companies to the Sealy Entities of all or a
portion of any such Receivables (and in any event the Sealy Companies will
permit the MMA Companies to so offset) and (iii) offset against accounts payable
by the MMA Companies to the Sealy Entities any co-op credits issued to the
Company by Sealy Mattress, subsidies and other rights that the Sealy Entities
have granted to the MMA Companies (and in any event the Sealy Companies will
permit the MMA Companies to so offset), in each case (meaning clauses (i), (ii)
and (iii) above), in the manner provided in the Supply Agreement (as herein
defined), the original supply agreement between the Company and Sealy Mattress
(which is being replaced by the Supply Agreement) and/or the arrangements set
forth in item #4 on Schedule 2.6 attached hereto, as such
agreements apply.  Nothing in this
Section 4.12 shall be construed as a waiver by any Sealy Entity of its
right to collect all amounts owed by the MMA Companies to Sealy Entities as
accounts payable (the “Remaining Accounts Payable”) on gross purchases
that represent inventory the gross amount set forth on the face of invoices for
inventory, which inventory the MMA Companies received from any Sealy Entity
other than the Foregone Accounts Payable. 
The provisions of this Section 4.12 shall have no effect unless the
Closing occurs.

 

Section 4.13           Cash
at the Company.  MHI hereby
agrees that as of the execution and delivery of this Agreement, the Company’s
consolidated “book cash” will be no less than $750,000 (as determined in a
manner consistent with the Company’s past practice) and after the execution and
delivery of this Agreement, the Company will not spend this cash prior to
Closing.

 

13

 

Article V

Conditions Precedent to the Transaction

 

Section 5.1             Conditions
Precedent to the Obligation of the Buyer.  Notwithstanding any other provision herein,
the obligations of the Buyer to consummate the transactions contemplated
hereunder are, at the option of the Buyer, subject to the satisfaction of each
of the following conditions precedent:

 

(a)           The representations and
warranties of the Seller contained in this Agreement shall be true and correct
in all material respects on and as of the Closing Date with the same force and
effect as though such representations and warranties had been restated and made
on and as of the Closing Date, except for those representations and warranties
that speak as of a specified date, which shall be true and correct in all
material respects on and as of such date.

 

(b)           At or prior to the
Closing, the Seller and Acquisition Company shall have complied with and duly
performed all covenants and obligations to be complied with or performed by
either of them at or prior to the Closing.

 

(c)           The Buyer shall have
received a certificate dated the Closing Date and executed by an officer of the
Seller certifying that that each of the conditions precedent in Sections 5.1(a)
and (b) shall have been satisfied.

 

(d)           The Buyer shall have
received a certificate of the Secretary of Acquisition Company certifying as to
(i) the full force and effect of its certificate of incorporation and by-laws
(or similar organizational documents) attached to such certificate as exhibits,
(ii) the full force and effect of resolutions of its board of directors
authorizing it to enter into this Agreement and perform its obligations
hereunder (which such resolutions shall be attached to such certificate as
exhibits) and (iii) the signature and incumbency of those of its officers who
are authorized to execute a Transaction Document.

 

(e)           There shall be no
order, decree or injunction of a court of competent jurisdiction or other
Governmental Entity that prevents the consummation of the transactions
contemplated by this Agreement or Proceeding (as herein defined) that threatens
to prevent such transactions.

 

(f)            There shall not have occurred a material adverse change in the financial
condition, results of operations, business or prospects of the Company since
September 1, 2002, which, in the Buyer’s judgment, would make it
inadvisable to proceed with the Closing. 
The Buyer shall not have discovered any fact, event or condition which,
in the Buyer’s judgment, has materially disrupted or is likely in the immediate
future to materially disrupt the conduct of the business of the Company or has
materially changed or is likely to materially change its ability to operate
such businesses in accordance with its financial projections.  Since September 1, 2002, the Company
shall not have sustained a loss material or substantial to it caused by fire,
flood, accident, hurricane, earthquake, theft, sabotage or other calamity or
act which, whether or not such loss shall have been insured, makes it, in the
Buyer’s opinion, inadvisable for it to proceed with the Closing.

 

14

 

(g)           The Seller shall have
delivered to the Buyer original certificates representing the Shares, with
endorsed blank stock powers attached, in form and substance satisfactory to the
Buyer, to vest in the Buyer all of the right, title and interest of the Seller
in and to the Shares, free and clear of all Liens.

 

(h)           The Buyer shall have
received the resignation of each director of New MMA.

 

(i)            The Buyer shall have
received evidence satisfactory to it that the following transactions shall have
occurred:

 

(i)            the
Seller and the Company shall have entered into the Secured Credit Agreement and
the Seller shall have advanced the funds required to be advanced by it
thereunder;

 

(ii)           the
Company Debt Repayments shall have occurred;

 

(iii)          the
transactions contemplated by the MHI Stock Purchase Agreements shall have been
consummated;

 

(iv)          the
MHI Contribution shall have been consummated;

 

(v)           the
Merger shall have been consummated;

 

(vi)          The Seller and New MMA
shall have amended and restated the Acquisition Company Note in a form mutually
agreeable to the Seller and the Buyer (the “New MMA Subordinated Note”);

 

(vii)         Sealy Mattress and New
MMA shall have entered into one or more Supply Agreements in a form mutually
agreeable to the Seller and the Buyer (collectively, the “Supply Agreement”);
and

 

(viii)        Sleep Country Canada Inc.,
a Canadian corporation shall have entered into a Non-Competition Agreement in
favor of New MMA in a form reasonably acceptable to the Buyer (the “Sleep
Country Canada Non-Competition Agreement”).

 

Section 5.2             Conditions
Precedent to the Obligation of the Seller and Acquisition Company.  Notwithstanding any other provision herein,
the obligations of the Seller and Acquisition Company to consummate the
transactions contemplated hereunder are, at the option of the Seller and
Acquisition Company, subject to the satisfaction of each of the following
conditions precedent:

 

(a)           The representations and
warranties of the Buyer contained in this Agreement shall be true and correct
in all material respects on and as of the Closing Date with the same force and
effect as though such representations and warranties had been restated and made
on and as of the Closing Date, except for those representations and warranties
that speak as of a specified date, which shall be true and correct in all
material respects on and as of such date.

 

15

 

(b)           At or prior to the
Closing, the Buyer shall have complied with and duly performed all covenants
and obligations to be complied with or performed by it at or prior to the
Closing.

 

(c)           The Seller shall have
received a certificate dated the Closing Date and executed by an officer of the
Buyer certifying that that each of the conditions precedent in Sections 5.2 (a)
and (b) shall have been satisfied.

 

(d)           The Seller shall have
received a certificate of the Secretary of the Buyer certifying as to (i) the
full force and effect of its certificate of incorporation and by-laws (or
similar organizational documents) attached to such certificate as exhibits,
(ii) the full force and effect of resolutions of its board of directors and
stockholders authorizing it to enter into this Agreement and perform its
obligations hereunder (which such resolutions shall be attached to such
certificate as exhibits) and (iii) the signature and incumbency of those of its
officers who are authorized to execute a Transaction Document.

 

(e)           There shall be no
order, decree or injunction of a court of competent jurisdiction or other
Governmental Entity that prevents the consummation of the transactions
contemplated by this Agreement or Proceeding that threatens to prevent such
transactions.

 

(f)            The Seller shall have
received evidence satisfactory to it that the following transactions shall have
occurred:

 

(i)            the
Buyer and the Company shall have entered into the Secured Credit Agreement and
the Buyer shall advanced the funds required to be advanced by it thereunder;

 

(ii)           the
Company Debt Repayments shall have occurred;

 

(iii)          New MMA shall have
executed and delivered to the Seller the New MMA Subordinated Note; and

 

(iv)          New MMA shall
have executed and delivered to Sealy Mattress the Supply Agreement.

 

(g)           The Buyer shall have
obtained from Finova a release of any and all liens that Finova may have on any
shares of MMA Common Stock.

 

(h)           The Buyer shall have
delivered the Purchase Price to the Seller.

 

(i)            New MMA shall have
reimbursed the Seller for the Seller’s and its affiliates’ out-of-pocket
expenses to the extent required by Section 8.10 hereof.

 

Article VI

Survival; Indemnification

 

Section 6.1             Survival
of Representations, Warranties, Covenants and Obligations of the Seller and
Acquisition Company.

 

16

 

(a)           Notwithstanding any
right of the Buyer to fully investigate the affairs of the Company and
notwithstanding any knowledge of facts determined or determinable by the Buyer
pursuant to such investigation or right of investigation, the Buyer has the
right to rely fully upon the representations and warranties of the Seller
contained in this Agreement.

 

(b)           The representations,
warranties, covenants and obligations of the Seller and Acquisition Company
shall survive the execution and delivery of this Agreement and the Closing
hereunder and shall thereafter continue in full force and effect, but the
representations and warranties of the Seller shall only survive until the date
which is 18 months after the Closing Date; provided, however,
that the representations and warranties contained in Sections 2.1 (Corporate
Organization, Etc.), 2.2(a), (b) and (c) (Power and Authority, Authorization
and Enforceability) and 2.3 (Capitalization) shall survive the Closing and the
liability of the Seller in respect of any breach thereof shall continue until
30 days after all liability relating thereto is barred by all applicable
statutes of limitation; provided, further, however, that
if any claim for indemnification hereunder that has been previously asserted by
a party to this Agreement in accordance with Section 6.5 is still pending
at the expiration of the applicable survival period, such claim shall continue
to be subject to the indemnification provisions of this Agreement until
resolved.

 

Section 6.2             Survival
of Representations, Warranties, Covenants and Obligations of the Buyer.

 

(a)           Notwithstanding any
right of the Seller to fully investigate the affairs of the Buyer and
notwithstanding any knowledge of facts determined or determinable by the Seller
pursuant to such investigation or right of investigation, the Seller have the
right to rely fully upon the representations and warranties of the Buyer
contained in this Agreement.  The waiver
of any condition based upon the accuracy of any representation or warrant, or
on the performance of, or compliance with, any covenant or obligation, will not
affect the right to indemnification, reimbursement or other remedy based upon
such representation, warranty, covenant or obligation.

 

(b)           The representations,
warranties, covenants and obligations of the Buyer shall survive the execution
and delivery of this Agreement and the Closing hereunder and shall thereafter
continue in full force and effect, but the representations and warranties of
the Buyer shall only survive until the date which is 18 months after the
Closing Date; provided, however, that the representations and
warranties contained in Sections 3.1 (Corporate Organization, Etc.) and 3.2(a),
(b) and (c) (Power and Authority, Authorization and Enforceability) shall
survive the Closing and the liability of the Buyer in respect of any breach
thereof shall continue until 30 days after all liability relating thereto is
barred by all applicable statutes of limitation; provided, further,
however, that if any claim for indemnification hereunder that has been
previously asserted by a party to this Agreement in accordance with
Section 6.5 is still pending at the expiration of the applicable survival
period, such claim shall continue to be subject to the indemnification
provisions of this Agreement until resolved.

 

Section 6.3             Indemnification
by the Seller.  Subject to the
limitations contained in Section 6.1 and Section 6.6, after the
Closing, the Seller shall indemnify and defend the Buyer and New MMA and each
of their respective officers, directors, employees and shareholders

 

17

 

(each,
a “Buyer Indemnitee”) from and against, and hold each Buyer Indemnitee
harmless from, any loss, liability, obligation, deficiency, damage or expense
including, without limitation, interest, penalties, reasonable attorneys’ and
consultants’ fees and disbursements (collectively, “Damages”), that any
Buyer Indemnitee may suffer or incur based upon, arising out of, relating to or
in connection with any of the following (whether or not in connection with any
third party claim):

 

(a)           the
inaccuracy of any representation or warranty made by the Seller in this
Agreement;

 

(b)           the failure by the
Seller or Sealy Mattress to perform or to comply with any covenant or
obligation in this Agreement that is required to be performed or complied with
by the Seller or Sealy Mattress, as the case may be, or the failure by
Acquisition Company to perform or to comply with any covenant or obligation in
this Agreement that is required to be performed or complied with by Acquisition
Company prior to the Closing;

 

(c)           any of the Remaining
MMA Stockholders exercising any appraisal or dissenters rights, if any, arising
from the Merger as well as any and all other Damages payable to any of the
Remaining MMA Stockholders to the extent such Damages result from any such
Remaining MMA Stockholders’ acquisition or ownership of MMA Common Stock prior
to the Closing Date;

 

(d)           any and all Damages
attributable to the Finova Stock Purchase Warrant in an aggregate amount in
excess of the Finova Warrant Value; provided, that, notwithstanding the
foregoing, the Seller shall not indemnify any Buyer Indemnitee for, and New MMA
shall be solely responsible for, (i) any and all Damages attributable to
the warrants issued to Finova pursuant to the Finova Stock Purchase Warrant
that become exercisable in August of 2003 if any portion of the
indebtedness evidenced by the Note (as such term is defined in the Finova Stock
Purchase Warrant) is outstanding as of August 6, 2003 and (ii) any
and all Damages attributable to any failure of New MMA to pay the Finova
Warrant Value in cash to any holder of the 2002 Finova Warrants pursuant to
such holder’s exercise of such 2002 Finova Warrants, such holder’s put of such
2002 Finova Warrants and/or New MMA’s call of such 2002 Finova Warrants, in
each case, pursuant to the terms of the Finova Stock Purchase Warrant; and

 

(e)           any
and all Damages attributable to the warrants (the “Growth Capital Warrants”)
which may be issuable to Growth Capital Partners, Inc. (“GCP”) pursuant
to that certain engagement letter dated as of March 15, 1999 by and
between the Company and GCP.

 

Section 6.4             Indemnification
by the Buyer.  Subject to the
limitations contained in Section 6.2, after the Closing, the Buyer shall
indemnify and defend the Seller and each of its officers, directors, employees
and equityholders (each, a “Seller Indemnitee”) from and against, and
hold each Seller Indemnitee harmless from, any Damages that such Seller
Indemnitee may suffer or incur arising from, related to or in connection with
any of the following:

 

(a)           the
inaccuracy of any representation or warranty made by the Buyer in this
Agreement; and

 

18

 

(b)           the failure by the
Buyer to perform or to comply with any covenant or obligation in this Agreement
that is required to be performed or complied with by the Buyer or the failure
by New MMA (as a successor to Acquisition Company) to perform or to comply with
any covenant or obligation in this Agreement that is required to be performed
or complied with by New MMA (as a successor to Acquisition Company) after the
Closing.

 

Section 6.5             Indemnification
Procedures.

 

(a)           Promptly after notice
to an indemnified party of any claim or the commencement of any claim, suit,
action or proceeding (a “Proceeding”), including any Proceeding by a
third party, involving any Damages, such indemnified party shall, if a claim
for indemnification in respect thereof is to be made against an indemnifying
party pursuant to this Section 6, give written notice to such indemnifying
party by no later than seven days after the indemnified party’s receipt of
notice of such claim or the commencement of such Proceeding, as the case may
be, setting forth in reasonable detail the nature thereof and the basis upon
which such party seeks indemnification hereunder; provided, however,
that the failure of any indemnified party to give such notice shall not relieve
the indemnifying party of its indemnification obligations under this
Section 6, except to the extent that the indemnifying party is actually
and materially prejudiced by the failure to give such notice.

 

(b)           In the case of any
Proceeding by a third party against an indemnified party, the indemnifying
party shall, upon notice as provided above, assume the defense thereof, with
counsel reasonably satisfactory to the indemnified party, and, after notice
from the indemnifying party to the indemnified party of its assumption of the
defense thereof, the indemnifying party shall not be liable to such indemnified
party for any legal or other expenses subsequently incurred by the indemnified
party in connection with the defense thereof (but the indemnified party shall
have the right, but not the obligation, to participate at its own cost and
expense in such defense by counsel of its own choice) or for any amounts paid
or foregone by the indemnified party as a result of any settlement or
compromise thereof that is effected by the indemnified party (without the
written consent of the indemnifying party). 
Notwithstanding the foregoing, the Seller hereby expressly assumes the
defense of any and all Proceedings and negotiations regarding all matters for
which the Seller is providing the Buyer Indemnitees indemnification pursuant to
Sections 6.3(c), 6.3(d) and 6.3(e) hereof.

 

(c)           Anything in
Section 6.5(b) notwithstanding, (i) if both the indemnifying party and the
indemnified party are named as parties or subject to such Proceeding and either
such party determines with advice of counsel that there may be one or more
legal defenses available to it that are different from or additional to those
available to the other party or that a material conflict of interest between
such parties may exist in respect of such Proceeding, or (ii) if the Proceeding
involves a claim for equitable relief or other claim not entirely satisfiable
by monetary damages, or (iii) if the indemnifying party cannot reasonably
demonstrate to the indemnified party that it has sufficient monetary resources
to satisfy the claim, then and in any of such events, referred to in the
preceding clauses (i), (ii) or (iii), the indemnifying party may decline to
assume the defense on behalf of the indemnified party and after notice to such
effect is given hereunder to the other party, the indemnifying party shall be
relieved of its obligation to assume the defense on behalf of the indemnified
party, but shall be required to pay any legal or

 

19

 

other
expenses including, without limitation, reasonable attorneys’ fees and
disbursements, incurred by the indemnified party in such defense.

 

(d)           If the indemnifying
party assumes the defense of any such Proceeding, the indemnified party shall
cooperate fully with the indemnifying party and shall appear and give
testimony, produce documents and other tangible evidence, allow the
indemnifying party access to the books and records of the indemnified party and
otherwise assist the indemnifying party in conducting such defense.  No indemnifying party shall, without the
consent of the indemnified party, consent to entry of any judgment or enter
into any settlement or compromise that does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such indemnified party
of a release from all liability in respect of such claim or Proceeding, to the
extent an indemnity obligation exists with respect to such claim or Proceeding.  Provided that proper notice is duly given, if
the indemnifying party shall fail promptly and diligently to assume the defense
thereof or if the indemnifying party cannot reasonably demonstrate to the
indemnified party that it has sufficient monetary resources to satisfy the
claim, then the indemnified party may respond to, contest and defend against
such Proceeding (but the indemnifying party shall have the right to participate
at its own cost and expense in such defense by counsel of its own choice) and
may make in good faith any compromise or settlement with respect thereto, and
recover from the indemnifying party the entire cost and expense thereof
including, without limitation, reasonable attorneys’ fees and disbursements and
all amounts paid or foregone as a result of such Proceeding, and the settlement
or compromise thereof.  The
indemnification required hereunder shall be made by periodic payments of the
amount thereof during the course of the investigation or defense, as and when
bills or invoices are received or loss, liability, obligation, damage or
expense is actually suffered or incurred, unless the indemnifying party puts
forward a good faith defense to its indemnity obligation, in which case, such
payment shall be deferred until the resolution of the conflict over the indemnifying
party’s obligation to indemnify, either by agreement of the parties or by order
of a court of competent jurisdiction.

 

Section 6.6             Limitations on
Indemnification by the Seller.

 

(a)           The Seller shall have
indemnification obligations pursuant to Section 6.3(a) respecting Damages,
only:

 

(i)            if the aggregate of
all Damages with respect thereto shall exceed $150,000 (the “Basket Amount”)
at which time the Seller shall be liable for the amount of all such Damages in
excess of the Basket Amount (other than the representations and warranties
contained in Sections 2.1 (Corporate Organization, Etc.), 2.2(a), (b) and (c)
(Power and Authority, Authorization and Enforceability), 2.3 (Capitalization),
2.5 (Brokers and Finders) and 2.6 (Related Party Transactions), as to which no
such “basket” shall apply); and

 

(ii)           to the extent that the
aggregate of all Damages resulting with respect thereto shall not exceed
$500,000 (other than the representations and warranties contained in Sections
2.1 (Corporate Organization, Etc.), 2.2(a), (b) and (c) (Power and Authority,
Authorization and Enforceability), 2.3 (Capitalization), 2.5 (Brokers and
Finders) and 2.6 (Related Party Transactions), as to which no such “cap” shall
apply).

 

20

 

(b)           In no event shall the
limitations set forth in Section 6.6(a) apply in respect of any
indemnification obligation of the Seller under Sections 6.3(b), (c), (d) or (e)
(even if such obligation also arises under Section 6.3(a)) or with respect
to the representations and warranties set forth in the parenthetical in
Section 6.6(a)(i) and (ii).

 

Section 6.7             Indemnification
by Sealy Mattress.  Sealy
Mattress hereby agrees to be jointly and severally liable with the Seller for
all of Seller’s indemnification obligations pursuant to this Article VI.

 

Section 6.8             Exclusive
Remedy.  Notwithstanding
anything contained herein to the contrary, after the Closing, except in the
case of fraud, indemnification pursuant to this Article VI shall be the
exclusive remedy for the parties hereto for any misrepresentation or breach of
any warranty, covenant or other provision contained in this Agreement or in any
certificate or instrument of document delivered pursuant hereto.

 

Article VII

Termination

 

Section 7.1             Termination.  This Agreement may be terminated:

 

(a)           by
the mutual agreement of the parties;

 

(b)           by either party (if
such party is not in breach of or default under this Agreement) by giving
written notice to such effect to the other if the Closing shall not have
occurred on or before the close of business on October 18, 2002 or such
later date as the parties shall have agreed upon prior to the giving of such
notice; or

 

(c)           by
either the party in the event that the conditions precedent to its obligation
to consummate the transactions contemplated hereunder shall have become
incapable of being satisfied.

 

Section 7.2             Effect
of Termination.  In the event
of the termination and abandonment hereof prior to the Closing Date pursuant to
the provisions of this Article VII, this Agreement (other than this
Section 7 and Section 8.10) shall become void and have no effect,
and, subject to Section 8.10, each party shall pay all of its own expenses
incurred in connection herewith, without any liability on the part of any party
or its partners, directors, officers or shareholders; provided, however,
that if this Agreement is terminated and abandoned because either party has
defaulted under or breached this Agreement or any representation, warranty,
covenant or obligation set forth in this Agreement, then the party so electing
to terminate this Agreement shall be entitled to pursue, exercise and enforce
any and all other remedies, rights, powers and privileges available to it at
law or in equity.

 

Article VIII

Miscellaneous

 

Section 8.1             Notices.  Any and all notices, consents, demands,
instructions, requests and other communications required or permitted hereunder
must be in writing and shall be deemed to have been duly given only if
delivered personally, by facsimile transmission, by

 

21

 

first-class mail (postage
prepaid, return receipt requested), or by overnight delivery by a recognized
overnight courier service (all costs prepaid) to the parties at the following
addresses or facsimile numbers:

 

If to Sealy
Mattress, the Seller or Acquisition Company to:

 

Sealy Mattress Company

One Office Parkway

Trinity, NC 27370

Attention:  Secretary

Telecopier No.:  (336) 861-3786

 

with
a copy to:

 

Kirkland & Ellis

153 East 53rd Street

New York, New York 10022

Attention:  W. Brian Raftery

Telecopier No.:  (212) 446-4900

 

If to the Buyer:

 

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

Telecopier No.:  (561) 394-0540

 

with
a copy to:

 

Jenkens & Gilchrist Parker Chapin LLP

405 Lexington Avenue

New York, New York 
10174

Attention:  Michael Weinsier

Telecopier No.:  (212) 704-6288

 

All such notices,
requests and other communications will (a) if delivered personally to the
address as provided in this Section, be deemed given upon delivery, (b) if
delivered by facsimile transmission to the facsimile number as provided in this
Section 8.1, be deemed given upon receipt if received on a business day
between the hours of 9:00 a.m. and 6:00 p.m. in the city of the intended
recipient or on the next business day if received after that time, in each case
with automatic machine confirmation indicating the time of delivery, (c) if
delivered by mail in the manner described above to the address as provided in
this Section, be deemed given upon receipt or upon refusal of receipt and (d)
on the second business day after delivery to a recognized overnight courier
service in the manner described above. 
Any party from time to time may change its address, facsimile number or
other information for the purpose of notices to that party by giving like
notice specifying such change to the other party hereto.

 

22

 

Section 8.2             Further Assurances.  From and after the Closing Date, the parties
hereto will, without further consideration, execute and deliver such further
documents and instruments and take such other actions as may be necessary or
desirable to perfect the transactions contemplated hereby.

 

Section 8.3             Publicity.  Prior to the Closing, no publicity release or
announcement concerning this Agreement or the transactions contemplated hereby
shall be made without advance written approval thereof by the Seller and the Buyer.  After the Closing, no publicity release or
announcement concerning this Agreement or the transactions contemplated hereby
which identifies the parties hereto other than the party making such publicity
release or public announcement shall be made without advance approval thereof
by the Seller and the Buyer.

 

Section 8.4             No Waiver.  No failure or delay by any party in
exercising any right, power or privilege hereunder shall operate as a waiver
thereof nor shall any single or partial exercise thereof preclude any other or
further exercise thereof or the exercise of any other right, power or
privilege.  The rights and remedies
herein provided shall be cumulative and not exclusive of any rights or remedies
provided by law.

 

Section 8.5             Entire
Agreement.  This Agreement and
the Schedules and Exhibits hereto supersede all prior and/or contemporaneous
negotiations, understandings, discussions and agreements (written or oral)
between the parties with respect to the subject matter hereof (all of which are
merged herein and therein) and contains the sole and entire agreement among the
parties hereto with respect to the subject matter hereof.

 

Section 8.6             Governing Law.  This Agreement shall be construed,
interpreted and enforced in accordance with, and shall be governed by, the laws
of the State of New York applicable to contracts made and to be performed
wholly therein.

 

Section 8.7             Jurisdiction,
Etc.  Each of the parties hereto
hereby irrevocably consents and submits to the exclusive jurisdiction of the
United States District Court for the Southern District of New York in
connection with any dispute arising out of or relating to this Agreement or the
transactions contemplated hereby, waives any objection to venue in such
District (unless such court lacks jurisdiction with respect to such Proceeding,
in which case, each of the parties hereto irrevocably consents to the
jurisdiction of the courts of the State of New York in connection with such
Proceeding and waives any objection to venue in the State of New York), and
agrees that service of any summons, complaint, notice or other process relating
to such dispute may be effected in the manner provided by Section 8.1.

 

Section 8.8             Assignment.

 

(a)           Neither this Agreement
nor any of the rights, interests or obligations hereunder shall be assignable
by any of the parties hereto without the prior written consent of the other
party, except that the rights of the Buyer hereunder may be assigned, without
the consent of the other parties hereto, to any corporation all of the outstanding
capital stock of which is owned or controlled, directly or indirectly, by the
Buyer or to any affiliate of Sun Capital Partners, Inc.; provided that
(i) the assignee shall assume in writing all of the Buyer’s obligations
hereunder,

 

23

 

and
(ii) the Buyer shall not be released from any of its obligations hereunder by
reason of such assignment.

 

(b)           Notwithstanding the
foregoing, the Buyer (including each subsequent assignee of the Buyer) shall
have the right to assign any or all of its rights and obligations hereunder to
any other person who acquires all or substantially all of the assets and
business of the Buyer (or a subsequent assignee of the Buyer); provided
that the assignor shall not be released from any of its obligations hereunder
by reason of any such assignment.

 

(c)           Notwithstanding any
provision of this Agreement to the contrary, the Seller hereby acknowledges and
agrees that all of the representations, warranties, covenants and obligations
of it under this Agreement may be collaterally assigned to any and all lenders
to the Buyer or any of its affiliates, any and all of whom may enforce their
rights and remedies in connection with any such collateral assignment or
realization thereon to the extent provided in the applicable security
agreements and other debt instruments or at law or in equity.

 

Section 8.9             Binding
Effect; Third-Party Beneficiaries. 
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns.  This Agreement is not intended, and shall not
be deemed, to create or confer any right or interest for the benefit of any
person not a party hereto, except for the Buyer Indemnities and the Seller
Indemnities.

 

Section 8.10           Fees and Expenses.  The Seller and Sealy Mattress, on the one
hand, and the Buyer, on the other hand, shall each bear their own direct and
indirect expenses (including, without limitation, the fees and expenses of
their legal, tax and accounting counsel and advisors) incurred in connection
with the negotiation and preparation of this Agreement and the other agreements
and documents contemplated hereby and the consummation and performance of the
transactions contemplated hereby and thereby; provided, that,
notwithstanding the foregoing, if the Closing occurs, then, as of the Closing,
the Buyer will cause New MMA to reimburse the Seller for up to $500,000 of the
Seller’s and its affiliates (including Sealy Mattress) reasonable out-of-pocket
expenses incurred in connection with the transactions contemplated hereby
(including in connection with the Seller’s acquisition of MMA Common Stock not
owned by the Seller as of September 20, 2002, including pursuant to the
MHI Stock Purchase Agreements).

 

Section 8.11           Amendment
and Waiver.  Any term of this
Agreement may be amended and the observance of any term of this Agreement may
be waived (either generally or in a particular instance, either retroactively
or prospectively, and either for a specified period of time or indefinitely),
only by the written consent of all parties hereto.  Any agreement on the part of a party to any
extension or waiver shall only be valid if set forth in an instrument in
writing signed on behalf of such party. 
Any such waiver or extension shall not operate as waiver or extension of
any other subsequent condition or obligation.

 

Section 8.12           Unenforceability,
Severability.  If any provision of
this Agreement is found to be void or unenforceable by a court of competent
jurisdiction, the remaining provisions of this Agreement shall nevertheless be
binding upon the parties with the same force and effect as though the
unenforceable part had been severed and deleted.

 

24

 

Section 8.13           Specific
Performance.  The parties
hereto agree that irreparable damage would occur if any of the provisions of
this Agreement were not performed in accordance with their specific terms or
otherwise breached.  It is accordingly
agreed that the parties shall be entitled to an injunction or injunctions to
prevent breaches of this Agreement and to enforce specifically the terms and
provisions hereof, in addition to any other remedy to which they are entitled
at law or in equity.

 

Section 8.14           Counterparts.  This Agreement may be executed simultaneously
in one or more counterparts, each of which shall be deemed an original.  This Agreement shall become effective when
each party hereto shall have received counterparts hereof signed by all of the
other parties hereto.

 

[The next page is the signature page]

 

25

 

The parties have
executed this Stock Purchase Agreement as of the date first written above.

 

 

	
   

  	
  MATTRESS HOLDING CORP.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/ Marc
  Leder

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  MATTRESS HOLDINGS
  INTERNATIONAL,

  LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   /s/ Steve Barnes

  
	
   

  	
   

  	
  Name:

  	
  Steve Barnes

  
	
   

  	
   

  	
  Title:

  	
  President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  SEALY MATTRESS COMPANY

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   /s/ Kenneth
  Walker

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  MMA ACQUISITION
  COMPANY, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   /s/
  Kenneth Walker

  
	
   

  	
   

  	
  Name:

  	
  Kenneth Walker

  
	
   

  	
   

  	
  Title:

  	
  Vice President
  and SecretaryExhibit 10.1

 

FINANCING AGREEMENT

Dated as of March 31, 2004

by and among

MATTRESS HOLDING CORP.

and certain of its Subsidiaries

 

______________________

THE LENDERS FROM TIME TO TIME PARTY HERETO,

___________________

ABLECO FINANCE LLC,

as Collateral Agent,

and

ABLECO FINANCE LLC,

as Administrative Agent

 

 

TABLE OF CONTENTS

 

	
  ARTICLE I

  	
  DEFINITIONS; CERTAIN TERMS

  	
   

  
	
   

  	
   

  	
   

  
	
  Section 1.01

  	
  Definitions

  	
   

  
	
  Section 1.02

  	
  Terms Generally

  	
   

  
	
  Section 1.03

  	
  Accounting and Other Terms

  	
   

  
	
  Section 1.04

  	
  Time References

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE II

  	
  THE LOANS

  	
   

  
	
   

  	
   

  	
   

  
	
  Section 2.01

  	
  Commitments

  	
   

  
	
  Section 2.02

  	
  Making the Loans

  	
   

  
	
  Section 2.03

  	
  Repayment of
  Loans; Evidence of Debt

  	
   

  
	
  Section 2.04

  	
  Interest

  	
   

  
	
  Section 2.05

  	
  Reduction
  of Commitment; Prepayment of Loans

  	
   

  
	
  Section 2.06

  	
  [Intentionally Omitted]

  	
   

  
	
  Section 2.07

  	
  Securitization

  	
   

  
	
  Section 2.08

  	
  Taxes.

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE III

  	
  [INTENTIONALLY
  OMITTED]

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE IV

  	
  FEES, PAYMENTS
  AND OTHER COMPENSATION

  	
   

  
	
   

  	
   

  	
   

  
	
  Section 4.01

  	
  Audit and
  Collateral Monitoring Fees

  	
   

  
	
  Section 4.02

  	
  Payments;
  Computations and Statements

  	
   

  
	
  Section 4.03

  	
  Sharing of Payments, Etc

  	
   

  
	
  Section 4.04

  	
  Apportionment of Payments.

  	
   

  
	
  Section 4.05

  	
  Increased Costs and
  Reduced Return.

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE V

  	
  CONDITIONS TO
  LOANS

  	
   

  
	
   

  	
   

  	
   

  
	
  Section 5.01

  	
  Conditions Precedent

  	
   

  
	
  Section 5.02

  	
  Conditions
  Precedent to All Loans and Letters of Credit

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE VI

  	
  REPRESENTATIONS
  AND WARRANTIES

  	
   

  
	
   

  	
   

  	
   

  
	
  Section 6.01

  	
  Representations and
  Warranties

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE VII

  	
  COVENANTS
  OF THE LOAN PARTIES

  	
   

  
	
   

  	
   

  	
   

  
	
  Section 7.01

  	
  Affirmative Covenants

  	
   

  
	
  Section 7.02

  	
  Negative Covenants

  	
   

  
	
  Section 7.03

  	
  Financial Covenants

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE VIII

  	
  MANAGEMENT,
  COLLECTION AND STATUS OF ACCOUNTS RECEIVABLE AND OTHER COLLATERAL

  	
   

  
	
   

  	
   

  	
   

  
	
  Section 8.01

  	
  Collection
  of Accounts Receivable; Management of Collateral.

  	
   

  
	
  Section 8.02

  	
  Accounts Receivable
  Documentation

  	
   

  
				

 

i

 

	
  Section 8.03

  	
  Status
  of Accounts Receivable and Other Collateral

  	
   

  
	
  Section 8.04

  	
  Collateral Custodian

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE IX

  	
  EVENTS OF DEFAULT

  	
   

  
	
   

  	
   

  	
   

  
	
  Section 9.01

  	
  Events of Default

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE X

  	
  AGENTS

  	
   

  
	
   

  	
   

  	
   

  
	
  Section 10.01

  	
  Appointment

  	
   

  
	
  Section 10.02

  	
  Nature of Duties

  	
   

  
	
  Section 10.03

  	
  Rights,
  Exculpation, Etc

  	
   

  
	
  Section 10.04

  	
  Reliance

  	
   

  
	
  Section 10.05

  	
  Indemnification

  	
   

  
	
  Section 10.06

  	
  Agents
  Individually

  	
   

  
	
  Section 10.07

  	
  Successor Agent

  	
   

  
	
  Section 10.08

  	
  Collateral
  Matters

  	
   

  
	
  Section 10.09

  	
  Agency for
  Perfection

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE XI

  	
  GUARANTY

  	
   

  
	
   

  	
   

  	
   

  
	
  Section 11.01

  	
  Guaranty

  	
   

  
	
  Section 11.02

  	
  Guaranty
  Absolute

  	
   

  
	
  Section 11.03

  	
  Waiver

  	
   

  
	
  Section 11.04

  	
  Continuing
  Guaranty; Assignments

  	
   

  
	
  Section 11.05

  	
  Subrogation

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE XII

  	
  MISCELLANEOUS

  	
   

  
	
   

  	
   

  	
   

  
	
  Section 12.01

  	
  Notices, Etc

  	
   

  
	
  Section 12.02

  	
  Amendments, Etc

  	
   

  
	
  Section 12.03

  	
  No
  Waiver; Remedies, Etc

  	
   

  
	
  Section 12.04

  	
  Expenses;
  Taxes; Attorneys’ Fees

  	
   

  
	
  Section 12.05

  	
  Right of
  Set-off

  	
   

  
	
  Section 12.06

  	
  Severability

  	
   

  
	
  Section 12.07

  	
  Assignments
  and Participations.

  	
   

  
	
  Section 12.08

  	
  Counterparts

  	
   

  
	
  Section 12.09

  	
  GOVERNING LAW

  	
   

  
	
  Section 12.10

  	
  CONSENT
  TO JURISDICTION; SERVICE OF PROCESS AND VENUE

  	
   

  
	
  Section 12.11

  	
  WAIVER
  OF JURY TRIAL, ETC

  	
   

  
	
  Section 12.12

  	
  Consent
  by the Agents and Lenders

  	
   

  
	
  Section 12.13

  	
  No Party
  Deemed Drafter

  	
   

  
	
  Section 12.14

  	
  Reinstatement;
  Certain Payments

  	
   

  
	
  Section 12.15

  	
  Indemnification

  	
   

  
	
  Section 12.16

  	
  Records

  	
   

  
				

 

ii

 

	
  Section 12.17

  	
  Binding Effect

  	
   

  
	
  Section 12.18

  	
  Interest

  	
   

  
	
  Section 12.19

  	
  Confidentiality

  	
   

  
	
  Section 12.20

  	
  Integration

  	
   

  

 

iii

 

SCHEDULE AND EXHIBITS

 

	
  Schedule C-1

  	
  Lenders and Lenders’ Commitments

  	
   

  
	
  Schedule T-1

  	
  Texas Restructuring

  	
   

  
	
  Schedule 6.01(e)

  	
  Subsidiaries

  	
   

  
	
  Schedule 6.01(f)

  	
  Litigation; Commercial Tort Claims

  	
   

  
	
  Schedule 6.01(i)

  	
  ERISA

  	
   

  
	
  Schedule 6.01(o)

  	
  Real Property

  	
   

  
	
  Schedule 6.01(q)

  	
  Operating Leases

  	
   

  
	
  Schedule 6.01(r)

  	
  Environmental Matters

  	
   

  
	
  Schedule 6.01(s)

  	
  Insurance

  	
   

  
	
  Schedule 6.01(v)

  	
  Bank Accounts

  	
   

  
	
  Schedule 6.01(w)

  	
  Intellectual Property

  	
   

  
	
  Schedule 6.01(x)

  	
  Material Contracts

  	
   

  
	
  Schedule 6.01(dd)

  	
  Name; Jurisdiction of Organization; Organizational ID Number; Chief
  Place of Business; Chief Executive Office; FEIN

  	
   

  
	
  Schedule 6.01(ee)

  	
  Tradenames

  	
   

  
	
  Schedule 6.01(ff)

  	
  Collateral Locations

  	
   

  
	
  Schedule 7.02(a)

  	
  Existing Liens

  	
   

  
	
  Schedule 7.02(b)

  	
  Existing Indebtedness

  	
   

  
	
  Schedule 7.02(e)

  	
  Existing Investments

  	
   

  
	
  Schedule 7.02(k)

  	
  Limitations on Dividends and Other Payment Restrictions

  	
   

  
	
  Schedule 8.01

  	
  Lockbox Banks and Lockbox Accounts

  	
   

  
	
   

  	
   

  	
   

  
	
  Exhibit A-1

  	
  Form of Assignment and Acceptance

  	
   

  
	
  Exhibit B-1

  	
  Form of Borrowing Base Certificate

  	
   

  
	
  Exhibit G-1

  	
  Form of Guaranty

  	
   

  
	
  Exhibit I-1

  	
  Form of Intercompany Subordination Agreement

  	
   

  
	
  Exhibit S-1

  	
  Form of Security Agreement

  	
   

  
	
  Exhibit P-1

  	
  Form of Pledge Agreement

  	
   

  
	
  Exhibit T-1

  	
  Form of Trademark Security Agreement

  	
   

  
	
  Exhibit 2.02(a)

  	
  Form of Notice of Borrowing

  	
   

  
	
  Exhibit 5.01(d)(xiv)

  	
  Form of Opinion of Counsel

  	
   

  

 

 

FINANCING AGREEMENT

 

This Financing Agreement, dated as of March 31, 2004, by and among
MATTRESS FIRM, INC., a Delaware
corporation (the “Borrower”), MATTRESS
HOLDING CORP., a Delaware corporation ( “Parent”), each
Subsidiary of the Parent listed as a “Guarantor” on the signature pages hereto
(together with the Parent, each a “Guarantor” and collectively, jointly
and severally, the “Guarantors”), the lenders from time to time party
hereto (each a “Lender” and collectively, the ”Lenders”), ABLECO FINANCE LLC, a Delaware limited liability company (“Ableco”),
as collateral agent for the Lenders (in such capacity, together with any
successor collateral agent, the ”Collateral Agent”), and Ableco as
administrative agent for the Lenders (in such capacity, together with any
successor administrative agent, the ”Administrative Agent” and
together with the Collateral Agent, each an “Agent” and collectively,
the “Agents”).

 

RECITALS

 

The Borrower has asked the Lenders to extend
credit to the Borrower consisting of (a) a term loan in the aggregate principal
amount of $5,958,333.32, and (b) a revolving credit facility in an aggregate
amount not to exceed $6,000,000 at any time outstanding.  The proceeds of the term loan and the loans
made under the revolving credit facility shall be used to repay existing
indebtedness of the Borrower, for general working capital purposes of the
Borrower and the Guarantors, and to pay fees and expenses related to this
Agreement.  The Lenders are severally,
and not jointly, willing to extend such credit to the Borrower subject to the
terms and conditions hereinafter set forth.

 

In consideration of the premises and the
covenants and agreements contained herein, the parties hereto agree as follows:

 

ARTICLE I

DEFINITIONS; CERTAIN TERMS

 

Section 1.01           Definitions. 
As used in this Agreement, the following terms shall have the respective
meanings indicated below, such meanings to be applicable equally to both the
singular and plural forms of such terms:

 

“Ableco” has the meaning specified
therefor in the preamble hereto.

 

“Account Debtor” means any Person who
is or who may become obligated under, with respect to, or on account of, an
Account Receivable, chattel paper, or a general intangible.

 

“Account Receivable” means, with
respect to any Person, all of such Person’s now owned or hereafter acquired
right, title, and interest with respect to “accounts” (as that term is defined
in the Code) and any and all “supporting obligations” (as that term is defined
in the Code) in respect thereof.

 

5

 

“Action” has the meaning specified
therefor in Section 12.12.

 

“Administrative Agent” has the meaning
specified therefor in the preamble hereto.

 

“Administrative Agent’s Account” means
an account at a bank designated by the Administrative Agent from time to time
as the account into which the Borrower shall make all payments to the
Administrative Agent for the benefit of the Agents and the Lenders under this
Agreement and the other Loan Documents.

 

“Affiliate” means, with respect to any
Person, any other Person that directly or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control with,
such Person.  For purposes of this
definition, “control” of a Person means the power, directly or indirectly,
either to (i) vote 10% or more of the Capital Stock having ordinary voting
power for the election of directors of such Person or (ii) direct or cause the
direction of the management and policies of such Person whether by contract or
otherwise.  Notwithstanding anything
herein to the contrary, (x) in no event shall any Agent or any Lender be
considered an “Affiliate” of any Loan Party, or (y) prior to the occurrence of
a MFA Triggering Event, MFA shall not be considered an “Affiliate” of any Loan
Party.

 

“After Acquired Property” means any
interest in real property acquired by the Parent or any of its Subsidiaries
after the date hereof with a Current Value in excess of $50,000 in the case of
a fee interest or requiring the payment of annual rent exceeding in the
aggregate $250,000 in the case of a leasehold interest.

 

“Agent” has the meaning specified
therefor in the preamble hereto.

 

“Agreement” means this Financing
Agreement, including all amendments, modifications and supplements and any
exhibits or schedules to any of the foregoing, and shall refer to the Agreement
as the same may be in effect at the time such reference becomes operative.

 

“Anniversary Fee” has the meaning
specified therefor in Section 2.06(d).

 

“Assignment and Acceptance” means an
assignment and acceptance entered into by an assigning Lender and an assignee,
and accepted by the Collateral Agent, in accordance with Section 12.07
hereof and substantially in the form of Exhibit A-1 hereto or such
other form as may be acceptable to the Collateral Agent.

 

“Authorized Officer” means, with
respect to any Person, the chief executive officer, chief financial officer,
president or any vice president of such Person.

 

“Availability” means, at any time, the
difference between (i) the lesser of (A) the Borrowing Base and
(B) the Total Revolving Credit Commitment and (ii) the sum of
(A) the aggregate outstanding principal amount of all Revolving Loans, and
(B) the aggregate amount, if any, of all trade payables of the Borrower
and its Subsidiaries aged in excess of historical levels.

 

6

 

“Bailee Agency Agreement” means that
certain bailee agency agreement dated contemporaneously herewith by and between
Collateral Agent and Subco which is in form and substance satisfactory to
Collateral Agent.

 

“Bankruptcy Code” means the United
States Bankruptcy Code (11 U.S.C. § 101, et  seq.), as
amended, and any successor statute.

 

“Blocked Account” has the meaning
specified in Section 8.01(a) hereof.

 

“Blocked Account Bank” has the meaning
specified in Section 8.01(a) hereof.

 

“Board” means the Board of Governors
of the Federal Reserve System of the United States.

 

“Book Value” means, with respect to
any Inventory of any Person, the cost (as reflected in the general ledger of
such Person before customary (but not extraordinary) reserves established by
such Person in good faith and in accordance with GAAP and without giving effect
to any capitalized vendor incentives with respect thereto), determined in
accordance with GAAP calculated on a first-in first-out basis.

 

“Borrower” has the meaning specified
therefor in the preamble hereto

 

“Business Day” means any day other
than a Saturday, Sunday or other day on which commercial banks in New York City
are authorized or required to close.

 

“Borrowing Base” means, as of any date
of determination, the difference between (a) the sum of (i) up to 80%
of the value of the Net Amount of Eligible Accounts Receivable at such time, less the amount, if any, of the Dilution Reserve, plus (ii) up to 65% of the difference between (A) the
Book Value of the Eligible Inventory at such time and (B) the then extant
Inventory Reserve, and (b) such reserves as the Administrative Agent may
deem appropriate in the exercise of its business judgment based upon the
lending practices of the Administrative Agent.

 

“Borrowing Base Certificate” means a
certificate signed by an Authorized Officer of the Borrower and setting forth
the calculation of the Borrowing Base in compliance with Section 7.01(a)(v),
substantially in the form of Exhibit B-1.

 

“Capital Expenditures” means, with
respect to any Person for any period, the sum of (i) the aggregate of all
expenditures by such Person and its Subsidiaries during such period that in
accordance with GAAP are or should be included in “property, plant and
equipment” or in a similar fixed asset account on its balance sheet, whether
such expenditures are paid in cash or financed and including all Capitalized
Lease Obligations incurred during such period, and (ii) to the extent not
covered by clause (i) above, the aggregate of all expenditures by such Person
and its Subsidiaries during such period to acquire by purchase or otherwise the
business or fixed assets of, or the Capital Stock of, any other Person; provided
that, the amount of any such expenditure funded from Extraordinary Receipts
which are not required to be paid to the Lender Group pursuant to Section 2.05
or funded by a landlord of a Loan Party (if such landlord is not itself a Loan
Party) shall be excluded from such sum.

 

7

 

“Capital Guideline” means any law,
rule, regulation, policy, guideline or directive (whether or not having the
force of law and whether or not the failure to comply therewith would be
unlawful) (i) regarding capital adequacy, capital ratios, capital requirements,
the calculation of a bank’s capital or similar matters, or (ii) affecting the
amount of capital required to be obtained or maintained by any Lender, any
Person controlling any Lender, or the manner in which any Lender, any Person
controlling any Lender, allocates capital to any of its contingent liabilities,
advances, acceptances, commitments, assets or liabilities.

 

“Capitalized Lease” means, with
respect to any Person, any lease of real or personal property by such Person as
lessee which is required under GAAP to be capitalized on the balance sheet of
such Person.

 

“Capitalized Lease Obligations” means,
with respect to any Person, obligations of such Person and its Subsidiaries
under Capitalized Leases, and, for purposes hereof, the amount of any such
obligation shall be the capitalized amount thereof determined in accordance
with GAAP.

 

“Capital Stock” means (i) with respect
to any Person that is a corporation, any and all shares, interests,
participations or other equivalents (however designated and whether or not
voting) of corporate stock, and (ii) with respect to any Person that is not a
corporation, any and all partnership, membership or other equity interests of
such Person.

 

“Cash and Cash Equivalents” means all
cash, deposit or securities account balances, certificates of deposit or other
financial instruments properly classified as cash or cash equivalents under
GAAP.

 

“Change of Control” means each
occurrence of any of the following:

 

(a)           the Permitted Holders
shall cease to have beneficial ownership (as defined in Rule 13d-3 under the
Exchange Act), in the aggregate, of at least 100% of the aggregate outstanding
voting power of the Capital Stock of Parent or at least 51% of the outstanding
non-voting power of the Capital Stock of Parent,

 

(b)           Parent ceases to own
and control directly 100% of the Capital Stock of the Borrower,

 

(c)           the Borrower cease to
own, directly or indirectly, and control 100% of the Capital Stock of any
Guarantor (other than Parent) or any of the Borrower’s Subsidiaries, unless
otherwise permitted hereunder,

 

(d)           (i) Parent consolidates
with or merges into another entity or conveys, transfers or leases all or
substantially all of its property and assets to any Person, or (ii) any entity
consolidates with or merges into Parent, which in either event (i) or (ii) is
pursuant to a transaction in which the outstanding voting Capital Stock of Parent
is reclassified or changed into or exchanged for cash, securities or other
property, other than any such transaction in which the Permitted Holder have a
beneficial ownership in the aggregate of at least 100% of the aggregate
outstanding voting power of the Capital Stock of the resulting, surviving or
transferee

 

8

 

entity or at least 51% of the outstanding non-voting power of the
Capital Stock of the resulting, surviving or transferee entity.

 

“Closing Fee” has the meaning
specified therefor in Section 2.06(a).

 

“Code” means the New York Uniform
Commercial Code, as in effect from time to time.

 

“Collateral” means all of the property
and assets and all interests therein and proceeds thereof now owned or hereafter
acquired by any Person upon which a Lien is granted or purported to be granted
by such Person as security for all or any part of the Obligations.

 

“Collateral Agent” has the meaning
specified therefor in the preamble hereto.

 

“Collateral Agent Advances” has the
meaning specified therefor in Section 10.08(a).

 

“Commitments” means, with respect to
each Lender, such Lender’s Revolving Credit Commitment and Term Loan
Commitment.

 

“Consolidated EBITDA” means, with
respect to any Person for any period, the Consolidated Net Income of such
Person and its Subsidiaries for such period, plus (i) without
duplication, the sum of the following amounts of such Person and its
Subsidiaries for such period and to the extent deducted in determining
Consolidated Net Income of such Person and its Subsidiaries for such
period:  (A) Consolidated Net Interest
Expense, (B) income tax expense, (C) depreciation expense,
(D) amortization expense, (E) fees and expenses related to this Agreement
and (F) fees payable by the Borrower to Sun (or its Affiliates) pursuant to the
Sun Management Agreement in accordance with the provisions of this Agreement.

 

“Consolidated Funded Indebtedness”
means, with respect to any Person at any date, all Indebtedness of such Person
and its Subsidiaries, determined on a consolidated basis in accordance with
GAAP, which by its terms matures more than one year after the date of
calculation, and any such Indebtedness maturing within one year from such date
which is renewable or extendable at the option of such Person to a date more
than one year from such date, including, in any event, but without duplication,
with respect to the Parent and its Subsidiaries, the Revolving Loans, and the
amount of their Capital Lease Obligations.

 

“Consolidated Net Income” means, with
respect to any Person for any period, the net income (loss) of such Person and
its Subsidiaries for such period, determined on a consolidated basis and in
accordance with GAAP, but excluding from the determination of Consolidated Net
Income (without duplication) (a) any non-cash extraordinary or non-recurring
gains or losses or non-cash gains or losses from dispositions, (b)
restructuring charges, (c) effects of discontinued operations, (d) interest
that is paid in kind, and (e) interest income.

 

“Consolidated Net Interest Expense”
means, with respect to any Person for any period, gross interest expense of
such Person and its Subsidiaries for such period determined on a consolidated
basis and in accordance with GAAP (including, without limitation, interest
expense

 

9

 

paid to Affiliates of such
Person), less (i) the sum of (A) interest income for such
period and (B) gains for such period on Hedging Agreements (to the extent
not included in interest income above and to the extent not deducted in the
calculation of gross interest expense), plus (ii) the sum of
(A) losses for such period on Hedging Agreements (to the extent not
included in such gross interest expense) and (B) the upfront costs or fees
for such period associated with Hedging Agreements (to the extent not included
in such gross interest expense), in each case, determined on a consolidated
basis and in accordance with GAAP.

 

“Contingent Obligation” means, with
respect to any Person, any obligation of such Person guaranteeing or intended
to guarantee any Indebtedness, leases, dividends or other obligations (“primary
obligations”) of any other Person (the ”primary obligor”) in any manner,
whether directly or indirectly, including, without limitation, (i) the direct
or indirect guaranty, endorsement (other than for collection or deposit in the
ordinary course of business), co-making, discounting with recourse or sale with
recourse by such Person of the obligation of a primary obligor, (ii) the
obligation to make take-or-pay or similar payments, if required, regardless of
nonperformance by any other party or parties to an agreement, (iii) any
obligation of such Person, whether or not contingent, (A) to purchase any such
primary obligation or any property constituting direct or indirect security
therefor, (B) to advance or supply funds (1) for the purchase or payment
of any such primary obligation or (2) to maintain working capital or
equity capital of the primary obligor or otherwise to maintain the net worth or
solvency of the primary obligor, (C) to purchase property, assets,
securities or services primarily for the purpose of assuring the owner of any
such primary obligation of the ability of the primary obligor to make payment
of such primary obligation or (D) otherwise to assure or hold harmless the
holder of such primary obligation against loss in respect thereof; provided,
however, that the term “Contingent Obligation” shall not include any
product warranties extended in the ordinary course of business.  The amount of any Contingent Obligation shall
be deemed to be an amount equal to the stated or determinable amount of the
primary obligation with respect to which such Contingent Obligation is made
(or, if less, the maximum amount of such primary obligation for which such
Person may be liable pursuant to the terms of the instrument evidencing such
Contingent Obligation) or, if not stated or determinable, the maximum
reasonably anticipated liability with respect thereto (assuming such Person is
required to perform thereunder), as determined by such Person in good faith.

 

“Current Value” has the meaning
specified therefor in Section 7.01(o).

 

“Default” means an event which, with
the giving of notice or the lapse of time or both, would constitute an Event of
Default.

 

“Dilution” means, as of any date of
determination, a percentage, based upon the experience of the immediately prior
90 days, that is the result of dividing the Dollar amount of (a) bad debt
write-downs, advertising allowances, credits, or other dilutive items (except
for discounts) with respect to the Borrower’s and its Subsidiaries’ Account
Receivables during such period, by (b) the Borrower’s and its Subsidiaries’
billings with respect to Account Receivables during such period (excluding
extraordinary items).

 

10

 

“Dilution Reserve” means, as of any
date of determination, an amount sufficient to reduce the advance rate against
Eligible Accounts Receivable by one percentage point for each percentage point
by which Dilution is in excess of 5%.

 

“Disbursement Agreement” means that
certain disbursement agreement by and between Administrative Agent and Borrower
dated contemporaneously herewith which is in form and substance satisfactory to
Administrative Agent.

 

“Disposition” means any transaction,
or series of related transactions, pursuant to which any Person or any of its
Subsidiaries sells, assigns, transfers or otherwise disposes of any property or
assets (whether now owned or hereafter acquired) to any other Person (other
than a transfer of a franchise to any Person), in each case, whether or not the
consideration therefor consists of cash, securities or other assets owned by
the acquiring Person.

 

“Dollar,” “Dollars” and the
symbol “$” each means lawful money of the United States of America.

 

“Effective Date” means the date, on or
before March 31, 2004, on which all of the conditions precedent set forth
in Section 5.01 are first satisfied or waived and the initial Loan
is made.

 

“Eligible Accounts Receivable” means
the Accounts Receivable of the Borrower and its Subsidiaries which are, and at
all times continue to be, acceptable to the Administrative Agent in the
exercise of its reasonable business judgment. 
In general, an Account Receivable may, in the sole and absolute
discretion of the Administrative Agent, be deemed to be eligible if:  (i) the rendition of the services has
been completed with respect to such Account Receivable (but, in the case of the
sale of merchandise, whether or not the same have been delivered); (ii) no
return, rejection, repossession or dispute has occurred with respect to such
Account Receivable, the Account Debtor has not asserted any setoff, defense or
counterclaim with respect to such Account Receivable, and there has not
occurred any extension of the time for payment with respect to such Account
Receivable without the consent of the Administrative Agent, provided
that, in the case of any dispute, setoff, defense or counterclaim with respect
to an Account Receivable, the portion of such Account Receivable not subject to
such dispute, setoff, defense or counterclaim will not be ineligible solely by
reason of this clause (ii); (iii) such Account Receivable is lawfully
owned by the Borrower or its Subsidiary free and clear of any Lien other than
in favor of the Collateral Agent for the benefit of the Lenders and otherwise
continues to be in full conformity with all representations and warranties made
by the Loan Parties to the Agents and the Lenders with respect thereto in the
Loan Documents; (iv) such Account Receivable is unconditionally payable in
Dollars within 15 days from the invoice date and is not evidenced by a
promissory note, chattel paper or any other instrument or other document;
(v) no more than 10 days have elapsed from the invoice due date and no
more than 25 days have elapsed from the invoice date with respect to such
Account Receivable; (vi) such Account Receivable is not due from an
Affiliate of the Borrower; (vii) such Account Receivable does not constitute
an obligation of the United States or any other Governmental Authority (unless
all steps required by the Administrative Agent in connection therewith,
including notice to the United States Government under the Federal Assignment
of Claims Act or any action under any state statute comparable to the Federal
Assignment of Claims Act, have been duly taken in a manner

 

11

 

satisfactory to the
Administrative Agent); (viii) the Account Debtor (or the applicable office
of the Account Debtor) with respect to such Account Receivable is located in
the continental United States, unless such Account Receivable is supported by a
letter of credit or other similar obligation satisfactory to the Administrative
Agent; (ix) the Account Debtor with respect to such Account Receivable is
not a supplier to or creditor of any Loan Party; provided, however,
that in the event that an Account Debtor is a supplier to or creditor of a Loan
Party such Account Receivable will be eligible under this clause if the Account
Debtor has executed a non-offset letter reasonably acceptable to the
Administrative Agent; provided further, however, that if such an
Account Debtor has not executed a non-offset agreement, Administrative Agent,
in its discretion, may include as eligible the net amount due from such Account
Debtor to the applicable Loan Party; (x) not more than 50% of the aggregate
amount of all Accounts Receivable of the Account Debtor with respect to such
Account Receivable have remained unpaid 15 days past the invoice due date or 25
days past the invoice date; (xi) the Account Debtor with respect to such
Account Receivable (A) has not filed a petition for bankruptcy or any other
relief under the Bankruptcy Code or any other law relating to bankruptcy,
insolvency, reorganization or relief of debtors, made an assignment for the
benefit of creditors, had filed against it any petition or other application
for relief under the Bankruptcy Code or any such other law, (B) has not failed,
suspended business operations, or called a meeting of its creditors for the
purpose of obtaining any financial concession or accommodation, (C) has not had
or suffered to be appointed a receiver or a trustee for all or a significant
portion of its assets or affairs or (D) in the case of an Account Debtor who is
an individual, is not an employee of the Borrower or any of its Affiliates and
has not died or been declared incompetent; and (xii) the Administrative Agent
is, and continues to be, satisfied with the credit standing of the Account
Debtor in relation to the amount of credit extended and the Administrative
Agent believes, in its discretion, that the prospect of collection of such
Account Receivable is not impaired for any reason.

 

“Eligible Inventory” means all
Inventory consisting of finished goods and raw materials of the Borrower and
its Subsidiaries that meets all of the following specifications:  (i) such Inventory is lawfully owned by
the Borrower or its Subsidiary, as applicable, free and clear of any existing
Lien other than in favor of the Collateral Agent for the benefit of the
Lenders, has not been delivered to any of Borrower’s customers and otherwise
continues to be in full conformity with all representations and warranties made
by the Loan Parties to the Agents and the Lenders with respect thereto in the
Loan Documents; (ii) such Inventory is not held on consignment and may be
lawfully sold; (iii) the Borrower or its Subsidiary, as applicable, has
the right to grant Liens on such Inventory; (iv) such Inventory arose or
was acquired in the ordinary course of the business of the Borrower or its
Subsidiary, as applicable, and does not represent damaged, obsolete or
non-salable goods; (v) no Account Receivable then exists with respect to
such Inventory (unless the reserve required under the definition of “Net Amount
of Eligible Accounts Receivable” is then in effect) and no document of title
has been created or issued with respect to such Inventory; (vi) such
Inventory is located in (or is in transit to) one of the locations in one of
the continental United States listed on Schedule 6.01(ff) (as such
schedule may be amended from time to time in accordance with the
provisions of Section 6.01(ff)) or such other locations in the
continental United States as the Collateral Agent may approve in writing from
time to time; (vii) if such Inventory consists of finished goods Inventory
sold under a licensed trademark or if such Inventory contains or uses a medium
subject to a copyright (A) the Collateral Agent shall have entered into a
waiver letter, in form and substance satisfactory to the

 

12

 

Collateral Agent, with the
licensor with respect to the rights of the Collateral Agent to use the licensed
trademark or copyright to sell or otherwise dispose of such Inventory or
(B) the Collateral Agent shall otherwise be satisfied, in its sole
discretion, that the Collateral Agent has rights to sell or dispose of such
Inventory; (viii) the Inventory is not work-in-process, supplies or
packaging; and (ix) such Inventory is and at all times shall continue to
be acceptable to the Administrative Agent.

 

“Employee Plan” means an employee
benefit plan (other than a Multiemployer Plan) covered by Title IV of ERISA and
maintained (or that was maintained at any time during the six (6) calendar
years preceding the date of any borrowing hereunder) for employees of any Loan
Party or any of its ERISA Affiliates.

 

“Environmental Actions” means any
complaint, summons, citation, notice, directive, order, claim, litigation,
investigation, judicial or administrative proceeding, judgment, letter or other
communication from any Governmental Authority involving violations of
Environmental Laws or Releases of Hazardous Materials (i) from any assets,
properties or businesses of any Loan Party or any of its Subsidiaries or any
predecessor in interest; (ii) from adjoining properties or businesses (and as
to which any Loan Party or any of its Subsidiaries could have any liability);
or (iii) onto any facilities which received Hazardous Materials generated by
any Loan Party or any of its Subsidiaries or any predecessor in interest.

 

“Environmental Laws” means the
Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C.
§ 9601, et  seq.), the Hazardous Materials Transportation Act
(49 U.S.C. § 1801, et  seq.), the Resource Conservation and
Recovery Act (42 U.S.C. § 6901, et  seq.), the Federal
Clean Water Act (33 U.S.C. § 1251 et  seq.), the Clean
Air Act (42 U.S.C. § 7401 et  seq.), the Toxic
Substances Control Act (15 U.S.C. § 2601 et  seq.) and
the Occupational Safety and Health Act (29 U.S.C. § 651 et  seq.),
as such laws may be amended or otherwise modified from time to time, and any
other present or future federal, state, local or foreign statute, ordinance,
rule, regulation, order, judgment, decree, permit, license or other binding
determination of any Governmental Authority imposing liability or establishing
standards of conduct for protection of the environment or other government restrictions
relating to the protection of the environment or the release, emission,
deposit, discharge, leaching, migration or spill of any Hazardous Materials
into the environment.

 

“Environmental Liabilities and Costs”
means all liabilities, monetary obligations, Remedial Actions, losses, damages,
punitive damages, consequential damages, treble damages, costs and expenses
(including all reasonable fees, disbursements and expenses of counsel, experts
and consultants and costs of investigations and feasibility studies), fines,
penalties, sanctions and interest incurred as a result of any claim or demand
by any Governmental Authority or any third party, and which relate to any
environmental condition or a Release of Hazardous Materials from or onto (i) any
property currently or formerly owned by any Loan Party or any of its
Subsidiaries or (ii) any facility which received Hazardous Materials
generated by any Loan Party or any of its Subsidiaries.

 

“Environmental Lien” means any Lien in
favor of any Governmental Authority for Environmental Liabilities and Costs.

 

13

 

“ERISA” means the Employee Retirement
Income Security Act of 1974, as amended, and any successor statute of similar
import, and regulations thereunder, in each case, as in effect from time to
time.  References to sections of ERISA
shall be construed also to refer to any successor sections.

 

“ERISA Affiliate” means, with respect
to any Person, any trade or business (whether or not incorporated) which is a
member of a group of which such Person is a member and which would be deemed to
be a “controlled group” within the meaning of Sections 414(b), (c), (m) and (o)
of the IRC.

 

“Event of Default” means any of the
events set forth in Section 9.01.

 

“Exchange Act” means the Securities
Exchange Act of 1934, as amended.

 

“Excess Availability” means, as of any
date, the result of (a) Borrower’s Availability as of such date, plus (b) the
aggregate amount of Qualified Cash of any Loan Party, minus (c) the aggregate
amount of all outstanding checks or other instruments written or otherwise
issued with respect to any deposit account of any Loan Party that have not yet
been honored by the applicable depository institution.

 

“Existing Debt” means (a) the
Indebtedness of Borrower owed to Parent and to Mattress Holdings International,
LLC in the original principal amount of $6,000,000, (b) the Indebtedness of
Borrower owed to LaSalle, and (c) the Indebtedness of Parent owed to Harris
Trust and Savings Bank.

 

“Extraordinary Receipts” means any
cash received (other than in the ordinary course of business and not consisting
of proceeds of Dispositions, Franchise Events or Indebtedness), by the Parent
or any of its Subsidiaries (other than from a Loan Party), including, without
limitation, (i) foreign, United States, state or local tax refunds,
(ii) pension plan reversions, (iii) proceeds of insurance,
(iv) judgments, proceeds of settlements or other consideration of any kind
in connection with any cause of action, (v) condemnation awards (and
payments in lieu thereof), (vi) indemnity payments and (vii) any
purchase price adjustment received in connection with any purchase agreement.

 

“Facility” means each of the parcels
of real property identified on Schedule F-1 attached hereto,
including, without limitation, all buildings and other improvements thereon,
all fixtures located at or used in connection with such facility, all whether
now or hereafter existing.

 

“Federal Funds Rate” means, for any
period, a fluctuating interest rate per annum equal to, for each day during
such period, the weighted average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers, as published on the next succeeding Business Day by the Federal
Reserve Bank of New York, or, if such rate is not so published for any day
which is a Business Day, the average of the quotations for such day on such
transactions received by the Administrative Agent from three Federal funds
brokers of recognized standing selected by it.

 

14

 

“Final Maturity Date” means
March 31, 2007, or such earlier date on which any Loan shall become due
and payable in full in accordance with the terms of this Agreement and the
other Loan Documents.

 

“Financial Statements” means (i) the
audited consolidated balance sheet of the Parent and its Subsidiaries for
Fiscal Year 2002 (ended January 28, 2003), and the related consolidated
statement of operations, shareholders’ equity and cash flows for the Fiscal
Year then ended, and (ii) the unaudited consolidated balance sheet of the
Parent and its Subsidiaries for the eleven Fiscal Months ended
December 30, 2003, and the related consolidated statement of operations,
shareholder’s equity and cash flows for the eleven Fiscal Months then ended in
each case prepared in accordance with GAAP (in the case of clause (ii), except
for the absence of footnotes and subject to year-end audit adjustment).

 

“Fiscal Month” means a fiscal month of
Borrower and its Subsidiaries.

 

“Fiscal Year” means the fiscal year of
the Borrower and its Subsidiaries ending on the Tuesday closest to
January 31st.  References in any
Loan Document to a specific Fiscal Year means the Fiscal Year roughly
corresponding to the referenced calendar year (e.g. “Fiscal Year 2004” means
the Fiscal Year ending February 1, 2005).

 

“Fixed Charge Coverage Ratio” means,
with respect to any Person as at any referenced date, the ratio of (i) the
TTM EBITDA of such Person and its Subsidiaries as at such date (the fiscal
period included in the determination of the TTM EBITDA as at such date being
the corresponding “period”), to (ii) the sum of (A) all principal of
Indebtedness of such Person and its Subsidiaries scheduled to be paid during
such period to the extent there is not an equivalent permanent reduction in the
commitments thereunder, plus (B) Consolidated Net Interest Expense
of such Person and its Subsidiaries for such period, plus
(C) income taxes paid or payable by such Person and its Subsidiaries
during such period, plus (D) cash dividends or distributions paid
by such Person and its Subsidiaries (other than, in the case of the Parent,
dividends or distributions paid to Parent or its wholly-owned Subsidiaries)
during such period, plus (E) Capital Expenditures made by such
Person and its Subsidiaries during such period, plus (F) fees and
expenses related to this Agreement plus (G) fees payable by the Borrower
to Sun (or its Affiliates) pursuant to the Sun Management Agreement in accordance
with the provisions of this Agreement.

 

“Franchise Event” means (a) the
issuance by a Loan Party of a new franchise agreement or (b) the opening of a
new store by a franchisee of a Loan Party.

 

“GAAP” means generally accepted
accounting principles in effect from time to time in the United States, applied
on a consistent basis, provided that for the purpose of Section 7.03
hereof and the definitions used therein, “GAAP” shall mean generally accepted
accounting principles in effect on the date hereof and consistent with those
used in the preparation of the Financial Statements, provided, further, that if
there occurs after the date of this Agreement any change in GAAP that affects
in any respect the calculation of any covenant contained in Section 7.03
hereof, the Collateral Agent and the Borrower shall negotiate in good faith
amendments to the provisions of this Agreement that relate to the calculation
of such covenant with the intent of having the respective positions of the
Lenders and the Borrower after

 

15

 

such change in GAAP conform as
nearly as possible to their respective positions as of the date of this
Agreement and, until any such amendments have been agreed upon, the covenants
in Section 7.03 hereof shall be calculated as if no such change in
GAAP has occurred.

 

“GERS System” means the integrated
retail computer system being implemented by the Loan Parties.

 

“Governmental Authority” means any
nation or government, any Federal, state, city, town, municipality, county,
local or other political subdivision thereof or thereto and any department,
commission, board, bureau, instrumentality, agency or other entity exercising
executive, legislative, judicial, taxing, regulatory or administrative powers
or functions of or pertaining to government.

 

“Guaranteed Obligations” has the
meaning specified therefor in Section 11.01.

 

“Guarantor” means (i) the Parent, and
each Subsidiary of the Parent listed as a “Guarantor” on the signature pages
hereto, and (ii) each other Person which guarantees, pursuant to Section 7.01(b)
or otherwise, all or any part of the Obligations.

 

“Guaranty” means (i) the guaranty of
each Guarantor party hereto contained in Article XI hereof, and
(ii) each guaranty substantially in the form of Exhibit G-1,
made by any other Guarantor in favor of the Collateral Agent for the benefit of
the Lenders pursuant to Section 7.01(b) or otherwise.

 

“Hazardous Materials” means
(a) any element, compound or chemical that is defined, listed or otherwise
classified as a contaminant, pollutant, toxic pollutant, toxic or hazardous
substance, extremely hazardous substance or chemical, hazardous waste, special
waste, or solid waste under Environmental Laws or that is likely to cause
immediately, or at some future time, harm to or have an adverse effect on, the
environment or risk to human health or safety, including, without limitation,
any pollutant, contaminant, waste, hazardous waste, toxic substance or
dangerous good which is defined or identified in any Environmental Law and
which is present in the environment in such quantity or state that it
contravenes any Environmental Law; (b) petroleum and its refined products;
(c) polychlorinated biphenyls; (d) any substance exhibiting a hazardous
waste characteristic, including, without limitation, corrosivity, ignitability,
toxicity or reactivity as well as any radioactive or explosive materials; and
(e) any raw materials, building components (including, without limitation,
asbestos-containing materials) and manufactured products containing hazardous
substances listed or classified as such under Environmental Laws.

 

“Hedging Agreement” means any interest
rate, foreign currency, commodity or equity swap, collar, cap, floor or forward
rate agreement, or other agreement or arrangement designed to protect against
fluctuations in interest rates or currency, commodity or equity values
(including, without limitation, any option with respect to any of the foregoing
and any combination of the foregoing agreements or arrangements), and any
confirmation executed in connection with any such agreement or arrangement.

 

16

 

“Highest Lawful Rate” means, with
respect to any Agent or any Lender, the maximum non-usurious interest rate, if
any, that at any time or from time to time may be contracted for, taken,
reserved, charged or received on the Obligations under laws applicable to such
Agent or such Lender which are currently in effect or, to the extent allowed by
law, under such applicable laws which may hereafter be in effect and which
allow a higher maximum non-usurious interest rate than applicable laws now
allow.

 

“Indebtedness” means, with respect to
any Person, without duplication, (i) all indebtedness of such Person for borrowed
money; (ii) all obligations of such Person for the deferred purchase price
of property or services (other than trade payables or other accounts payable
incurred in the ordinary course of such Person’s business and not outstanding
for more than 90 days after the date such payable was created (“Current
Accounts Payable”)); (iii) all obligations of such Person evidenced by
bonds, debentures, notes or other similar instruments or upon which interest
payments are customarily made; (iv) all reimbursement, payment or other
obligations and liabilities of such Person created or arising under any
conditional sales or other title retention agreement with respect to property
used and/or acquired by such Person, even though the rights and remedies of the
lessor, seller and/or lender thereunder may be limited to repossession or sale
of such property; (v) all Capitalized Lease Obligations of such Person;
(vi) all obligations and liabilities, contingent or otherwise, of such
Person, in respect of letters of credit, acceptances and similar facilities;
(vii) all obligations and liabilities, calculated on a basis satisfactory
to the Collateral Agent and in accordance with accepted practice, of such
Person under Hedging Agreements; (viii) all Contingent Obligations (except
that this clause (viii) shall not apply to the computation of any of the
financial covenants set forth in Section 7.03 or in the definitions
related specifically to such financial covenants); (ix) liabilities
incurred under Title IV of ERISA with respect to any plan (other than a
Multiemployer Plan) covered by Title IV of ERISA and maintained for
employees of such Person or any of its ERISA Affiliates; (x) withdrawal
liability incurred under ERISA by such Person or any of its ERISA Affiliates
with respect to any Multiemployer Plan; (xi) all other items (other than
Current Accounts Payable and other than obligations in respect of deferred
taxes, deferred rent, vendor incentives and customer deposits that are not more
than 90 days past due) which, in accordance with GAAP, would be included as
liabilities on the liability side of the balance sheet of such Person; and
(xii) all obligations referred to in clauses (i) through (xi) of this
definition of another Person secured by (or for which the holder of such Indebtedness
has an existing right, contingent or otherwise, to be secured by) a Lien upon
property owned by such Person, even though such Person has not assumed or
become liable for the payment of such Indebtedness.  The Indebtedness of any Person shall include,
without duplication, the Indebtedness of any partnership of or joint venture in
which such Person is a general partner or a joint venturer.

 

“Indemnified Matters” has the meaning
specified therefor in Section 12.15.

 

“Indemnitees” has the meaning specified
therefor in Section 12.15.

 

“Insolvency Proceeding” means any
proceeding commenced by or against any Person under any provision of the
Bankruptcy Code or under any other bankruptcy or insolvency law, assignments
for the benefit of creditors, formal or informal moratoria, compositions, or
extensions generally with creditors, or proceedings seeking reorganization,
arrangement, or other similar relief.

 

17

 

“Intercompany Subordination Agreement”
means an intercompany subordination agreement, dated as of the Effective Date,
duly executed by each of the Loan Parties, substantially in the form of Exhibit
I-1.

 

“Inventory Reserve” means, with
respect to Eligible Inventory which has not yet been delivered to any customer
of a Loan Party but with respect to which a Loan Party has received payment in
cash by or on behalf of the applicable customer, a reserve in an amount equal
to the aggregate amount of the Book Value of all such Eligible Inventory, which
reserve shall be maintained until such Inventory has been delivered to the
applicable customer of such Loan Party.

 

“IRC” means the Internal Revenue Code
of 1986, as amended (or any successor statute thereto) and the regulations
thereunder.

 

“Inventory” means all of each of the
Loan Parties’ now owned and/or hereafter acquired right, title, and interest
with respect to “inventory” (as that term is defined in the Code).

 

“Key Contracts” means (i) that certain
Amended Branded Product Supply Agreement by and between Borrower and Sealy
Mattress Company dated as of November 12, 2003; (ii) that certain Private
Label Supply Agreement by and between Borrower and Sealy Mattress Company dated
as of October 18, 2002; and (iii) that certain Spring Air Product Supply
Agreement by and between Borrower and The Spring Air Company dated as of May 2,
2003.

 

“LaSalle” means LaSalle Business
Credit, Inc., a Delaware corporation.

 

“Lease” means any lease of real
property to which any Loan Party or any of its Subsidiaries is a party as
lessor or lessee.

 

“Lender” has the meaning specified
therefor in the preamble hereto.

 

“Leverage Ratio” has the meaning
specified therefor in Section 7.03(a).

 

“Liabilities” has the meaning
specified therefor in Section 2.07.

 

“Lien” means any mortgage, deed of trust,
pledge, lien (statutory or otherwise), security interest, charge or other
encumbrance or security or preferential arrangement of any nature, including,
without limitation, any conditional sale or title retention arrangement, any
Capitalized Lease and any assignment, deposit arrangement or financing lease
intended as, or having the effect of, security.

 

“Loan” means the Term Loan or any
Revolving Loan made by an Agent or a Lender to the Borrower pursuant to
Article II hereof.

 

“Loan Account” means an account
maintained hereunder by the Administrative Agent on its books of account at the
Payment Office, and with respect to the Borrower, in which the Borrower will be
charged with all Loans made to, and all other Obligations incurred by, the
Borrower.

 

18

 

“Loan Document” means this Agreement,
the Bailee Agency Agreement, the Disbursement Agreement, any Guaranty, any
Security Agreement, any Pledge Agreement, any Mortgage, any UCC Filing
Authorization Letter, the Intercompany Subordination Agreement, the Trademark
Security Agreement and any other agreement, instrument, and other document
executed and delivered pursuant hereto or thereto or otherwise evidencing or
securing any Loan or any other Obligation.

 

“Loan Party” means the Borrower and/or
any Guarantor.

 

“Loan Servicing Fee” has the meaning
specified therefor in Section 2.06(c).

 

“Material Adverse Effect” means a
material adverse effect on any of (i) the operations, business, assets,
properties, condition (financial or otherwise) or prospects of any Loan Party
or the Loan Parties taken as a whole, (ii) the ability of any Loan Party
to perform any of its obligations under any Loan Document to which it is a
party, (iii) the legality, validity or enforceability of this Agreement or
any other Loan Document, (iv) the rights and remedies of any Agent or any
Lender under any Loan Document, or (v) the validity, perfection or
priority (subject to Permitted Liens) of a Lien in favor of the Collateral Agent
for the benefit of the Lenders on any of the Collateral.

 

“Material Contract” means, with
respect to any Person, (i) each contract or agreement to which such Person or
any of its Subsidiaries is a party involving aggregate consideration payable to
or by such Person or such Subsidiary of $100,000 or more during any Fiscal Year
(other than purchase orders in the ordinary course of the business of such
Person or such Subsidiary and other than contracts that by their terms may be
terminated by such Person or Subsidiary in the ordinary course of its business
upon less than 60 days notice without penalty or premium), (ii) all other
contracts or agreements material to the business, operations, condition
(financial or otherwise), performance, prospects or properties of such Person
or such Subsidiary, and, (iii) with respect to the Borrower or any Subsidiary
of the Borrower shall include the Sealy Subordinated Debt Documents and those
contracts identified on Schedule 6.01(x).

 

“MFA” means Mattress Firm Arizona,
LLC, an Arizona limited liability company.

 

“MFA Triggering Event” means the date
when (a) MFA’s TTM EBITDA at any time is greater than $250,000, and (b)
Collateral Agent requests that MFA execute a joinder to this Agreement and the
other Loan Documents.

 

“MFOL” means Mattress Firm Operating,
Ltd., a Texas limited partnership.

 

“MFOL Management Agreement” the
Management, Operation and Services Agreement, by and between Borrower and MFOL,
as in effect on the date hereof.

 

“Moody’s” means Moody’s Investors
Service, Inc. and any successor thereto.

 

“Mortgage” means a mortgage, deed of
trust or deed to secure debt, in form and substance satisfactory to the
Collateral Agent, made by a Loan Party in favor of the Collateral

 

19

 

Agent for the benefit of the
Lenders, securing the Obligations and delivered to the Collateral Agent
pursuant to the provisions hereof or otherwise.

 

“Multiemployer Plan” means a
“multiemployer plan” as defined in Section 4001(a)(3) of ERISA to which
any Loan Party or any of its ERISA Affiliates has contributed to, or has been
obligated to contribute, at any time during the preceding six (6) years.

 

“Net Amount of Eligible Accounts
Receivable” means the aggregate unpaid invoice amount of Eligible Accounts
Receivable less, without duplication, the sum of (a) sales, excise or similar
taxes, returns, discounts, chargebacks, claims, advance payments, credits and
allowances of any nature at any time issued, owing, granted, outstanding,
available or claimed with respect to such Eligible Accounts Receivable, and (b)
the aggregate amount of liabilities established by the Loan Parties in respect
of customer deposits relating to sales giving rise to such Eligible Accounts
Receivable (it being understood that liabilities with respect to customer
deposits shall be recorded in the Loan Parties’ books and records in an amount
not less than the amount of each Eligible Account Receivable with respect to
which the applicable Inventory has not been delivered to and accepted by a customer
of a Loan Party, and will not be eliminated until (i) such Inventory has been
delivered to and accepted by the applicable customer or (ii) such Account
Receivable has been paid in full in cash).

 

“Net Cash Proceeds” means,
(i) with respect to any Disposition or Franchise Event by any Person or
any of its Subsidiaries, the amount of cash received (directly or indirectly)
from time to time (whether as initial consideration or through the payment or
disposition of deferred consideration) by or on behalf of such Person or such
Subsidiary, in connection therewith after deducting therefrom only (A) the
amount of any Indebtedness secured by any Permitted Lien on any asset (other
than Indebtedness assumed by the purchaser of such asset) which is required to be,
and is, repaid in connection with such Disposition or Franchise Event (other
than Indebtedness under this Agreement), (B) reasonable expenses related
thereto incurred by such Person or such Subsidiary in connection therewith,
(C) transfer taxes paid to any taxing authorities by such Person or such
Subsidiary in connection therewith, and (D) net income taxes to be paid in
connection with such Disposition or Franchise Event (after taking into account
any tax credits or deductions and any tax sharing arrangements) and
(ii) with respect to the issuance or incurrence of any Indebtedness by any
Person or any of its Subsidiaries, or the sale or issuance by any Person or any
of its Subsidiaries of any shares of its Capital Stock, the aggregate amount of
cash received (directly or indirectly) from time to time (whether as initial
consideration or through the payment or disposition of deferred consideration)
by or on behalf of such Person or such Subsidiary in connection therewith,
after deducting therefrom only (A) reasonable expenses related thereto
incurred by such Person or such Subsidiary in connection therewith, (B)
transfer taxes paid by such Person or such Subsidiary in connection therewith
and (C) net income taxes to be paid in connection therewith (after taking into
account any tax credits or deductions and any tax sharing arrangements); in
each case of clause (i) and (ii) to the extent, but only to the extent, that
the amounts so deducted are (x) actually paid to a Person that, except in
the case of reasonable out-of-pocket expenses, is not an Affiliate of such
Person or any of its Subsidiaries and (y) properly attributable to such
transaction or to the asset that is the subject thereof.

 

“Notice of Borrowing” has the meaning
specified therefor in Section 2.02(a).

 

20

 

“Obligations” means all present and
future indebtedness, obligations, and liabilities of each Loan Party to the
Agents and the Lenders, or any of them, under the Loan Documents, whether or
not the right of payment in respect of such claim is reduced to judgment,
liquidated, unliquidated, fixed, contingent, matured, disputed, undisputed,
legal, equitable, secured, unsecured, and whether or not such claim is
discharged, stayed or otherwise affected by any proceeding referred to in Section 9.01.  Without limiting the generality of the
foregoing, the Obligations of each Loan Party under the Loan Documents include
(a) the obligation to pay principal, interest, charges, expenses, fees,
attorneys’ fees and disbursements, indemnities and other amounts payable by
such Person under the Loan Documents (including any portion thereof that
accrues after the commencement of an Insolvency Proceeding, whether or not
allowed or allowable in whole or in part as a claim in any such Insolvency
Proceeding), and (b) the obligation of such Person to reimburse any amount
in respect of any of the foregoing that any Agent or any Lender (in its sole
discretion) may elect to pay or advance on behalf of such Person.

 

“Operating Lease Obligations” means
all obligations for the payment of rent for any real or personal property under
leases or agreements to lease, other than Capitalized Lease Obligations.

 

“Other Taxes” has the meaning
specified therefor in Section 2.08(a)(iii).

 

“Parent” has the meaning specified
therefor in the preamble hereto.

 

“Participant Register” has the meaning
specified therefor in Section 12.07(b)(v).

 

“Payment Office” means the
Administrative Agent’s office located at 299 Park Avenue, New York, New
York, or at such other office or offices of the Administrative Agent as
may be designated in writing from time to time by the Administrative Agent to
the Collateral Agent and the Borrower.

 

“PBGC” means the Pension Benefit
Guaranty Corporation or any successor thereto.

 

“Permitted Dispositions” means (a)
sales or other dispositions of Inventory to buyers in the ordinary course of
business, (b) sales or other dispositions of obsolete or worn-out equipment in
the ordinary course of business, (c) sales or other dispositions of other
property or assets for cash in an aggregate amount not less than the fair
market value of such property or assets, provided that the Net Cash
Proceeds of such dispositions in the case of clauses (b) and (c) do not exceed
$100,000 in the aggregate in any twelve-month period, (d) the use or transfer
of Cash or Cash Equivalents by any Loan Party or its Subsidiaries in a manner
that is not prohibited by the terms of this Agreement or the other Loan
Documents, (e) the licensing by any Loan Party or its Subsidiaries, on a
non-exclusive basis, of patents, trademarks, copyrights, and other intellectual
property rights in the ordinary course of business, (f) the granting of leases
or subleases to other Persons not materially interfering with the conduct of
business of any of the Loan Parties, (g) the return of Inventory to suppliers
in the ordinary course of business, (h) the transfers of assets described in Section 5.03(b)
of this Agreement, and (i) the disposition of less than five store locations in
any one city or metropolitan area, the approval of the opening by a

 

21

 

franchisee of a Loan Party of
less than five store locations in any one city or metropolitan area, or the
grant of a franchise, so long as such franchise does not involve five or more
store locations in any one city or metropolitan area.

 

“Permitted Holder” means Sun and its
Affiliates.

 

“Permitted Indebtedness” means:

 

(a)           any Indebtedness owing to any Agent and any
Lender under this Agreement and the other Loan Documents;

 

(b)           Indebtedness listed on Schedule 7.02(b)
(exclusive of any Indebtedness evidenced by Capital Lease Obligations, any
purchase money Indebtedness and any Indebtedness incurred in connection with
the acquisition or installation of the GERS System), and the extension of
maturity, refinancing or modification of the terms thereof; provided, however,
that (i) such extension, refinancing or modification is pursuant to terms that
are not less favorable to the Loan Parties and the Lenders than the terms of
the Indebtedness being extended, refinanced or modified and (ii) after giving
effect to such extension, refinancing or modification, the amount of such
Indebtedness is not greater than the amount of Indebtedness outstanding
immediately prior to such extension, refinancing or modification plus accrued
interest thereon and the fees incurred in connection with the extension,
refinancing, or modification;

 

(c)           Indebtedness of Borrower consisting of (i)
guaranties by Borrower of Indebtedness of another Loan Party that otherwise
constitutes Permitted Indebtedness or (ii) guaranties by Borrower of any other
obligation of another Loan Party provided such obligation itself is otherwise
permitted under the Loan Documents;

 

(d)           Indebtedness evidenced by Capitalized Lease
Obligations entered into at any time in order to finance Capital Expenditures
made by the Loan Parties in accordance with the provisions of Section 7.02(g),
which Indebtedness, when aggregated with the principal amount of all
Indebtedness incurred under this clause (d) and clause (e) of this definition,
does not exceed $1,500,000 at any time outstanding;

 

(e)           purchase money Indebtedness incurred at any
time to enable a Loan Party to acquire equipment in the ordinary course of its
business, which Indebtedness, when aggregated with the principal amount of all
Indebtedness incurred under this clause (e) and clause (d) of this definition,
does not exceed $1,500,000 at any time outstanding;

 

(f)            Indebtedness permitted under Section 7.02(e);

 

(g)           Indebtedness of a Loan Party or any of its
Subsidiaries under any Hedging Agreement so long as such Hedging Agreements are
used solely as a part of its normal business operations as a risk management
strategy and/or hedge against changes resulting from market operations and not
as a means to speculate for investment purposes on trends and shifts in
financial or commodities markets;

 

(h)           Subordinated Debt;

 

22

 

(i)            [intentionally omitted]

 

(j)            Indebtedness to customers in respect of
warranty claims and rights of return of inventory which is incurred in the
ordinary course of business; and

 

(k)           Indebtedness pursuant to the Sun Management
Agreement and the MFOL Management Agreement, in an aggregate amount not to
exceed the amount that is permitted to be paid pursuant to Section 7.02(h)(F)
and Section 7.02(h)(G), respectively.

 

“Permitted Investments” means
(i) marketable direct obligations issued or unconditionally guaranteed by
the United States Government or issued by any agency or instrumentality thereof
and backed by the full faith and credit of the United States, in each case,
maturing within six months from the date of acquisition thereof;
(ii) commercial paper, maturing not more than 270 days after the date
of issue rated P-1 by Moody’s or A-1 by Standard & Poor’s;
(iii) certificates of deposit maturing not more than 270 days after
the date of issue, issued by commercial banking institutions, and money market
or demand deposit accounts maintained at commercial banking institutions, each
of which is a member of the Federal Reserve System and has a combined capital
and surplus and undivided profits of not less than $500,000,000;
(iv) repurchase agreements having maturities of not more than 90 days
from the date of acquisition which are entered into with banks included in the
commercial banking institutions described in clause (iii) above and which
are secured by marketable direct obligations of the United States Government or
any agency thereof, (v) money market accounts maintained with mutual funds
having assets in excess of $2,500,000,000; (vi) tax exempt securities
rated A or better by Moody’s or A+ or better by Standard & Poor’s; and
(vii) advances to officers and other employees of the Loan Parties in the
ordinary course of business in an aggregate outstanding amount at any one time
not in excess of $100,000.

 

“Permitted Liens” means:

 

(a)           Liens securing the Obligations;

 

(b)           [intentionally omitted];

 

(c)           Liens for taxes, assessments and governmental
charges the payment of which is not required under Section 7.01(c);

 

(d)           Liens imposed by law, such as carriers’,
warehousemen’s, mechanics’, materialmen’s and other similar Liens arising
(provided they are subordinate to the Collateral Agent’s Liens on Collateral)
in the ordinary course of business and securing obligations (other than
Indebtedness for borrowed money) that are not overdue by more than 30 days
or are being contested in good faith and by appropriate proceedings promptly
initiated and diligently conducted, and a reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made therefor;

 

(e)           Liens described on Schedule 7.02(a)
(exclusive of any Liens securing Indebtedness evidenced by Capital Lease Obligations,
any Liens securing purchase money Indebtedness and any Liens securing
Indebtedness incurred in connection with the acquisition or

 

23

 

installation of the GERS
System), but not the extension of coverage thereof to other property or assets

 

(f)            Liens arising under Capitalized Leases or
securing purchase money Indebtedness permitted under the definition of
Permitted Indebtedness; provided, however, that (A) no such
Lien shall extend to or cover any other property of any Loan Party or any of
its Subsidiaries, and (B) the principal amount of the Indebtedness secured
by any such Lien shall not exceed the lesser of 80% of the fair market value or
the cost of the property so held or acquired;

 

(g)           deposits and pledges of cash securing (i)
obligations incurred in respect of workers’ compensation, unemployment
insurance or other forms of governmental insurance or benefits, (ii) the
performance of bids, tenders, leases, contracts (other than for the payment of money)
and statutory obligations or (iii) obligations on surety or appeal bonds, but
only to the extent such deposits or pledges are incurred or otherwise arise in
the ordinary course of business and secure obligations not past due;

 

(h)           easements, zoning restrictions and similar
encumbrances on real property and minor irregularities in the title thereto
that do not (i) secure obligations for the payment of money or (ii) materially
impair the value of such property or its use by any Loan Party or any of its
Subsidiaries in the normal conduct of such Person’s business;

 

(i)            leases or subleases granted to other
Persons not materially interfering with the conduct of the business of the
Borrower or any of its Subsidiaries;

 

(j)            precautionary UCC financing statement
filings regarding operating leases;

 

(k)           Liens arising out of the existence of
judgments or awards not giving rise to an Event of Default; and

 

(l)            statutory and common law landlords’ liens
under leases to which the Borrower or any of its Subsidiaries is a party.

 

“Permitted Purchase” means the
acquisition by Subco of all or any portion of the Sealy Subordinated Debt for
an amount equal to or less than the face amount of such debt reduced by the
Required Purchase Discount.

 

“Person” means an individual,
corporation, limited liability company, partnership, association, joint-stock
company, trust, unincorporated organization, joint venture or other enterprise
or entity or Governmental Authority.

 

“Pledge Agreement” means a Pledge and
Security Agreement made by a Loan Party in favor of the Collateral Agent for
the benefit of the Lenders, substantially in the form of Exhibit P-1,
securing the Obligations and delivered to the Collateral Agent.

 

“Post-Default Rate” means a rate of
interest per annum equal to the rate of interest otherwise in effect from time
to time pursuant to the terms of this Agreement plus 4.0 percentage

 

24

 

points, or, if a rate of
interest is not otherwise in effect, interest at the highest rate specified
herein for any Loan prior to the Event of Default plus 4.0 percentage points.

 

“property” means any right or interest
in or to property of any kind whatsoever, whether real, personal or mixed and
whether tangible or intangible.

 

“Pro Rata Share” means:

 

(a)           with respect to a Lender’s obligation to
make Revolving Loans and receive payments of interest, fees, and principal with
respect thereto, the percentage obtained by dividing (i) such Lender’s
Revolving Credit Commitment, by (ii) the Total Revolving Credit
Commitment, provided, that, if the Total Revolving Credit Commitment has
been reduced to zero, the numerator shall be the aggregate unpaid principal
amount of such Lender’s Revolving Loans (including Collateral Agent Advances)
and the denominator shall be the aggregate unpaid principal amount of all
Revolving Loans (including Collateral Agent Advances),

 

(b)           with respect to a Lender’s obligation to
make the Term Loan and receive payments of interest, fees, and principal with
respect thereto, the percentage obtained by dividing (i) such Lender’s
Term Loan Commitment, by (ii) the Total Term Loan Commitment, provided
that if the Total Term Loan Commitment has been reduced to zero, the numerator
shall be the aggregate unpaid principal amount of such Lender’s portion of the
Term Loan and the denominator shall be the aggregate unpaid principal amount of
the Term Loan, and

 

(c)           with respect to all other matters
(including, without limitation, the indemnification obligations arising under Section 10.05),
the percentage obtained by dividing (i) the sum of such Lender’s Revolving
Credit Commitment and the unpaid principal amount of such Lender’s portion of
the Term Loan, by (ii) the sum of the Total Revolving Credit Commitment
and the aggregate unpaid principal amount of the Term Loan, provided,
that, if such Lender’s Revolving Credit Commitment shall have been reduced to
zero, such Lender’s Revolving Credit Commitment shall be deemed to be the
aggregate unpaid principal amount of such Lender’s Revolving Loans (including
Collateral Agent Advances) and if the Total Revolving Credit Commitment shall
have been reduced to zero, the Total Revolving Credit Commitment shall be
deemed to be the aggregate unpaid principal amount of all Revolving Loans
(including Collateral Agent Advances).

 

“Qualified Cash” means, as of any date
of determination, the amount of unrestricted Cash and Cash Equivalents of the
Loan Parties that is in a deposit account or in a securities account of a Loan
Party, or any combination thereof, and which such deposit acount or securities
account is the subject of a control agreement in favor of Collateral Agent
which is in form and substance satisfactory to Collateral Agent and is
maintained by a branch office of the bank or securities intermediary located
within the United States.

 

“Rating Agencies” has the meaning
specified therefor in Section 2.07.

 

“Reference Bank” means JPMorgan Chase
Bank, its successors or any other commercial bank designated by the
Administrative Agent to the Borrower from time to time.

 

25

 

“Reference Rate” means the greater of
(a) the rate of interest publicly announced by the Reference Bank in New York,
New York from time to time as its reference rate, base rate or prime rate.  The reference rate, base rate or prime rate
is determined from time to time by the Reference Bank as a means of pricing
some loans to its borrowers and neither is tied to any external rate of
interest or index nor necessarily reflects the lowest rate of interest actually
charged by the Reference Bank to any particular class or category of customers,
and (b) 4% per annum.  Each change in the
Reference Rate shall be effective from and including the date such change is
publicly announced as being effective.

 

“Register” has the meaning specified
therefor in Section 12.07(b)(ii).

 

“Registered Loan” has the meaning
specified therefore in Section 12.07(b)(ii).

 

“Regulation T”, “Regulation U”
and “Regulation X” mean, respectively, Regulations T, U and X of the
Board or any successor, as the same may be amended or supplemented from time to
time.

 

“Release” means any spilling, leaking,
pumping, pouring, emitting, emptying, discharging, injecting, escaping,
leaching, seeping, migrating, dumping or disposing of any Hazardous Material
(including the abandonment or discarding of barrels, containers and other
closed receptacles containing any Hazardous Material) into the environment,
including, without limitation, the movement of Hazardous Materials through or
in the ambient air, soil, surface or ground water, or property.

 

“Remedial Action” means all actions
taken to (i) clean up, remove, remediate, contain, treat, monitor, assess,
evaluate or in any other way address Hazardous Materials in the environment;
(ii) prevent or minimize a Release or threatened Release of Hazardous Materials
so they do not migrate or endanger or threaten to endanger public health or
welfare or the indoor or outdoor environment; (iii) perform pre-remedial
studies and investigations and post-remedial operation and maintenance
activities; or (iv) any other actions authorized by 42 U.S.C. § 9601.

 

“Reportable Event” means an event
described in Section 4043 of ERISA (other than an event not subject to the
provision for 30-day notice to the PBGC under the regulations promulgated under
such Section).

 

“Required Lenders” means Lenders whose
Pro Rata Shares (calculated under clause (c) of the definition thereof)
aggregate at least 51%.

 

“Required Purchase Discount” means,
with respect to any Permitted Purchase, an amount equal to or greater than
$5,000,000 of the amount of the Sealy Subordinated Debt that is the subject of
the Permitted Purchase.

 

“Revolving Credit Commitment” means,
with respect to each Lender, the commitment of such Lender to make Revolving
Loans to the Borrower in the amount set forth opposite such Lender’s name in Schedule C-1
hereto, as such amount may be terminated or reduced from time to time in
accordance with the terms of this Agreement.

 

26

 

“Revolving Loan” means a loan made by
a Lender to the Borrower pursuant to Section 2.01(a)(i).

 

“Revolving Loan Lender” means a Lender
with a Revolving Credit Commitment.

 

“Revolving Loan Obligations” means any
Obligations with respect to the Revolving Loans (including without limitation,
the principal thereof, the interest thereon, and the fees and expenses
specifically related thereto).

 

“Sealy Subordinated Debt” means the
Indebtedness owed to Subco in the principal amount of $17,000,000.

 

“Sealy Subordinated Debt Documents”
means the notes, instruments, and other documents entered into by the Loan
Parties in connection with the incurrence of the Sealy Subordinated Debt.

 

“SEC” means the Securities and
Exchange Commission or any other similar or successor agency of the Federal
government administering the Securities Act.

 

“Securities Act” means the Securities
Act of 1933, as amended, or any similar Federal statute, and the rules and
regulations of the SEC thereunder, all as the same shall be in effect from time
to time.

 

“Securitization” has the meaning
specified therefor in Section 2.07.

 

“Securitization Parties” has the
meaning specified therefor in Section 2.07.

 

“Security Agreement” means a Security
Agreement made by a Loan Party in favor of the Collateral Agent for the benefit
of the Lenders, substantially in the form of Exhibit S-1, securing
the Obligations and delivered to the Collateral Agent.

 

“Settlement Period” has the meaning
specified therefor in Section 2.02(d)(i) hereof.

 

“Solvent” means, with respect to any
Person on a particular date, that on such date (i) the fair value of the
property of such Person is not less than the total amount of the liabilities of
such Person, (ii) the present fair salable value of the assets of such Person
is not less than the amount that will be required to pay the probable liability
of such Person on its existing debts as they become absolute and matured,
(iii) such Person is able to realize upon its assets and pay its debts and
other liabilities, contingent obligations and other commitments as they mature
in the normal course of business, (iv) such Person does not intend to, and
does not believe that it will, incur debts or liabilities beyond such Person’s
ability to pay as such debts and liabilities mature, and (v) such Person
is not engaged in business or a transaction, and is not about to engage in
business or a transaction, for which such Person’s property would constitute
unreasonably small capital.

 

“Standard & Poor’s” means Standard
& Poor’s Ratings Services, a division of The McGraw-Hill Companies,
Inc. and any successor thereto.

 

27

 

“Subco” means SLN Finance, LLC, a
Delaware limited liability company.

 

“Subordinated Debt” means Indebtedness
of any Loan Party to any other Person (other than another Loan Party) the terms
of which are satisfactory to the Collateral Agent and the Required Lenders and
which has been expressly subordinated in right of payment to all Obligations of
such Loan Party under the Loan Documents and all other Indebtedness of such
Loan Party under the Loan Documents, and otherwise is on terms and conditions
(including, without limitation, subordination provisions, payment terms,
interest rates, covenants, remedies, defaults and other material terms)
satisfactory to the Collateral Agent and the Required Lenders.

 

“Subsidiary” means, with respect to
any Person at any date, any corporation, limited or general partnership,
limited liability company, trust, estate, association, joint venture or other
business entity (i) the accounts of which would be consolidated with those
of such Person in such Person’s consolidated financial statements if such
financial statements were prepared in accordance with GAAP or (ii) of
which more than 50% of (A) the outstanding Capital Stock having (in the
absence of contingencies) ordinary voting power to elect a majority of the
board of directors or other managing body of such Person, (B) in the case
of a partnership or limited liability company, the interest in the capital or
profits of such partnership or limited liability company or (C) in the
case of a trust, estate, association, joint venture or other entity, the
beneficial interest in such trust, estate, association or other entity business
is, at the time of determination, owned or controlled directly or indirectly
through one or more intermediaries, by such Person; provided, that prior
to the occurrence of a MFA Triggering Event, MFA shall not be deemed to be a
Subsidiary of a Loan Party.

 

“Sun” means Sun Capital Partners II,
LP, a Delaware limited partnership.

 

“Sun Management Agreement” the
Management Services Agreement, dated as of October 18, 2002, by and
between Sun Capital Partners Management, LLC and Borrower, as in effect on the
date hereof.

 

“Taxes” has the meaning specified
therefor in Section 2.08(a).

 

“Term Loans” means, collectively, the
loans made by the Term Loan Lenders to the Borrower pursuant to Section 2.01(a)(ii)
and “Term Loan” means any one of them.

 

“Term Loan Commitment” means, with
respect to each Lender, the commitment of such Lender to make its portion of
the Term Loans to the Borrower in the amount set forth in Schedule C-1
hereto, as the same may be terminated or reduced from time to time in
accordance with the terms of this Agreement.

 

“Term Loan Lender” means a Lender with
a Term Loan Commitment.

 

“Term Loan Obligations” means any
Obligations with respect to the Term Loans (including without limitation, the
principal thereof, the interest thereon, and the fees and expenses specifically
related thereto).

 

28

 

“Termination Event” means (i) a
Reportable Event with respect to any Employee Plan, (ii) any event that causes
any Loan Party or any of its ERISA Affiliates to incur liability under
Section 409, 502(i), 502(l), 515, 4062, 4063, 4064, 4069, 4201, 4204 or
4212 of ERISA or Section 4971 or 4975 of the IRC, (iii) the filing of a
notice of intent to terminate an Employee Plan or the treatment of an Employee
Plan amendment as a termination under Section 4041 of ERISA, (iv) the
institution of proceedings by the PBGC to terminate an Employee Plan, or
(v) any other event or condition which might constitute grounds under
Section 4042 of ERISA for the termination of, or the appointment of a
trustee to administer, any Employee Plan.

 

“Texas Restructuring” means the
transactions described on Schedule T-1.

 

“Total Commitment” means the sum of
the Total Revolving Credit Commitment and the Total Term Loan Commitment.

 

“Total Revolving Credit Commitment”
means $6,000,000, which amount is the sum of the amounts of the Lenders’
Revolving Credit Commitments.

 

“Total Term Loan Commitment” means
$5,958,333.32, which amount is the sum of the amounts of the Lenders’ Term Loan
Commitments.

 

“Trademark Security Agreement” means a
Trademark Security Agreement made by a Loan Party in favor of the Collateral
Agent for the benefit of the Lenders, substantially in the form of Exhibit
T-1, securing the Obligations and delivered to the Collateral Agent.

 

“Triggering Event” means either (a)
the occurrence of an Event of Default, or (b) any date on which Borrower’s
average daily Excess Availability during the preceding 30 days is less than
$3,000,000 , or (c) any date on which Borrower’s Excess Availability is less
than $1,250,000.

 

“TTM EBITDA” means, as of any date of
determination and with respect to a Person, the Consolidated EBITDA of such
Person and its Subsidiaries for the 12 month period most recently ended.

 

“UCC Filing Authorization Letter”
means a letter duly executed by each Loan Party authorizing the Collateral
Agent to file appropriate financing statements on Form UCC-1 without the
signature of such Loan Party in such office or offices as may be necessary or,
in the opinion of the Collateral Agent, desirable to perfect the security
interests purported to be created by each Security Agreement and Pledge
Agreement.

 

“WARN” has the meaning specified
therefor in Section 6.01(z).

 

Section 1.02           Terms Generally.  The definitions of terms herein shall apply equally
to the singular and plural forms of the terms defined.  Whenever the context may require, any pronoun
shall include the corresponding masculine, feminine and neuter forms.  The words “include”, “includes” and
“including” shall be deemed to be followed by the phrase “without limitation”,
whether or not so expressly stated in each such instance.  The word “will” shall be construed to have
the same meaning and effect as the word “shall”.  Unless the context requires

 

29

 

otherwise, (a) any definition of or reference to any agreement,
instrument or other document herein shall be construed as referring to such
agreement, instrument or other document as from time to time amended,
supplemented or otherwise modified (subject to any restrictions on such
amendments, supplements or modifications set forth herein), (b) any reference
herein to any Person shall be construed to include such Person’s successors and
assigns, (c) the words “herein”, “hereof” and “hereunder”, and words of similar
import, shall be construed to refer to this Agreement in its entirety and not
to any particular provision hereof, (d) all references herein to Articles,
Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections
of, and Exhibits and Schedules to, this Agreement and (e) the words “asset” and
“property” shall be construed to have the same meaning and effect and to refer
to any and all tangible and intangible assets and properties, including cash,
securities, accounts and contract rights. 
References in this Agreement to “determination” by any Agent include
estimates honestly made by such Agent (in the case of quantitative
determinations) and beliefs honestly held by such Agent (in the case of
qualitative determinations).

 

Section 1.03           Accounting and Other Terms.  Unless otherwise expressly provided herein,
each accounting term used herein shall have the meaning given it under
GAAP.  All terms used in this Agreement
which are defined in Article 8 or Article 9 of the Code and which are
not otherwise defined herein shall have the same meanings herein as set forth
therein.

 

Section 1.04           Time References.  Unless otherwise indicated herein, all
references to time of day refer to Eastern Standard Time or Eastern daylight
saving time, as in effect in New York City on such day.  For purposes of the computation of a period
of time from a specified date to a later specified date, the word “from” means
“from and including” and the words “to” and “until” each means “to but excluding”;
provided, however, that with respect to a computation of fees or
interest payable to any Agent or any Lender, such period shall in any event
consist of at least one full day.

 

ARTICLE II

THE LOANS

 

Section 2.01           Commitments.  (a) Subject to the terms and conditions and
relying upon the representations and warranties herein set forth,

 

(i)            each Revolving Loan
Lender severally agrees to make Revolving Loans to the Borrower at any time and
from time to time from the Effective Date to the Final Maturity Date, or until
the earlier reduction of its Revolving Credit Commitment to zero in accordance
with the terms hereof, in an aggregate principal amount of Revolving Loans at
any time outstanding not to exceed the amount of such Lender’s Revolving Credit
Commitment or its Pro Rata Share of the then extant Borrowing Base; and

 

(ii)           (ii)           each Term Loan Lender severally agrees to
make its portion of the Term Loan to the Borrower on the Effective Date, in an
aggregate principal amount equal to the amount of such Lender’s Term Loan
Commitment.

 

(b)           Notwithstanding the
foregoing:

 

30

 

(i)            The aggregate
principal amount of Revolving Loans outstanding at any time to the Borrower
shall not exceed the lower of (A) the Total Revolving Credit Commitment
and (B) the then current Borrowing Base. 
The Revolving Credit Commitment of each Lender shall automatically and
permanently be reduced to zero on the Final Maturity Date.  Within the foregoing limits, the Borrower may
borrow, repay and reborrow the Revolving Loans, on or after the Effective Date
and prior to the Final Maturity Date, subject to the terms, provisions and
limitations set forth herein.

 

(ii)           The aggregate principal
amount of the Term Loan made on the Effective Date shall not exceed the Total
Term Loan Commitment.  Any principal
amount of the Term Loan that is repaid or prepaid may not be reborrowed.

 

Section 2.02           Making
the Loans.  

 

(a)           The Borrower shall give
the Administrative Agent prior telephonic notice (immediately confirmed in
writing, in substantially the form of Exhibit 2.02 hereto (a “Notice
of Borrowing”)), not later than 12:00 noon (New York City time) on the
date which is 3 Business Days prior to the date of the proposed Loan (or such
shorter period as the Administrative Agent is willing to accommodate, but in no
event later than 12:00 noon (New York City time) on the borrowing date of the
proposed Loan).  Such Notice of Borrowing
shall be irrevocable and shall specify (i) the principal amount of the
proposed Loan, and (ii) the proposed borrowing date, which must be a
Business Day, and must be on or after the Effective Date and, with respect to
the Revolving Loans, before the Final Maturity Date and, with respect to the
Term Loans, on the Effective Date.  The
Administrative  Agent and the Lenders may act
without liability upon the basis of written, telecopied or telephonic notice
believed by the Administrative Agent in good faith to be from any Authorized
Officer of the Borrower designated in writing, purportedly from the Borrower,
to the Administrative Agent as being authorized to give such notice.  The Borrower hereby waives the right to
dispute the Administrative Agent’s record of the terms of any such telephonic
Notice of Borrowing.  The Administrative
Agent and each Lender shall be entitled to rely conclusively on any such
designated Authorized Officer’s authority to request a Loan on behalf of the
Borrower until the Administrative Agent receives written notice to the
contrary.  The Administrative Agent and
the Lenders shall have no duty to verify the authenticity of the signature
appearing on any written Notice of Borrowing.

 

(b)           Each Notice of
Borrowing pursuant to this Section 2.02 shall be irrevocable and
the Borrower shall be bound to make a borrowing in accordance therewith.  Each Revolving Loan shall be made in a
minimum amount of $300,000 and shall be in integral multiples of $100,000 in
excess thereof.  

 

(c)           (i)            Except as otherwise provided in this Section 2.02(c),
all Loans under this Agreement shall be made by the Lenders simultaneously and
proportionately to their Pro Rata Shares of the Total Revolving Credit
Commitment and the Total Term Loan Commitment, as the case may be, it being
understood that no Lender shall be responsible for any default by any other
Lender in that other Lender’s obligations to make a Loan requested hereunder,
nor shall the Commitment of any Lender be increased or decreased as a result of
the default by any other Lender in that other Lender’s obligation to make a Loan
requested

 

31

 

hereunder, and each Lender shall be obligated to make the Loans
required to be made by it by the terms of this Agreement regardless of the
failure by any other Lender.

 

(ii)           Notwithstanding any
other provision of this Agreement, and in order to reduce the number of fund
transfers among the Borrower, the Agents and the Lenders, the Borrower, the
Agents and the Lenders agree that the Administrative Agent may (but shall not
be obligated to), and the Borrower and the Lenders hereby irrevocably authorize
the Administrative Agent to, fund, on behalf of the Lenders with a Revolving
Credit Commitment, Revolving Loans pursuant to Section 2.01,
subject to the procedures for settlement set forth in Section 2.02(d);
provided, however, that (a) the Administrative Agent shall
in no event fund any such Revolving Loans if the Administrative Agent shall
have received written notice from the Collateral Agent or the Required Lenders
prior to the time of the proposed Revolving Loan that one or more of the
conditions precedent contained in Section 5.02 will not be
satisfied at the time of the proposed Revolving Loan, and (b) the
Administrative Agent shall not otherwise be required to determine that, or take
notice whether, the conditions precedent in Section 5.02 have been
satisfied.  If the Borrower gives a
Notice of Borrowing requesting a Revolving Loan and the Administrative Agent
elects not to fund such Revolving Loan on behalf of the Revolving Loan Lenders,
then promptly after receipt of the Notice of Borrowing requesting such
Revolving Loan, the Administrative Agent shall notify each Revolving Loan
Lender of the specifics of the requested Revolving Loan and that it will not
fund the requested Revolving Loan on behalf of the Revolving Loan Lenders.  If the Administrative Agent notifies the
Revolving Loan Lenders that it will not fund a requested Revolving Loan on
behalf of such Revolving Loan Lenders, each Revolving Loan Lender shall make
its Pro Rata Share of the Revolving Loan available to the Administrative  Agent, in immediately available funds, at the Payment
Office no later than 3:00 p.m. (New York City time) (provided that the
Administrative  Agent requests payment from such
Revolving Loan Lender not later than 1:00 p.m. (New York City time)) on
the date of the proposed Revolving Loan. 
The Administrative Agent will make the proceeds of such Revolving Loans
available to the Borrower on the day of the proposed Revolving Loan by causing
an amount, in immediately available funds, equal to the proceeds of all such
Revolving Loans received by the Administrative  Agent
at the Payment Office or the amount funded by the Administrative  Agent on behalf of the Revolving Loan Lenders to be
deposited in an account designated by the Borrower.

 

(iii)          If the Administrative  Agent has notified the Revolving Loan Lenders that the
Administrative  Agent, on behalf of such
Revolving Loan Lenders, will fund a particular Revolving Loan pursuant to Section 2.02(c)(ii),
the Administrative  Agent may
assume that each such Revolving Loan Lender has made such amount available to
the Administrative  Agent on such
day and the Administrative  Agent, in its
sole discretion, may, but shall not be obligated to, cause a corresponding
amount to be made available to the Borrower on such day.  If the Administrative  Agent
makes such corresponding amount available to the Borrower and such
corresponding amount is not in fact made available to the Administrative  Agent by any such Revolving Loan Lender, the Administrative  Agent shall be entitled to recover such corresponding
amount on demand from such Revolving Loan Lender together with interest
thereon, for each day from the date such payment was due until the date such
amount is paid to the Administrative  Agent, at the
Federal Funds Rate for 3 Business Days and thereafter at the Reference
Rate.  During the period in which such
Revolving Loan Lender has not paid such

 

32

 

corresponding amount to the Administrative  Agent,
notwithstanding anything to the contrary contained in this Agreement or any
other Loan Document, the amount so advanced by the Administrative  Agent to the Borrower shall, for all purposes hereof, be a
Revolving Loan made by the Administrative Agent for its own account.  Upon any such failure by a Revolving Loan
Lender to pay the Administrative  Agent, the
Administrative  Agent shall promptly thereafter
notify the Borrower of such failure and the Borrower shall immediately pay such
corresponding amount to the Administrative  Agent for its
own account.

 

(iv)          Nothing in this Section 2.02(c)
shall be deemed to relieve any Revolving Loan Lender from its obligations to
fulfill its Revolving Credit Commitment hereunder or to prejudice any rights
that the Administrative Agent or the Borrower may have against any Revolving
Loan Lender as a result of any default by such Revolving Loan Lender hereunder.

 

(d)           (i)            With respect to all periods for which the
Administrative Agent has funded Revolving Loans pursuant to Section 2.02(c),
on Friday of each week, or if the applicable Friday is not a Business Day, then
on the following Business Day, or such shorter period as the Administrative
Agent may from time to time select (any such week or shorter period being
herein called a “Settlement Period”), the Administrative Agent shall
notify each Revolving Loan Lender of the unpaid principal amount of the
Revolving Loans outstanding as of the last day of each such Settlement
Period.  In the event that such amount is
greater than the unpaid principal amount of the Revolving Loans outstanding on
the last day of the Settlement Period immediately preceding such Settlement
Period (or, if there has been no preceding Settlement Period, the amount of the
Revolving Loans made on the date of such Revolving Loan Lender’s initial
funding), each Revolving Loan Lender shall promptly (and in any event not later
than 2:00 p.m. (New York City time) if the Administrative Agent requests
payment from such Lender not later than 12:00 noon (New York City time) on
such day) make available to the Administrative Agent its Pro Rata Share of the
difference in immediately available funds. 
In the event that such amount is less than such unpaid principal amount,
the Administrative Agent shall promptly pay over to each Revolving Loan Lender
its Pro Rata Share of the difference in immediately available funds.  In addition, if the Administrative Agent
shall so request at any time when a Default or an Event of Default shall have
occurred and be continuing, or any other event shall have occurred as a result
of which the Administrative Agent shall determine that it is desirable to
present claims against the Borrower for repayment, each Revolving Loan Lender
shall promptly remit to the Administrative Agent or, as the case may be, the
Administrative Agent shall promptly remit to each Revolving Loan Lender,
sufficient funds to adjust the interests of the Revolving Loan Lenders in the
then outstanding Revolving Loans to such an extent that, after giving effect to
such adjustment, each such Revolving Loan Lender’s interest in the then
outstanding Revolving Loans will be equal to its Pro Rata Share thereof.  The obligations of the Administrative Agent
and each Revolving Loan Lender under this Section 2.02(d) shall be
absolute and unconditional.  Each
Revolving Loan Lender shall only be entitled to receive interest on its Pro
Rata Share of the Revolving Loans which have been funded by such Revolving Loan
Lender.

 

(e)           In the event that any
Revolving Loan Lender fails to make any payment required to be made by it
pursuant to Section 2.02(d)(i), the Administrative Agent shall

 

33

 

be entitled to recover such corresponding amount on demand from such
Revolving Loan Lender together with interest thereon, for each day from the
date such payment was due until the date such amount is paid to the
Administrative Agent, at the Federal Funds Rate for 3 Business Days and
thereafter at the Reference Rate.  During
the period in which such Revolving Loan Lender has not paid such corresponding
amount to the Administrative Agent, notwithstanding anything to the contrary
contained in this Agreement or any other Loan Document, the amount so advanced
by the Administrative Agent to the Borrower shall, for all purposes hereof, be
a Revolving Loan made by the Administrative Agent for its own account.  Upon any such failure by a Revolving Loan
Lender to pay the Administrative Agent, the Administrative Agent shall promptly
thereafter notify the Borrower of such failure and the Borrower shall
immediately pay such corresponding amount to the Administrative Agent for its
own account.  Nothing in this Section 2.02(d)(ii)
shall be deemed to relieve any Revolving Loan Lender from its obligation to
fulfill its Revolving Credit Commitment hereunder or to prejudice any rights
that the Administrative Agent or the Borrower may have against any Revolving
Loan Lender as a result of any default by such Revolving Loan Lender hereunder.

 

Section 2.03           Repayment
of Loans; Evidence of Debt.  (a)  The outstanding principal of all Revolving
Loans shall be due and payable on the Final Maturity Date.

 

(b)           The outstanding
principal of the Term Loans shall be repayable in twenty-four (24) consecutive
monthly installments, on the first day of each month commencing on
April 1, 2005, consisting of (i) twelve (12) consecutive monthly
installments, each in an amount equal to $35,049.02, followed by (ii) twelve
(12) consecutive monthly installments, each in an amount equal to $61,335.78.  The outstanding principal of all Loans shall
be due and payable in full on the Final Maturity Date.

 

(c)           Each Lender shall
maintain in accordance with its usual practice an account or accounts
evidencing the Indebtedness of the Borrower to such Lender resulting from each
Loan made by such Lender, including the amounts of principal and interest
payable and paid to such Lender from time to time hereunder.

 

(d)           The Administrative
Agent shall maintain accounts in which it shall record (i) the amount of each
Loan made hereunder, (ii) the amount of any principal or interest due and
payable or to become due and payable from the Borrower to each Lender hereunder
and (iii) the amount of any sum received by the Administrative Agent hereunder
for the account of the Lenders and each Lender’s share thereof.

 

(e)           The entries made in the
accounts maintained pursuant to subsections (c) or (d) of this Section 2.03
shall be prima  facie evidence of the existence and amounts of the
obligations recorded therein; provided that the failure of any Lender or
the Administrative Agent to maintain such accounts or any error therein shall
not in any manner affect the obligation of the Borrower to repay the Loans in
accordance with the terms of this Agreement.

 

(f)            Any Lender may request
that Loans made by it be evidenced by a promissory note.  In such event, the Borrower shall execute and
deliver to such Lender a promissory note payable to the order of such Lender
(or, if requested by such Lender, to such

 

34

 

Lender and its registered assigns) in a form furnished by the
Collateral Agent and reasonably acceptable to the Borrower.  Thereafter, the Loans evidenced by such
promissory note and interest thereon shall at all times (including after
assignment pursuant to Section 12.07) be represented by one or more
promissory notes in such form payable to the order of the payee named therein
(or, if such promissory note is a registered note, to such payee and its
registered assigns).

 

Section 2.04           Interest.

 

(a)           Loans.  Except as provided in Section 2.04(b)
below, the Loans shall bear interest on the principal amount thereof from time
to time outstanding, from the date of the making of the Loans until such
principal is repaid, at a rate per annum equal to the Reference Rate plus 4.75
percentage points.

 

(b)           Default Interest.  To the extent permitted by law, upon the
occurrence and during the continuance of an Event of Default, the principal of,
and all accrued and unpaid interest on, all Loans, fees, indemnities, or any
other Obligations of the Loan Parties under this Agreement and the other Loan
Documents, shall bear interest, from the date such Event of Default occurred
until the date such Event of Default is cured or waived in writing in
accordance herewith, at a rate per annum equal at all times to the Post-Default
Rate.

 

(c)           Interest Payment.  Interest on each Loan shall be payable
monthly, in arrears, on the first day of each month, commencing on the first
day of the month following the month in which such Loan is made and at maturity
(whether upon demand, by acceleration or otherwise).  Interest at the Post-Default Rate shall be
payable on demand.  The Borrower hereby
authorizes the Administrative Agent to, and the Administrative Agent may, from
time to time, charge the Loan Account pursuant to Section 4.02 with
the amount of any interest payment due hereunder.

 

(d)           General.  All interest shall be computed on the basis
of a year of 360 days for the actual number of days, including the first day
but excluding the last day, elapsed.

 

Section 2.05           Reduction
of Commitment; Prepayment of Loans.

 

(a)           Reduction of
Commitments.

 

(i)            Revolving Credit
Commitments.  The Total Revolving
Credit Commitment shall terminate on the Final Maturity Date.  The Borrower may, without premium or penalty,
reduce the Total Revolving Credit Commitment to an amount (which may be zero)
not less than the sum of (A) the aggregate unpaid principal amount of all
Revolving Loans (after giving effect to any concurrent prepayment) then outstanding,
and (B) the aggregate principal amount of all Revolving Loans not yet made
as to which a Notice of Borrowing has been given by the Borrower under Section 2.02.  Each such reduction shall be in an amount
which is an integral multiple of $1,000,000 (unless the Total Revolving Credit
Commitment in effect immediately prior to such reduction is less than
$1,000,000), shall be made by providing not less than 5 Business Days prior
written notice to the Administrative Agent and shall be

 

35

 

irrevocable.  Once reduced, the
Total Revolving Credit Commitment may not be increased.  Each such reduction of the Total Revolving
Credit Commitment shall reduce the Revolving Credit Commitment of each Lender
proportionately in accordance with its Pro Rata Share thereof.

 

(ii)           The Term Loan
Commitments shall terminate upon the making of the Term Loans in the aggregate
principal amount of the Total Term Loan Commitment.

 

(b)           Optional Prepayment.

 

(i)            Revolving Loans.  The Borrower may prepay without penalty or
premium the principal of any Revolving Loan, in whole or in part.

 

(ii)           The Borrower may, upon
at least 5 Business Days prior written notice to the Administrative Agent,
prepay without penalty or premium the principal of the Term Loans, in whole or
in part.  Each prepayment made pursuant
to this Section 2.05(b)(ii) shall be accompanied by the payment of
accrued interest to the date of such payment on the amount prepaid.  Each such prepayment shall be applied against
the remaining installments of principal due on the Term Loans in the inverse
order of maturity.

 

(c)           Mandatory
Prepayments.

 

(i)            The Borrower will
immediately prepay the Revolving Loans at any time when the aggregate principal
amount of all Revolving Loans exceeds the Borrowing Base, to the full extent of
any such excess.  On each day that any
Revolving Loans are outstanding, the Borrower shall hereby be deemed to
represent and warrant to the Agents and the Lenders that the Borrowing Base
calculated as of such day equals or exceeds the aggregate principal amount of
all Revolving Loans outstanding on such day.

 

(ii)           The Borrower will
immediately prepay the outstanding principal amount of the Term Loans in the
event that the Total Revolving Credit Commitment is terminated for any reason.

 

(iii)          Except to the extent
provided to the contrary in Section 2.05(d)(i), the Administrative Agent
shall on each Business Day apply all funds transferred to or deposited in the
Administrative Agent’s Account, to the payment, in whole or in part, of the
outstanding principal amount of the Revolving Loans.

 

(iv)          Immediately upon receipt
of any proceeds of any Disposition by any Loan Party or its Subsidiaries (other
than a Permitted Disposition of the type described in clauses (a), (d), (e) or
(f) of the definition of Permitted Dispositions), or the up front fees received
by such Loan Party or such Subsidiary in consideration of any Franchise Event
(regardless of whether paid to such Loan Party or such Subsidiary initially or
paid over time) and all other similar fees paid in accordance with historical
practices (such fees, collectively the “Up Front Franchise Fees”), the
Borrower shall prepay the outstanding principal amount of the Loans in an
amount equal to 100% of (x) in the case of Dispositions, the Net Cash Proceeds
received by such Person in connection with such Disposition, or (y) in the case
of a Franchise Event, the Up

 

36

 

Front Franchise Fees received by such Loan Party or such Subsidiary,
the aggregate amount of Net Cash Proceeds or such Up Front Franchise Fees
received by all Loan Parties and their Subsidiaries (and not paid to the
Administrative Agent as a prepayment of the Loans or to Subco as a prepayment
of the Sealy Subordinated Debt) exceeds $50,000 for all such Dispositions and
Franchise Events since the Effective Date; provided, that to the extent
that, pursuant to the terms of the Sealy Subordinated Debt Documents (as in
effect on the Effective Date), Borrower is required to use such Net Cash
Proceeds to prepay the Sealy Subordinated Debt, Borrower’s obligation to prepay
the Loans pursuant to this Section 2.05(c)(iv) shall be reduced on
a dollar-for-dollar basis by the amount of such prepayment by Borrower of the
Sealy Subordinated Debt.  Nothing
contained in this clause (iv) shall permit any Loan Party or any of its
Subsidiaries to dispose of any property other than in connection with a
Permitted Disposition.

 

(v)           Upon the issuance or
incurrence by any Loan Party or any of its Subsidiaries of any Indebtedness
(other than Indebtedness referred to in clauses (a), (b), (c), (d), (e),
(f), (g), (i), (j) and (k) of the definition of Permitted Indebtedness), or the
sale or issuance by any Loan Party or any of its Subsidiaries of any shares of
its Capital Stock, the Borrower shall prepay the outstanding principal amount
of the Loans in an amount equal to 100% of the Net Cash Proceeds received by
such Person in connection with such Indebtedness; provided, that to the
extent that, pursuant to the terms of the Sealy Subordinated Debt Documents (as
in effect on the Effective Date), Borrower is required to use such Net Cash
Proceeds to prepay the Sealy Subordinated Debt, Borrower’s obligation to prepay
the Loans pursuant to this Section 2.05(c)(v) shall be reduced on a
dollar-for-dollar basis by the amount of such prepayment by Borrower of the
Sealy Subordinated Debt.  The provisions
of this subsection (v) shall not be deemed to be implied consent to any
such issuance, incurrence or sale otherwise prohibited by the terms and
conditions of this Agreement.

 

(vi)          Upon the receipt by any
Loan Party or any of its Subsidiaries of any Extraordinary Receipts, the
Borrower shall prepay the outstanding principal amount of the Loans in an
amount equal to 100% of such Extraordinary Receipts, net of any reasonable
expenses incurred in collecting such Extraordinary Receipts; provided,
that to the extent that, pursuant to the terms of the Sealy Subordinated Debt
Documents (as in effect on the Effective Date), Borrower is required to use
such Extraordinary Receipts to prepay the Sealy Subordinated Debt, Borrower’s
obligation to prepay the Loans pursuant to this Section 2.05(c)(vi)
shall be reduced on a dollar-for-dollar basis by the amount of such prepayment
by Borrower of the Sealy Subordinated Debt; provided, further,
that; if no Event of Default has occurred and is continuing, such prepayment
shall only be required if the aggregate amount of all such Extraordinary
Receipts received since the Effective Date exceeds $10,000; provided, further,
however, that so long as (A) no Event of Default has occurred and is
continuing or would result therefrom, and (B) Borrower has not less than
$4,000,000 of Excess Availability, the Borrower may, on or prior to the date of
the receipt of the proceeds of Extraordinary Receipts in the form of proceeds
of insurance or condemnation awards, request that the amount of the required
prepayments set forth in this Section 2.05(c)(vi), not occur at
such time, and that Borrower be permitted to apply such Extraordinary Receipts
to the costs of repairs, replacement or restoration of the property which is
the subject of the loss, destruction, or taking by condemnation (so long as
such proceeds do not relate to damage or destruction of a warehouse or
distribution facility (or the goods contained therein) of a Loan Party).  If such notice is timely

 

37

 

given and if such proceeds do not relate to damage or destruction of a
warehouse or distribution facility (or the goods contained therein) of a Loan
Party, the Borrower shall be relieved of its obligation to make such mandatory
prepayments at such time; provided, further, however, that
pending the re-investment of such proceeds by the Borrower in accordance with
the provisions of this Section, such proceeds shall be paid over to the
Administrative Agent and the Administrative Agent shall impose a reserve
against the Borrowing Base and the Maximum Revolver Amount equivalent to such
amount paid over until such time as either the sums are re-invested or are
applied to the prepayment or repayment, as applicable, of the Loans, in each
case, as herein provided.  If such notice
is timely given and if such proceeds do relate to damage or destruction of a
warehouse or distribution facility (or the goods contained therein) of a Loan
Party, and if, in the sole judgment of the Collateral Agent, the Loan Parties
have Availability, and/or casualty and business interruption insurance proceeds
in amounts sufficient to ensure that the Borrower will be able to make payment
as and when due in respect of the Obligations and the Sealy Subordinated Debt
that will be payable during the period of repair, replacement, or restoration,
the Borrower shall be relieved of its obligation to make such mandatory
prepayments at such time; provided, further, however, that
pending the re-investment of such proceeds by the Borrower in accordance with
the provisions of this Section, such proceeds shall be paid over to the
Administrative Agent and the Administrative Agent shall impose a reserve
against the Borrowing Base and the Maximum Revolver Amount equivalent to such
amount paid over until such time as either the sums are re-invested or are used
to make the required prepayment or repayment, as applicable, of the Sealy
Subordinated Debt or the Loans, as applicable, in each case, as herein
provided.  If, within 90 days after the
date of the Borrower’s receipt of the proceeds of such Extraordinary Receipts,
the Borrower provides the Administrative Agent reasonably detailed reporting
indicating that the Borrower has invested all or a portion of such proceeds in
assets used or useful in the business similar or ancillary to the business of
the Borrower as it exists as of the date hereof, then the required prepayment
shall be reduced on a dollar-for-dollar basis with the amount of the proceeds
so invested; provided  further, however, that if, on such
90th day all or any portion of such proceeds have not been so invested, the
portion remaining shall be used to make the required prepayment or repayment,
as applicable, of the Sealy Subordinated Debt or the Loans (in accordance with
the provisions set forth above in this clause (vi)) as of such 90th day.

 

(vii)         In the event that the
difference between (A) the aggregate amount of the cash and Permitted
Investments of the Loan Parties and their Subsidiaries and (B) the aggregate
amount of all outstanding checks or other instruments written or otherwise
issued with respect to any deposit account of any Loan Party that have not yet
been honored by the applicable depository institution, exceeds $1,500,000, for
two consecutive Business Days, the Borrower shall immediately prepay the
outstanding principal of the Revolving Loans in the amount equal to the difference
between (X) the difference between (I) the amount of such Permitted Investments
as of such date and (II) the aggregate amount of all outstanding checks or
other instruments written or otherwise issued with respect to any deposit
account of any Loan Party that have not yet been honored by the applicable
depository institution, and (Y) $1,000,000.

 

38

 

(d)           Application of
Payments.

 

(i)            Each prepayment of the
Loans made pursuant to subsections (c)(iv), (c)(v), and (c)(vi)
above shall be applied, first, to the Term Loans until paid in full, and
second, to the Revolving Loans; provided, that any prepayment of the
Loans pursuant to subsection (c)(vi) from Extraordinary Receipts on
account of proceeds of insurance or casualty proceeds, to the extent that such
Extraordinary Receipts relate to Eligible Inventory, shall be applied first to
the Revolving Loans until paid in full, and second to the Term Loans.  Each such prepayment of the Term Loans shall
be applied against the remaining installments of principal of the Term Loans in
the inverse order of their maturity. Each prepayment of the Revolving Loans
pursuant to the foregoing application of payments provision (other than
pursuant to the proviso set forth in the first sentence of this subsection (d)(i))
shall also reduce the Total Revolving Credit Commitment by an equivalent amount
and a reserve shall be imposed against the Borrowing Base in an equivalent
amount.

 

(e)           Interest and Fees.  Any prepayment made pursuant to this Section 2.05
shall be accompanied by accrued interest on the principal amount being prepaid
to the date upon which such prepayment is credited to Borrower’s account
pursuant to Section 4.02.

 

(f)            Cumulative
Prepayments.  Except as otherwise
expressly provided in this Section 2.05, payments with respect to
any subsection of this Section 2.05 are in addition to
payments made or required to be made under any other subsection of this Section 2.05.

 

Section 2.06           Fees.

 

(a)           Closing Fee.  On or prior to the Effective Date, the
Borrower shall pay to the Administrative Agent for the account of the Lenders,
in accordance with their Pro Rata Shares, a non-refundable closing fee
(the ”Closing Fee”) equal to $478,333.32.

 

(b)           [Intentionally
Omitted]

 

(c)           Loan Servicing Fee.  From and after the Effective Date and until
the date on which all Obligations are paid in full in cash and all Commitments
have been terminated, the Borrower shall pay to the Administrative Agent for
the account of the Agents, a non-refundable loan servicing fee (the ”Loan
Servicing Fee”) equal to $2,000 each month (or portion thereof), which
shall be payable monthly in advance on the first day of each calendar month
after the Effective Date, commencing on April 1, 2004.

 

(d)           Anniversary Fee.  The Borrower shall pay to the Administrative
Agent for the account of the Lenders, in accordance with their Pro Rata Shares,
a non-refundable anniversary fee (the ”Anniversary Fee”) equal to
$163,854.16, which shall be fully earned on the Effective Date and payable on
each anniversary of the Effective Date occurring prior to the date on which all
Obligations are paid in full in cash and all Commitments have been terminated.

 

Section 2.07           Securitization.  The Borrower hereby acknowledges that the Lenders
and their Affiliates may sell or securitize the Loans (a ”Securitization”)
through the pledge of the Loans as collateral security for loans to the Lenders
or their Affiliates or through the sale of the Loans or the issuance of direct
or indirect interests in the Loans, which loans to the Lenders or their
Affiliates or direct or indirect interests will be rated by Moody’s, Standard
&

 

39

 

Poor’s or one or more other rating agencies (the “Rating Agencies”).  The Borrower shall cooperate with the Lenders
and their Affiliates to effect the Securitization including, without
limitation, by (a) amending this Agreement and the other Loan Documents,
and executing such additional documents, as reasonably requested by the Lenders
in connection with the Securitization, provided  that (i) any
such amendment or additional documentation does not impose material additional
costs on the Loan Parties and (ii) any such amendment or additional
documentation does not materially adversely affect the rights, or materially
increase the obligations, of the Loan Parties under the Loan Documents or
change or affect in a manner adverse to the Loan Parties the financial terms of
the Loans, (b) providing such information as may be reasonably requested
by the Lenders in connection with the rating of the Loans or the
Securitization, and (c) providing in connection with any rating of the
Loans a certificate (i) agreeing to indemnify the Lenders and their
Affiliates, any of the Rating Agencies, or any party providing credit support
or otherwise participating in the Securitization (collectively, the “Securitization
Parties”) for any losses, claims, damages or liabilities (insofar as
arising out of any of the matters described below, the ”Liabilities”)
to which the Lenders, their Affiliates or such Securitization Parties may
become subject insofar as the Liabilities arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact by any Loan
Party contained in any Loan Document or in any writing delivered by or on
behalf of any Loan Party to the Lenders in connection with any Loan Document or
arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein, or necessary in order to
make the statements therein, in light of the circumstances under which they
were made, not misleading, and such indemnity shall survive any transfer by the
Lenders or their successors or assigns of the Loans and (ii) agreeing to
reimburse the Lenders and their Affiliates for any legal or other expenses
reasonably incurred by such Persons in connection with defending the
Liabilities.

 

Section 2.08           Taxes.  (a)  All
payments made by the Borrower hereunder or under any other Loan Document shall
be made without set-off, counterclaim, deduction or other defense.  All such payments shall be made free and
clear of and without deduction for any present or future income, franchise,
sales, use, excise, stamp or other taxes, levies, imposts, deductions, charges,
fees, withholdings, restrictions or conditions of any nature now or hereafter
imposed, levied, collected, withheld or assessed by any jurisdiction (whether
pursuant to United States Federal, state, local or foreign law) or by any
political subdivision or taxing authority thereof or therein, and all interest,
penalties or similar liabilities, excluding taxes on the net income of, and
branch profit taxes of, any Lender or any Agent imposed by the jurisdiction in
which such Lender or such Agent is organized or any political subdivision
thereof or taxing authority thereof or any jurisdiction in which such Person’s
principal office or relevant lending office is located or any political
subdivision thereof or taxing authority thereof (such nonexcluded taxes,
levies, imposts, deductions, charges, fees, withholdings, restrictions and
conditions being hereinafter collectively referred to as “Taxes”).  If the Borrower shall be required by law,
rule, regulation or any interpretation of any relevant Governmental Authority
to deduct or to withhold any Taxes from or in respect of any amount payable
hereunder,

 

(i)            the amount so payable shall be increased to
the extent necessary so that after making all required deductions and
withholdings (including Taxes on amounts payable to the Lenders or the Agents
pursuant to this sentence) the Lenders or the

 

40

 

Agents receive an amount equal to the sum they would have received had
no such deduction or withholding been made,

 

(ii)           the Borrower shall make such deduction or
withholding, and

 

(iii)          the Borrower shall pay the full amount
deducted or withheld to the relevant taxation authority in accordance with
applicable law. Whenever any Taxes are payable by the Borrower, as promptly as
possible thereafter, the Borrower shall send the Lenders and the Agents an
official receipt (or, if an official receipt is not available, such other
documentation as shall be satisfactory to the Lenders or the Agents, as the
case may be) showing payment. In addition, the Borrower agrees to pay any
present or future taxes, charges or similar levies which arise from any payment
made hereunder or from the execution, delivery, performance, recordation or
filing of, or otherwise with respect to, this Agreement or any other Loan
Document other than the foregoing excluded taxes (hereinafter referred to as “Other
Taxes”).

 

(b) 
The Borrower will indemnify the Lenders and the Agents for the amount of
Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes
imposed by any jurisdiction on amounts payable under this Section 2.08)
paid by any Lender, or any Agent and any liability (including penalties,
interest and expenses for nonpayment, late payment or otherwise) arising therefrom
or with respect thereto, whether or not such Taxes or Other Taxes were
correctly or legally asserted. This indemnification shall be paid within 10
days from the date on which any such Lender or any such Agent makes written
demand therefor, which demand shall identify the nature and amount of Taxes or
Other Taxes for which indemnification is being sought and the basis of the
claim.

 

(c) 
Each Lender that is organized in a jurisdiction other than the United
States, a State thereof or the District of Columbia hereby agrees that:

 

(i)            it shall, no later than the Effective Date
(or, in the case of a Lender which becomes a party hereto pursuant to Section 12.07
hereof after the Effective Date, the date upon which such Lender becomes a
party hereto) deliver to the Borrower and the Agents:  (A) two accurate, complete and signed
originals of U.S. Internal Revenue Service Form W-8ECI or successor form, or
(B) two accurate, complete and signed originals of U.S. Internal Revenue
Service Form W-8BEN or successor form, in each case, indicating that such
Lender is on the date of delivery thereof entitled to receive payments of
principal, interest and fees for the account of its lending office under this
Agreement free from, or subject to a reduced rate of, withholding of United
States Federal income tax; and

 

(ii)           if at any time such Lender changes its
lending office or offices or selects an additional lending office for purposes
of this Agreement, it shall, at the same time or reasonably promptly
thereafter, deliver to the Borrower and the Agents the appropriate forms as
described in clause (i) above in replacement for, or in addition to, the
forms previously delivered by it hereunder.

 

41

 

(d)  If
the Borrower fails to perform any of its obligations under this Section 2.08,
the Borrower shall indemnify the Lenders or the Agents for any taxes, interest
or penalties that may become payable as a result of any such failure.  The obligations of the Borrower under this Section 2.08
shall survive the termination of this Agreement and the payment of the Loans
and all other amounts payable hereunder.

 

ARTICLE III

[INTENTIONALLY OMITTED]

 

ARTICLE IV

FEES, PAYMENTS AND OTHER COMPENSATION

 

Section 4.01           Audit
and Collateral Monitoring Fees.  The
Borrower acknowledges that pursuant to Section 7.01(f),
representatives of the Agents may visit any Loan Party and/or conduct audits,
inspections and/or field examinations of any Loan Party and valuations or
appraisals of any or all of the Collateral and/or business or enterprise
valuations of the Loan Parties at any time and from time to time in a manner so
as to not unduly disrupt the business of such Loan Party.  The Borrower agrees to pay (i) $1,500 per day
per examiner plus the examiner’s out-of-pocket costs and reasonable expenses
incurred in connection with all such visits, audits, inspections, valuations
and field examinations and (ii) the cost of all audits, appraisals and
valuations conducted by third party auditors or appraisers on behalf of the
Agents.

 

Section 4.02           Payments;
Computations and Statements.  (a) The
Borrower will make each payment under this Agreement not later than 12:00 noon
(New York City time) on the day when due, in lawful money of the United States
of America and in immediately available funds, to the Administrative Agent’s
Account.  All payments received by the
Administrative Agent after 12:00 noon (New York City time) on any Business Day
will be credited to the Loan Account on the next succeeding Business Day.  All payments shall be made by the Borrower
without set-off, counterclaim, deduction or other defense to the Agents and the
Lenders.  Except as provided in
Section 2.02, after receipt, the Administrative Agent will promptly
thereafter cause to be distributed like funds relating to the payment of
principal ratably to the Lenders in accordance with their Pro Rata Shares and
like funds relating to the payment of any other amount payable to any Lender to
such Lender, in each case to be applied in accordance with the terms of this
Agreement, provided that the Administrative Agent will cause to be distributed
all interest and fees received from or for the account of the Borrower not less
than once each month and in any event promptly after receipt thereof.  The Lenders and the Borrower hereby authorize
the Administrative Agent to, and the Administrative Agent shall, from time to
time, charge the Loan Account of the Borrower with any amount due and payable
by the Borrower under any Loan Document. 
Each of the Lenders and the Borrower agrees that the Administrative
Agent shall have the right to make such charges whether or not any Default or
Event of Default shall have occurred and be continuing or whether any of the
conditions precedent in Section 5.02 have been satisfied.  Any amount charged to the Loan Account of the
Borrower shall be deemed a Revolving Loan hereunder made by the Revolving Loan
Lenders to the Borrower, funded by the Administrative Agent on behalf of the
Revolving Loan Lenders and subject to Section 2.02 of this Agreement.  Whenever any payment to be made under any
such Loan Document shall be

 

42

 

stated to be due on a day other than a Business Day, such payment shall
be made on the next succeeding Business Day and such extension of time shall in
such case be included in the computation of interest or fees, as the case may
be.  All computations of fees shall be
made by the Administrative Agent on the basis of a year of 360 days for the
actual number of days (including the first day but excluding the last day)
occurring in the period for which such fees are payable.  Each determination by the Administrative
Agent of an interest rate or fees hereunder shall be conclusive and binding for
all purposes in the absence of manifest error.

 

(b)           The Administrative
Agent shall provide the Borrower, promptly after the end of each calendar
month, a summary statement (in the form from time to time used by the
Administrative Agent) of the opening and closing daily balances in the Loan
Account of the Borrower during such month, the amounts and dates of all Loans
made to the Borrower during such month, the amounts and dates of all payments
on account of the Loans to the Borrower during such month and the Loans to
which such payments were applied, the amount of interest accrued on the Loans
to the Borrower during such month, the amount of charges to the Loan Account,
and the amount and nature of any charges to the Loan Account made during such
month on account of fees, commissions, expenses and other Obligations.  All entries on any such statement shall be
presumed to be correct and, 30 days after the same is sent, shall be final and
conclusive absent manifest error.

 

Section 4.03           Sharing
of Payments, Etc.  Except as provided
in Section 2.02 hereof, if any Lender shall obtain any payment
(whether voluntary, involuntary, through the exercise of any right of set-off,
or otherwise) on account of any Obligation in excess of its ratable share of
payments on account of similar obligations obtained by all the Lenders, such
Lender shall forthwith purchase from the other Lenders such participations in
such similar obligations held by them as shall be necessary to cause such
purchasing Lender to share the excess payment ratably with each of them; provided,
however, that if all or any portion of such excess payment is thereafter
recovered from such purchasing Lender, such purchase from each Lender shall be
rescinded and such Lender shall repay to the purchasing Lender the purchase
price to the extent of such recovery together with an amount equal to such
Lender’s ratable share (according to the proportion of (i) the amount of such
Lender’s required repayment to (ii) the total amount so recovered from the
purchasing Lender of any interest or other amount paid by the purchasing Lender
in respect of the total amount so recovered). 
The Borrower agrees that any Lender so purchasing a participation from
another Lender pursuant to this Section 4.03 may, to the fullest
extent permitted by law, exercise all of its rights (including the Lender’s
right of set-off) with respect to such participation as fully as if such Lender
were the direct creditor of the Borrower in the amount of such participation.

 

Section 4.04           Apportionment
of Payments.  Subject to Section 2.02 hereof and to
any written agreement among the Agents and/or the Lenders:

 

(a)           all payments of
principal and interest in respect of outstanding Loans, all payments of fees
(other than the audit and collateral monitoring fees provided for in Section 4.01)
and all other payments in respect of any other Obligations, shall be allocated
by the Administrative Agent among such of the Lenders as are entitled thereto,
in proportion to their respective Pro Rata Shares or otherwise as provided
herein or, in respect of payments not made on account of Loans, as designated
by the Person making payment when the payment is made.

 

43

 

(b)           After the occurrence
and during the continuance of an Event of Default, the Administrative Agent
may, and upon the direction of the Required Lenders shall, apply all payments
in respect of any Obligations and all proceeds of the Collateral, subject to
the provisions of this Agreement, (i) first, ratably to pay the
Obligations in respect of any fees, expense reimbursements, indemnities and
other amounts then due to the Agents until paid in full; (ii) second,
ratably to pay any fees and indemnities then due to the Revolving Loan Lenders
until paid in full; (iii) third, ratably to pay interest due in
respect of the Revolving Loans and Collateral Agent Advances until paid in
full; (iv) fourth, ratably to pay principal of the Revolving Loans
and Collateral Agent Advances until paid in full; (v) fifth,
ratably to pay any fees and indemnities then due to the Term Loan Lenders until
paid in full; (vi) sixth, ratably to pay interest due in respect of
the Term Loans until paid in full; (vii) seventh, ratably to pay
principal of the Term Loans until paid in full, and (viii) eighth, to
the ratable payment of all other Obligations then due and payable.

 

(c)           In each instance, so
long as no Event of Default has occurred and is continuing, Section 4.04(b)
shall not be deemed to apply to any payment by the Borrower specified by the
Borrower to the Administrative Agent to be for the payment of Obligations then
due and payable under any provision of this Agreement or the prepayment of all
or part of the principal of Loans in accordance with the terms and conditions
of Section 2.05.

 

(d)           For purposes of the
foregoing, “paid in full” means payment of all amounts owing under the Loan
Documents according to the terms thereof, including loan fees, service fees,
professional fees, interest (and specifically including interest accrued after
the commencement of any Insolvency Proceeding), default interest, interest on
interest, and expense reimbursements, whether or not the same would be or is
allowed or disallowed in whole or in part in any Insolvency Proceeding.

 

(e)           In the event of a
direct conflict between the priority provisions of this Section 4.04
and other provisions contained in any other Loan Document, it is the intention
of the parties hereto that both such priority provisions in such documents
shall be read together and construed, to the fullest extent possible, to be in
concert with each other.  In the event of
any actual, irreconcilable conflict that cannot be resolved as aforesaid, the
terms and provisions of this Section 4.04 shall control and govern.

 

Section 4.05           Increased
Costs and Reduced Return.  (a)  If any Lender or any
Agent shall have determined that the adoption or implementation of, or any
change in, any law, rule, treaty or regulation, or any policy, guideline or
directive of, or any change in, the interpretation or administration thereof by,
any court, central bank or other administrative or Governmental Authority, or
compliance by any Lender or any Agent or any Person controlling any such Lender
or any such Agent with any directive of, or guideline from, any central bank or
other Governmental Authority or the introduction of, or change in, any
accounting principles applicable to any Lender or any Agent or any Person
controlling any such Lender or any such Agent (in each case, occurring after
the Effective Date and irrespective of whether having the force of law), shall
(i) subject any Lender or any Agent, or any Person controlling any such
Lender or any such Agent to any tax, duty or other charge with respect to this
Agreement or any Loan made by such Lender or such Agent, or change the basis of
taxation of payments to any Lender or any Agent or any Person controlling any
such Lender or any such Agent of any

 

44

 

amounts payable hereunder (except for taxes on the overall net income
of any Lender or any Agent or any Person controlling any such Lender or any
such Agent), (ii) impose, modify or deem applicable any reserve, special
deposit or similar requirement against any Loan or against assets of or held
by, or deposits with or for the account of, or credit extended by, any Lender
or any Agent or any Person controlling any such Lender or any such Agent or
(iii) impose on any Lender or any Agent or any Person controlling any such
Lender or any such Agent any other condition regarding this Agreement or any
Loan, and the result of any event referred to in clauses (i), (ii) or (iii)
above shall be to increase the cost to any Lender or any Agent of making any
Loan, or agreeing to make any Loan, or to reduce any amount received or
receivable by any Lender or any Agent hereunder, then, upon demand by any such
Lender or any such Agent, the Borrower shall pay to such Lender or such Agent
such additional amounts as will compensate such Lender or such Agent for such
increased costs or reductions in amount.

 

(e)           If any Lender or any Agent shall have
determined that any Capital Guideline or the adoption or implementation of, or
any change in, any Capital Guideline by the Governmental Authority charged with
the interpretation or administration thereof, or compliance by any Lender or
any Agent or any Person controlling such Lender or such Agent with any Capital
Guideline or with any request or directive of any such Governmental Authority
with respect to any Capital Guideline, or the implementation of, or any change in,
any applicable accounting principles (in each case, occurring after the
Effective Date and irrespective of whether having the force of law), either
(i) affects or would affect the amount of capital required or expected to
be maintained by any Lender or any Agent or any Person controlling such Lender
or such Agent, and any Lender or any Agent determines that the amount of such
capital is increased as a direct or indirect consequence of any Loans made or
maintained, any Lender’s or any Agent’s or any such other controlling Person’s
other obligations hereunder, or (ii) has or would have the effect of
reducing the rate of return on any Lender’s or any Agent’s any such other
controlling Person’s capital to a level below that which such Lender or such Agent
or such controlling Person could have achieved but for such circumstances as a
consequence of any Loans made or maintained or any agreement to make Loans or
such Lender’s or such Agent’s or such other controlling Person’s other
obligations hereunder (in each case, taking into consideration, such Lender’s
or such Agent’s or such other controlling Person’s policies with respect to
capital adequacy), then, upon demand by any Lender or any Agent, the Borrower
shall pay to such Lender or such Agent from time to time such additional
amounts as will compensate such Lender or such Agent for such cost of
maintaining such increased capital or such reduction in the rate of return on
such Lender’s or such Agent’s or such other controlling Person’s capital.

 

All amounts payable under this Section 4.05
shall bear interest from the date that is ten (10) days after the date of
demand by any Lender or any Agent until payment in full to such Lender or such
Agent at the Reference Rate.  A
certificate of such Lender or such Agent claiming compensation under this Section 4.05,
specifying the event herein above described and the nature of such event shall
be submitted by such Lender or such Agent to the Borrower, setting forth the
additional amount due and an explanation of the calculation thereof, and such
Lender’s or such Agent’s reasons for invoking the provisions of this Section 4.05,
and shall be final and conclusive absent manifest error.

 

45

 

ARTICLE V

CONDITIONS TO LOANS

 

Section 5.01           Conditions
Precedent.  The obligation of the
Lenders (and of each Lender) to make the initial Loans or otherwise to extend
any credit provided for hereunder, is subject to the fulfillment, to the
satisfaction of the Agents, of each of the conditions precedent set forth
below:

 

(a)           Payment of Fees,
Etc.  The Borrower shall have
paid all fees, costs, expenses and taxes then payable pursuant to this
Agreement including Section 2.06 and Section 12.04
hereof.

 

(b)           Representations and
Warranties; No Event of Default. 
The following statements shall be true and correct:  (i) the representations and warranties
contained in Article VI and in each other Loan Document, certificate or
other writing delivered to any Agent or any Lender pursuant hereto or thereto
on or prior to the Effective Date are true and correct in all material respects
(except that such materiality qualifier shall not be applicable to any
representations and warranties that already are qualified or modified by
materiality in the text thereof) on and as of the Effective Date as though made
on and as of such date (it being understood and agreed that any representation
or warranty which by its terms is made as of a specified date shall be required
to be true and correct in all material respects only as of such specified date)
and (ii) no Default or Event of Default shall have occurred and be
continuing on the Effective Date or would result from this Agreement or the
other Loan Documents becoming effective in accordance with its or their
respective terms.

 

(c)           Legality.  The making of the Loans shall not contravene
any law, rule or regulation applicable to any Agent or any Lender.

 

(d)           Delivery of
Documents.  The Collateral Agent
shall have received on or before the Effective Date the following, each in form
and substance satisfactory to the Collateral Agent and, unless indicated
otherwise, dated the Effective Date:

 

(i)            a Security Agreement,
duly executed and delivered by each Loan Party;

 

(ii)           a Trademark Security
Agreement, duly executed and delivered by Borrower and Collateral Agent;

 

(iii)          a Pledge Agreement, duly
executed and delivered by each Loan Party, together with the original
certificates representing all of the Capital Stock owned by such Loan Party (other
than Capital Stock in MFA) and all intercompany promissory notes of any Loan
Party, accompanied by undated stock powers executed in blank and other proper
instruments of transfer;

 

(iv)          the Intercompany
Subordination Agreement, duly executed and delivered by each Loan Party;

 

46

 

(v)           the Disbursement
Agreement, duly executed and delivered by Borrower and Administrative Agent;

 

(vi)          the Bailee Agency
Agreement, duly executed and delivered by Subco and Collateral Agent;

 

(vii)         a UCC Filing
Authorization Letter, duly executed and delivered by each Loan Party, together
with appropriate financing statements duly filed in such office or offices as
may be necessary or, in the opinion of the Collateral Agent, desirable to
perfect the security interests purported to be created by each Security
Agreement, each Pledge Agreement and each Mortgage;

 

(viii)        certified copies of lien
searches, listing all effective financing statements which name as debtor any
Loan Party, together with copies of such financing statements, none of which,
except as otherwise agreed in writing by the Collateral Agent, shall cover any
of the Collateral and the results of searches for any tax Lien and judgment
Lien filed against such Person or its property, which results, except as
otherwise agreed to in writing by the Collateral Agent, shall not show any such
Liens;

 

(ix)           a copy of the
resolutions of each Loan Party, certified as of the Effective Date by an
Authorized Officer thereof, authorizing (A) the transactions contemplated
by the Loan Documents to which such Loan Party is or will be a party, and
(B) the execution, delivery and performance by such Loan Party of each
Loan Document to which such Loan Party is or will be a party and the execution
and delivery of the other documents to be delivered by such Person in
connection herewith and therewith;

 

(x)            a certificate of an
Authorized Officer of each Loan Party, certifying the names and true signatures
of the representatives of such Loan Party authorized to sign each Loan Document
to which such Loan Party is or will be a party and the other documents to be
executed and delivered by such Loan Party in connection herewith and therewith,
together with evidence of the incumbency of such authorized officers;

 

(xi)           a certificate of the
appropriate official(s) of the state of organization and each state of foreign
qualification of each Loan Party certifying as to the subsistence in good
standing of, and the payment of taxes by, such Loan Party in such states;

 

(xii)          a true and complete copy
of the charter, certificate of formation, certificate of limited partnership or
other publicly filed organizational document of each Loan Party certified as of
a recent date not more than 30 days prior to the Effective Date by an
appropriate official of the state of organization of such Loan Party which
shall set forth the same complete name of such Loan Party as is set forth
herein and the organizational number of such Loan Party, if an organized number
is issued in such jurisdiction;

 

(xiii)         a copy of the charter and
by-laws, limited liability company agreement, operating agreement, agreement of
limited partnership or other organizational document of each Loan Party,
together with all amendments thereto, certified as of the Effective Date by an
Authorized Officer of such Loan Party;

 

47

 

(xiv)        an opinion of counsel to
the Loan Parties, substantially in the form of Exhibit 5.01(d)(xiv) and
opining as to such other matters as the Collateral Agent may reasonably
request;

 

(xv)         a certificate of an
Authorized Officer of each Loan Party, certifying as to the matters set forth
in Section 5.01(b);

 

(xvi)        a copy of the Financial
Statements, together with a certificate of an Authorized Officer of Parent
setting forth all existing Indebtedness, pending or threatened litigation or
claims and other contingent liabilities of the Loan Parties;

 

(xvii)       a copy of the financial
projections described in Section 6.01(g)(ii) hereof, which
projections shall be satisfactory in form and substance to the Agents;

 

(xviii)      a certificate of the chief
financial officer of the Borrower, setting forth in reasonable detail the
calculations required to establish compliance, on a pro forma basis based on
the Financial Statements and after giving effect to the transactions under this
Agreement, with each of the financial covenants contained in Section 7.03;

 

(xix)         a certificate of the
chief financial officer of each Loan Party, certifying as to the solvency of
such Loan Party, which certificate shall be satisfactory in form and substance
to the Collateral Agent;

 

(xx)          evidence of the
insurance coverage required by Section 7.01 and the terms of each
Security Agreement and each Mortgage and such other insurance coverage with
respect to the business and operations of the Loan Parties as the Collateral
Agent may reasonably request, in each case, where requested by the Collateral
Agent, with such endorsements as to the named insureds or loss payees thereunder
as the Collateral Agent may request and providing that such policy may be
terminated or canceled (by the insurer or the insured thereunder) only upon
30 days prior written notice to the Collateral Agent and each such named
insured or loss payee;

 

(xxi)         a certificate of an
Authorized Officer of the Borrower, certifying the names and true signatures of
the persons that are authorized to provide Notices of Borrowing and all other
notices under this Agreement and the other Loan Documents;

 

(xxii)        the documents evidencing
the Sealy Subordinated Debt prior to the Effective Date shall have been amended
and restated pursuant to amended and restated loan documents that are in form
and substance satisfactory to the Agents;

 

(xxiii)       executed copies of the
Material Contracts as in effect on the Effective Date, certified as true and
correct copies thereof by an Authorized Officer of the Borrower, together with
a certificate of an Authorized Officer of the Borrower stating that such
agreements remain in full force and effect and that none of the Loan Parties
has breached or defaulted in any of its obligations under such agreements;

 

48

 

(xxiv)       a termination and release
agreement with respect to the Existing Debt, together with the authorization to
file termination statements for all financing statements filed by any holder of
the Existing Debt with respect to any Loan Party; and

 

(xxv)        such other agreements,
instruments, approvals, opinions and other documents, each satisfactory to the
Collateral Agent in form and substance, as the Collateral Agent may reasonably
request.

 

(e)           Material Adverse
Effect.  The Collateral Agent shall
have determined, in its sole judgment, that no event or development shall have
occurred since January 28, 2003 which could reasonably be expected to
result in a Material Adverse Effect.

 

(f)            Permitted Purchase.  Subco shall have consummated the Permitted
Purchase.

 

(g)           Repayment of
Existing Debt.  Agents shall have
received evidence satisfactory to them that the Existing Debt will be repaid on
terms and conditions satisfactory to Agents with the proceeds of Loans proposed
to be made on the Effective Date.

 

(h)           Proceedings; Receipt
of Documents.  All proceedings in
connection with the making of the Loans and the other transactions contemplated
by this Agreement and the other Loan Documents, and all documents incidental
hereto and thereto shall be satisfactory to the Collateral Agent and its
counsel, and the Collateral Agent and such counsel shall have received all such
information and such counterpart originals or certified or other copies of such
documents as the Collateral Agent or such counsel may reasonably request.

 

(i)            Management
Reference Checks.  The Collateral
Agent shall have received satisfactory reference checks for key management of
each Loan Party.

 

(j)            Due Diligence.  The Agents shall have completed their
business and legal due diligence with respect to each Loan Party and the
results thereof shall be acceptable to the Agents, in their sole and absolute
discretion.

 

(k)           Availability.  After giving effect to the Loans to be made
on the Effective Date, and payment of all fees, expenses and costs due under
this Agreement or any Loan Document, the Borrower shall have Availability of
not less than $5,000,000.  The Borrower
shall deliver to the Collateral Agent a certificate of the chief financial
officer of the Borrower certifying as to the calculation of Availability.

 

Section 5.02           Conditions
Precedent to All Loans.  The
obligation of any Agent or any Lender to make any Loan is subject to the
fulfillment of each of the following conditions precedent:

 

(a)           Payment of Fees,
Etc.  The Borrower shall have paid
all fees, costs, expenses and taxes then payable by the Borrower pursuant to
this Agreement and the other Loan Documents, including, without limitation, Sections
2.06 and 12.04 hereof.

 

49

 

(b)           Representations and
Warranties; No Event of Default. 
The following statements shall be true and correct, and the submission
by the Borrower to the Administrative Agent of a Notice of Borrowing with
respect to each such Loan, and the Borrower’s acceptance of the proceeds of
such Loan, shall each be deemed to be a representation and warranty by each
Loan Party on the date of such Loan that: 
(i) the representations and warranties contained in Article VI
and in each other Loan Document, certificate or other writing delivered any
Agent or any Lender pursuant hereto or thereto on or prior to the date of such
Loan are true and correct in all material respects (except that such
materiality qualifier shall not be applicable to any representations and
warranties that already are qualified or modified by materiality in the text
thereof) on and as of such date as though made on and as of such date (it being
understood and agreed that any representation or warranty which by its terms is
made as of a specified date shall be required to be true and correct in all
material respects only as of such specified date), (ii) at the time of and
after giving effect to the making of such Loan and the application of the
proceeds thereof, no Default or Event of Default has occurred and is continuing
or would result from the making of the Loan to be made, and (iii) the
conditions set forth in Section 2.02(a) and this Section 5.02
have been satisfied as of the date of such request.

 

(c)           Legality.  The making of such Loan shall not contravene
any law, rule or regulation applicable to any Agent or any Lender.

 

(d)           Notices.  The Administrative Agent shall have received
a Notice of Borrowing pursuant to Section 2.02 hereof.

 

(e)           Delivery of
Documents.  The Agents shall have
received such other agreements, instruments, approvals, opinions and other
documents, each in form and substance satisfactory to the Agents, as any Agent
may reasonably request.

 

(f)            Proceedings;
Receipt of Documents.  All
proceedings in connection with the making of such Loan and the other
transactions contemplated by this Agreement and the other Loan Documents, and
all documents incidental hereto and thereto, shall be satisfactory to the
Agents and their counsel, and the Agents and such counsel shall have received
all such information and such counterpart originals or certified or other
copies of such documents, in form and substance satisfactory to the Agents, as
the Agents or such counsel may reasonably request.

 

Section 5.03           Conditions
Subsequent to All Loans.  The
obligation of any Agent or any Lender to continue to make any Loan is subject
to the fulfillment, on or before the date applicable thereto, of each of the
conditions subsequent set forth below (the failure by the Loan Parties to so
perform or cause to be performed constituting an Event of Default):

 

(a)           the Loan Parties shall
use their commercially reasonable efforts to obtain a landlord waiver within 30
days of the Effective Date, in form and substance satisfactory to the
Collateral Agent and which may be included as a provision contained in the
relevant Lease, executed by each landlord with respect to each of the following
locations: each of their warehouses in Houston, Texas and in Dallas, Texas;

 

50

 

(b)           within 30 days of the
Effective Date, Administrative Agent shall have received agreements with the
credit card clearinghouses and processors of the Borrower pursuant to which
such credit card clearinghouses and processors agree to transfer on a daily
basis all credit card receipts of the Borrower, or other amounts payable by
such clearinghouse or processor to the Borrower, into a Blocked Account, in
form and substance reasonably satisfactory to Administrative Agent;

 

(c)           within 45 days of the
Effective Date, Collateral Agent shall have received a certificate from the
appropriate official(s) of the state of Missouri, certifying as to the
subsistence in good standing of, and the payment of taxes by, Borrower in
Missouri; and

 

(d)           within 45 days of the
Effective Date, Administrative Agent shall have received such evidence as it
shall require to demonstrate that the Texas Restructuring shall have been
consummated (including executed copies of each agreement executed in connection
therewith, certified as being true, correct and complete copies thereof by an
Authorized Officer of Borrower).

 

ARTICLE VI

REPRESENTATIONS AND WARRANTIES

 

Section 6.01           Representations
and Warranties.  Each Loan Party
hereby represents and warrants to the Agents and the Lenders as follows:

 

(a)           Organization, Good
Standing, Etc.  Each Loan Party (i)
is a corporation, limited liability company or limited partnership duly
organized, validly existing and in good standing under the laws of the state or
jurisdiction of its organization, (ii) has all requisite power and authority to
conduct its business as now conducted and as currently contemplated and, in the
case of the Borrower, to make the borrowings hereunder, and to execute and
deliver each Loan Document to which it is a party, and to consummate the
transactions contemplated thereby, and (iii) is duly qualified to do business
and is in good standing in each jurisdiction in which the character of the
properties owned or leased by it or in which the transaction of its business
makes such qualification necessary and where the failure to do so could not
reasonably be expected to result in a Material Adverse Effect.

 

(b)           Authorization, Etc.  The execution, delivery and performance by
each Loan Party of each Loan Document to which it is or will be a party, (i)
have been duly authorized by all necessary action, (ii) do not and will not
contravene its charter or by-laws, its limited liability company or operating
agreement or its certificate of partnership or partnership agreement, as
applicable, or any applicable law or any contractual restriction binding on or
otherwise affecting it or any of its properties, (iii) do not and will not
result in or require the creation of any Lien (other than pursuant to any Loan
Document) upon or with respect to any of its properties, and (iv) do not and
will not result in any default, noncompliance, suspension, revocation, impairment,
forfeiture or non-renewal of any permit, license, authorization or approval
applicable to its operations or any of its properties.

 

51

 

(c)           Governmental
Approvals.  No authorization or
approval or other action by, and no notice to or filing with, any Governmental
Authority is required in connection with the due execution, delivery and
performance by any Loan Party of any Loan Document to which it is or will be a
party, except for those which were obtained on or prior to the Effective Date.

 

(d)           Enforceability of
Loan Documents.  This Agreement is,
and each other Loan Document to which any Loan Party is or will be a party,
when delivered hereunder, will be, a legal, valid and binding obligation of
such Person, enforceable against such Person in accordance with its terms,
except as may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws, and by general principles of equity.

 

(e)           Subsidiaries.  Schedule 6.01(e) is a complete
and correct description of the name, jurisdiction of incorporation and
ownership of the outstanding Capital Stock of the Borrower and each Subsidiary
of the Borrower.  All of the issued and
outstanding shares of Capital Stock of such Subsidiaries have been validly
issued and are fully paid and non-assessable, and the holders thereof are not
entitled to any preemptive, first refusal or other similar rights.  Except as indicated on such Schedule, all
such Capital Stock is owned by Parent or the Borrower, free and clear of all
Liens (other than Collateral Agent’s Liens). 
There are no outstanding debt or equity securities of the Borrower or
any of its Subsidiaries and no outstanding obligations of the Borrower or any
of its Subsidiaries convertible into or exchangeable for, or warrants, options
or other rights for the purchase or acquisition from the Borrower or any of its
Subsidiaries, or other obligations of any Subsidiary to issue, directly or
indirectly, any shares of Capital Stock of the Borrower or any Subsidiary of
the Borrower.

 

(f)            Litigation;
Commercial Tort Claims.  Except as
set forth in Schedule 6.01(f), (i) there is no pending or, to
the best knowledge of any Loan Party, threatened action, suit or proceeding
affecting any Loan Party before any court or other Governmental Authority or
any arbitrator that (A) if adversely determined, could reasonably be
expected to result in a Material Adverse Effect or (B) relates to this
Agreement or any other Loan Document or any transaction contemplated hereby or
thereby and (ii) as of the Effective Date, none of the Loan Parties holds
any commercial tort claims in respect of which a claim has been filed in a
court of law or a written notice by an attorney has been given to a potential
defendant.

 

(g)           Financial Condition.

 

(i)            The Financial
Statements, copies of which have been delivered to each Agent and each Lender,
fairly present the consolidated financial condition of the Borrower and its
Subsidiaries as at the respective dates thereof and the consolidated results of
operations of the Borrower and its Subsidiaries for the fiscal periods ended on
such respective dates, all in accordance with GAAP, and since January 28,
2003 no event or development has occurred that has had or could reasonably be
expected to result in a Material Adverse Effect.

 

(ii)           Parent has heretofore
furnished to each Agent and each Lender (A) projected monthly balance
sheets, income statements and statements of cash flows of the Borrower and its
Subsidiaries for Fiscal Year 2004 (ending February 1, 2005), and (B)
projected annual balance sheets, income statements and statements of cash flows
of the Borrower

 

52

 

and its Subsidiaries for the Fiscal Years 2005 (ending January 31,
2006) through 2006 (ending January 29, 2007), which projected financial
statements shall be updated from time to time pursuant to Section 7.01(a)(vi).  Such projections, as so updated, are
believed by the Borrower at the time furnished to be reasonable, have been
prepared on a reasonable basis and in good faith by the Borrower, and have been
based on assumptions believed by the Borrower to be reasonable at the time made
and upon the best information then reasonably available to the Borrower, and at
the time furnished the Borrower was not aware of any facts or information that
would lead it to believe that such projections, as so updated, were incorrect
or misleading in any material respect.

 

(h)           Compliance with Law,
Etc.  No Loan Party is in violation
of its organizational documents, any law, rule, regulation, judgment or order
of any Governmental Authority applicable to it or any of its property or
assets, or any material term of any Material Contract binding on or otherwise
affecting it or any of its properties, and no Default or Event of Default has
occurred and is continuing.

 

(i)            ERISA.  Except as set forth on Schedule 6.01(i),
(i) each Employee Plan is in substantial compliance with ERISA and the IRC,
(ii) no Termination Event has occurred nor is reasonably expected to occur
with respect to any Employee Plan, (iii) the most recent annual report
(Form 5500 Series) with respect to each Employee Plan, including any required
Schedule B (Actuarial Information) thereto, copies of which have been
filed with the Internal Revenue Service and delivered to the Agents, is
complete and correct and fairly presents the funding status of such Employee
Plan, and since the date of such report there has been no material adverse
change in such funding status, (iv) copies of each agreement entered into
with the PBGC, the U.S. Department of Labor or the Internal Revenue Service
with respect to any Employee Plan have been delivered to the Agents,
(v) no Employee Plan had an accumulated or waived funding deficiency or
permitted decrease which would create a deficiency in its funding standard
account or has applied for an extension of any amortization period within the
meaning of Section 412 of the IRC at any time during the previous
60 months, and (vi) no Lien imposed under the IRC or ERISA exists or
is likely to arise on account of any Employee Plan within the meaning of
Section 412 of the IRC.  Except as
set forth on Schedule 6.01(i), no Loan Party or any of its ERISA
Affiliates has incurred any withdrawal liability under ERISA with respect to
any Multiemployer Plan, or is aware of any facts indicating that it or any of
its ERISA Affiliates may in the future incur any such withdrawal
liability.  No Loan Party or any of its
ERISA Affiliates nor any fiduciary of any Employee Plan has (A) engaged in a
nonexempt prohibited transaction described in Sections 406 of ERISA or 4975 of
the IRC, (B) failed to pay any required installment or other payment required
under Section 412 of the IRC on or before the due date for such required
installment or payment, (C) engaged in a transaction within the meaning of
Section 4069 of ERISA or (D) incurred any liability to the PBGC which
remains outstanding other than the payment of premiums, and there are no
premium payments which have become due which are unpaid.  There are no pending or, to the best
knowledge of any Loan Party, threatened claims, actions, proceedings or
lawsuits (other than claims for benefits in the normal course) asserted or
instituted against (1) any Employee Plan or its assets, (2) any fiduciary with
respect to any Employee Plan, or (3) any Loan Party or any of its ERISA
Affiliates with respect to any Employee Plan. 
Except as required by Section 4980B of the Internal Revenue Code,
no Loan Party or any of its ERISA Affiliates maintains an employee welfare
benefit plan (as defined in Section 3(1) of ERISA) which provides health
or welfare benefits (through the

 

53

 

purchase of insurance or otherwise) for any retired or former employee
of any Loan Party or any of its ERISA Affiliates or coverage after a
participant’s termination of employment.

 

(j)            Taxes, Etc.  All Federal, state and local tax returns and
other reports required by applicable law to be filed by any Loan Party have
been filed, or extensions have been obtained, and all taxes, assessments and
other governmental charges imposed upon any Loan Party or any property of any
Loan Party and which have become due and payable have been paid, except to the
extent contested in good faith by proper proceedings which stay the imposition
of any penalty, fine or Lien resulting from the non-payment thereof and with
respect to which adequate reserves have been set aside for the payment thereof
in accordance with GAAP.

 

(k)           Regulations T, U and
X.  No Loan Party is or will be
engaged in the business of extending credit for the purpose of purchasing or
carrying margin stock (within the meaning of Regulation T, U or X), and no
proceeds of any Loan will be used to purchase or carry any margin stock or to extend
credit to others for the purpose of purchasing or carrying any margin stock.

 

(l)            Nature of Business.  No Loan Party is engaged in any business
other than (i) the retail sale of mattresses, and related items, (ii)
franchising, and (iii) activities reasonably related thereto.

 

(m)          Adverse Agreements,
Etc.  No Loan Party is a party to
any agreement or instrument, or subject to any charter, limited liability
company agreement, partnership agreement or other corporate, partnership or
limited liability company restriction or any judgment, order, regulation,
ruling or other requirement of a court or other Governmental Authority, which
has, or in the future could reasonably be expected to result in, a Material
Adverse Effect.

 

(n)           Permits, Etc.  Each Loan Party has, and is in compliance
with, all material permits, licenses, authorizations, approvals, entitlements
and accreditations required for such Person lawfully to own, lease, manage or
operate, or to acquire, each business currently owned, leased, managed or
operated, or to be acquired, by such Person. 
No condition exists or event has occurred which, in itself or with the
giving of notice or lapse of time or both, would result in the suspension,
revocation, impairment, forfeiture or non-renewal of any such permit, license,
authorization, approval, entitlement or accreditation, and there is no claim
that any thereof is not in full force and effect.

 

(o)           Properties.  (i)  Each
Loan Party has good and marketable title to, valid leasehold interests in, or
valid licenses to use, all property and assets material to its business, free
and clear of all Liens, except Permitted Liens.  All such properties and assets are in good working order and
condition, ordinary wear and tear excepted.

 

(ii)           Schedule 6.01(o)
sets forth a complete and accurate list, as of the Effective Date, of the
location, by state and street address, of all real property owned or leased by
each Loan Party.  As of the Effective
Date, each Loan Party has valid leasehold interests in the Leases described on Schedule 6.01(o)
to which it is a party.  Schedule 6.01(o)
sets

 

54

 

forth with respect to each such Lease, the commencement date,
termination date, renewal options (if any) and annual base rents.  Each such Lease is valid and enforceable in
accordance with its terms in all material respects and is in full force and
effect.  No consent or approval of any
landlord or other third party in connection with any such Lease is necessary
for any Loan Party to enter into and execute the Loan Documents to which it is
a party, except as set forth on Schedule 6.01(o).  To the best knowledge of any Loan Party, no
other party to any such Lease is in default of its obligations thereunder, and
no Loan Party (or any other party to any such Lease) has at any time delivered
or received any notice of default which remains uncured under any such Lease
and, as of the Effective Date, no event has occurred which, with the giving of
notice or the passage of time or both, would constitute a default under any
such Lease.

 

(p)           Full Disclosure.  Each Loan Party has disclosed to the Agents
all agreements, instruments and corporate or other restrictions to which it is
subject, and all other matters known to it, that, individually or in the
aggregate, could reasonably be expected to result in a Material Adverse
Effect.  None of the other reports,
financial statements, certificates or other information furnished by or on
behalf of any Loan Party to the Agents in connection with the negotiation of
this Agreement or delivered hereunder (as modified or supplemented by other
information so furnished) contains any material misstatement of fact or omits
to state any material fact necessary to make the statements therein, in the
light of the circumstances under which it was made, not misleading; provided
that, with respect to projected financial information, each Loan Party
represents only that such information was prepared in good faith based upon
assumptions believed to be reasonable at the time.  There is no contingent liability or fact that could reasonably be
expected to result in a Material Adverse Effect.

 

(q)           Operating Lease
Obligations.  On the Effective Date,
none of the Loan Parties has any Operating Lease Obligations other than the Operating
Lease Obligations set forth on Schedule 6.01(q).

 

(r)            Environmental
Matters.  Except as set forth on Schedule 6.01(r),
(i) the operations of each Loan Party are in compliance with all Environmental
Laws; (ii) there has been no Release at any of the properties owned or operated
by any Loan Party or a predecessor in interest, or at any disposal or treatment
facility which received Hazardous Materials generated by any Loan Party or any
predecessor in interest which could reasonably be expected to result in a
Material Adverse Effect; (iii) no Environmental Action has been asserted
against any Loan Party or any predecessor in interest nor does any Loan Party
have knowledge or notice of any threatened or pending Environmental Action
against any Loan Party or any predecessor in interest which could reasonably be
expected to result in a Material Adverse Effect; (iv) no Environmental
Actions have been asserted against any facilities that may have received
Hazardous Materials generated by any Loan Party or any predecessor in interest
which could reasonably be expected to result in a Material Adverse Effect;
(v) no property now or formerly owned or occupied by a Loan Party has been
used as a treatment or disposal site for any Hazardous Material; (vi) no
Loan Party has failed to report to the proper Governmental Authority the
occurrence of any Release which is required to be so reported by any
Environmental Laws which could reasonably be expected to result in a Material
Adverse Effect; (vii) each Loan Party holds all licenses, permits and
approvals required under any Environmental Laws in connection with the
operation of the business carried on by it, except for such licenses,

 

55

 

permits and approvals as to which a Loan Party’s failure to maintain or
comply with could not reasonably be expected to result in a Material Adverse
Effect; and (viii) no Loan Party has received any notification pursuant to any
Environmental Laws that (A) any work, repairs, construction or Capital
Expenditures are required to be made in respect as a condition of continued
compliance with any Environmental Laws, or any license, permit or approval
issued pursuant thereto or (B) any license, permit or approval referred to
above is about to be reviewed, made subject to limitations or conditions,
revoked, withdrawn or terminated, in each case, except as could not reasonably
be expected to result in a Material Adverse Effect.

 

(s)           Insurance.  Each Loan Party keeps its property
adequately insured and maintains (i) insurance to such extent and against
such risks, including fire, as is customary with companies in the same or
similar businesses, (ii) worker’s compensation insurance in the amount required
by applicable law, (iii) public liability insurance, which shall include
product liability insurance, in the amount customary with companies in the same
or similar business against claims for personal injury or death on properties
owned, occupied or controlled by it, and (iv) such other insurance as may be
required by law or as may be reasonably required by the Collateral Agent
(including, without limitation, against larceny, embezzlement or other criminal
misappropriation).  Schedule 6.01(s)
sets forth a list of all insurance maintained by each Loan Party on the
Effective Date.

 

(t)            Use of Proceeds.  The proceeds of the Loans shall be used (a)
in the case of the initial Term Loan and the initial Revolving Loans, to
refinance the Existing Debt, (b) to pay fees and expenses in connection with
the transactions contemplated hereby, and (c) to fund working capital of
the Borrower and the Guarantors.

 

(u)           Solvency.  After giving effect to the transactions
contemplated by this Agreement and before and after giving effect to each Loan,
each Loan Party is, and the Loan Parties on a consolidated basis are, Solvent.

 

(v)           Location of Bank
Accounts.  Schedule 6.01(v)
sets forth a complete and accurate list as of the Effective Date of all
deposit, checking and other bank accounts, all securities and other accounts
maintained with any broker dealer and all other similar accounts maintained by
each Loan Party, together with a description thereof (i.e., the bank or
broker dealer at which such deposit or other account is maintained and the
account number and the purpose thereof).

 

(w)          Intellectual Property.  Except as set forth on
Schedule 6.01(w), each Loan Party owns or licenses or otherwise has the
right to use all licenses, permits, patents, patent applications, trademarks,
trademark applications, service marks, tradenames, copyrights, copyright
applications, franchises, authorizations, non-governmental licenses and permits
and other intellectual property rights that are necessary for the operation of
its business, without infringement upon or conflict with the rights of any other
Person with respect thereto, except for such infringements and conflicts which,
individually or in the aggregate, could not reasonably be expected to result in
a Material Adverse Effect.  Set forth on
Schedule 6.01(w) is a complete and accurate list as of the Effective Date
of all such material licenses, permits, patents, patent applications,
trademarks, trademark applications, service marks, tradenames, copyrights,
copyright applications, franchises, authorizations, non-governmental licenses
and permits and

 

56

 

other intellectual property rights of each Loan Party.  No slogan or other advertising device,
product, process, method, substance, part or other material now employed, or
now contemplated to be employed, by any Loan Party infringes upon or conflicts
with any rights owned by any other Person, and no claim or litigation regarding
any of the foregoing is pending or threatened, except for such infringements
and conflicts which could not reasonably be expected to result in, individually
or in the aggregate, a Material Adverse Effect.  To the best knowledge of each Loan Party, no patent, invention,
device, application, principle or any statute, law, rule, regulation, standard
or code is pending or proposed, which, individually or in the aggregate, could
reasonably be expected to result in a Material Adverse Effect.

 

(x)            Material Contracts.  Set forth on Schedule 6.01(x) is
a complete and accurate list as of the Effective Date of all Material Contracts
of each Loan Party, showing the parties and subject matter thereof and
amendments and modifications thereto. 
Each such Material Contract (i) is in full force and effect and is
binding upon and enforceable against each Loan Party that is a party thereto
and, to the best knowledge of such Loan Party, all other parties thereto in
accordance with its terms, (ii) has not been otherwise amended or modified
(other than amendments or modifications that are not prohibited by the terms of
this Agreement), and (iii) is not in default due to the action of any Loan
Party or, to the best knowledge of any Loan Party, any other party thereto.

 

(y)           Holding Company and
Investment Company Acts.  None of
the Loan Parties is (i) a “holding company” or a “subsidiary company” of a
“holding company” or an “affiliate” of a “holding company”, as such terms are
defined in the Public Utility Holding Company Act of 1935, as amended, or
(ii) an “investment company” or an “affiliated person” or “promoter” of,
or “principal underwriter” of or for, an “investment company”, as such terms
are defined in the Investment Company Act of 1940, as amended.

 

(z)            Employee and Labor
Matters.  There is (i) no unfair
labor practice complaint pending or, to the best knowledge of any Loan Party,
threatened against any Loan Party before any Governmental Authority and no
grievance or arbitration proceeding pending or threatened against any Loan
Party which arises out of or under any collective bargaining agreement, (ii) no
strike, labor dispute, slowdown, stoppage or similar action or grievance
pending or threatened against any Loan Party or (iii) to the best knowledge of
any Loan Party, no union representation question existing with respect to the
employees of any Loan Party and no union organizing activity taking place with
respect to any of the employees of any Loan Party.  No Loan Party or any of its ERISA Affiliates has incurred any
liability or obligation under the Worker Adjustment and Retraining Notification
Act (“WARN”) or similar state law, which remains unpaid or
unsatisfied.  The hours worked and
payments made to employees of any Loan Party have not been in violation of the
Fair Labor Standards Act or any other applicable legal requirements, except to
the extent such violations could not, individually or in the aggregate,
reasonably be expected to result in a Material Adverse Effect.  All material payments due from any Loan
Party on account of wages and employee health and welfare insurance and other
benefits have been paid or accrued as a liability on the books of such Loan
Party, except where the failure to do so could not, individually or in the
aggregate, reasonably be expected to result in a Material Adverse Effect.

 

57

 

(aa)         Customers and
Suppliers.  There exists no actual
or threatened termination, cancellation or limitation of, or modification to or
change in, the business relationship between (i) any Loan Party, on the one
hand, and any customer or any group thereof, on the other hand, whose agreements
with any Loan Party are individually or in the aggregate material to the
business or operations of such Loan Party, or (ii) any Loan Party, on the
one hand, and any material supplier thereof, on the other hand, except where
such a termination, cancellation, limitation, modification or change could not,
individually or in the aggregate, reasonably be expected to result in a
Material Adverse Effect; and there exists no present state of facts or
circumstances that reasonably could be expected to give rise to or result in
any such termination, cancellation, limitation, modification or change, except
where such a termination, cancellation, limitation, modification or change
could not, individually or in the aggregate, reasonably be expected to result
in a Material Adverse Effect.

 

(bb)         No Bankruptcy Filing.  No Loan Party is contemplating either the
filing of a petition by it under any state, federal or foreign bankruptcy or
insolvency laws or the liquidation of all or a major portion of such Loan
Party’s assets or property, and no Loan Party has any knowledge of any Person
contemplating the filing of any such petition against it.

 

(cc)         Separate Existence.

 

(i)            All customary
formalities regarding the corporate existence of the Borrower and each other
Loan Party have been at all times since its formation observed.

 

(ii)           Each Loan Party has at
all times since its formation accurately maintained its financial statements,
accounting records and other organizational documents separate from those of
any Affiliate thereof and any other Person. 
No Loan Party has, at any time since its formation, commingled its
assets with those of any of its Affiliates or any other Person.  Each Loan Party has at all times since its
formation accurately maintained its own bank accounts and separate books of
account.

 

(iii)          Each Loan Party has at
all times since its formation paid its own liabilities from its own separate
assets.

 

(iv)          To the extent that any
Loan Party has identified itself the public, each Loan Party has at all times since
its formation identified itself in all dealings with the public under its own
name and as a separate and distinct Person. 
No Loan Party has, at any time since its formation, identified itself as
being a division or a part of any other Person.

 

(dd)         Name; Jurisdiction of
Organization; Organizational ID Number; Chief Place of Business; Chief
Executive Office; FEIN. 
Schedule 6.01(dd) (which, upon 30 days prior written notice by
Borrower to each Agent, shall be deemed to be amended as set forth in such written
notice) sets forth a complete and accurate list as of the date hereof of
(i) the exact legal name of each Loan Party, (ii) the jurisdiction of
organization of each Loan Party, (iii) the organizational identification
number of each Loan Party (or indicates that such Loan Party has no
organizational identification number), (iv) each place of business of each
Loan Party, (v) the chief executive office of each Loan Party and
(vi) the federal employer identification number of each Loan Party.

 

58

 

(ee)         Tradenames.  Schedule 6.01(ee) hereto sets
forth a complete and accurate list as of the Effective Date of all tradenames
used by each Loan Party.

 

(ff)           Locations of
Tangible Collateral.  There is no
location at which any Loan Party has any tangible Collateral (except for
Inventory in transit) other than (i) those locations listed on Schedule 6.01(ff)
(which Schedule shall be deemed to be amended to include information set
forth in any written notice provided pursuant to Section 7.01(l))
and (ii) any other locations approved in writing by the Collateral Agent
from time to time.  Schedule 6.01(ff)
hereto (as amended from time to time as set forth in the preceding sentence)
contains a true, correct and complete list, as of the Effective Date, of the
legal names and addresses of each warehouse at which Collateral of each Loan
Party is stored.  None of the receipts
received by any Loan Party from any warehouse states that the goods covered
thereby are to be delivered to bearer or to the order of a named Person or to a
named Person and such named Person’s assigns.

 

(gg)         Security Interests.  Each Security Agreement and each Pledge
Agreement creates in favor of the Collateral Agent, for the benefit of the
Lenders, a legal, valid and enforceable security interest in the Collateral
covered thereby.  Upon the filing of the
financing statements described in Section 5.01(d)(iv), such
security interests in and Liens on the Collateral granted by such Security
Agreements and Pledge Agreements shall be perfected, first priority security
interests (subject only to Permitted Liens), and, except for continuations, no
further recordings or filings are or will be required in connection with the
creation, perfection or enforcement of such security interests and Liens.

 

(hh)         Schedules.  All of the information which is required to
be scheduled to this Agreement is set forth on the Schedules attached hereto,
is correct and accurate and does not omit to state any information material
thereto.

 

(ii)           Sealy Subordinated
Debt Documents.  Parent has
delivered true and correct copies of all Sealy Subordinated Debt Documents to
the Agents.  The subordination
provisions of the subordinated note contained in the Sealy Subordinated Debt
Documents are and will be enforceable by the Agents against the holders of the
Sealy Subordinated Debt.  All
Obligations, including, without limitation, those to pay principal of and
interest on the Loans and fees and expenses in connection therewith (including
any portion thereof that accrues after the commencement of an Insolvency
Proceeding, whether or not allowed or allowable in whole or in part as a claim
in any such Insolvency Proceeding), constitute Senior Indebtedness (as defined
in the Sealy Subordinated Debt Documents), and all such Obligations, and the
Liens securing such Obligations, are entitled to the benefits of the
subordination created by the Sealy Subordinated Debt Documents.  The Borrower acknowledges that the Agents
and the Lenders are entering into this Agreement, and making the Loans
hereunder in reliance upon the subordination provisions of the Sealy
Subordinated Debt Documents.

 

(jj)           Key Contracts.  The Borrower has delivered true and correct
copies of all Key Contracts to the Agents.

 

(kk)         Representations and
Warranties in Documents; No Default. 
All representations and warranties set forth in this Agreement and the
other Loan Documents are true and correct in all material respects (except that
such materiality qualifier shall not be applicable

 

59

 

to any representations and warranties that already are qualified or
modified by materiality in the text thereof) at the time as of which such
representations were made and on the Effective Date (it being understood and
agreed that any representation or warranty which by its terms is made as of a
specified date shall be required to be true and correct in all material
respects only as of such specified date). 
No Event of Default has occurred and is continuing and no condition
exists which constitutes a Default or an Event of Default.

 

ARTICLE VII

COVENANTS OF THE LOAN PARTIES

 

Section 7.01           Affirmative
Covenants.  So long as any principal
of or interest on any Loan or any other Obligation (whether or not due) shall
remain unpaid or any Lender shall have any Commitment hereunder, each Loan
Party will:

 

(a)           Reporting
Requirements.  Furnish to each Agent
and each Lender:

 

(i)            as soon as available
and in any event within 45 days after the end of each fiscal quarter of the
Borrower, consolidated and consolidating balance sheets, consolidated and
consolidating statements of operations and retained earnings and consolidated
and consolidating statements of cash flows of the Borrower and its Subsidiaries
as at the end of such quarter, and for the period commencing at the end of the
immediately preceding Fiscal Year and ending with the end of such quarter,
setting forth in each case in comparative form the figures for the
corresponding date or period of the immediately preceding Fiscal Year, all in
reasonable detail and certified by an Authorized Officer of the Borrower as
fairly presenting, in all material respects, the financial position of the
Borrower and its Subsidiaries as of the end of such quarter and the results of operations
and cash flows of the Borrower and its Subsidiaries for such quarter, in
accordance with GAAP applied in a manner consistent with that of the most
recent audited financial statements of the Borrower and its Subsidiaries
furnished to the Agents and the Lenders, subject to normal year-end audit
adjustments and the absence of footnotes;

 

(ii)           as soon as available,
and in any event within 90 days after the end of each Fiscal Year, consolidated
and consolidating balance sheets, consolidated and consolidating statements of
operations and retained earnings and consolidated and consolidating statements
of cash flows of the Borrower and its Subsidiaries as at the end of such Fiscal
Year, setting forth in each case in comparative form the corresponding figures
for the immediately preceding Fiscal Year, all in reasonable detail and
prepared in accordance with GAAP, and accompanied by a report and an
unqualified opinion, prepared in accordance with generally accepted auditing
standards, of independent certified public accountants of recognized standing
selected by the Borrower and reasonably satisfactory to the Agents (which
opinion shall be without (A) a “going concern” or like qualification or
exception, (B) any qualification or exception as to the scope of such
audit, or (C) any qualification which relates to the treatment or
classification of any item and which, as a condition to the removal of such
qualification, would require an adjustment to such item, the effect of which
would be to cause any noncompliance with the provisions of  Section 7.03),
together with a written statement of such accountants (1) to the effect
that, in making the examination necessary for their audit of such financial
statements, they have not obtained any knowledge of the existence of an Event
of Default or a Default under

 

60

 

Section 7.03 and (2) if
such accountants shall have obtained any knowledge of the existence of an Event
of Default or such Default under Section 7.03, describing the
nature thereof;

 

(iii)          as soon as available,
and in any event within 30 days after the end of each fiscal month of the
Borrower and its Subsidiaries, internally prepared consolidated and
consolidating balance sheets, consolidated and consolidating statements of
operations and retained earnings and consolidated and consolidating statements
of cash flows as at the end of such fiscal month, and for the period commencing
at the end of the immediately preceding Fiscal Year and ending with the end of
such fiscal month, all in reasonable detail and certified by an Authorized
Officer of the Borrower as fairly presenting, in all material respects, the
financial position of the Borrower and its Subsidiaries as at the end of such
fiscal month and the results of operations, retained earnings and cash flows of
the Borrower and its Subsidiaries for such fiscal month, in accordance with
GAAP applied in a manner consistent with that of the most recent audited
financial statements furnished to the Agents and the Lenders, subject to normal
year-end audit adjustments and the absence of footnotes;

 

(iv)          simultaneously with the
delivery of the financial statements of the Borrower and its Subsidiaries
required by clauses (i), (ii) and (iii) of this Section 7.01(a), a
certificate of an Authorized Officer of the Borrower (A) stating that such
Authorized Officer has reviewed the provisions of this Agreement and the other
Loan Documents and has made or caused to be made under his or her supervision a
review of the condition and operations of the Borrower and its Subsidiaries
during the period covered by such financial statements with a view to
determining whether the Borrower and its Subsidiaries were in compliance with
all of the provisions of this Agreement and such Loan Documents at the times
such compliance is required hereby and thereby, and that such review has not
disclosed, and such Authorized Officer has no knowledge of, the existence
during such period of an Event of Default or Default or, if an Event of Default
or Default existed, describing the nature and period of existence thereof and
the action which the Borrower and its Subsidiaries propose to take or have
taken with respect thereto, (B) stating that such Authorized Officer has
reviewed the provisions of this Agreement and the other Loan Documents and has
made or caused to be made under his or her supervision a review of the
condition and operations of the Borrower and its Subsidiaries during the period
covered by such financial statements with a view to determining whether the
representations and warranties contained herein are true and correct at the
time of the delivery of such certificate and that such review has not
disclosed, and such Authorized Officer has no knowledge of, the existence of
any representation and warranty that is not, as of the date of such
certificate, true and correct in all material respects (it being understood and
agreed that any representation or warranty which by its terms is made as of a
specified date shall be required to be true and correct in all material
respects only as of such specified date), and (C) attaching a
schedule showing the calculation of the financial covenants specified in Section 7.03;

 

(v)           as soon as available
and in any event within 3 Business Days after the end of each week commencing
with the first week ending after the Effective Date, a Borrowing Base
Certificate, current as of the close of business on the Friday of the
immediately preceding week, supported by schedules showing the derivation
thereof and containing such detail and other information as any Agent may
reasonably request from time to time, provided that (A) the Borrowing Base
set forth in the Borrowing Base Certificate shall be

 

61

 

effective from and including the date such Borrowing Base Certificate
is duly received by the Agents but not including the date on which a subsequent
Borrowing Base Certificate is received by the Agents, unless any Agent disputes
the eligibility of any property included in the calculation of the Borrowing
Base or the valuation thereof by notice of such dispute to the Borrower and
(B) in the event of any dispute about the eligibility of any property
included in the calculation of the Borrowing Base or the valuation thereof,
such Agent’s good faith judgment shall control;

 

(vi)          on or before
December 1st of each year, financial projections, supplementing and
superseding the financial projections for the period referred to in Section 6.01(g)(ii)(A),
for the immediately succeeding Fiscal Year, prepared on a monthly basis, and
for each Fiscal Year thereafter through the 2007 Fiscal Year, prepared on an
annual basis, and in each case otherwise in form and substance satisfactory to
the Agents, all such financial projections to be prepared on a reasonable basis
and in good faith, and to be based on assumptions believed by the Borrower to
be reasonable at the time made and from the best information then available to
the Borrower;

 

(vii)         promptly after submission
to any Governmental Authority, all documents and information furnished to such
Governmental Authority in connection with any investigation of any Loan Party
other than routine inquiries by such Governmental Authority;

 

(viii)        as soon as possible, and
in any event within 3 days after the occurrence of an Event of Default or
Default or the occurrence of any event or development that could reasonably be
expected to result in a Material Adverse Effect, the written statement of an
Authorized Officer of the Borrower setting forth the details of such Event of
Default or Default or other event or development reasonably expected to result
in a Material Adverse Effect and the action which the affected Loan Party
proposes to take with respect thereto;

 

(ix)           (A) as soon as possible
and in any event within 10 Business Days days after any Loan Party or any ERISA
Affiliate thereof knows or has reason to know that (1) any Reportable Event
with respect to any Employee Plan has occurred, (2) any other Termination Event
with respect to any Employee Plan has occurred, or (3) an accumulated funding
deficiency has been incurred or an application has been made to the Secretary
of the Treasury for a waiver or modification of the minimum funding standard
(including installment payments) or an extension of any amortization period
under Section 412 of the IRC with respect to an Employee Plan, a statement
of an Authorized Officer of the Borrower setting forth the details of such
occurrence and the action, if any, which such Loan Party or such ERISA
Affiliate proposes to take with respect thereto, (B) promptly and in any event
within 3 Business Days after receipt thereof by any Loan Party or any ERISA
Affiliate thereof from the PBGC, copies of each notice received by any Loan
Party or any ERISA Affiliate thereof of the PBGC’s intention to terminate any
Plan or to have a trustee appointed to administer any Plan, (C) promptly and in
any event within 10 Business Days after the filing thereof with the Internal
Revenue Service if requested by any Agent, copies of each Schedule B (Actuarial
Information) to the annual report (Form 5500 Series) with respect to each
Employee Plan and Multiemployer Plan, (D) promptly and in any event within 10
Business Days after any Loan Party or any ERISA Affiliate thereof knows or has
reason to know that a required installment within the meaning of
Section 412 of the IRC has not been made when due with respect to an
Employee Plan, (E) promptly and in any

 

62

 

event within 3 Business Days after receipt thereof by any Loan Party or
any ERISA Affiliate thereof from a sponsor of a Multiemployer Plan or from the
PBGC, a copy of each notice received by any Loan Party or any ERISA Affiliate
thereof concerning the imposition or amount of withdrawal liability under
Section 4202 of ERISA or indicating that such Multiemployer Plan may enter
reorganization status under Section 4241 of ERISA, and (F) promptly and in
any event within 10 Business Days after any Loan Party or any ERISA Affiliate
thereof sends notice of a plant closing or mass layoff (as defined in WARN) to
employees, copies of each such notice sent by such Loan Party or such ERISA
Affiliate thereof;

 

(x)            promptly after the
commencement thereof but in any event not later than 5 Business Days after
service of process with respect thereto on, or the obtaining of knowledge
thereof by, any Loan Party, notice of each action, suit or proceeding before
any court or other Governmental Authority or other regulatory body or any
arbitrator which, if adversely determined, could reasonably be expected to
result in a Material Adverse Effect;

 

(xi)           as soon as possible and
in any event within 5 days after receipt or delivery thereof, copies of any
material notices that any Loan Party receives or delivers in connection with any
Material Contract, any Key Contract or the Sealy Subordinated Debt Documents;

 

(xii)          promptly after the
sending or filing thereof, copies of all statements, reports and other
information any Loan Party sends to any holders of its Indebtedness or its securities,
in their capacities as holders, or files with the SEC or any national (domestic
or foreign) securities exchange;

 

(xiii)         promptly upon receipt
thereof, copies of all financial reports (including, without limitation,
management letters), if any, submitted to any Loan Party by its auditors in
connection with any annual or interim audit of the books thereof; and

 

(xiv)        promptly upon request,
such other information concerning the condition or operations, financial or
otherwise, of any Loan Party as any Agent may from time to time may reasonably
request.

 

(b)           Additional
Guaranties and Collateral Security. 
Cause:

 

(i)            each Subsidiary of any
Loan Party to execute and deliver to the Collateral Agent promptly and in any
event within 5 Business Days after the formation or acquisition thereof,
or in the case of MFA, within 5 Business Days after the occurrence of a
MFA Triggering Event, (A) a Guaranty guaranteeing the Obligations, (B) a
Security Agreement, (C) if such Subsidiary has any Subsidiaries, a Pledge Agreement
together with (x) certificates evidencing all of the Capital Stock of any
Person owned by such Subsidiary, (y) undated stock powers executed in blank
with signature guaranteed, and (z) such opinion of counsel and such approving
certificate of such Subsidiary as the Collateral Agent may reasonably request
in respect of complying with any legend on any such certificate or any other
matter relating to such shares, (D) if the Subsidiary owns real property that
would constitute After Acquired Property if it were acquired by a Loan Party,
one or more mortgages creating on the real property of such Subsidiary a
perfected, first priority Lien (subject to Permitted Liens) on such real
property, a

 

63

 

title insurance policy covering such real property, a current ALTA
survey thereof and a surveyor’s certificate, each in form and substance
satisfactory to the Collateral Agent, together with such other agreements,
instruments and documents as the Collateral Agent may require, and
(E) such other agreements, instruments, approvals, legal opinions or other
documents reasonably requested by the Collateral Agent in order to create,
perfect, establish the first priority (subject to Permitted Liens) of or
otherwise protect any Lien purported to be covered by any such Security
Agreement, Pledge Agreement, or Mortgage, or otherwise to effect the intent
that such Subsidiary shall become bound by all of the terms, covenants and
agreements contained in the Loan Documents and that all property and assets of
such Subsidiary shall become Collateral for the Obligations; and

 

(ii)           each owner of the
Capital Stock of any such Subsidiary to execute and deliver promptly and in any
event within 5 Business Days after the formation or acquisition of such
Subsidiary, or in the case of MFA, within 5 Business Days after the
occurrence of a MFA Triggering Event, a Pledge Agreement, together with
(A) certificates evidencing all of the Capital Stock of such Subsidiary,
(B) undated stock powers or other appropriate instruments of assignment
executed in blank with signature guaranteed, (C) such opinion of counsel
and such approving certificate of such Subsidiary as the Collateral Agent may
reasonably request in respect of complying with any legend on any such
certificate or any other matter relating to such shares and (D) such other
agreements, instruments, approvals, legal opinions or other documents requested
by the Collateral Agent.

 

(c)           Compliance with
Laws, Etc.  Comply, and cause each
of its Subsidiaries to comply, in all material respects with all applicable
laws, rules, regulations and orders (including, without limitation, all
Environmental Laws), such compliance to include, without limitation, (i) paying
before the same become delinquent all taxes, assessments and governmental
charges or levies imposed upon it or upon its income or profits or upon any of
its properties, and (ii) paying all other lawful claims which if unpaid
might become a Lien or charge upon any of its properties, except, in each case,
to the extent contested in good faith by proper proceedings which stay the
imposition of any penalty, fine or Lien resulting from the non-payment thereof
and with respect to which adequate reserves have been set aside for the payment
thereof in accordance with GAAP.

 

(d)           Preservation of
Existence, Etc.  Maintain and
preserve, and cause each of its Subsidiaries to maintain and preserve, its
existence, rights and privileges, and become or remain, and cause each of its
Subsidiaries to become or remain, duly qualified and in good standing in each
jurisdiction in which the character of the properties owned or leased by it or
in which the transaction of its business makes such qualification necessary.

 

(e)           Keeping of Records
and Books of Account.  Keep,
and cause each of its Subsidiaries to keep, adequate records and books of
account, with complete entries made to permit the preparation of financial
statements in accordance with GAAP. 
Without limiting the generality of the foregoing, Borrower will maintain
liabilities on its books and records with respect to customer deposits in an
amount not less than the amount of each Eligible Account Receivable with
respect to which the applicable Inventory has not been delivered to and
accepted by a customer of Borrower, and will not be eliminated until such
Inventory has been delivered to and accepted by the applicable customer.

 

64

 

(f)            Inspection Rights.  Permit, and cause each of its Subsidiaries
to permit, the Agents and representatives of any Agent at any time and from
time to time during normal business hours, at the expense of the Borrower, to
examine and make copies of and abstracts from its records and books of account,
to visit and inspect its properties, to verify leases, notes, accounts
receivable, deposit accounts and its other assets, to conduct audits, physical
counts, valuations, appraisals, or examinations and to discuss its affairs,
finances and accounts with any of its directors, officers, managerial employees,
independent accountants or any of its other representatives.

 

(g)           Maintenance of
Properties, Etc.  Maintain and
preserve, and cause each of its Subsidiaries to maintain and preserve, all of
its properties which are necessary or useful in the proper conduct of its
business in good working order and condition, ordinary wear and tear excepted,
and comply, and cause each of its Subsidiaries to comply, at all times with the
provisions of all material leases to which it is a party as lessee or under which
it occupies property, so as to prevent any loss or forfeiture thereof or
thereunder.

 

(h)           Maintenance of
Insurance.  Maintain, and cause each
of its Subsidiaries to maintain, insurance with responsible and reputable
insurance companies or associations (including, without limitation,
comprehensive general liability, hazard, rent and business interruption
insurance) with respect to its properties (including each Facility and all real
properties leased or owned by Borrower or any of its Subsidiaries) and business,
in such amounts and covering such risks as is required by any Governmental
Authority having jurisdiction with respect thereto or as is carried generally
in accordance with sound business practice by companies in similar businesses
similarly situated and in any event in amount, adequacy and scope reasonably
satisfactory to the Collateral Agent. 
All policies covering the Collateral are to be made payable to the
Collateral Agent for the benefit of the Lenders, as its interests may appear,
in case of loss, under a standard non-contributory “lender” or “secured party”
clause and are to contain such other provisions as the Collateral Agent may
require to fully protect the Lenders’ interest in the Collateral and to any
payments to be made under such policies. 
All certificates of insurance are to be delivered to the Collateral
Agent and the policies are to be premium prepaid, with the loss payable and
additional insured endorsement in favor of the Collateral Agent and such other
Persons as the Collateral Agent may designate from time to time, and shall
provide for not less than 30 days prior written notice to the Collateral Agent
of the exercise of any right of cancellation. 
If any Loan Party or any of its Subsidiaries fails to maintain such
insurance, the Collateral Agent may arrange for such insurance, but at the
Borrower’s expense and without any responsibility on the Collateral Agent’s
part for obtaining the insurance, the solvency of the insurance companies, the
adequacy of the coverage, or the collection of claims.  Upon the occurrence and during the
continuance of an Event of Default, the Collateral Agent shall have the sole
right, in the name of the Lenders, any Loan Party and its Subsidiaries, to file
claims under any insurance policies, to receive, receipt and give acquittance
for any payments that may be payable thereunder, and to execute any and all
endorsements, receipts, releases, assignments, reassignments or other documents
that may be necessary to effect the collection, compromise or settlement of any
claims under any such insurance policies.

 

(i)            Obtaining of
Permits, Etc.  Obtain, maintain and
preserve, and cause each of its Subsidiaries to obtain, maintain and preserve,
and take all necessary action to

 

65

 

timely renew, all permits, licenses, authorizations, approvals,
entitlements and accreditations which are necessary or useful in the proper
conduct of its business.

 

(j)            Environmental.  (i)  Keep any property owned by it
or any of its Subsidiaries free of any Environmental Liens; (ii) comply,
and cause each of its Subsidiaries to comply, in all material respects with
Environmental Laws and provide to the Collateral Agent any documentation of
such compliance which the Collateral Agent may reasonably request;
(iii) promptly notify the Agents of any Release of a Hazardous Material in
excess of any reportable quantity from or onto property owned or operated by it
or any of its Subsidiaries and take any Remedial Actions required to abate said
Release; (iv) promptly provide the Agents with written notice within 10
days of the receipt of any of the following: 
(A) notice that an Environmental Lien has been filed against any
property of any Loan Party or any of its Subsidiaries; (B) commencement of
any Environmental Action or notice that an Environmental Action will be filed
against any Loan Party or any of its Subsidiaries which reasonably could be
expected to result in any Loan Party incurring material liabilities; and
(C) notice of a violation, citation or other administrative order which
could reasonably be expected to result in a Material Adverse Effect and
(v) except in the case of gross negligence or willful misconduct by the
Lender Group as determined by a final judgment of a court of competent jurisdiction,
defend, indemnify and hold harmless the Agents and the Lenders and their
successors or assigns, and their respective employees, agents, officers and
directors, from and against any claims, demands, penalties, fines, liabilities,
settlements, damages, out-of-pocket costs or expenses (including, without
limitation, reasonable attorney and consultant fees, investigation and
laboratory fees, court costs and litigation expenses) arising out of
(A) the presence, Release or threatened Release of any Hazardous Materials
on any property at any time owned or occupied by any Loan Party or any of its
Subsidiaries, (B) any personal injury (including wrongful death) or
property damage (real or personal) arising out of or related to such Hazardous
Materials, (C) any investigation, lawsuit brought or threatened,
settlement reached or government order relating to such Hazardous Materials,
(D) any violation of any Environmental Law by any Loan Party or any of
their respective Subsidiaries and/or (E) any Environmental Action filed against
any Agent or any Lender.

 

(k)           Further Assurances.  Take such action and execute, acknowledge
and deliver, and cause each of its Subsidiaries to take such action and
execute, acknowledge and deliver, at its sole cost and expense, such
agreements, instruments or other documents as any Agent may reasonably require
from time to time in order (i) to carry out more effectively the purposes
of this Agreement and the other Loan Documents, (ii) to subject to valid
and perfected first priority Liens (subject to Permitted Liens) any of the
Collateral or any other property of any Loan Party and its Subsidiaries,
(iii) to establish and maintain the validity and effectiveness of any of
the Loan Documents and the validity, perfection and priority of the Liens
intended to be created thereby, and (iv) to better assure, convey, grant,
assign, transfer and confirm unto each Agent and each Lender the rights now or
hereafter intended to be granted to it under this Agreement or any other Loan
Document.  In furtherance of the
foregoing, to the maximum extent permitted by applicable law, each Loan Party
(A) authorizes each Agent to execute any such agreements, instruments or
other documents in such Loan Party’s name and to file such agreements, instruments
or other documents in any appropriate filing office, (B) authorizes each Agent
to file any financing statement required hereunder or under any other Loan
Document, and

 

66

 

any continuation statement or amendment with respect thereto, in any
appropriate filing office without the signature of such Loan Party, and
(C) ratifies the filing of any financing statement, and any continuation
statement or amendment with respect thereto, filed without the signature of such
Loan Party prior to the date hereof.

 

(l)            Change in
Collateral.  Give the Collateral
Agent not less than 30 days prior written notice of any change in the
location of any Collateral, other than to (or in-transit between) locations set
forth on Schedule 6.01(ff) and with respect to which the Collateral
Agent has fully perfected its Liens thereon.

 

(m)          Landlord Waivers;
Collateral Access Agreements.

 

(i)            At any time any
Collateral with a book value in excess of $500,000 is located on any real
property of the Borrower or any other Loan Party (whether such real property is
now existing or acquired after the Effective Date) which is not owned by the
Borrower or any other Loan Party, use commercially reasonable efforts to obtain
written subordinations or waivers, in form and substance satisfactory to the
Collateral Agent, of all present and future Liens to which the owner or lessor
of such premises may be entitled to assert against the Collateral; and

 

(ii)           Use commercially
reasonable efforts to obtain written access agreements, in form and substance
reasonably satisfactory to the Collateral Agent, providing access to Collateral
located on any premises not owned by a Loan Party (and with respect to which no
Collateral was located as of the Effective Date) in order to remove such
Collateral from such premises during an Event of Default.

 

(n)           Subordination.  Cause all Indebtedness and other obligations
now or hereafter owed by it to any of its Affiliates, to be subordinated in
right of payment and security to the Indebtedness and other Obligations owing
to the Agents and the Lenders in accordance with a subordination agreement in
form and substance satisfactory to the Agents.

 

(o)           After Acquired Real
Property.  Upon the acquisition by
it or any of its Subsidiaries of any After Acquired Property, immediately so
notify the Collateral Agent, setting forth with specificity a description of
the interest acquired, the location of the real property, any structures or
improvements thereon and either an appraisal or such Loan Party’s good-faith
estimate of the current value of such real property (for purposes of this
Section, the ”Current Value”). 
The Collateral Agent shall notify such Loan Party whether it intends to
require a Mortgage and the other documents referred to below or in the case of
leasehold, a leasehold Mortgage or landlord’s waiver (pursuant to Section 7.01(m)
hereof).  Upon receipt of such notice
requesting a Mortgage, the Person which has acquired such After Acquired
Property shall immediately furnish to the Collateral Agent the following, each
in form and substance satisfactory to the Collateral Agent:  (i) a Mortgage with respect to such
real property and related assets located at the After Acquired Property, each
duly executed by such Person and in recordable form; (ii) evidence of the
recording of the Mortgage referred to in clause (i) above in such office or
offices as may be necessary or, in the opinion of the Collateral Agent,
desirable to create and perfect a valid and enforceable first priority lien on
the property purported to be covered thereby or to otherwise protect the rights
of the Agents and the Lenders thereunder,

 

67

 

(iii) a Title Insurance Policy, (iv) a survey of such real
property, certified to the Collateral Agent and to the issuer of the Title
Insurance Policy by a licensed professional surveyor reasonably satisfactory to
the Collateral Agent, (v) Phase I Environmental Site Assessments with
respect to such real property, certified to the Collateral Agent by a company
reasonably satisfactory to the Collateral Agent, (vi) in the case of a
leasehold interest, a certified copy of the lease between the landlord and such
Person with respect to such real property in which such Person has a leasehold
interest, and the certificate of occupancy with respect thereto, (vii) in
the case of a leasehold interest, an attornment and nondisturbance agreement
between the landlord (and any fee mortgagee) with respect to such real property
and the Collateral Agent, and (viii) such other documents or instruments
(including guarantees and opinions of counsel) as the Collateral Agent may
reasonably require.  The Borrower shall
pay all fees and expenses, including reasonable attorneys’ fees and expenses,
and all title insurance charges and premiums, in connection with each Loan
Party’s obligations under this Section 7.01(n).

 

(p)           Fiscal Year.  Cause each fiscal year of Borrower and its
Subsidiaries to end as described in the definition of “Fiscal Year” in
Section 1.01 unless each Agent consents to a change in such fiscal year of
Borrower and its Subsidiaries (such consent not to be unreasonably withheld)
(and appropriate related changes to this Agreement).

 

(q)           Borrowing Base.  Maintain all Revolving Loans in compliance with
the then current Borrowing Base.

 

Section 7.02           Negative
Covenants.  So long as any principal
of or interest on any Loan or any other Obligation (whether or not due) shall
remain unpaid or any Lender shall have any Commitment hereunder, each Loan
Party shall not:

 

(a)           Liens, Etc.  Create, incur, assume or suffer to exist, or
permit any of its Subsidiaries to create, incur, assume or suffer to exist, any
Lien upon or with respect to any of its properties, whether now owned or
hereafter acquired; file or suffer to exist under the Uniform Commercial Code
or any similar law or statute of any jurisdiction, a financing statement (or
the equivalent thereof) that names it or any of its Subsidiaries as debtor;
sign or suffer to exist any security agreement authorizing any secured party
thereunder to file such financing statement (or the equivalent thereof); sell
any of its property or assets (except Inventory sold in the ordinary course of
business subject to customary return and refund rights) subject to an understanding
or agreement, contingent or otherwise, to repurchase such property or assets
(including sales of accounts receivable) with recourse to it or any of its
Subsidiaries or assign or otherwise transfer, or permit any of its Subsidiaries
to assign or otherwise transfer, any account or other right to receive income;
other than, as to all of the above, Permitted Liens; provided, that, no
Liens shall be permitted on any assets in the Borrowing Base (except Liens
granted in favor of Collateral Agent).

 

(b)           Indebtedness.  Create, incur, assume, guarantee or suffer
to exist, or otherwise become or remain liable with respect to, or permit any
of its Subsidiaries to create, incur, assume, guarantee or suffer to exist or
otherwise become or remain liable with respect to, any Indebtedness other than
Permitted Indebtedness.

 

68

 

(c)           Fundamental Changes;
Dispositions.  Wind-up, liquidate or
dissolve, or merge, consolidate or amalgamate with any Person, or convey, sell,
lease or sublease, transfer or otherwise dispose of, whether in one transaction
or a series of related transactions, all or any part of its business, property
or assets (including without limitation granting a new franchise, approving the
opening of a new store by a franchisee of a Loan Party, or selling, closing or
otherwise disposing of one or more store locations), whether now owned or
hereafter acquired (or agree to do any of the foregoing), or purchase or
otherwise acquire, whether in one transaction or a series of related
transactions, all or substantially all of the assets of any Person (or any
division thereof) (or agree to do any of the foregoing), or permit any of its
Subsidiaries to do any of the foregoing; provided, however, that

 

(i)            any Guarantor (other
than Parent) may be (x) merged with and into any other Guarantor (other than
Parent) or with and into the Borrower, or (y) liquidated or dissolved, in each
case, so long as (A) no other provision of this Agreement would be
violated thereby, (B) such Loan Party gives the Agents at least 30 days
prior written notice of such merger, liquidation or dissolution, (C) no
Default or Event of Default shall have occurred and be continuing either before
or after giving effect to such transaction, (D) the Lenders’ rights in any
Collateral, including, without limitation, the existence, perfection and
priority of any Lien thereon, are not adversely affected by such merger,
liquidation, or dissolution, and (E) the surviving Person in any merger or
consolidation with the Borrower shall be the Borrower and (F) the surviving
Person in any merger or consolidation is joined as a Loan Party hereunder and
is a party to a Security Agreement and the Capital Stock of such Person is the
subject of a Pledge Agreement, in each case, which is in full force and effect
on the date of and immediately after giving effect to such merger or
consolidation; and

 

(ii)           any Loan Party and its
Subsidiaries may make Permitted Dispositions.

 

(d)           Change in Nature of
Business.  Make, or permit any of
its Subsidiaries to make, any change in the nature of its business as described
in Section 6.01(l).

 

(e)           Loans, Advances,
Investments, Etc.  Make or commit or
agree to make any loan, advance guarantee of obligations, other extension of
credit or capital contributions to, or hold or invest in or commit or agree to
hold or invest in, or purchase or otherwise acquire or commit or agree to
purchase or otherwise acquire any shares of the Capital Stock, bonds, notes,
debentures or other securities of, or make or commit or agree to make any other
investment in, any other Person, or purchase or own any futures contract or
otherwise become liable for the purchase or sale of currency or other
commodities at a future date in the nature of a futures contract, or permit any
of its Subsidiaries to do any of the foregoing, except for:  (i) investments existing on the date
hereof, as set forth on Schedule 7.02(e) hereto, but not any
increase in the amount thereof as set forth in such Schedule or any other
modification of the terms thereof, (ii) temporary loans and advances in cash
among the Loan Parties made in the ordinary course of business, (iii)
agreements with franchisees entered into in the ordinary course of business
permitting such franchisees to pay any applicable Up Front Franchise Fee to the
applicable Loan Party over time in a manner that is consistent with historical
practices, and (iv) Permitted Investments.

 

69

 

(f)            Lease Obligations.  Create, incur or suffer to exist, or permit
any of its Subsidiaries to create, incur or suffer to exist, any obligations as
lessee (i) for the payment of rent for any real or personal property in
connection with any sale and leaseback transaction, or (ii) for the payment
of rent on account of Capitalized Lease Obligations other than Capitalized
Lease Obligations which would not cause the aggregate amount of all obligations
under Capitalized Leases owing by all Loan Parties and their Subsidiaries in
any Fiscal Year to exceed the amounts set forth in subsection (g)
of this Section 7.02.

 

(g)           Capital Expenditures.  Make or commit or agree to make, or permit
any of its Subsidiaries to make or commit or agree to make, any Capital
Expenditure (by purchase or Capitalized Lease) that would cause the aggregate
amount of all Capital Expenditures made by the Loan Parties and their
Subsidiaries to exceed (a) $11,300,000 in Fiscal Year 2004, (b) $7,800,000 in
Fiscal Year 2005, or (c) $6,500,000 in Fiscal Year 2006 or in any Fiscal Year
thereafter.

 

(h)           Restricted Payments.  (i)  Declare
or pay any dividend or other distribution, direct or indirect, on account of
any Capital Stock of any Loan Party or any of its Subsidiaries, now or
hereafter outstanding, (ii) make any repurchase, redemption, retirement,
defeasance, sinking fund or similar payment, purchase or other acquisition for
value, direct or indirect, of any Capital Stock of any Loan Party or any direct
or indirect parent of any Loan Party, now or hereafter outstanding, (iii) make
any payment to retire, or to obtain the surrender of, any outstanding warrants,
options or other rights for the purchase or acquisition of shares of any class
of Capital Stock of any Loan Party, now or hereafter outstanding, or (iv) pay
any management fees or any other fees or expenses (including the reimbursement
thereof by any Loan Party or any of its Subsidiaries) pursuant to any
management, consulting or other services agreement to any of the shareholders
or other equityholders of any Loan Party or any of its Subsidiaries or other
Affiliates, or to any other Subsidiaries or Affiliates of any Loan Party; provided,
however, that (x) so long as no Event of Default has occurred or would
result therefrom and (y) (I) with respect to clauses (A), (B), (C), (D), and (E)
below, so long as after giving effect thereto the Borrower has Excess
Availability of at least $3,000,000 after giving effect thereto, and (II) with
respect to clause (F) below, so long as after giving effect thereto the
Borrower has Excess Availability of at least $2,000,000 after giving effect
thereto, (A) Borrower and its Subsidiaries may pay dividends or make advances
to the Parent (1) in amounts necessary to pay the customary expenses of the
Parent in the ordinary course of its business solely as a result of its
ownership and operation of the Borrower and its Subsidiaries (including
salaries and related reasonable and customary expenses incurred by employees of
the Parent) and (2) in amounts necessary to enable the Parent to pay taxes when
due and owing solely as a result of its ownership of the Borrower and its
Subsidiaries, (B) any Subsidiary of the Borrower may pay dividends to or make
distributions to Borrower, (C) the Parent may pay dividends in the form of
common Capital Stock, (D) Parent and its Subsidiaries may pay amounts necessary
to repurchase any equity securities of Parent from its employees, officers or
directors, in an aggregate amount not in excess of $200,000 in an any Fiscal
Year, (E) Parent and its Subsidiaries may pay expenses incurred by the Loan
Parties on or before the Effective Date in connection with this Agreement and
the other Loan Documents and the transaction contemplated thereby, (F) Borrower
may pay any fees payable to Sun (or its Affiliates) pursuant to the terms and
conditions of the Sun Management Agreement, in an aggregate amount during any
Fiscal Year not greater

 

70

 

than $1,000,000, and (G) Borrower may pay any fees payable to MFOL
pursuant to the terms and conditions of the MFOL Management Agreement, in an
aggregate amount during any Fiscal Year not greater than $1,000,000.

 

(i)            Federal Reserve
Regulations.  Permit any Loan or the
proceeds of any Loan under this Agreement to be used for any purpose that would
cause such Loan to be a margin loan under the provisions of Regulation T, U or
X of the Board.

 

(j)            Transactions with
Affiliates.  Enter into, renew,
extend or be a party to, or permit any of its Subsidiaries to enter into,
renew, extend or be a party to, any transaction or series of related
transactions (including, without limitation, the purchase, sale, lease,
transfer or exchange of property or assets of any kind or the rendering of
services of any kind) with any Affiliate, except (i) in the ordinary
course of business in a manner and to an extent consistent with past practice
and necessary or desirable for the prudent operation of its business, for fair
consideration and on terms no less favorable to it or its Subsidiaries than
would be obtainable in a comparable arm’s length transaction with a Person that
is not an Affiliate thereof, (ii) transactions with another Loan Party,
(iii) transactions permitted by Section 7.02(e) or (h), or
(iv) the Permitted Purchase.

 

(k)           Limitations on
Dividends and Other Payment Restrictions Affecting Subsidiaries.  Except as otherwise set forth in this
Agreement, create or otherwise cause, incur, assume, suffer or permit to exist
or become effective any consensual encumbrance or restriction of any kind on
the ability of any Subsidiary of any Loan Party (i) to pay dividends or to
make any other distribution on any shares of Capital Stock of such Subsidiary
owned by any Loan Party or any of its Subsidiaries, (ii) to pay or prepay
or to subordinate any Indebtedness owed to any Loan Party or any of its
Subsidiaries, (iii) to make loans or advances to any Loan Party or any of
its Subsidiaries or (iv) to transfer any of its property or assets to any
Loan Party or any of its Subsidiaries, or permit any of its Subsidiaries to do
any of the foregoing; provided,  however,  that nothing in any of
clauses (i) through (iv) of this Section 7.02(k) shall prohibit or
restrict compliance with:

 

(A)          this
Agreement and the other Loan Documents;

 

(B)           any
agreements in effect on the date of this Agreement and described on Schedule 7.02(k);

 

(C)           any
applicable law, rule or regulation (including, without limitation, applicable
currency control laws and applicable state corporate statutes restricting the
payment of dividends in certain circumstances);

 

(D)          in
the case of clause (iv), any agreement setting forth customary restrictions on
the subletting, assignment or transfer of any property or asset that is leased
or licensed; or

 

(E)           in
the case of clause (iv), any agreement, instrument or other document evidencing
a Permitted Lien that restricts, on customary terms, the transfer of any
property or assets subject thereto.

 

71

 

(l)            Limitation on
Issuance of Capital Stock. Except in the case of the Parent’s Capital Stock
(or any options or warrants therefore), issue or sell or enter into any
agreement or arrangement for the issuance and sale of, or permit any of its
Subsidiaries to issue or sell or enter into any agreement or arrangement for
the issuance and sale of, any shares of its Capital Stock, any securities
convertible into or exchangeable for its Capital Stock or any warrants.

 

(m)          Modifications of
Indebtedness, Organizational Documents and Certain Other Agreements; Etc.  (i) Except, (A) on the Effective Date, with
respect to the Sealy Subordinated Debt, and (B) so long as no Default or Event
of Default has occurred and is continuing or would result therefrom, with
respect to any Indebtedness between the Loan Parties, amend, modify or
otherwise change (or permit the amendment, modification or other change in any
manner of) any of the provisions of any of its or its Subsidiaries’
Indebtedness for borrowed money or of any instrument or agreement (including,
without limitation, any purchase agreement, indenture, loan agreement or
security agreement) relating to any such Indebtedness if such amendment,
modification or change would shorten the final maturity or average life to
maturity of, or require any payment to be made earlier than the date originally
scheduled on, such Indebtedness, would increase the interest rate applicable to
such Indebtedness, would change the subordination provisions, if any, of such
Indebtedness, or would otherwise be adverse to the Lenders or the issuer of
such Indebtedness in any respect, (ii) except with respect to (A) so long
as an Event of Default has not occurred and is not continuing, Indebtedness
between the Loan Parties (to the extent otherwise permitted by this Agreement),
and (B) the Obligations, make any voluntary or optional payment, prepayment,
redemption, defeasance, sinking fund payment or other acquisition for value of
any of its or its Subsidiaries’ Indebtedness for borrowed money (including,
without limitation, by way of depositing money or securities with the trustee
therefor before the date required for the purpose of paying any portion of such
Indebtedness when due), or refund, refinance, replace or exchange any other
Indebtedness for any such Indebtedness (except to the extent such Indebtedness
is otherwise expressly permitted by the definition of “Permitted
Indebtedness”), or make any payment, prepayment, redemption, defeasance,
sinking fund payment or repurchase of any such Indebtedness as a result of any
asset sale, change of control, issuance and sale of debt or equity securities
or similar event, or give any notice with respect to any of the foregoing,
(iii) except as permitted by Section 7.02(c), amend, modify or
otherwise change its name, jurisdiction of organization, organizational
identification number or FEIN, or (iv) amend, modify or otherwise change
its certificate of incorporation or bylaws (or other similar organizational
documents), including, without limitation, by the filing or modification of any
certificate of designation, or any agreement or arrangement entered into by it,
with respect to any of its Capital Stock (including any shareholders’
agreement), or enter into any new agreement with respect to any of its Capital
Stock, except any such amendments, modifications or changes or any such new
agreements or arrangements pursuant to this clause (iv) that either
individually or in the aggregate, could not reasonably be expected to result in
a Material Adverse Effect.

 

(n)           Investment Company
Act of 1940.  Engage in any
business, enter into any transaction, use any securities or take any other
action or permit any of its Subsidiaries to do any of the foregoing, that would
cause it or any of its Subsidiaries to become subject to the registration
requirements of the Investment Company Act of 1940, as amended, by virtue of

 

72

 

being an “investment company” or a company “controlled” by an
“investment company” not entitled to an exemption within the meaning of such
Act.

 

(o)           [Intentionally
Omitted].

 

(p)           ERISA.  (i) Engage, or permit any ERISA Affiliate to
engage, in any transaction described in Section 4069 of ERISA;
(ii) engage, or permit any ERISA Affiliate to engage, in any prohibited
transaction described in Section 406 of ERISA or 4975 of the IRC for which
a statutory or class exemption is not available or a private exemption has not
previously been obtained from the U.S. Department of Labor; (iii) adopt or
permit any ERISA Affiliate to adopt any employee welfare benefit plan within
the meaning of Section 3(1) of ERISA which provides benefits to employees
after termination of employment other than as required by Section 601 of
ERISA or applicable law; (iv) fail to make any contribution or payment to any
Multiemployer Plan which it or any ERISA Affiliate may be required to make
under any agreement relating to such Multiemployer Plan, or any law pertaining
thereto; or (v) fail, or permit any ERISA Affiliate to fail, to pay any
required installment or any other payment required under Section 412 of
the IRC on or before the due date for such installment or other payment.

 

(q)           Environmental.  Permit the use, handling, generation,
storage, treatment, Release of Hazardous Materials at any property owned or
leased by it or any of its Subsidiaries, except in compliance, in all material
respects, with Environmental Laws and so long as such use, handling,
generation, storage, treatment, Release of Hazardous Materials could not
reasonably be expected to result in a Material Adverse Effect.

 

(r)            Certain Agreements.  Agree to any material amendment or other
material change to or material waiver of any of its rights under any Material
Contract or Key Contract.

 

Section 7.03           Financial
Covenants.  So long as any principal
of or interest on any Loan or any other Obligation (whether or not due) shall
remain unpaid or any Lender shall have any Commitment hereunder, each Loan
Party shall not:

 

(a)           Leverage Ratio.  Permit the ratio (the “Leverage Ratio”)
of Consolidated Funded Indebtedness as of the last day of each Fiscal Month set
forth below to TTM EBITDA of the Borrower and its Subsidiaries as of the last
day of such Fiscal Month to be greater than the applicable ratio set forth
opposite such date:

 

	
  Fiscal Month End

  	
   

  	
  Leverage
  Ratio

  
	
   

  	
   

  	
   

  
	
  April 6, 2004

  	
   

  	
  2.94:1.00

  
	
   

  	
   

  	
   

  
	
  May 4, 2004

  	
   

  	
  3.21:1.00

  
	
   

  	
   

  	
   

  
	
  June 1, 2004

  	
   

  	
  2.98:1.00

  
	
   

  	
   

  	
   

  
	
  July 6, 2004

  	
   

  	
  2.83:1.00

  

 

73

 

	
  August 3, 2004

  	
   

  	
  2.92:1.00

  
	
   

  	
   

  	
   

  
	
  August 31, 2004

  	
   

  	
  2.85:1.00

  
	
   

  	
   

  	
   

  
	
  October 5, 2004

  	
   

  	
  2.46:1.00

  
	
   

  	
   

  	
   

  
	
  November 2, 2004

  	
   

  	
  2.87:1.00

  
	
   

  	
   

  	
   

  
	
  November 30, 2004

  	
   

  	
  2.63:1.00

  
	
   

  	
   

  	
   

  
	
  January 4, 2005

  	
   

  	
  2.19:1.00

  
	
   

  	
   

  	
   

  
	
  February 1, 2005

  	
   

  	
  2.18:1.00

  
	
   

  	
   

  	
   

  
	
  March 1, 2005

  	
   

  	
  1.94:1.00

  
	
   

  	
   

  	
   

  
	
  April 5, 2005

  	
   

  	
  1.88:1.00

  
	
   

  	
   

  	
   

  
	
  May 3, 2005

  	
   

  	
  2.08:1.00

  
	
   

  	
   

  	
   

  
	
  May 31, 2005 and the last day of each Fiscal Month thereafter

  	
   

  	
  2.00:1.00

  

 

(b)           Fixed Charge
Coverage Ratio. Permit the Fixed Charge Coverage Ratio of the Borrower and
its Subsidiaries as of the last day of each Fiscal Month set forth below to be
less than the applicable ratio set forth opposite such date:

 

	
  Fiscal Month End

  	
   

  	
  Fixed
  Charge Coverage Ratio

  
	
   

  	
   

  	
   

  
	
  April 6, 2004

  	
   

  	
  0.83:1.00

  
	
   

  	
   

  	
   

  
	
  May 4, 2004

  	
   

  	
  0.83:1.00

  
	
   

  	
   

  	
   

  
	
  June 1, 2004

  	
   

  	
  0.78:1.00

  
	
   

  	
   

  	
   

  
	
  July 6, 2004

  	
   

  	
  0.80:1.00

  
	
   

  	
   

  	
   

  
	
  August 3, 2004

  	
   

  	
  0.76:1.00

  
	
   

  	
   

  	
   

  
	
  August 31, 2004

  	
   

  	
  0.78:1.00

  
	
   

  	
   

  	
   

  
	
  October 5, 2004

  	
   

  	
  0.76:1.00

  

 

74

 

	
  November 2, 2004

  	
   

  	
  0.76:1.00

  
	
   

  	
   

  	
   

  
	
  November 30, 2004

  	
   

  	
  0.82:1.00

  
	
   

  	
   

  	
   

  
	
  January 4, 2005

  	
   

  	
  0.93:1.00

  
	
   

  	
   

  	
   

  
	
  February 1, 2005

  	
   

  	
  0.87:1.00

  
	
   

  	
   

  	
   

  
	
  March 1, 2005

  	
   

  	
  0.93:1.00

  
	
   

  	
   

  	
   

  
	
  April 5, 2005

  	
   

  	
  1.00:1.00

  
	
   

  	
   

  	
   

  
	
  May 3, 2005

  	
   

  	
  1.04:1.00

  
	
   

  	
   

  	
   

  
	
  May 31, 2005

  	
   

  	
  1.17:1.00

  
	
   

  	
   

  	
   

  
	
  July 5, 2005

  	
   

  	
  1.21:1.00

  
	
   

  	
   

  	
   

  
	
  August 2, 2005

  	
   

  	
  1.27:1.00

  
	
   

  	
   

  	
   

  
	
  August 30, 2005

  	
   

  	
  1.28:1.00

  
	
   

  	
   

  	
   

  
	
  October 4, 2005

  	
   

  	
  1.13:1.00

  
	
   

  	
   

  	
   

  
	
  November 1, 2005

  	
   

  	
  1.14:1.00

  
	
   

  	
   

  	
   

  
	
  November 29, 2005

  	
   

  	
  1.13:1.00

  
	
   

  	
   

  	
   

  
	
  January 3, 2006

  	
   

  	
  1.10:1.00

  
	
   

  	
   

  	
   

  
	
  January 31, 2006

  	
   

  	
  1.09:1.00

  
	
   

  	
   

  	
   

  
	
  February 28, 2006

  	
   

  	
  1.10:1.00

  
	
   

  	
   

  	
   

  
	
  April 4, 2006

  	
   

  	
  1.11:1.00

  
	
   

  	
   

  	
   

  
	
  May 2, 2006

  	
   

  	
  1.12:1.00

  
	
   

  	
   

  	
   

  
	
  May 30, 2006

  	
   

  	
  1.13:1.00

  
	
   

  	
   

  	
   

  
	
  July 4, 2006

  	
   

  	
  1.13:1.00

  
	
   

  	
   

  	
   

  
	
  August 1, 2006

  	
   

  	
  1.14:1.00

  
	
   

  	
   

  	
   

  
	
  August 29, 2006

  	
   

  	
  1.15:1.00

  

 

75

 

	
  October 3, 2006

  	
   

  	
  1.14:1.00

  
	
   

  	
   

  	
   

  
	
  October 31, 2006

  	
   

  	
  1.15:1.00

  
	
   

  	
   

  	
   

  
	
  November 28, 2006

  	
   

  	
  1.16:1.00

  
	
   

  	
   

  	
   

  
	
  January 2, 2007

  	
   

  	
  1.17:1.00

  
	
   

  	
   

  	
   

  
	
  January 30, 2007 and the last day of each Fiscal Month
  thereafter

  	
   

  	
  1.18:1.00

  

 

(c)           TTM EBITDA.  Permit the TTM EBITDA of the Borrower and
its Subsidiaries at the end of each Fiscal Month set forth below to be less
than the applicable amount set forth opposite such date:

 

	
  Fiscal Month End

  	
   

  	
  TTM EBITDA

  
	
   

  	
   

  	
   

  
	
  April 6, 2004

  	
   

  	
  $

  	
  8,960,000

  
	
   

  	
   

  	
   

  
	
  May 4, 2004

  	
   

  	
  $

  	
  9,060,000

  
	
   

  	
   

  	
   

  
	
  June 1, 2004

  	
   

  	
  $

  	
  9,150,000

  
	
   

  	
   

  	
   

  
	
  July 6, 2004

  	
   

  	
  $

  	
  9,400,000

  
	
   

  	
   

  	
   

  
	
  August 3, 2004

  	
   

  	
  $

  	
  9,200,000

  
	
   

  	
   

  	
   

  
	
  August 31, 2004

  	
   

  	
  $

  	
  9,070,000

  
	
   

  	
   

  	
   

  
	
  October 5, 2004

  	
   

  	
  $

  	
  9,430,000

  
	
   

  	
   

  	
   

  
	
  November 2, 2004

  	
   

  	
  $

  	
  9,400,000

  
	
   

  	
   

  	
   

  
	
  November 30, 2004

  	
   

  	
  $

  	
  9,990,000

  
	
   

  	
   

  	
   

  
	
  January 4, 2005

  	
   

  	
  $

  	
  11,590,000

  
	
   

  	
   

  	
   

  
	
  February 1, 2005

  	
   

  	
  $

  	
  11,190,000

  
	
   

  	
   

  	
   

  
	
  March 1, 2005

  	
   

  	
  $

  	
  12,140,000

  
	
   

  	
   

  	
   

  
	
  April 5, 2005

  	
   

  	
  $

  	
  12,450,000

  
	
   

  	
   

  	
   

  
	
  May 3, 2005

  	
   

  	
  $

  	
  12,750,000

  

 

76

 

	
  May 31, 2005

  	
   

  	
  $

  	
  13,680,000

  
	
   

  	
   

  	
   

  
	
  July 5, 2005

  	
   

  	
  $

  	
  14,280,000

  
	
   

  	
   

  	
   

  
	
  August 2, 2005

  	
   

  	
  $

  	
  14,580,000

  
	
   

  	
   

  	
   

  
	
  August 30, 2005

  	
   

  	
  $

  	
  14,940,000

  
	
   

  	
   

  	
   

  
	
  October 4, 2005

  	
   

  	
  $

  	
  15,220,000

  
	
   

  	
   

  	
   

  
	
  November 1, 2005

  	
   

  	
  $

  	
  15,560,000

  
	
   

  	
   

  	
   

  
	
  November 29, 2005

  	
   

  	
  $

  	
  15,430,000

  
	
   

  	
   

  	
   

  
	
  January 3, 2006

  	
   

  	
  $

  	
  14,560,000

  
	
   

  	
   

  	
   

  
	
  January 31, 2006

  	
   

  	
  $

  	
  14,490,000

  
	
   

  	
   

  	
   

  
	
  February 28, 2006

  	
   

  	
  $

  	
  14,530,000

  
	
   

  	
   

  	
   

  
	
  April 4, 2006

  	
   

  	
  $

  	
  14,540,000

  
	
   

  	
   

  	
   

  
	
  May 2, 2006

  	
   

  	
  $

  	
  14,560,000

  
	
   

  	
   

  	
   

  
	
  May 30, 2006

  	
   

  	
  $

  	
  14,610,000

  
	
   

  	
   

  	
   

  
	
  July 4, 2006

  	
   

  	
  $

  	
  14,620,000

  
	
   

  	
   

  	
   

  
	
  August 1, 2006

  	
   

  	
  $

  	
  14,660,000

  
	
   

  	
   

  	
   

  
	
  August 29, 2006

  	
   

  	
  $

  	
  14,690,000

  
	
   

  	
   

  	
   

  
	
  October 3, 2006

  	
   

  	
  $

  	
  14,690,000

  
	
   

  	
   

  	
   

  
	
  October 31, 2006

  	
   

  	
  $

  	
  14,740,000

  
	
   

  	
   

  	
   

  
	
  November 28, 2006

  	
   

  	
  $

  	
  14,810,000

  
	
   

  	
   

  	
   

  
	
  January 2, 2007

  	
   

  	
  $

  	
  14,950,000

  
	
   

  	
   

  	
   

  
	
  January 30, 2007 and the last day of each Fiscal Month
  thereafter

  	
   

  	
  $

  	
  15,050,000

  

 

77

 

ARTICLE VIII

MANAGEMENT, COLLECTION AND STATUS OF

ACCOUNTS RECEIVABLE AND OTHER COLLATERAL

 

Section 8.01           Collection
of Accounts Receivable; Management of Collateral.  (a)  On
or prior to the Effective Date, the Borrower shall assist the Administrative
Agent in establishing, and, during the term of this Agreement, maintaining
blocked accounts (the “Blocked Accounts”) with respect to the Borrower’s
principal concentration accounts with the financial institution set forth on
Schedule 8.01 hereto (the “Blocked Account Bank”), and entering
into a control agreement relating to the Blocked Account with the Borrower, the
Collateral Agent, and the Blocked Account Bank.  Each of the Borrower and each Subsidiary shall irrevocably
instruct its Account Debtors (until instructed to the contrary by Collateral
Agent), with respect to its Accounts Receivable consisting of credit or debit
card payments, to remit all payments to be made by them, whether by means of
checks or other drafts or by wire transfer or by Automated Clearing House, Inc.
payment, to a Blocked Account and shall instruct the Blocked Account Bank to
deposit all amounts received by it to a Blocked Account at such Blocked Account
Bank on the day received or, if such day is not a Business Day, on the next succeeding
Business Day.  Each of the Borrower and
each Subsidiary will enforce, collect and receive all amounts owing on their
Accounts Receivable for the Agents’ benefit and on the Administrative Agent’s
behalf, but at the Borrower’s or such Subsidiary’s expense; and such privilege
shall terminate at the election of any Agent hereunder upon the occurrence and
during the continuance of an Event of Default. 
All checks, drafts, notes, money orders, acceptances, cash and other
evidences of Indebtedness received directly by the Borrower or any of its
Subsidiaries from any Account Debtor, as proceeds from their Accounts
Receivable, or as proceeds of any other Collateral, shall be held by the
Borrower or such Subsidiaries in trust for the Agents and the Lenders and upon
receipt be deposited by the Borrower or such Subsidiaries in original form and
no later than the next Business Day after receipt thereof into a Blocked
Account.  Except to the extent permitted
by clause (ii) of the following sentence, the Borrower and such Subsidiaries
shall not commingle such collections with their own funds, with the funds of
any Subsidiary or Affiliate of the Borrower or with the proceeds of any assets
not included in the Collateral.  All
funds received in the Blocked Accounts (i) after the occurrence and during the
continuance of a Triggering Event, upon request by Collateral Agent, shall be
sent by wire transfer or Automated Clearing House, Inc. payment to the Payment
Office to be credited to the Administrative Agent’s Account for application at
the end of each Business Day when such funds are received in Administrative
Agent’s Account to reduce the then principal balance of the Revolving Loans and
the other Obligations then due and payable, conditional upon final payment to the
Administrative Agent, and (ii) at all other times, may be transferred to an
operating account of the Borrower or one of its Subsidiaries.  No checks, drafts or other instruments
received by the Administrative Agent shall constitute final payment to the Administrative
Agent unless and until such checks, drafts or instruments have actually been
collected.

 

(b)           After the occurrence
and during the continuance of an Event of Default, the Collateral Agent may
send a notice of assignment and/or notice of the Lenders’ security interest to
any and all Account Debtors and, thereafter, the Collateral Agent shall have
the sole right to collect the Accounts Receivable and payment intangibles of
the Borrower and its Subsidiaries and/or take possession of the Collateral and
the books and records relating thereto. 
After the occurrence and during the continuation of an Event of Default,
upon receipt of a notice

 

78

 

from Collateral Agent of its election with respect thereto, the
Borrower and its Subsidiaries shall not, without prior written consent of the
Collateral Agent, grant any extension of time of payment of any Account
Receivable or payment intangible, compromise or settle any Account Receivable
or payment intangible for less than the full amount thereof, release, in whole
or in part, any Person or property liable for the payment thereof, or allow any
credit or discount whatsoever thereon.

 

(c)           The Borrower hereby
appoints each Agent or its designee on behalf of such Agent as the Borrower’s
attorney-in-fact with power exercisable during the continuance of an Event of
Default to (i) endorse the Borrower’s name upon any notes, acceptances, checks,
drafts, money orders or other evidences of payment relating to the Accounts Receivable
or payment intangibles of the Borrower, (ii) sign the Borrower’s name on any
invoice or bill of lading relating to any of the Accounts Receivable or payment
intangibles of the Borrower, drafts against Account Debtors with respect to
Accounts Receivable or payment intangibles of the Borrower, assignments and
verifications of Accounts Receivable or payments intangibles and notices to
Account Debtors with respect to Accounts Receivable of the Borrower, (iii) send
verification of Accounts Receivable or payment intangibles of the Borrower, and
(iv) notify the Postal Service authorities to change the address for delivery
of mail addressed to the Borrower to such address as such Agent may designate
and to do all other acts and things necessary to carry out this Agreement.  All acts of said attorney or designee are
hereby ratified and approved, and said attorney or designee shall not be liable
for any acts of omission or commission (other than acts of omission or commission
constituting gross negligence or willful misconduct as determined by a final
judgment of a court of competent jurisdiction), or for any error of judgment or
mistake of fact or law; this power being coupled with an interest is
irrevocable until all of the Loans and other Obligations under the Loan
Documents are paid in full and all of the Loan Documents are terminated.

 

(d)           Nothing herein
contained shall be construed to constitute any Agent as agent of the Borrower
for any purpose whatsoever, and the Agents shall not be responsible or liable
for any shortage, discrepancy, damage, loss or destruction of any part of the
Collateral wherever the same may be located and regardless of the cause thereof
(other than from acts of omission or commission constituting gross negligence
or willful misconduct as determined by a final judgment of a court of competent
jurisdiction).  The Agents shall not,
under any circumstance or in any event whatsoever, have any liability for any
error or omission or delay of any kind occurring in the settlement, collection
or payment of any of the Accounts Receivable of the Borrower or any instrument
received in payment thereof or for any damage resulting therefrom (other than
acts of omission or commission constituting gross negligence or willful
misconduct as determined by a final judgment of a court of competent
jurisdiction).  The Agents, by anything
herein or in any assignment or otherwise, do not assume any of the obligations
under any contract or agreement assigned to any Agent and shall not be
responsible in any way for the performance by the Borrower of any of the terms
and conditions thereof.

 

(e)           If any Account
Receivable of the Borrower includes a charge for any tax payable to any
Governmental Authority, each Agent is hereby authorized (but in no event
obligated) in its discretion to pay the amount thereof to the proper taxing
authority for the Borrower’s account and to charge the Borrower therefor.  The Borrower shall notify the Agents

 

79

 

if any Account Receivable of the Borrower includes any taxes due to any
such Governmental Authority and, in the absence of such notice, the Agents
shall have the right to retain the full proceeds of such Account Receivable and
shall not be liable for any taxes that may be due by reason of the sale and
delivery creating such Account Receivable.

 

(f)            Notwithstanding any
other terms set forth in the Loan Documents, the rights and remedies of the
Agents and the Lenders herein provided, and the obligations of the Loan Parties
set forth herein, are cumulative of, may be exercised singly or concurrently
with, and are not exclusive of, any other rights, remedies or obligations set
forth in any other Loan Document or as provided by law.

 

Section 8.02           Accounts
Receivable Documentation.  The Borrower
will, from and after the occurrence and during the continuation of an Event of
Default, at such intervals as the Agents may require, execute and deliver
confirmatory written assignments of the Accounts Receivable to the Agents and
furnish such further schedules and/or information as any such Agent may require
relating to the Accounts Receivable, including, without limitation, sales
invoices or the equivalent, credit memos issued, remittance advices, reports
and copies of deposit slips and copies of original shipping or delivery
receipts for all merchandise sold.  In
addition, the Borrower shall notify the Agents of any non-compliance in respect
of the representations, warranties and covenants contained in Section 8.03.  The items to be provided under this
Section 8.02 are to be in form reasonably satisfactory to the Agents and
are to be executed and delivered to the Agents from time to time solely for
their convenience in maintaining records of the Collateral.  The Borrower’s failure to give any of such
items to the Agents shall not affect, terminate, modify or otherwise limit the
Collateral Agent’s Lien on the Collateral. 
The Borrower shall not re-date any invoice or sale or make sales on
extended dating beyond that customary in the Borrower’s industry, and shall not
re-bill any Accounts Receivable without promptly disclosing the same to the
Agents and providing the Agents with a copy of such re-billing, identifying the
same as such.  If the Borrower becomes
aware of anything materially detrimental to any of the Borrower’s customers’
credit, the Borrower will promptly advise the Agents thereof.

 

Section 8.03           Status
of Accounts Receivable and Other Collateral.  With respect to Collateral of any Loan Party at the time the
Collateral becomes subject to the Collateral Agent’s Lien, each Loan Party
covenants, represents and warrants:  (a)
such Loan Party shall be the sole owner, free and clear of all Liens (except
for the Liens granted in the favor of the Collateral Agent for the benefit of
the Lenders and Permitted Liens), and shall be fully authorized under
applicable law to sell, transfer, pledge and/or grant a security interest in
each and every item of said Collateral; (b) each Account Receivable identified
by Borrower as an Eligible Account Receivable in a Borrowing Base report
submitted to either Agent shall be a good and valid account representing a bona
fide indebtedness incurred by the Account Debtor therein named, for a fixed sum
as set forth in the invoice relating thereto; (c) no Eligible Account Receivable
identified by Borrower as an Eligible Account Receivable in a Borrowing Base
report submitted to either Agent shall be subject to any defense, offset,
counterclaim, discount or allowance except as may be stated in the invoice
relating thereto, discounts and allowances as may be customary in such Loan
Party’s business and as otherwise disclosed to the Agents; (d) none of the
transactions underlying or giving rise to any Account Receivable identified by

 

80

 

Borrower as an Eligible Account Receivable in a Borrowing Base report
submitted to either Agent shall violate any applicable state or federal laws or
regulations, and all documents relating thereto shall be legally sufficient
under such laws or regulations and shall be legally enforceable in accordance
with their terms; (e) no agreement under which any deduction or offset of any
kind, other than normal trade discounts, may be granted or shall have been made
by such Loan Party at or before the time any Account Receivable identified by
Borrower as an Eligible Account Receivable in a Borrowing Base report submitted
to either Agent is created; (f) all agreements, instruments and other documents
relating to any Account Receivable identified by Borrower as an Eligible
Account Receivable in a Borrowing Base report submitted to either Agent shall
be true and correct and in all material respects what they purport to be; (g)
all signatures and endorsements that appear on all material agreements,
instruments and other documents relating to any Account Receivable identified
by Borrower as an Eligible Account Receivable in a Borrowing Base report
submitted to either Agent shall be genuine and all signatories and endorsers
shall have full capacity to contract; (h) such Loan Party shall maintain books
and records pertaining to said Collateral in such detail, form and scope as the
Agents shall reasonably require; (i) such Loan Party shall immediately
notify the Agents if any Account Receivable arises out of contracts with any
Governmental Authority, and will execute any instruments and take any steps
required by the Agents in order that all monies due or to become due under any
such contract shall be assigned to the Collateral Agent and notice thereof
given to such Governmental Authority under the Federal Assignment of Claims Act
or any similar state or local law; (j) such Loan Party will, immediately
upon learning thereof, report to the Agents any material loss or destruction
of, or substantial damage to, any of the Collateral, and any other matters
affecting the value, enforceability or collectability of any of the Collateral;
(k) if any amount payable under or in connection with any Account
Receivable is evidenced by a promissory note or other instrument, such
promissory note or instrument shall be immediately pledged, endorsed, assigned
and delivered to the Collateral Agent for the benefit of the Lenders as
additional Collateral; (l) such Loan Party shall not re-date any invoice or
sale or make sales on extended dating beyond that which is customary in the
ordinary course of its business and in the industry; (m) such Loan Party shall
conduct a physical count of its Inventory at such intervals as any Agent may
request and such Loan Party shall promptly supply the Agents with a copy of
such count accompanied by a report of the value (based on the lower of cost (on
a first in first out basis) and market value) of such Inventory; and (n) such
Loan Party is not and shall not be entitled to pledge any Agent’s or any
Lender’s credit on any purchases or for any purpose whatsoever.

 

Section 8.04           Collateral
Custodian.  Upon the occurrence and
during the continuance of any Event of Default, the Collateral Agent may at any
time and from time to time employ and maintain on the premises of any Loan
Party a custodian selected by the Collateral Agent who shall have full
authority to do all acts necessary to protect the Agents’ and the Lenders’
interests.  Each Loan Party hereby
agrees to, and to cause its Subsidiaries to, cooperate with any such custodian
and to do whatever the Collateral Agent may reasonably request to preserve the
Collateral.  All costs and expenses
incurred by the Collateral Agent by reason of the employment of the custodian
shall be the responsibility of the Borrower and charged to the Loan Account.

 

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ARTICLE IX

EVENTS OF DEFAULT

 

Section 9.01           Events
of Default.  If any of the following
Events of Default shall occur and be continuing:

 

(a)           the Borrower shall fail
to pay any principal of or interest on any Loan, any Collateral Agent Advance,
or any fee, indemnity or other amount payable under this Agreement or any other
Loan Document when due (whether by scheduled maturity, required prepayment,
acceleration, demand or otherwise);

 

(b)           any representation or
warranty made or deemed made by or on behalf of any Loan Party or by any
officer of the foregoing under or in connection with any Loan Document or under
or in connection with any report, certificate, or other document delivered to
any Agent or any Lender pursuant to any Loan Document shall have been incorrect
in any material respect when made or deemed made;

 

(c)           any Loan Party shall
fail to perform or comply with any covenant or agreement contained in
Article VII or Article VIII, or any Loan Party shall fail to perform
or comply with any covenant or agreement contained in any Security Agreement to
which it is a party, any Pledge Agreement to which it is a party or any
Mortgage to which it is a party;

 

(d)           any Loan Party shall
fail to perform or comply with any other term, covenant or agreement contained
in any Loan Document to be performed or observed by it and, except as set forth
in subsections (a), (b) and (c) of this Section 9.01, such
failure, if capable of being remedied, shall remain unremedied for 15 days
after the earlier of the date a senior officer of any Loan Party becomes aware
of such failure and the date written notice of such default shall have been
given by any Agent to such Loan Party;

 

(e)           any Loan Party shall
fail to pay any principal of or interest on any of its Indebtedness (excluding
the Obligations) in excess of $100,000, or any premium thereon, when due
(whether by scheduled maturity, required prepayment, acceleration, demand or
otherwise) and such failure shall continue after the applicable grace period,
if any, specified in the agreement or instrument relating to such Indebtedness,
or any other default under any agreement or instrument relating to any such
Indebtedness, or any other event, shall occur and shall continue after the
applicable grace period, if any, specified in such agreement or instrument, if
the effect of such default or event is to accelerate, or to permit the
acceleration of, the maturity of such Indebtedness; or any such Indebtedness
shall be declared to be due and payable, or required to be prepaid (other than
by a regularly scheduled required prepayment), redeemed, purchased or defeased
or an offer to prepay, redeem, purchase or defease such Indebtedness shall be
required to be made, in each case, prior to the stated maturity thereof;

 

(f)            any Loan Party (i)
shall institute any proceeding or voluntary case seeking to adjudicate it a
bankrupt or insolvent, or seeking dissolution, liquidation, winding up,
reorganization, arrangement, adjustment, protection, relief or composition of
it or its debts under any law relating to bankruptcy, insolvency,
reorganization or relief of debtors, or seeking the

 

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entry of an order for relief or the appointment of a receiver, trustee,
custodian or other similar official for any such Person or for any substantial
part of its property, (ii) shall be generally not paying its debts as such
debts become due or shall admit in writing its inability to pay its debts
generally, (iii) shall make a general assignment for the benefit of creditors,
or (iv) shall take any action to authorize or effect any of the actions set
forth above in this subsection (f);

 

(g)           any proceeding shall be
instituted against any Loan Party seeking to adjudicate it a bankrupt or
insolvent, or seeking dissolution, liquidation, winding up, reorganization,
arrangement, adjustment, protection, relief of debtors, or seeking the entry of
an order for relief or the appointment of a receiver, trustee, custodian or
other similar official for any such Person or for any substantial part of its
property, and either such proceeding shall remain undismissed or unstayed for a
period of 30 days or any of the actions sought in such proceeding (including,
without limitation, the entry of an order for relief against any such Person or
the appointment of a receiver, trustee, custodian or other similar official for
it or for any substantial part of its property) shall occur;

 

(h)           any provision of any
Loan Document shall at any time for any reason (other than pursuant to the
express terms thereof) cease to be valid and binding on or enforceable against
any Loan Party intended to be a party thereto, or the validity or
enforceability thereof shall be contested by any party thereto, or a proceeding
shall be commenced by any Loan Party or any Governmental Authority having
jurisdiction over any of them, seeking to establish the invalidity or
unenforceability thereof, or any Loan Party shall deny in writing that it has
any liability or obligation purported to be created under any Loan Document;

 

(i)            any Security
Agreement, any Pledge Agreement, any Mortgage or any other security document,
after delivery thereof pursuant hereto, shall for any reason fail or cease to
create a valid and perfected and, except to the extent permitted by the terms
hereof or thereof, first priority Lien in favor of the Collateral Agent for the
benefit of the Lenders on any Collateral purported to be covered thereby;

 

(j)            any bank at which any
deposit account, blocked account, or lockbox account of any Loan Party is
maintained shall fail to comply with any of the terms of any deposit account,
blocked account, lockbox account or similar agreement to which such bank is a
party or any securities intermediary, commodity intermediary or other financial
institution at any time in custody, control or possession of any investment
property of any Loan Party shall fail to comply with any of the terms of any
investment property control agreement to which such Person is a party;

 

(k)           one or more judgments
or orders for the payment of money exceeding $50,000 in the aggregate shall be
rendered against Parent or any of its Subsidiaries and remain unsatisfied, or
the Parent or any of its Subsidiaries shall agree to the settlement of any one
or more pending or threatened actions, suits or proceedings affecting any Loan
Party before any court or other Governmental Authority or any arbitrator or
mediator, providing for the payment of money exceeding $50,000 in the
aggregate, and in the case of any such judgment or order either
(i) enforcement proceedings shall have been commenced by any creditor upon
any such judgment or order, or (ii) there shall be a period of 10
consecutive days after entry thereof

 

83

 

during which a stay of enforcement of any such judgment or order, by
reason of a pending appeal or otherwise, shall not be in effect; provided,
however, that any such judgment, order or settlement shall not give rise
to an Event of Default under this subsection (k) if and for so long
as (A) the amount of such judgment, order or settlement is covered by a valid
and binding policy of insurance between the defendant and the insurer covering
full payment thereof (subject to customary deductibles) and (B) such
insurer has been notified, and has not disputed the claim made for payment, of
the amount of such judgment, order or settlement;

 

(l)            any Loan Party is
enjoined, restrained or in any way prevented by the order of any court or any
Governmental Authority from conducting all or any material part of its business
for more than 15 days;

 

(m)          any material damage to,
or loss, theft or destruction of, any Collateral, whether or not insured, or
any strike, lockout, labor dispute, embargo, condemnation, act of God or public
enemy, or other casualty which causes, for more than 15 days, the cessation or
substantial curtailment of revenue producing activities at any facility of any
Loan Party, if any such event or circumstance could reasonably be expected to
result in a Material Adverse Effect;

 

(n)           any cessation of a
substantial part of the business of any Loan Party for a period which
materially and adversely affects the ability of any Loan Party to continue its
business on a profitable basis;

 

(o)           the loss, suspension or
revocation of, or failure to renew, any license or permit now held or hereafter
acquired by the Borrower or any of its Subsidiaries, if such loss, suspension,
revocation or failure to renew could reasonably be expected to result in a
Material Adverse Effect;

 

(p)           the indictment, or the
threatened indictment of any Loan Party under any criminal statute, or
commencement or threatened commencement of criminal or civil proceedings
against any Loan Party, pursuant to which statute or proceedings the penalties
or remedies sought or available include forfeiture to any Governmental
Authority of any material portion of the property of such Person;

 

(q)           any Loan Party or any
of its ERISA Affiliates shall have made a complete or partial withdrawal from a
Multiemployer Plan, and, as a result of such complete or partial withdrawal,
any Loan Party or any of its ERISA Affiliates incurs a withdrawal liability in
an annual amount exceeding $50,000; or a Multiemployer Plan enters reorganization
status under Section 4241 of ERISA, and, as a result thereof any Loan
Party’s or any of its ERISA Affiliates’ annual contribution requirements with
respect to such Multiemployer Plan increases in an annual amount exceeding
$50,000;

 

(r)            any Termination Event
with respect to any Employee Plan shall have occurred, and, 30 days after
notice thereof shall have been given to any Loan Party by any Agent, (i) such
Termination Event (if correctable) shall not have been corrected, and (ii) the
then current value of such Employee Plan’s vested benefits exceeds the then
current value of assets allocable to such benefits in such Employee Plan by
more than $50,000 (or, in the case of a Termination Event involving liability
under Section 409, 502(i), 502(l), 515, 4062, 4063, 4064,

 

84

 

4069, 4201, 4204 or 4212 of ERISA or Section 4971 or 4975 of the
IRC, the liability is in excess of such amount);

 

(s)           any Loan Party shall be
liable for any Environmental Liabilities and Costs the payment of which could
reasonably be expected to result in a Material Adverse Effect;

 

(t)            a Change of Control
shall have occurred;

 

(u)           an event or development
occurs which could reasonably be expected to result in a Material Adverse Effect;
or

 

(v)           an event of default
shall have occurred and be continuing under the Sealy Subordinated Debt
Documents, or any other Material Contract,

 

then, and in any such event, the Collateral
Agent may, and shall at the request of the Required Lenders, by notice to the
Borrower, (i) terminate all Commitments, whereupon all Commitments shall
immediately be so terminated, (ii) declare all or any portion of the Loans then
outstanding to be due and payable, whereupon all or such portion of the
aggregate principal of all Loans, all accrued and unpaid interest thereon, all
fees and all other amounts payable under this Agreement and the other Loan
Documents shall become due and payable immediately, without presentment,
demand, protest or further notice of any kind, all of which are hereby
expressly waived by each Loan Party and (iii) exercise any and all of its
other rights and remedies under applicable law, hereunder and under the other
Loan Documents; provided, however, that upon the occurrence of
any Event of Default described in subsection (f) or (g) of this Section 9.01,
without any notice to any Loan Party or any other Person or any act by any
Agent or any Lender, all Commitments shall automatically terminate and all
Loans then outstanding, together with all accrued and unpaid interest thereon,
all fees and all other amounts due under this Agreement and the other Loan
Documents shall become due and payable automatically and immediately, without
presentment, demand, protest or notice of any kind, all of which are expressly
waived by each Loan Party.

 

ARTICLE X

AGENTS

 

Section 10.01         Appointment.  Each Lender (and each subsequent maker of
any Loan by its making thereof) hereby irrevocably appoints and authorizes the
Administrative Agent and the Collateral Agent to perform the duties of each
such Agent as set forth in this Agreement including:  (i) to receive on behalf of each Lender any payment of
principal of or interest on the Loans outstanding hereunder and all other
amounts accrued hereunder for the account of the Lenders and paid to such
Agent, and, subject to Section 2.02 of this Agreement, to
distribute promptly to each Lender its Pro Rata Share of all payments so
received; (ii) to distribute to each Lender copies of all material notices
and agreements received by such Agent and not required to be delivered to each
Lender pursuant to the terms of this Agreement, provided that the Agents shall
not have any liability to the Lenders for any Agent’s inadvertent failure to
distribute any such notices or agreements to the Lenders; (iii) to
maintain, in

 

85

 

accordance with its customary business practices, ledgers and records
reflecting the status of the Obligations, the Loans, and related matters and to
maintain, in accordance with its customary business practices, ledgers and
records reflecting the status of the Collateral and related matters;
(iv) to execute or file any and all financing or similar statements or
notices, amendments, renewals, supplements, documents, instruments, proofs of
claim, notices and other written agreements with respect to this Agreement or
any other Loan Document; (v) to make the Loans and Collateral Agent
Advances, for such Agent or on behalf of the applicable Lenders as provided in
this Agreement or any other Loan Document; (vi) to perform, exercise, and
enforce any and all other rights and remedies of the Lenders with respect to
the Loan Parties, the Obligations, or otherwise related to any of same to the
extent reasonably incidental to the exercise by such Agent of the rights and
remedies specifically authorized to be exercised by such Agent by the terms of
this Agreement or any other Loan Document; (vii)  to incur and pay such
fees necessary or appropriate for the performance and fulfillment of its
functions and powers pursuant to this Agreement or any other Loan Document; and
(viii) subject to Section 10.03 of this Agreement, to take
such action as such Agent deems appropriate on its behalf to administer the
Loans and the Loan Documents and to exercise such other powers delegated to
such Agent by the terms hereof or the other Loan Documents (including, without
limitation, the power to give or to refuse to give notices, waivers, consents,
approvals and instructions and the power to make or to refuse to make
determinations and calculations) together with such powers as are reasonably
incidental thereto to carry out the purposes hereof and thereof.  As to any matters not expressly provided for
by this Agreement and the other Loan Documents (including, without limitation,
enforcement or collection of the Loans), the Agents shall not be required to
exercise any discretion or take any action, but shall be required to act or to
refrain from acting (and shall be fully protected in so acting or refraining
from acting) upon the instructions of the Required Lenders, and such
instructions of the Required Lenders shall be binding upon all Lenders and all
makers of Loans.

 

Section 10.02         Nature
of Duties.  The Agents shall have no
duties or responsibilities except those expressly set forth in this Agreement
or in the other Loan Documents.  The
duties of the Agents shall be mechanical and administrative in nature.  The Agents shall not have by reason of this
Agreement or any other Loan Document a fiduciary relationship in respect of any
Lender.  Nothing in this Agreement or
any other Loan Document, express or implied, is intended to or shall be
construed to impose upon the Agents any obligations in respect of this Agreement
or any other Loan Document except as expressly set forth herein or
therein.  Each Lender shall make its own
independent investigation of the financial condition and affairs of the Loan
Parties in connection with the making and the continuance of the Loans
hereunder and shall make its own appraisal of the creditworthiness of the Loan
Parties and the value of the Collateral, and the Agents shall have no duty or
responsibility, either initially or on a continuing basis, to provide any
Lender with any credit or other information with respect thereto, whether
coming into their possession before the initial Loan hereunder or at any time
or times thereafter, provided that, upon the reasonable request of a Lender,
each Agent shall provide to such Lender any documents or reports delivered to
such Agent by the Loan Parties pursuant to the terms of this Agreement or any
other Loan Document.  If any Agent seeks
the consent or approval of the Required Lenders to the taking or refraining
from taking any action hereunder, such Agent shall send notice thereof to each
Lender.  Each

 

86

 

Agent shall promptly notify each Lender any time that the Required
Lenders have instructed such Agent to act or refrain from acting pursuant
hereto.

 

Section 10.03         Rights,
Exculpation, Etc.  The Agents and
their directors, officers, agents or employees shall not be liable to any
Lender for any action taken or omitted to be taken by them under or in
connection with this Agreement or the other Loan Documents, except for their
own gross negligence or willful misconduct as determined by a final judgment of
a court of competent jurisdiction. 
Without limiting the generality of the foregoing, the Agents
(i) may treat the payee of any Loan as the owner thereof until the
Collateral Agent receives written notice of the assignment or transfer thereof,
pursuant to Section 12.07 hereof, signed by such payee and in form
satisfactory to the Collateral Agent; (ii) may consult with legal counsel
(including, without limitation, counsel to any Agent or counsel to the Loan
Parties), independent public accountants, and other experts selected by any of
them and shall not be liable for any action taken or omitted to be taken in
good faith by any of them in accordance with the advice of such counsel or experts;
(iii) make no warranty or representation to any Lender and shall not be
responsible to any Lender for any statements, certificates, warranties or
representations made in or in connection with this Agreement or the other Loan
Documents; (iv) shall not have any duty to ascertain or to inquire as to
the performance or observance of any of the terms, covenants or conditions of
this Agreement or the other Loan Documents on the part of any Person, the
existence or possible existence of any Default or Event of Default, or to
inspect the Collateral or other property (including, without limitation, the
books and records) of any Person; (v) shall not be responsible to any
Lender for the due execution, legality, validity, enforceability, genuineness,
sufficiency or value of this Agreement or the other Loan Documents or any other
instrument or document furnished pursuant hereto or thereto; and (vi) shall not
be deemed to have made any representation or warranty regarding the existence,
value or collectability of the Collateral, the existence, priority or
perfection of the Collateral Agent’s Lien thereon, or any certificate prepared
by any Loan Party in connection therewith, nor shall the Agents be responsible
or liable to the Lenders for any failure to monitor or maintain any portion of
the Collateral.  The Agents shall not be
liable for any apportionment or distribution of payments made in good faith
pursuant to Section 4.04, and if any such apportionment or
distribution is subsequently determined to have been made in error the sole
recourse of any Lender to whom payment was due but not made, shall be to
recover from other Lenders any payment in excess of the amount which they are
determined to be entitled.  The Agents
may at any time request instructions from the Lenders with respect to any
actions or approvals which by the terms of this Agreement or of any of the
other Loan Documents the Agents are permitted or required to take or to grant,
and if such instructions are promptly requested, the Agents shall be absolutely
entitled to refrain from taking any action or to withhold any approval under
any of the Loan Documents until they shall have received such instructions from
the Required Lenders.  Without limiting
the foregoing, no Lender shall have any right of action whatsoever against any
Agent as a result of such Agent acting or refraining from acting under this
Agreement or any of the other Loan Documents in accordance with the
instructions of the Required Lenders.

 

Section 10.04         Reliance.  Each Agent shall be entitled to rely upon
any written notices, statements, certificates, orders or other documents or any
telephone message believed by it in good faith to be genuine and correct and to
have been signed, sent or made by the proper

 

87

 

Person, and with respect to all matters pertaining to this Agreement or
any of the other Loan Documents and its duties hereunder or thereunder, upon
advice of counsel selected by it.

 

Section 10.05         Indemnification.  To the extent that any Agent is not
reimbursed and indemnified by any Loan Party, the Lenders will reimburse and
indemnify such Agent from and against any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses,
advances or disbursements of any kind or nature whatsoever which may be imposed
on, incurred by, or asserted against such Agent in any way relating to or
arising out of this Agreement or any of the other Loan Documents or any action
taken or omitted by such Agent under this Agreement or any of the other Loan
Documents, in proportion to each Lender’s Pro Rata Share, including, without
limitation, advances and disbursements made pursuant to Section 10.08;
provided, however, that no Lender shall be liable for any portion
of such liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses, advances or disbursements for which there
has been a final judicial determination that such liability resulted from such
Agent’s gross negligence or willful misconduct.  The obligations of the Lenders under this Section 10.05
shall survive the payment in full of the Loans and the termination of this
Agreement.

 

Section 10.06         Agents
Individually.  With respect to its
Pro Rata Share of the Total Commitment hereunder and the Loans made by it, each
Agent shall have and may exercise the same rights and powers hereunder and is
subject to the same obligations and liabilities as and to the extent set forth
herein for any other Lender or maker of a Loan.  The terms “Lenders” or “Required Lenders” or any similar terms
shall, unless the context clearly otherwise indicates, include each Agent in
its individual capacity as a Lender or one of the Required Lenders.  Each Agent and its Affiliates may accept
deposits from, lend money to, and generally engage in any kind of banking,
trust or other business with the Borrower as if it were not acting as an Agent
pursuant hereto without any duty to account to the other Lenders.

 

Section 10.07         Successor
Agent.  (a)  Each Agent
may resign from the performance of all its functions and duties hereunder and
under the other Loan Documents at any time by giving at least 30 Business Days
prior written notice to the Borrower and each Lender.  Such resignation shall take effect upon the acceptance by a
successor Agent of appointment pursuant to clauses (b) and (c) below or as
otherwise provided below.

 

(b)           Upon any such notice of
resignation, the Required Lenders shall appoint a successor Agent.  Upon the acceptance of any appointment as
Agent hereunder by a successor Agent, such successor Agent shall thereupon
succeed to and become vested with all the rights, powers, privileges and duties
of the retiring Agent, and the retiring Agent shall be discharged from its
duties and obligations under this Agreement and the other Loan Documents.  After any Agent’s resignation hereunder as
an Agent, the provisions of this Article X shall inure to its benefit as
to any actions taken or omitted to be taken by it while it was an Agent under
this Agreement and the other Loan Documents.

 

(c)           If a successor Agent
shall not have been so appointed within said thirty (30) Business Day period,
the retiring Agent, with the consent of the other Agent shall then appoint a
successor Agent who shall serve as an Agent until such time, if any, as the
Required Lenders, with the consent of the other Agent, appoint a successor
Agent as provided above.

 

88

 

Section 10.08         Collateral
Matters.

 

(a)           The Collateral Agent
may from time to time make such disbursements and advances (“Collateral
Agent Advances”) which the Collateral Agent, in its sole discretion, deems
necessary or desirable to preserve, protect, prepare for sale or lease or
dispose of the Collateral or any portion thereof, to enhance the likelihood or
maximize the amount of repayment by the Borrower of the Loans and other
Obligations or to pay any other amount chargeable to the Borrower pursuant to
the terms of this Agreement, including, without limitation, costs, fees and expenses
as described in Section 12.04. 
The Collateral Agent Advances shall be repayable on demand and be
secured by the Collateral.  The
Collateral Agent Advances shall constitute Obligations hereunder which may be
charged to the Loan Account in accordance with Section 4.02.  The Collateral Agent shall notify each
Lender and the Borrower in writing of each such Collateral Agent Advance, which
notice shall include a description of the purpose of such Collateral Agent
Advance.  Without limitation to its obligations
pursuant to Section 10.05, each Lender agrees that it shall make
available to the Collateral Agent, upon the Collateral Agent’s demand, in
Dollars in immediately available funds, the amount equal to such Lender’s Pro
Rata Share of each such Collateral Agent Advance.  If such funds are not made available to the Collateral Agent by
such Lender, the Collateral Agent shall be entitled to recover such funds on
demand from such Lender, together with interest thereon for each day from the
date such payment was due until the date such amount is paid to the Collateral
Agent, at the Federal Funds Rate for 3 Business Days and thereafter at the
Reference Rate.

 

(b)           The Lenders hereby
irrevocably authorize the Collateral Agent, at its option and in its discretion,
to release any Lien granted to or held by the Collateral Agent upon any
Collateral upon termination of the Total Commitment and payment and
satisfaction of all Loans and all other Obligations which have matured and
which the Collateral Agent has been notified in writing are then due and
payable; or constituting property being sold or disposed of in compliance with
the terms of this Agreement and the other Loan Documents; or constituting
property in which the Loan Parties owned no interest at the time the Lien was
granted or at any time thereafter; or if approved, authorized or ratified in
writing by the Lenders.  Upon request by
the Collateral Agent at any time, the Lenders will confirm in writing the
Collateral Agent’s authority to release particular types or items of Collateral
pursuant to this Section 10.08(b).

 

(c)           Without in any manner
limiting the Collateral Agent’s authority to act without any specific or
further authorization or consent by the Lenders (as set forth in Section 10.08(b)),
each Lender agrees to confirm in writing, upon request by the Collateral Agent,
the authority to release Collateral conferred upon the Collateral Agent under Section 10.08(b).  Upon receipt by the Collateral Agent of
confirmation from the Lenders of its authority to release any particular item
or types of Collateral, and upon prior written request by any Loan Party, the
Collateral Agent shall (and is hereby irrevocably authorized by the Lenders to)
execute such documents as may be necessary to evidence the release of the Liens
granted to the Collateral Agent for the benefit of the Lenders upon such
Collateral; provided, however, that (i) the Collateral Agent
shall not be required to execute any such document on terms which, in the
Collateral Agent’s opinion, would expose the Collateral Agent to liability or
create any obligations or entail any consequence other than the release of such
Liens without recourse or warranty, and (ii) such release shall not in any
manner discharge, affect or impair the Obligations

 

89

 

or any Lien upon (or obligations of any Loan Party in respect of) all
interests in the Collateral retained by any Loan Party.

 

(d)           The Collateral Agent
shall have no obligation whatsoever to any Lender to assure that the Collateral
exists or is owned by the Loan Parties or is cared for, protected or insured or
has been encumbered or that the Lien granted to the Collateral Agent pursuant
to this Agreement or any other Loan Document has been properly or sufficiently
or lawfully created, perfected, protected or enforced or is entitled to any
particular priority, or to exercise at all or in any particular manner or under
any duty of care, disclosure or fidelity, or to continue exercising, any of the
rights, authorities and powers granted or available to the Collateral Agent in
this Section 10.08 or in any other Loan Document, it being
understood and agreed that in respect of the Collateral, or any act, omission
or event related thereto, the Collateral Agent may act in any manner it may
deem appropriate, in its sole discretion, given the Collateral Agent’s own
interest in the Collateral as one of the Lenders and that the Collateral Agent
shall have no duty or liability whatsoever to any other Lender, except as
otherwise provided herein.

 

Section 10.09         Agency
for Perfection.  Each Lender hereby
appoints each Agent and each other Lender as agent and bailee for the purpose
of perfecting the security interests in and liens upon the Collateral in assets
which, in accordance with Article 9 of the Code, can be perfected only by
possession or control (or where the security interest of a secured party with
possession or control has priority over the security interest of another
secured party) and each Agent and each Lender hereby acknowledges that it holds
possession or control of any such Collateral for the benefit of the Collateral
Agent as secured party.  Should any
Lender obtain possession or control of any such Collateral, such Lender shall
notify the Collateral Agent thereof, and, promptly upon the Collateral Agent’s
request therefor shall deliver possession or control of such Collateral to the
Collateral Agent or in accordance with the Collateral Agent’s
instructions.  Each Loan Party by its execution and delivery of this
Agreement hereby consents to the foregoing.

 

ARTICLE XI

GUARANTY

 

Section 11.01         Guaranty.  Each Guarantor hereby unconditionally and
irrevocably guarantees the punctual payment when due, whether at stated
maturity, by acceleration or otherwise, of all Obligations of the Borrower now
or hereafter existing under any Loan Document, whether for principal, interest,
fees, expenses or otherwise, including any portion thereof that accrues after
the commencement of an Insolvency Proceeding, whether or not allowed or allowable
in whole or in part as a claim in any such Insolvency Proceeding, (such
obligations, to the extent not paid by the Borrower, being the ”Guaranteed
Obligations”), and agrees to pay any and all expenses (including reasonable
counsel fees and expenses) incurred by the Agents and the Lenders in enforcing
any rights under the guaranty set forth in this Article.  Without limiting the generality of the
foregoing, each Guarantor’s liability shall extend to all amounts that
constitute part of the Guaranteed Obligations and would be owed by the Borrower
to the Agents and\or the Lenders under any Loan Document but for the fact that
they are

 

90

 

unenforceable or not allowable due to the existence of a bankruptcy,
reorganization or similar proceeding involving any Loan Party.

 

Section 11.02         Guaranty
Absolute.  Each Guarantor guarantees
that the Guaranteed Obligations will be paid strictly in accordance with the
terms of the Loan Documents, regardless of any law, regulation or order now or
hereafter in effect in any jurisdiction affecting any of such terms or the
rights of the Agents or the Lenders with respect thereto.  The obligations of each Guarantor under this
Article are independent of the Guaranteed Obligations, and a separate
action or actions may be brought and prosecuted against each Guarantor to
enforce such obligations, irrespective of whether any action is brought against
any Loan Party or whether any Loan Party is joined in any such action or
actions.  The liability of each
Guarantor under this Article shall be irrevocable, absolute and
unconditional irrespective of, and each Guarantor hereby irrevocably waives any
defenses it may now or hereafter have in any way relating to, any or all of the
following:

 

(a)           any lack of validity or
enforceability of any Loan Document or any agreement or instrument relating
thereto;

 

(b)           any change in the time,
manner or place of payment of, or in any other term of, all or any of the
Guaranteed Obligations, or any other amendment or waiver of or any consent to
departure from any Loan Document, including, without limitation, any increase
in the Guaranteed Obligations resulting from the extension of additional credit
to any Loan Party or otherwise;

 

(c)           any taking, exchange, release
or non-perfection of any Collateral, or any taking, release or amendment or
waiver of or consent to departure from any other guaranty, for all or any of
the Guaranteed Obligations;

 

(d)           any change,
restructuring or termination of the corporate, limited liability company or
partnership structure or existence of any Loan Party; or

 

(e)           any other circumstance
(including, without limitation, any statute of limitations) or any existence of
or reliance on any representation by the Agents or the Lenders that might
otherwise constitute a defense available to, or a discharge of, any Loan Party
or any other guarantor or surety.

 

This Article shall continue to be
effective or be reinstated, as the case may be, if at any time any payment of
any of the Guaranteed Obligations is rescinded or must otherwise be returned by
the Agents, the Lenders, or any other Person upon the insolvency, bankruptcy or
reorganization of the Borrower or otherwise, all as though such payment had not
been made.

 

Section 11.03         Waiver.  Each Guarantor hereby waives promptness,
diligence, notice of acceptance and any other notice with respect to any of the
Guaranteed Obligations and this Article and any requirement that the
Agents or the Lenders exhaust any right or take any action against any Loan
Party or any other Person or any Collateral. 
Each Guarantor acknowledges that it will receive direct and indirect
benefits from the financing arrangements contemplated herein and that the
waiver set forth in this Section 11.03 is knowingly made in

 

91

 

contemplation of such benefits. 
Each Guarantor hereby waives any right to revoke this Article, and
acknowledges that this Article is continuing in nature and applies to all
Guaranteed Obligations, whether existing now or in the future.

 

Section 11.04         Continuing
Guaranty; Assignments.  This
Article is a continuing guaranty and shall (a) remain in full force and
effect until the later of (i) the cash payment in full of the Guaranteed
Obligations (other than indemnification obligations as to which no claim has
been made) and all other amounts payable under this Article and (ii) the
termination of all Commitments, (b) be binding upon each Guarantor, its
successors and assigns and (c) inure to the benefit of and be enforceable by
the Agents and the Lenders and their successors, pledgees, transferees and
assigns.  Without limiting the
generality of the foregoing clause (c), any Lender may pledge, assign or
otherwise transfer all or any portion of its rights and obligations under this
Agreement (including, without limitation, all or any portion of its Commitments
and its Loans) to any other Person, and such other Person shall thereupon
become vested with all the benefits in respect thereof granted such Lender herein
or otherwise, in each case as provided in Section 12.07.

 

Section 11.05         Subrogation.  No Guarantor will exercise any rights that
it may now or hereafter acquire against any Loan Party or any other guarantor
that arise from the existence, payment, performance or enforcement of such
Guarantor’s obligations under this Article, including, without limitation, any
right of subrogation, reimbursement, exoneration, contribution or
indemnification and any right to participate in any claim or remedy of the Agents
and the Lenders against any Loan Party or any other guarantor or any
Collateral, whether or not such claim, remedy or right arises in equity or
under contract, statute or common law, including, without limitation, the right
to take or receive from any Loan Party or any other guarantor, directly or
indirectly, in cash or other property or by set-off or in any other manner,
payment or security solely on account of such claim, remedy or right, unless
and until all of the Guaranteed Obligations and all other amounts payable under
this Article shall have been paid in full in cash and the Final Maturity
Date shall have occurred.  If any amount
shall be paid to any Guarantor in violation of the immediately preceding sentence
at any time prior to the later of the payment in full in cash of the Guaranteed
Obligations and all other amounts payable under this Article and the Final
Maturity Date, such amount shall be held in trust for the benefit of the Agents
and the Lenders and shall forthwith be paid to the Agents and the Lenders to be
credited and applied to the Guaranteed Obligations and all other amounts
payable under this Article, whether matured or unmatured, in accordance with
the terms of this Agreement, or to be held as Collateral for any Guaranteed
Obligations or other amounts payable under this Article thereafter
arising.  If (i) any Guarantor
shall make payment to the Agents and the Lenders of all or any part of the
Guaranteed Obligations, (ii) all of the Guaranteed Obligations and all
other amounts payable under this Article shall be paid in full in cash and
(iii) all Commitments have been terminated, the Agents and the Lenders
will, at such Guarantor’s request and expense, execute and deliver to such
Guarantor appropriate documents, without recourse and without representation or
warranty, necessary to evidence the transfer by subrogation to such Guarantor
of an interest in the Guaranteed Obligations resulting from such payment by
such Guarantor.

 

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ARTICLE XII

 

MISCELLANEOUS

 

Section 12.01         Notices,
Etc.  All notices and other
communications provided for hereunder shall be in writing and shall be mailed,
telecopied or delivered, if to any Loan Party, at the following address:

 

MATTRESS
FIRM, INC.

5815 Gulf Freeway

Houston, TX 77023

Attention:  Jim R. Black, Chief
Financial Officer

Telephone:  (713) 651-2083

Telecopier:  (713) 921-4053

 

with a copy of
notices pertaining to Defaults and Events of Defaults to:

 

JENKENS & GILCHRIST PARKER CHAPIN LLP

The Chrysler Building

405 Lexington Avenue

New York, NY 10174

Attention: Mitchell P. Portnoy, Esq.

Telephone:  (212) 704-6135

Telecopier:  (212) 704-6288

 

if to the
Administrative  Agent, to it at the following address:

 

ABLECO FINANCE LLC

299 Park Avenue, 23rd Floor

New York, New York  10171

Attention: Daniel Wolf

Telephone: 212-891-2100

Telecopier: 212-891-1541

 

if to the
Collateral Agent, to it at the following address:

 

ABLECO FINANCE LLC

299 Park Avenue, 23rd Floor

New York, New York  10171

Attention:  Daniel Wolf

Telephone:  212-891-2100

Telecopier:  212-891-1541

 

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in each case,
with a copy to:

 

PAUL, HASTINGS, JANOFSKY & WALKER LLP
515 South Flower Street

Los Angeles, CA 90071

Attention:  John Francis Hilson, Esq.

Telephone:  213-683-6300

Telecopier:  213-627-0705

 

or, as to each party, at such other address
as shall be designated by such party in a written notice to the other parties
complying as to delivery with the terms of this Section 12.01.  All such notices and other communications
shall be effective, (i) if mailed, when received or three days after deposited
in the mails, whichever occurs first, (ii) if telecopied, when transmitted and
confirmation received, or (iii) if delivered, upon delivery, except that notices
to any Agent pursuant to Article II shall not be effective until
received by such Agent, as the case may be.

 

Section 12.02         Amendments,
Etc.  No amendment or waiver of any
provision of this Agreement or any other Loan Document, and no consent to any
departure by any Loan Party therefrom, shall in any event be effective unless
the same shall be in writing and signed by Borrower and the Required Lenders
(or by the Collateral Agent with the consent of the Required Lenders), and then
such waiver or consent shall be effective only in the specific instance and for
the specific purpose for which given, provided, however, that no
amendment, waiver or consent shall (i) increase the Commitment of any
Lender, reduce the principal of, or interest on, the Loans payable to any
Lender, reduce the amount of any fee payable for the account of any Lender, or
postpone or extend any date fixed for any payment of principal of, or interest
or fees on, the Loans payable to any Lender, in each case without the written
consent of any Lender affected thereby, (ii) increase the Total Commitment
without the written consent of each Lender, (iii) change the percentage of
the Commitments or of the aggregate unpaid principal amount of the Loans that
is required for the Lenders or any of them to take any action hereunder, (iv)
amend the definition of “Required Lenders” or “Pro Rata Share”,
(v) release all or a substantial portion of the Collateral (except as
otherwise provided in this Agreement and the other Loan Documents), subordinate
any Lien granted in favor of the Collateral Agent for the benefit of the
Lenders, or release the Borrower or any Guarantor, or (vi) amend, modify
or waive Section 4.04 or this Section 12.02 of this
Agreement, in each case, without the written consent of each Lender.  Notwithstanding the foregoing, no amendment,
waiver or consent shall, unless in writing and signed by an Agent, affect the
rights or duties of such Agent (but not in its capacity as a Lender) under this
Agreement or the other Loan Documents.

 

Section 12.03         No
Waiver; Remedies, Etc.  No failure
on the part of any Agent or any Lender to exercise, and no delay in exercising,
any right hereunder or under any other Loan Document shall operate as a waiver
thereof; nor shall any single or partial exercise of any right under any Loan
Document preclude any other or further exercise thereof or the exercise of any
other right.  The rights and remedies of
the Agents and the Lenders provided herein and in the other Loan Documents are
cumulative and are in addition to, and not exclusive of, any rights or remedies
provided by law.  The rights of the
Agents and the Lenders under any Loan Document against any party thereto are
not conditional or contingent on any attempt by the Agents and the

 

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Lenders to exercise any of their rights under any other Loan Document
against such party or against any other Person.

 

Section 12.04         Expenses;
Taxes; Attorneys’ Fees.  The
Borrower will pay on demand, all costs and expenses incurred by or on behalf of
each Agent (and, in the case of clauses (b) through (m) below, each Lender),
regardless of whether the transactions contemplated hereby are consummated,
including, without limitation, reasonable fees, costs, client charges and
expenses of counsel for each Agent (and, in the case of clauses (b) through (m)
below, each Lender), accounting, due diligence, periodic field audits, physical
counts, valuations, investigations, searches and filings, monitoring of assets,
appraisals of Collateral, title searches and reviewing environmental
assessments, miscellaneous disbursements, examination, travel, lodging and
meals, arising from or relating to:  (a)
the negotiation, preparation, execution, delivery, performance and
administration of this Agreement and the other Loan Documents (including,
without limitation, the preparation of any additional Loan Documents pursuant
to Section 7.01(b) or the review of any of the agreements,
instruments and documents referred to in Section 7.01(f)),
(b) any requested amendments, waivers or consents to this Agreement or the
other Loan Documents whether or not such documents become effective or are
given, (c) the preservation and protection of any of the Lenders’ rights
under this Agreement or the other Loan Documents, (d) the defense of any claim
or action asserted or brought against any Agent or any Lender by any Person
that arises from or relates to this Agreement, any other Loan Document, the
Agents’ or the Lenders’ claims against any Loan Party, or any and all matters
in connection therewith, (e) the commencement or defense of, or intervention
in, any court proceeding arising from or related to this Agreement or any other
Loan Document, (f) the filing of any petition, complaint, answer, motion
or other pleading by any Agent or any Lender, or the taking of any action in
respect of the Collateral or other security, in connection with this Agreement
or any other Loan Document, (g) the protection, collection, lease, sale, taking
possession of or liquidation of, any Collateral or other security in connection
with this Agreement or any other Loan Document, (h) any attempt to enforce any
Lien or security interest in any Collateral or other security in connection
with this Agreement or any other Loan Document, (i) any attempt to collect from
any Loan Party, (j) all liabilities and costs arising from or in connection
with the past, present or future operations of any Loan Party involving any
damage to real or personal property or natural resources or harm or injury alleged
to have resulted from any Release of Hazardous Materials on, upon or into such
property, (k) any Environmental Liabilities and Costs incurred in connection
with the investigation, removal, cleanup and/or remediation of any Hazardous
Materials present or arising out of the operations of any facility owned or
operated by any Loan Party, (l) any Environmental Liabilities and Costs
incurred in connection with any Environmental Lien, or (m) the receipt by any
Agent or any Lender of any advice from professionals with respect to any of the
foregoing.  Without limitation of the
foregoing or any other provision of any Loan Document:  (x) the Borrower agrees to pay all stamp,
document, transfer, recording or filing taxes or fees and similar impositions
now or hereafter determined by any Agent or any Lender to be payable in
connection with this Agreement or any other Loan Document, and the Borrower
agrees to save each Agent and each Lender harmless from and against any and all
present or future claims, liabilities or losses with respect to or resulting
from any omission to pay or delay in paying any such taxes, fees or
impositions, (y) the Borrower agrees to pay all broker fees that may become due
in connection with the transactions contemplated by this Agreement and the
other Loan Documents, and (z) if the Borrower fails to

 

95

 

perform any covenant or agreement contained herein or in any other Loan
Document, any Agent may itself perform or cause performance of such covenant or
agreement, and the expenses of such Agent incurred in connection therewith
shall be reimbursed on demand by the Borrower.

 

Section 12.05         Right
of Set-off.  Upon the occurrence and
during the continuance of any Event of Default, any Agent or any Lender may,
and is hereby authorized to, at any time and from time to time, without notice
to any Loan Party (any such notice being expressly waived by the Loan Parties)
and to the fullest extent permitted by law, set off and apply any and all
deposits (general or special, time or demand, provisional or final) at any time
held and other Indebtedness at any time owing by such Agent or such Lender to
or for the credit or the account of any Loan Party against any and all
obligations of the Loan Parties either now or hereafter existing under any Loan
Document, irrespective of whether or not such Agent or such Lender shall have
made any demand hereunder or thereunder and although such obligations may be
contingent or unmatured.  Each Lender
agrees to notify such Loan Party promptly after any such set-off and
application made by such Agent or such Lender provided that the failure to give
such notice shall not affect the validity of such set-off and application.  The rights of the Agents and the Lenders
under this Section 12.05 are in addition to the other rights and
remedies (including other rights of set-off) which the Agents and the Lenders
may have under this Agreement or any other Loan Documents of law or otherwise.

 

Section 12.06         Severability.  Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining portions hereof or affecting the validity or enforceability
of such provision in any other jurisdiction.

 

Section 12.07         Assignments
and Participations.   (a)  This Agreement and the
other Loan Documents shall be binding upon and inure to the benefit of each
Loan Party and each Agent and each Lender and their respective successors and
assigns; provided, however, that none of the Loan Parties may
assign or transfer any of its rights hereunder without the prior written
consent of each Lender and any such assignment without the Lenders’ prior
written consent shall be null and void.

 

(b)           Each Lender may, with
the written consent of the Collateral Agent, assign to one or more other
lenders or other entities all or a portion of its rights and obligations under
this Agreement (including, without limitation, all or a portion of its
Commitments and the Loans made by it); provided, however, that
(i) such assignment is in an amount which is at least $2,500,000 or a multiple
of $1,000,000 in excess thereof (or the remainder of such Lender’s Commitment)
(except such minimum amount shall not apply to an Affiliate of a Lender or a
fund or account managed by a Lender or an Affiliate of a Lender) and
(ii) the parties to each such assignment shall execute and deliver to the
Collateral Agent, for its acceptance, an Assignment and Acceptance, together
with any promissory note subject to such assignment and such parties shall
deliver to the Collateral Agent a processing and recordation fee of $5,000
(except the payment of such fee shall not be required if the assignee is an Affiliate
of a Lender or a fund or account managed by a Lender or an Affiliate of a
Lender).  Upon such execution, delivery
and acceptance, from and after the effective date specified in each Assignment
and Acceptance, which effective date shall be at least 3 Business Days after
the delivery thereof to the Collateral Agent (or such shorter period as shall
be agreed to by the Collateral Agent and the parties to such

 

96

 

assignment), (A) the assignee thereunder shall become a “Lender”
hereunder and, in addition to the rights and obligations hereunder held by it
immediately prior to such effective date, have the rights and obligations
hereunder that have been assigned to it pursuant to such Assignment and Acceptance
and (B) the assigning Lender thereunder shall, to the extent that rights and
obligations hereunder have been assigned by it pursuant to such Assignment and
Acceptance, relinquish its rights and be released from its obligations under
this Agreement (and, in the case of an Assignment and Acceptance covering all
or the remaining portion of an assigning Lender’s rights and obligations under
this Agreement, such Lender shall cease to be a party hereto).

 

(i)            By executing and
delivering an Assignment and Acceptance, the assigning Lender and the assignee
thereunder confirm to and agree with each other and the other parties hereto as
follows:  (A) other than as
provided in such Assignment and Acceptance, the assigning Lender makes no
representation or warranty and assumes no responsibility with respect to any
statements, warranties or representations made in or in connection with this
Agreement or any other Loan Document or the execution, legality, validity,
enforceability, genuineness, sufficiency or value of this Agreement or any
other Loan Document furnished pursuant hereto; (B) the assigning Lender
makes no representation or warranty and assumes no responsibility with respect
to the financial condition of any Loan Party or any of its Subsidiaries or the performance
or observance by any Loan Party of any of its obligations under this Agreement
or any other Loan Document furnished pursuant hereto; (C) such assignee
confirms that it has received a copy of this Agreement and the other Loan
Documents, together with such other documents and information it has deemed
appropriate to make its own credit analysis and decision to enter into such
Assignment and Acceptance; (D) such assignee will, independently and
without reliance upon the assigning Lender, any Agent or any Lender and based
on such documents and information as it shall deem appropriate at the time,
continue to make its own credit decisions in taking or not taking action under
this Agreement and the other Loan Documents; (E) such assignee appoints
and authorizes the Agents to take such action as agents on its behalf and to
exercise such powers under this Agreement and the other Loan Documents as are
delegated to the Agents by the terms hereof and thereof, together with such
powers as are reasonably incidental hereto and thereto; and (F) such
assignee agrees that it will perform in accordance with their terms all of the
obligations which by the terms of this Agreement and the other Loan Documents
are required to be performed by it as a Lender.

 

(ii)           The Collateral Agent
shall, on behalf of the Borrower, maintain, or cause to be maintained at the
Payment Office, a copy of each Assignment and Acceptance delivered to and
accepted by it and a register (the ”Register”) for the recordation
of the names and addresses of the Lenders and the Commitments of, and principal
amount of the Loans (the ”Registered Loans”) owing to each Lender
from time to time.  The entries in the
Register shall be conclusive and binding for all purposes, absent manifest
error, and the Borrower, the Agents and the Lenders may treat each Person whose
name is recorded in the Register as a Lender hereunder for all purposes of this
Agreement.  The Register shall be
available for inspection by the Borrower and any Lender at any reasonable time
and from time to time upon reasonable prior notice.  In the case of any assignment not reflected in the Register, the
assigning Lender shall maintain a comparable register.

 

97

 

(iii)          Upon its receipt of an
Assignment and Acceptance executed by an assigning Lender and an assignee,
together with any promissory notes subject to such assignment, the Collateral
Agent shall, if the Collateral Agent consents to such assignment and if such
Assignment and Acceptance has been completed (i) accept such Assignment
and Acceptance and (ii) record the information contained therein in the
Register.

 

(iv)          A Registered Loan (and
the registered note, if any, evidencing the same) may be assigned or sold in
whole or in part only by registration of such assignment or sale on the
Register (and each registered note shall expressly so provide).  Any assignment or sale of all or part of
such Registered Loan (and the registered note, if any, evidencing the same) may
be effected only by registration of such assignment or sale on the Register,
together with the surrender of the registered note, if any, evidencing the same
duly endorsed by (or accompanied by a written instrument of assignment or sale
duly executed by) the holder of such registered note, whereupon, at the request
of the designated assignee(s) or transferee(s), one or more new registered
notes in the same aggregate principal amount shall be issued to the designated
assignee(s) or transferee(s).  Prior to
the registration of assignment or sale of any Registered Loan (and the
registered note, if any, evidencing the same), the Agents shall treat the
Person in whose name such Registered Loan (and the registered note, if any,
evidencing the same) is registered as the owner thereof for the purpose of
receiving all payments thereon and for all other purposes, notwithstanding
notice to the contrary.

 

(v)           In the event that any
Lender sells participations in a Registered Loan, such Lender shall maintain a
register on which it enters the name of all participants in the Registered
Loans held by it (the ”Participant Register”).  A Registered Loan (and the registered note,
if any, evidencing the same) may be participated in whole or in part only by
registration of such participation on the Participant Register (and each
registered note shall expressly so provide). 
Any participation of such Registered Loan (and the registered note, if
any, evidencing the same) may be effected only by the registration of such participation
on the Participant Register.

 

(vi)          Any foreign Person who
purchases or is assigned or participates in any portion of such Registered Loan
shall provide the Agents (in the case of a purchase or assignment) or the
Lender (in the case of a participation) with: (A) two accurate, complete and
signed originals of U.S. Internal Revenue Service Form W-8ECI or successor
form, (B) two accurate, complete and signed originals of U.S. Internal Revenue
Service Form W-8BEN or successor form, in each case, indicating that such
Lender is on the date of delivery thereof entitled to receive payments of
principal, interest and fees for the account of its lending office under this
Agreement free from, or subject to a reduced rate of, withholding of United
States Federal income tax; or (C) a substantially similar form for such
purchaser, participant or any other affiliate who is a holder of beneficial
interests in the Registered Loan.

 

(c)           Each Lender may sell
participations to one or more banks or other entities in or to all or a portion
of its rights and obligations under this Agreement and the other Loan Documents
(including, without limitation, all or a portion of its Commitments and the
Loans made by it); provided, that (i) such Lender’s obligations under this
Agreement (including without limitation, its Commitments hereunder) and the
other Loan Documents shall remain unchanged; (ii) such Lender shall remain
solely responsible to the other parties hereto for the

 

98

 

performance of such obligations, and the Borrower, the Agents and the
other Lenders shall continue to deal solely and directly with such Lender in
connection with such Lender’s rights and obligations under this Agreement and
the other Loan Documents; and (iii) a participant shall not be entitled to
require such Lender to take or omit to take any action hereunder except (A)
action directly effecting an extension of the maturity dates or decrease in the
principal amount of the Loans, (B) action directly effecting an extension of
the due dates or a decrease in the rate of interest payable on the Loans or the
fees payable under this Agreement, or (C) actions directly effecting a release
of all or a substantial portion of the Collateral or the Borrower or any
Guarantor (except as set forth in Section 10.08 of this Agreement
or any other Loan Document).  The Loan
Parties agree that each participant shall be entitled to the benefits of Section 2.08
and Section 4.05 of this Agreement with respect to its
participation in any portion of the Commitments and the Loans as if it was a
Lender.

 

Section 12.08         Counterparts.  This Agreement may be executed in any number
of counterparts and by different parties hereto in separate counterparts, each
of which shall be deemed to be an original, but all of which taken together
shall constitute one and the same agreement. 
Delivery of an executed counterpart of this Agreement by telefacsimile
shall be equally as effective as delivery of an original executed counterpart
of this Agreement.  Any party delivering
an executed counterpart of this Agreement by telefacsimile also shall deliver
an original executed counterpart of this Agreement but the failure to deliver
an original executed counterpart shall not affect the validity, enforceability,
and binding effect of this Agreement. 
The foregoing shall apply to each other Loan Document mutatis mutandis.

 

Section 12.09         GOVERNING LAW.  THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS EXPRESSLY
PROVIDED TO THE CONTRARY IN ANOTHER LOAN DOCUMENT IN RESPECT OF SUCH OTHER LOAN
DOCUMENT) SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF
THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED IN THE
STATE OF NEW YORK.

 

Section 12.10         CONSENT TO JURISDICTION; SERVICE OF PROCESS AND VENUE.  ANY LEGAL ACTION OR PROCEEDING WITH RESPECT
TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT SHALL BE BROUGHT IN THE COURTS OF
THE STATE OF NEW YORK IN THE COUNTY OF NEW YORK OR OF THE UNITED STATES
DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, AND, BY EXECUTION AND DELIVERY
OF THIS AGREEMENT, EACH LOAN PARTY HEREBY IRREVOCABLY ACCEPTS IN RESPECT OF ITS
PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID
COURTS. EACH LOAN PARTY HEREBY IRREVOCABLY CONSENTS TO THE SERVICE OF ANY AND
ALL LEGAL PROCESS, SUMMONS, NOTICES, AND DOCUMENTS IN ANY SUIT, ACTION, OR
PROCEEDING BROUGHT IN THE UNITED STATES OF AMERICA ARISING OUT OF OR IN
CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS BY THE
MAILING (BY REGISTERED MAIL OR CERTIFIED MAIL, POSTAGE PREPAID) OR DELIVERING
OF A COPY OF SUCH PROCESS TO SUCH LOAN PARTY, C/O THE BORROWER, AT THE
BORROWER’S ADDRESS FOR NOTICES AS SET FORTH IN

 

99

 

SECTION 12.01.  THE LOAN PARTIES AGREE THAT A FINAL JUDGMENT
IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN
OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY
LAW.  NOTHING HEREIN SHALL AFFECT THE
RIGHT OF THE AGENTS AND THE LENDERS TO SERVE PROCESS IN ANY OTHER MANNER
PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST
ANY LOAN PARTY IN ANY OTHER JURISDICTION. 
EACH LOAN PARTY HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST
EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO
THE JURISDICTION OR LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH
COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT
IN AN INCONVENIENT FORUM.  TO THE EXTENT
THAT ANY LOAN PARTY HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION
OF ANY COURT OR FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE,
ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH
RESPECT TO ITSELF OR ITS PROPERTY, EACH LOAN PARTY HEREBY IRREVOCABLY WAIVES
SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THIS AGREEMENT AND THE OTHER
LOAN DOCUMENTS.

 

Section 12.11         WAIVER OF JURY TRIAL, ETC.  EACH LOAN PARTY, EACH AGENT AND EACH LENDER
HEREBY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM CONCERNING ANY RIGHTS UNDER THIS AGREEMENT OR THE OTHER LOAN
DOCUMENTS, OR UNDER ANY AMENDMENT, WAIVER, CONSENT, INSTRUMENT, DOCUMENT OR
OTHER AGREEMENT DELIVERED OR WHICH IN THE FUTURE MAY BE DELIVERED IN CONNECTION
THEREWITH, OR ARISING FROM ANY FINANCING RELATIONSHIP EXISTING IN CONNECTION
WITH THIS AGREEMENT, AND AGREES THAT ANY SUCH ACTION, PROCEEDINGS OR
COUNTERCLAIM SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.  EACH LOAN PARTY CERTIFIES THAT NO OFFICER,
REPRESENTATIVE, AGENT OR ATTORNEY OF ANY AGENT OR ANY LENDER HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, THAT ANY AGENT OR ANY LENDER WOULD NOT, IN THE EVENT OF
ANY ACTION, PROCEEDING OR COUNTERCLAIM, SEEK TO ENFORCE THE FOREGOING WAIVERS.  EACH LOAN PARTY HEREBY ACKNOWLEDGES THAT
THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE AGENTS AND THE LENDERS ENTERING
INTO THIS AGREEMENT.

 

Section 12.12         Consent
by the Agents and Lenders.  Except
as otherwise expressly set forth herein to the contrary, if the consent, approval,
satisfaction, determination, judgment, acceptance or similar action (an “Action”)
of any Agent or any Lender shall be permitted or required pursuant to any
provision hereof or any provision of any other agreement to which any Loan
Party is a party and to which any Agent or any Lender has succeeded thereto,
such Action shall be required to be in writing and may be withheld or denied by
such Agent or

 

100

 

such Lender, in its sole discretion, with or without any reason, and
without being subject to question or challenge on the grounds that such Action
was not taken in good faith.

 

Section 12.13         No
Party Deemed Drafter.  Each of the
parties hereto agrees that no party hereto shall be deemed to be the drafter of
this Agreement.

 

Section 12.14         Reinstatement;
Certain Payments.  If any claim is
ever made upon any Agent or any Lender for repayment or recovery of any amount
or amounts received by such Agent or such Lender in payment or on account of
any of the Obligations, such Agent or such Lender shall give prompt notice of
such claim to each other Agent and Lender and the Borrower, and if such Agent
or such Lender repays all or part of such amount by reason of (i) any
judgment, decree or order of any court or administrative body having
jurisdiction over such Agent or such Lender or any of its property, or
(ii) any good faith settlement or compromise of any such claim effected by
such Agent or such Lender with any such claimant, then and in such event each Loan
Party agrees that (A) any such judgment, decree, order, settlement or
compromise shall be binding upon it notwithstanding the cancellation of any
Indebtedness hereunder or under the other Loan Documents or the termination of
this Agreement or the other Loan Documents, and (B) it shall be and remain
liable to such Agent or such Lender hereunder for the amount so repaid or
recovered to the same extent as if such amount had never originally been
received by such Agent or such Lender.

 

Section 12.15         Indemnification.  In addition to each Loan Party’s other
Obligations under this Agreement, each Loan Party agrees to, jointly and
severally, defend, protect, indemnify and hold harmless each Agent and each
Lender and all of their respective officers, directors, employees, attorneys,
consultants and agents (collectively called the ”Indemnitees”) from
and against any and all losses, damages, liabilities, obligations, penalties,
fees, reasonable costs and expenses (including, without limitation, reasonable
attorneys’ fees, costs and expenses) incurred by such Indemnitees, whether
prior to or from and after the Effective Date, whether direct, indirect or
consequential, as a result of or arising from or relating to or in connection
with any of the following:  (i) the
negotiation, preparation, execution or performance or enforcement of this
Agreement, any other Loan Document or of any other document executed in
connection with the transactions contemplated by this Agreement, (ii) any
Agent’s or any Lender’s furnishing of funds to the Borrower under this
Agreement or the other Loan Documents, including, without limitation, the
management of any such Loans, (iii) any matter relating to the financing
transactions contemplated by this Agreement or the other Loan Documents or by
any document executed in connection with the transactions contemplated by this
Agreement or the other Loan Documents, or (iv) any claim, litigation,
investigation or proceeding relating to any of the foregoing, whether or not
any Indemnitee is a party thereto (collectively, the ”Indemnified
Matters”); provided, however, that the Loan Parties shall not
have any obligation to any Indemnitee under this Section 12.15 for
any Indemnified Matter caused by the gross negligence or willful misconduct of
such Indemnitee, as determined by a final judgment of a court of competent
jurisdiction.  Such indemnification for
all of the foregoing losses, damages, fees, costs and expenses of the
Indemnitees are chargeable against the Loan Account.  To the extent that the undertaking to indemnify, pay and hold
harmless set forth in this Section 12.15 may be unenforceable
because it is violative of any law or public policy, each Loan Party shall,
jointly and severally, contribute the maximum portion which it is permitted to

 

101

 

pay and satisfy under applicable law, to the payment and satisfaction
of all Indemnified Matters incurred by the Indemnitees.  This Indemnity shall survive the repayment
of the Obligations and the discharge of the Liens granted under the Loan
Documents.

 

Section 12.16         Records.  The unpaid principal of and interest on the
Loans, the interest rate or rates applicable to such unpaid principal and
interest, the duration of such applicability, the Commitments, and the accrued
and unpaid fees payable pursuant to Section 2.06 hereof, shall at
all times be ascertained from the records of the Agents, which, subject to Section 4.02(b),
shall be conclusive and binding absent manifest error.

 

Section 12.17         Binding
Effect.  This Agreement shall become
effective when it shall have been executed by each Loan Party, each Agent and
each Lender and thereafter shall be binding upon and inure to the benefit of
each Loan Party, each Agent and each Lender, and their respective successors
and assigns, except that the Loan Parties shall not have the right to assign
their rights hereunder or any interest herein without the prior written consent
of each Lender, and any assignment by any Lender shall be governed by Section 12.07
hereof.

 

Section 12.18         Interest.  It is the intention of the parties hereto
that each Agent and each Lender shall conform strictly to usury laws applicable
to it.  Accordingly, if the transactions
contemplated hereby or by any other Loan Document would be usurious as to any
Agent or any Lender under laws applicable to it (including the laws of the
United States of America and the State of New York or any other jurisdiction
whose laws may be mandatorily applicable to such Agent or such Lender
notwithstanding the other provisions of this Agreement), then, in that event,
notwithstanding anything to the contrary in this Agreement or any other Loan
Document or any agreement entered into in connection with or as security for
the Obligations, it is agreed as follows: 
(i) the aggregate of all consideration which constitutes interest under
law applicable to any Agent or any Lender that is contracted for, taken,
reserved, charged or received by such Agent or such Lender under this Agreement
or any other Loan Document or agreements or otherwise in connection with the
Obligations shall under no circumstances exceed the maximum amount allowed by
such applicable law, any excess shall be canceled automatically and if
theretofore paid shall be credited by such Agent or such Lender on the
principal amount of the Obligations (or, to the extent that the principal
amount of the Obligations shall have been or would thereby be paid in full,
refunded by such Agent or such Lender, as applicable, to the Borrower); and
(ii) in the event that the maturity of the Obligations is accelerated by reason
of any Event of Default under this Agreement or otherwise, or in the event of
any required or permitted prepayment, then such consideration that constitutes
interest under law applicable to any Agent or any Lender may never include more
than the maximum amount allowed by such applicable law, and excess interest, if
any, provided for in this Agreement or otherwise shall be canceled
automatically by such Agent or such Lender, as applicable, as of the date of such
acceleration or prepayment and, if theretofore paid, shall be credited by such
Agent or such Lender, as applicable, on the principal amount of the Obligations
(or, to the extent that the principal amount of the Obligations shall have been
or would thereby be paid in full, refunded by such Agent or such Lender to the
Borrower).  All sums paid or agreed to
be paid to any Agent or any Lender for the use, forbearance or detention of
sums due hereunder shall, to the extent permitted by law applicable to such
Agent or such Lender, be amortized, prorated, allocated and spread throughout
the full term of the Loans until payment in full so that the rate or amount of

 

102

 

interest on account of any Loans hereunder does not exceed the maximum
amount allowed by such applicable law. 
If at an time and from time to time (i) the amount of interest payable
to any Agent or any Lender on any date shall be computed at the Highest Lawful
Rate applicable to such Agent or such Lender pursuant to this Section 12.18
and (ii) in respect of any subsequent interest computation period the
amount of interest otherwise payable to such Agent or such Lender would be less
than the amount of interest payable to such Agent or such Lender computed at
the Highest Lawful Rate applicable to such Agent or such Lender, then the
amount of interest payable to such Agent or such Lender in respect of such
subsequent interest computation period shall continue to be computed at the
Highest Lawful Rate applicable to such Agent or such Lender until the total
amount of interest payable to such Agent or such Lender shall equal the total
amount of interest which would have been payable to such Agent or such Lender
if the total amount of interest had been computed without giving effect to this
Section 12.18.

 

For purposes of this Section 12.18,
the term “applicable law” shall mean that law in effect from time to time and
applicable to the loan transaction between the Borrower, on the one hand, and
the Agents and the Lenders, on the other, that lawfully permits the charging
and collection of the highest permissible, lawful non-usurious rate of interest
on such loan transaction and this Agreement, including laws of the State of New
York and, to the extent controlling, laws of the United States of America.

 

The right to accelerate the maturity of the
Obligations does not include the right to accelerate any interest that has not
accrued as of the date of acceleration.

 

Section 12.19         Confidentiality.  Each Agent and each Lender agrees (on behalf
of itself and each of its affiliates, directors, officers, employees and
representatives) to use reasonable precautions to keep confidential, in
accordance with its customary procedures for handling confidential information
of this nature and in accordance with safe and sound practices of comparable
commercial finance companies, any material non-public information supplied to
it by or on behalf of the Loan Parties pursuant to or in connection with this
Agreement or the other Loan Documents which is identified in writing by the
Loan Parties as being confidential at the time the same is delivered to such
Person (and which at the time is not, and does not thereafter become, publicly
available or available to such Person from another source not known to be
subject to a confidentiality obligation to such Person not to disclose such
information), provided that nothing herein shall limit the disclosure of
any such information (i) to the extent required by statute, rule,
regulation or judicial process, (ii) to counsel for any Agent or any
Lender, (iii) to examiners, auditors, accountants or Securitization
Parties, (iv) in connection with any litigation to which any Agent or any
Lender is a party or (v) to any assignee or participant (or prospective
assignee or participant) so long as such assignee or participant (or
prospective assignee or participant) first agrees, in writing, to be bound by
confidentiality provisions similar in substance to this Section 12.19.  Each Agent and each Lender agrees that, upon
receipt of a request or identification of the requirement for disclosure
pursuant to clause (iv) hereof, it will make reasonable efforts to keep
the Loan Parties informed of such request or identification; provided
that the each Loan Party acknowledges that each Agent and each Lender may make
disclosure as required or requested by any Governmental Authority or
representative thereof and that each Agent and each Lender may be subject to
review by Securitization Parties or other regulatory

 

103

 

agencies and may be required to provide to, or otherwise make available
for review by, the representatives of such parties or agencies any such
non-public information.

 

Section 12.20         Section Headings.  Headings and numbers have been set forth
herein for convenience only.  Unless the
contrary is compelled by the context, everything contained in each
Section applies equally to this entire Agreement.

 

Section 12.21         Integration.  This Agreement, together with the other Loan
Documents, reflects the entire understanding of the parties with respect to the
transactions contemplated hereby and shall not be contradicted or qualified by
any other agreement, oral or written, before the date hereof.

 

104

 

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

 

	
   

  	
  BORROWER:

  
	
   

  	
   

  
	
   

  	
  MATTRESS FIRM, INC.,

  
	
   

  	
  a Delaware
  corporation,

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/   Jim
  R. Black

  
	
   

  	
   

  	
  Name:  Jim R. Black

  
	
   

  	
   

  	
  Title: CFO,
  Secretary and Treasurer

  

 

 

	
   

  	
  GUARANTORS:

  
	
   

  	
   

  
	
   

  	
  MATTRESS HOLDING CORP.,

  
	
   

  	
  a Delaware
  corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/   Jim
  R. Black

  
	
   

  	
   

  	
  Name:  Jim R. Black

  
	
   

  	
   

  	
  Title:
  Secretary and Treasurer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  MATTRESS FIRM INVESTMENT MANAGEMENT, INC.,

  
	
   

  	
  an Arizona
  corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Benjamin
  S. Emmons

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  FESTRO, INC.,

  
	
   

  	
  a Texas
  corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/   Jim
  R. Black

  
	
   

  	
   

  	
  Name:  Jim R. Black

  
	
   

  	
   

  	
  Title: Secretary
  and Treasurer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  TEAMEXCEL MANAGEMENT COMPANY,

  
	
   

  	
  a Texas
  corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/   Jim
  R. Black

  
	
   

  	
   

  	
  Name:  Jim R. Black

  
	
   

  	
   

  	
  Title:
  Secretary and Treasurer

  

 

 

	
   

  	
  MATTRESS FIRM OPERATING, LTD.,

  
	
   

  	
  a Texas
  limited partnership

  
	
   

  	
   

  
	
   

  	
   

  	
  By:  Festro, Inc., its general partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/   Jim
  R. Black

  
	
   

  	
   

  	
   Name:  Jim R. Black

  
	
   

  	
   

  	
   Title:
  Secretary and Treasurer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  MATTRESS VENTURE INVESTMENT

  MANAGEMENT, LLC,

  
	
   

  	
  an Arizona
  limited liability company

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Benjamin
  S. Emmons

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  FESTRO II, LLC,

  
	
   

  	
  a Texas limited liability company

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/   Jim
  R. Black

  
	
   

  	
   

  	
  Name:  Jim R. Black

  
	
   

  	
   

  	
  Title:
  Secretary and Treasurer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  THE MATTRESS VENTURE, L.P.,

  
	
   

  	
  a Texas
  limited partnership

  
	
   

  	
   

  
	
   

  	
   

  	
  By:  Festro II, LLC, its general partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/   Jim
  R. Black

  
	
   

  	
   

  	
  Name:  Jim R. Black

  
	
   

  	
   

  	
  Title:
  Secretary and Treasurer

  

 

 

	
   

  	
  COLLATERAL AGENT AND LENDER:

  
	
   

  	
   

  
	
   

  	
  ABLECO FINANCE LLC,

  
	
   

  	
  a Delaware limited liability company

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ 

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
  ADMINISTRATIVE AGENT AND LENDER:

  
	
   

  	
   

  
	
   

  	
  ABLECO FINANCE LLC,

  
	
   

  	
  a Delaware
  limited liability company

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

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